A History of a Modern Empire: How Bill Gates Built Microsoft

Introduction

The invention named Microsoft is found by a Harvard College Student named Bills Gates. The legender was born in a successful business family on October 28, 1955, William Henry Gates iii was his father and they were settled at Washington. Microsoft Windows Operating system was initially just an additional optional to the MS-DOS operating system.

Microsoft Corporation is a big name in the software companies. We are going to discuss some of the financial ratios with the same company for the Fiscal year 2010. The operating system of windows is one of the highly favourable systems for the users who are using personal use of computers. Microsoft Corporation is also making software for the different other applicability like Microsoft Office, Windows Media Player and Internet explorer which are generally given with the operating system itself or are solely sellable as well. That is not the end, along with that; the company is the manufacture and seller of mice, keyboards, and many other things.

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As per one news article, Microsoft Corp. revenue of $16.20 billion for the Sept. 30, 2010, a 25% hike from the similar period of the previous year. Operating income, net income and diluted earnings per share for the quarter were $7.12 billion, $5.41 billion and $0.62 per share, which represented increases of 59%, 51% and 55%, parallely, when matched with the previous year.

The previous data showed the difference of $1.47 billion of revenue, because of the effect of $ 0.12 diluted earnings per share, which was because of Windows 7 upgrade Option program and the sale of Windows 7 to OEM s and retailers before that available generally in the year 2009.

In 2010, Office 2010 is going well with the growth in revenue of 15% in first year in the market.

Microsoft is looking ahead with the growth for further more with Xbox 360 with the increasing selling in the first quarter.

Financial Analysis

Any firm, when starts the business, their intention is clear to make profit. Here through different ratio, we can analyse that the company is going in which direction in the future. There are different applications of the ratios for any organisation and their uses are different for the firm’s owners, employees and the public.

Ratios can be classified in given main areas.

1. Liquidity based Ratio
2. Asset management ratio
3. Gearing/Financial stability ratio
4. Cash Efficiency Ratio

We are going to discuss some of them below with reference to Microsoft Corporation Financial Fiscal year data for September 2010.

Profitability Ratio

This ratio shows company’s transfer capacity from product to its sell. It gives an overall efficiency of the company for generating the shareholders returns, so provides useful information to the company. Let us calculate formula for the same.

Gross Profit Margin

This is a type of profitability ratio which represents the cost of goods sold at a sales percentage. The ratio shows the control of the company over its cost of its inventory and operational costs. If the gross profit margin is bigger, it’s better for the company.

The formula for Gross Profit/Net Sales

For this example, its, 24098/62484 = 0.39%

Net Profit Margin

This ratio is used more frequently when a simple ratio analysis is used. It shows the companies income after paid off all the expenses.

The calculation for net profit margin is: Net Income/Net Sales

For this example, its, 18760/62484 = 3.00%

Return on Equity

This ratio seems to be the main one for the all financial ratios for the investors of the company. It provides the return on the investors money invested in the company. Thus can be decisive for the investors whether to invest or not.

The calculation for the company is: Net Income/Stockholder’s Equity

18760/46175 = 0.41%

Current Ratio

This ratio shows the balance changes that the net working capital ratio will not be able to show with reference to the assets against the current liabilities.

The formula for the same is 

Current Assets/Current Liabilities

55676/26147 = 2.13%

It discloses the business ability of the company, but it should be supported with the other ratios as below.

Quick Ratio (Acid Test Ratio)

This ratio is very useful for the company as it shows that how quick company can convert their current assets into the cash. This shows the current company’s sufficiency. This ratio is pre minded by considering all assets are equal liquidity. And the account receivables are more should be considered as liquidity than the stock. The sales can be considered when amount is received against the credits.

Cash + Marketable Securities + Accounts Receivable (net) = Quick Ratio

Current Liabilities

5505+62+13014/26147 = 0.71%

Efficiency Ratios

Efficiency ratio shows the efficiency of the company to change their inventory, assets, receivables, sales or account payables. It helps company to find out the meetigants for short term and long term obligations. As it takes into account the principle that we can pay you when we are paid.

