Question

You are an analyst at Microsoft, and your boss has asked you to complete a ratio analysis for the firm’s competitors. Use the following information to write a complete ratio analysis for Microsoft’s competitors. Firm’s are identified by tickers below. Ratio MSFT IBM SAP AAPL Profit Margin ROE ROA Debt to Equity Current Ratio 28.31% 39.35% 9.44% 92.79% 3.12 10.97% 50.34% 6.64% 270.60% 1.29 16.53% 15.03% 8.36% 40.44% 1.59 22.72% 46.05% 10.89% 97.32% 1.30

Answer 1

Ratio Analysis

Ratio	MSFT	IBM	SAP	AAPL
Profit Margin	28.31%	10.97%	16.53%	22.72%
ROE	39.35%	50.34%	15.03%	46.05%
ROA	9.44%	6.64%	8.36%	10.89%
Debt to Equity	92.79%	270.60%	40.44%	97.32%
Current Ratio	3.12	1.29	1.59	1.30

Competitors for Microsoft are listed as IBM, SAP and Apple.

Profit margin measures what percentage of sales has turned into profits. As far as the profit margin is concerned, higher the number, the better a firm is performing. Judging by this metric MSFT has outperformed the competitors. It has the highest profit margin at 28.31% while IBM has lowest profit margin at 10.97% among the four companies.

Return on Equity is calculated by dividing net income by shareholders’ equity. Higher this figure, the better it is. ROE is the highest for IBM at 50.34%, followed by Apple at 46.05%. Microsoft is next with 39.35% while SAP is a distant fourth with 15.03%. The ROE figures for the first three companies-IBM, AAPL and MSFT are quite and indicate that the firms are generating a high return on shareholders’ equity.

Return on Assets is calculated by dividing net income by total assets. This figure indicates the earnings a firm can generate from each dollar invested in the assets. The higher this figure, the better it is. ROA is highest for AAPL at 10.89%, followed by MSFT at 9.44%, SAP at 8.36% and IBM at 6.64%.

Debt to Equity ratio is calculated by dividing debt by equity. It indicates how much leverage a firm has and the proportion of debt and equity that the firm is using to finance its assets. A high debt equity ratio indicates a high dependence on borrowed funds, which translates to high fixed financial costs in the form of interests. Ideal debt equity ratio differs from industry to industry. For technology companies ideal ratio is close to 1 or 100%. Of the four companies, SAP has the lowest D/E ratio at 40.44%, while IBM has the highest at 279.60%. AAPL and MSFT are close with 97.32% and 92.79% D/E ratio, respectively.

Current ratio is calculated by dividing current assets by current liabilities. Current assets and liabilities pertain to the short term, hence current ratio tells us how comfortable the firm is in meeting its short-term liabilities. If current assets are greater than current liabilities then current ratio is greater than 1, indicating that the firm has enough assets to cover its short-term liabilities. For most industries, 1.5 is an acceptable current ratio. MSFT has the highest current ratio at 3.12, followed by SAP at 1.59. IBM and AAPL have almost similar current ratios at 1.29 and 1.30, respectively.

In conclusion, MSFT appears to performing well. It has the highest profit margin and current ratio. Return on assets and debt to equity ratios are also reasonable. It is second last when it comes to return on equity, but far above industry standards.