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Ratio Analysis Project
Microsoft is a company worth investing in as they continue to demonstrate positive
growth. Microsoft has been investing heavily into cloud technology as well as acquiring other
companies, such as LinkedIn and the artificial intelligence company Maluuba. By widening their
offerings beyond what they are traditionally known for that is; Windows and Office, they can
maximize their revenue streams and increase market competiveness for the future. Some of their
financial ratios exemplify a negative trend, such as the decrease in the gross margin and current
ratio, both of which can be attributed to a rise in liabilities. This is necessary to fund projects
necessary to stay competitive. The recent positive trend in the price earnings ratio demonstrates
what the company’s future market evaluation could be in the future. Their current state is by no
means making leaps and bounds ahead of the competition but is showing steady growth worthy
of investment.
One way to measure the financial attractiveness of a company is through the gross margin
ratio. The gross margin ratio measures the sales revenue preserved after direct costs are
subtracted. Microsoft’s gross margin has steadily been declining since 2012. It has decreased
from 76.22% in 2012 to 61.58% in 2016. This means that for each dollar of sales, Microsoft is
taking in roughly 61 cents. It is important to note that cost of goods sold, the direct costs, have
rose over 15,000 since 2012. Microsoft sites increasing costs of innovation as the contributing
factor for the increase in cost of goods sold. This is common for tech companies, Google’s cost
of goods sold has steadily increased to 39.6 in 2016 (Microsoft Corporation 2016). With
increasing competition and Microsoft continuing into the hardware business with it Surface Pro
and Surface Book lineup, the costs for developing such products and for the company will
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naturally increase. Even with the increased costs, having such a high gross margin compared to
their competitors has allowed Microsoft to devote large amounts of its revenue to research and
development, upwards of 14%, roughly 12 billion dollars (Microsoft Corporation 2016). The
company has stated that they will continue to invest heavily into their projects to stay relevant
and competitive in the marketplace.
To measure the financial leverage a company has, the debt to equity ratio is used. The
debt-to-equity ratio is calculated by dividing total liabilities by total equity. This ratio has
progressively increased from .4527 in 2012 to .6282 in 2016, for every .6282 dollars of debt,
Microsoft has one dollar of equity. According to Amy Gallo (2015) of the Harvard Business
Review, with large tech companies, it is common to have a debt-to-equity ratio below one due to
the large amounts of cash stored up. In order to balance how they are funding projects and
