Company Analysis

Microsoft Corporation is a technology corporation that specializes in computer software
and programs, consumer electronics, and software-related services. Microsoft is a publicly-
traded company under the stock symbol MSFT. Microsoft’s financial statements are available in
the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) of the United States
Securities and Exchange Commission (SEC). This report uses the financial data and notes from
EDGAR to analyze the performance of Microsoft Corporation over three financial years between
2019 and 2021 by tracking changes in financial metrics and through financial ratios.
Income Statements
A review of Microsoft’s income statement between 2019 and 2021 shows a 33.5%
increase in revenues from $125,843 million in 2019 to $143,015 in 2021 to $168,088 million in
2021 (SEC, 2021). It shows that the corporation prevailed in a difficult period for many
businesses due to the COVID-19 pandemic, which affected the global economy. There was also
a significant increase in the cost of revenue between the period from $42,910 million in 2019 to
$52,232million in 2021 (SEC, 2021). Microsoft’s expenses show an organization’s aggressive
investment in revenue drivers. Between 2019 and 2021, Microsoft spent over 40% of expenses in
marketing and advertisement and another 40% in research and development. General and
administrative expenses comprised about 10% in that period. The corporations net income rose
from $39,240 million in 2019 to $61,271 million in 2021 (SEC, 2021). As a result, there was an
increase of $3.01 in basic earnings per share (EPS).

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Balance Sheet
An analysis of current and noncurrent assets between 2020 and 2021 shows an increase
of $32,468 million (SEC, 2021). This shows that the corporation could structure its operations to
increase the value of its investments. This increase translates to a general increase in the net
worth of Microsoft. There was also an increase in liabilities due to an increase in short-term and
long-term debts. Microsoft increased its equity for its shareholders, as seen in the increase in
retained earnings from $34,566 million in 2020 to $57,055 in 2021 (SEC, 2021). The income
statement and balance sheet show that the company is able to continue operating into the future
and generate enough cash and reserves to create value for the shareholders’ investment.
Statement of Cashflows
Microsoft’s statement of cash flows shows an increase in cash flows from operating and
cash used in investing and financing activities. Microsoft increased its cash from operating
activities from $52,185 million in 2019 to $76,740 million, signifying a 47% increase (SEC,
2021). Microsoft increased its financing cash outflow from $36,887 million in 2019 to $48,486
million in 2021, and its investing from $15,773 million in 2019 to $27,577 in 2021 (SEC, 2021).
Notes to the Financial Statements
Microsoft accounts represent the transactions of Microsoft Corporation and its
subsidiaries. According to Generally Accepted Accounting Principles (GAAP), the accounts
have been done. Microsoft acknowledges that the statements may differ from the management’s
assumptions due to COVID-19 uncertainties. The notes also include revenue recognition, assets,
and justification for expenses. Further disclosures show the unrealized income from investments,
advisement on debt maturities, and the performance of subsidiaries. In one component, Microsoft

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discloses that it was able to increase the acquisition of intangible assets from $531 million in
2020 to $1,628 million, which represents a 207% increase (SEC, 2021).
Financial Ratios
Liquidity ratios are used in financial analysis to test the ability of an organization to meet
short-term obligations (Bunker et al., 2019). Liquidity ratios include current ratio, quick ratio,
and cash ratio.
The current ratio is expressed as; current assets/current liabilities
Year endingCurrent AssetsCurrent LiabilitiesCurrent Ratio
2021184,406.00 88,657.00 2.079993684
2020181,915.00 72,310.00 2.515765454

In both years, the ratio is above 2.0, meaning that Microsoft is adequately liquid and can meet its
cash obligations in the short run. The quick ratio measures the ability of a company to convert
assets into cash without selling its existing inventory. It is expressed as (current assets-
inventories)/ current liabilities.
Year endingCurrent AssetsCurrent LiabilitiesInventoriesQuick Ratio
2021184,406.00 88,657.00 26362.050261119
2020181,915.00 72,310.00 18952.489558844
In both years, Microsoft demonstrates its ability to meet its current liabilities without relying on
the sale of inventories.
Debt to Equity Ratio
The debt-to-equity ratio analyzes how much debt the corporation holds in relation to
shareholders’ funds. This ratio demonstrates Microsoft’s leverage. The ratio shows how much

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Microsoft depends on debt to finance its growth. It is expressed as total liabilities/shareholders
equity.
Year endingTotal LiabilitiesShareholder’s equityD/E ratio
2021191,791.00 141,988.00 1.350754993
2020183,007.00 118,304.00 1.54692149

Microsoft Corporation has $1.35 debt from the above computation for every $1 in equity. This
shows that the corporation’s leverage does not threaten shareholders’ interests. However, should
the ratio increase towards 2.0, Microsoft depends too much on debt which is risky for
shareholders.
Return on Equity
The return on equity ratio is a profitability ratio that shows how much the corporation earns per
unit (1$) of shareholders’ investment. It is expressed as net income/shareholders’ equity.
Year endingNet IncomeShareholder’s equityR.O.E ratio
202161,271.00 141,988.00 0.431522382
202044,281.00 118,304.00 0.374298418
From the above computation, Microsoft Corporation could return $0.43 for every $1 of
shareholders’ investment in 2021 or 43% of the shareholders’ investment.
Net Proft Margin
This is a measure of how much income Microsoft makes per unit of revenue. This ratio
illustrates the efficiency of a company to convert revenues into profits (Nariswari &Nugraha,
2020). It is expressed as net income/revenues.

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Year endingNet IncomeTotal RevenueNet Profit Margin
202161,271.00 168,088.00 0.364517396
202044,281.00 143,015.00 0.309624865
The above computations show that the corporation converted 36% of its total revenue
into profit in 2021 and 31% in 2020. This shows that Microsoft made 5% more profit per $1 in
revenues. It demonstrates efficiency in converting revenues to profits.
In conclusion, from the above analysis, Microsoft performed expectedly well between
2019 and 2021. Financial ratios and analysis on its statements show the company is efficiently
run and will continue to create wealth for its shareholders in the short run and long run.

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References

Bunker, R. B., Cagle, C., & Harris, D. (2019). A liquidity ratio analysis of lean vs. not-lean
operations. Management Accounting Quarterly, 20(2), 10-16.
Nariswari, T. N., & Nugraha, N. M. (2020). Profit Growth: Impact of Net Profit Margin, Gross
Profit Margin and Total Assests Turnover. International Journal of Finance & Banking
Studies (2147–4486), 9(4), 87–96. https://doi.org/10.20525/ijfbs.v9i4.937
Securities and Exchange Commission (SEC). (2021, July 29). Microsoft Corporation Annual
Report Pursuant to Section 13 Or 15(D) of the Securities Exchange ACT OF 1934.
Electronic Data Gathering, Analysis, and Retrieval (EDGAR) System. Retrieved January
18, 2022, from
https://www.sec.gov/ix?doc=/Archives/edgar/data/789019/000156459021039151/msft-
10k_20210630.htm#ITEM_8_FINANCIAL_STATEMENTS_AND_SUPPLEM