First efficiency ratio

The ratio includes the days sales outstanding calculation, which shows the cash and receivables are going to be occurred when. This is considered the test of the company’s efficiency, as it shows the conversion capacity of the company from receivables to cash.

The calculation takes current receivables, total credit sales period and the number of day’s period into consideration for the formula.

The formula for the same is

Days outstanding = Current Receivables/Total Credit Sales X No. of Day =13014/24098*60 = 32.40 days

Solvency Ratio

Solvency ratio refers to company’s capability to meet their long term obligations. It gives an idea for the investor whether to go for the investment in the company or not.

The formula for this is

Solvency Ratio = (After Tax Profits + Depreciation)/ (long term liabilities + Short term liabilities) =18760+2673/13791+9564 =9.18%

Higher the ratio of solvency, higher company’s capacity to meet its long term obligations.

Gearing Ratio

Gearing ratio compares the certain owner’s equity to borrowed funds, as it calculates leverage and shows the extent to which a company is funded with its own fund against creditors’. Higher the leverage ratio, more risk to the company.

debt-to-equity ratio shows company’s equity against debt which shows company’s risk.

The formula is : (total debt / total equity)

=39938/46175= 0.85%

The company has more equity than debt that means company is in the good position.

How company can improve?

Company is running so smoothly on the basis of financial statement we can say that company is creating a good amount of cash than it is needed to meet its debtors. The major problem since 2009 company is facing is the credit periods instability, it run through 50 to 200, for some of the debtors. So if it is in the control its better for the company.

One other problem with the company is in the recession time, it has been heard first time from the company in its history that it layoff its staff. Because of recession, there was a drop of 0.5% sale of the company in last quarter and hence fore company decided that. So for re-improve the sale they might need some more funding as its more laptops are used now a days, they need to initiate some more upgraded technique than windows 7, of course it will capture a good market as new windows 7 is upcoming, but company need to take into consideration the computer users converting them to laptop users.

Conclusion

As from above case, we can conclude that the ratio analysis is the tool for the company to measure its financial conditions against market and the competitors. It is always useful for the company to look at the change of the every small change as it’s a company which is changing probably every day the market updating and the situations. The Microsoft Corporation is the pioneer and it has achieved that stage from where to sustain and maintain that level, it need a good effort in the information technology to be at the same stage. As the competition is at the ear that it cannot be underestimated the potential of any new comer as the competitors like Intel and others are coming up with something new every day.

Ratio analysis is handful tool for the company from company, investors and employee’s point of view as it gives the summary of the company’s operating ability, liquidity and profitability. The company like this has a niche area to check as it’s a well established company and do not need to check for a broad idea. But for the new coming firms, it is very much essential to keep a strong control over its ratios as it is the best the way to establish good reputation and development in the market in such a competitive era.

References:

1. http://www.microsoft.com/investor/reports/ar10/10k_fr_bal.html
2. http://mbadox.com/wp-content/uploads/2010/09/fin_rat.pdf
3. Managerial Economics And Financial Analysis By S. A. Siddiqu
4. Financial Ratio Analysis: A Handy Guidebook Charles K. Vandyck
5. Fundamentals of financial management By Eugene F. Brigham, Joel F. Houston
6. http://www.investopedia.com/terms/g/gearingratio.asp
7. http://www.scribd.com/doc/17318817/Financial-Ratio-Analysis-Formulas
8. http://basiccollegeaccounting.com/table-summary-of-financial-accounting-ratio-analysis/
9. http://www.microsoft.com/investor/EarningsAndFinancials/Earnings/PressReleaseAndWebcast/FY11/Q1/default.aspx
10. http://www.google.co.uk/images?hl=en&biw=1920&bih=979&gbv=2&tbs=isch%3A1&sa=1&q=financial+ratio+analysis+images&aq=f&aqi=&aql=&oq=

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