Question

In: Accounting

Instructions: Answer the last three questions using the information below. Microsoft Corp. (MSFT) Ratios Industry Average...

Instructions: Answer the last three questions using the information below.

Microsoft Corp. (MSFT)

Ratios Industry Average Ratio Three Year Company Ratio Results
2015 2016 2017
Year(s) Year Year Year
Debt/Equity 0.96 1.178639661 1.687167521 2.33019311
Current 3.43 2.47340222 2.352881716 2.477273079
Quick Ratio 3.28 1.944246379 1.907778358 2.060858245
Return on Assets 5.49 0.069952697 0.091252316 0.097589713
Return on Equity 17.23 0.178219848 0.245866967 0.30844425
Net Profit Margin 11.57 0.130294935 0.196882325 0.235730962
Instructions:
Discuss the following questions throughly (2-3 sentences).

What does each ratio reveal about the company?

Have the ratios improved or worsened over time? Explain why you think this happened.
Compare the company ratio results with the industry average ratios. What do the numbers reveal?

Solutions

Expert Solution

1) What does each ratio reveal about company ?

Ratio Analysis (Current Year 2017)
Debt / Equity 2.33

Debt / Equity Ratio < 1 means a more financial stable Business.

Debt / Equity Ratio = 1 means both Creditors and Investors have Equal Stake in business.

Debt / Equity Ratio > 1 means more risky to creditors and Investors

Here Ratio is greater than 1, so business will be risky for creditors and investors.

Current Ratio 2.47 A current ratio of 2 would mean that the company has 2 times more current assets than current liabilities.

A higher current ratio is always more favorable than a lower current ratio because it shows the company can more easily make current debt payments.

Quick ratio 2.06

Quick Ratio lower than 1 means that company is relying heavily on inventories or other assets to pay short term liabilities and may soon can be bankrupt. quick ratio higher than 1 means the better of company's liquidity position.

Here company's ratio is 2, so company is having better liquidity position and had have higher account receivables.

Return on Assets 0.09

Return on Assets shows the percentage of profit a company earns in relation to its overall resourses.

Here company is having ratio of 0.09, means company is having profits from its business.

Return on Equity 0.30

Return on Equity (ROE) is an indicator of company's profitability by measuring how much profit the company generates with the money invested by common stock owners. ROE is also and indicator of how effective management is at using equity financing to fund operations and grow the company

Here ROE is 0.30 means company's is profitable to its shareholders or investors.

Net Profit margin 0.23

Net Profit Margin Ratio is the percentage of net profit relative to the revenue earned during a period.

Here company's having ratio of 0.23, that means business is profitable for the company.

2) Have the ratios improved or worsened over time? Explain why you think this happened.

Debt/Equity Ratio The Debt/Equity Ratio has worsen over time as it kept increasing above 1. A higher debt-to-equity ratio typically shows that a company has been aggressive in financing its growth with debt, and there may be a greater potential for financial distress if earnings do not exceed the cost of borrowed funds.
Current ratio Company's Current ratio improved from last years ratio, also greater than 2015's ratio. and it's also greater than 2, so thats good for the company as it easily make debt payments.
Quick Ratio Company's quick ratio has improved than last years ratio. It's Goog for the company. This may be happen because of accounts receivables has increased.
Return on Assets ratio Company's Return on Equity (ROA) ratio is getting better and better in past couple of years. its good for the company as it may have started allocating its sources accordingly better.
Return on Equity ratio Company's ROE is getting better in last few years. Its good for the company as shareholder's are getting more profit as compares to previous years. this might happen because of company policies or company have generated better income in last couple of years.
Net Profit Margin Company's Net proft margin has increased significantly over the years. This is good for the company as they are income is increasing. This may happen because of costs might be reduced, availability of substitue materials etc.

3) Compare the company ratio results with the industry average ratios. What do the numbers reveal ?

Ratio Avg. Industry ratio 2017 Ratio Analysis
Debt / Equity ratio 0.96 2.33 Comapny's D/E Ratio is higher than Industry Average Ratio, and also greater than 1, so company will lesser investors and creditors than its competitors.
Current ratio 3.43 2.47 Company's Current ratio is lower than industry Average. Means Company is higher short term debt than it's competitors, and will have competitive disadvantage. This is because company don't have much current assets or have higher short term debts.
Quick Ratio 3.28 2.06 Company's Quick ratio is lower than industry Average ratio. This means company's liquidity position is not that great comparing to its competitors.
Return on Assets 5.49 0.09 Company's ROA is way behind than Industry Average. its just 0.016 of Industry average. means way behind its competitors in industry and need to make full use of resources to improve it.
Return on Equity 17.23 0.30

Company's ROE is way behind industry average. Its a disadvange in competitive market as Investors/shareholder's will invest in companies who will provide them better returns.

Net Profit Margin 11.57 0.23 Company's Net Profit margin Ratio is too low than Industry Average. This might be a advantage or disadvantage for the company. From the customers prospective they are getting services cheaply, it might help in company to get more revenue in subsequent years. From the Investors prospective they will always prefers the company who are more profitable , so that company will provide them more dividend.

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