Sei sulla pagina 1di 7

D ATA C ASE - C ASE 1

M I C R OS O F T C O R P O R A T I ON (MSFT) & F O R D M OT OR S (F)

FIN 7410

Fis Malsori
2/1/2016

Fis Malsori

2/1/2016

Introduction
The purpose of this study is to assess the financial health of two companies, that of Microsoft
Corporation (MSFT) and Ford Motors (F). These companies operate in different industries, and
the assessment will be conducted by analyzing trends and significant factors in their financial
indicators such as Liquidity Ratios, Profitability Margins, Capital Returns, Debt Managing Ratios,
and Valuation Ratios.
1)
a) Ford Motors (F)

Indicator/Year

2011

2012

2013

2014

$ 10.64

$ 12.95

$ 15.43

$ 15.50

4.11

4.02

4.09

4.05

Market Capitalization ($Billion)

$ 43.74

$ 51.99

$ 63.06

$ 62.70

Market Value Net Debt ($Billion)

$ 99.49

$ 105.06

$ 114.69

$ 119.17

Enterprise Value ($Billion)

$ 126.08

$ 141.39

$ 163.28

$ 171.11

Stock Price
Shares Outstanding (Billions)

Indicator/Year

2011

2012

2013

2014

Industry Average1

Liquidity Ratios
Current Ratio
Quick Ratio
Cash Ratio

1.82
1.74
0.67

1.94
1.83
0.71

2.04
1.94
0.76

2.01
1.91
0.70

N/A

Debt Management
Debt-to-Enterprise Ratio
Debt-to-Equity Ratio (Book Values)

0.79
6.62

0.74
6.59

0.70
4.35

0.70
4.80

N/A
0.76 (MRQ)

2.57

8.82

6.56

4.62

1.01 (TTM)

8.35%
14.83%

4.69%
4.22%

3.70%
4.87%

2.60%
2.21%

9.48%
10.71%

134.50%

35.52%

27.12%

12.85%

23.97%

6.46%

3.38%

2.51%

1.69%

18.67%

Interest Coverage Ratio


Profitability of Operations
EBIT Margin (%)
Net Profit Margin (%)
Return on Capital
Return on Equity (%)
ROIC (%)

1.31
1.09

Industry Average values represent the most recent quarter (MRQ), Trailing Twelve Months

(TTM) or a 5year average as found available on reuters.com


2

When calculating ROIC for the company a 35% tax rate on Taxable Profit is assumed.
1

Fis Malsori

2/1/2016

b) Microsoft Corporation (MSFT)


Indicator/Year

2011

Stock Price

2012

26.00

Shares Outstanding (Billions)

2013

30.59

34.54

2014
$

41.70

8.49

8.40

8.38

8.30

Market Capitalization ($Billion)

$ 220.74

$ 256.83

$ 289.27

$ 346.07

Market Value Net Debt ($Billion)

Enterprise Value ($Billion)

$ 223.05

Indicator/Year

2011

11.92

2012

11.94

$ 261.84

2013

2014

15.60

$ 301.07

22.65

$ 360.04

Industry Average3

Liquidity Ratios
Current Ratio
Quick Ratio
Cash Ratio

2.60
2.35
1.83

2.60
2.41
1.93

2.71
2.53
2.06

2.50
2.31
1.88

Debt-to-Enterprise Ratio
Debt-to-Equity Ratio (Book Values)
Interest Coverage Ratio
Profitability of Operations
EBIT Margin (%)
Net Profit Margin (%)

0.05
0.21
92.07

0.05
0.18
57.27

0.05
0.20
62.39

0.06
0.25
46.50

N/A
0.15(MRQ)
16.16(TTM)

38.8%
33.1%

29.5%
23.0%

34.4%
28.1%

32.0%
25.4%

23.6%
17.1%

Return on Capital
Return on Equity (%)
ROIC (%)4

40.6%
25.6%

25.6%
18.1%

27.7%
18.4%

24.6%
16.0%

17.4%
15.5%

2.83
1.57
N/A

Debt Management

Industry Average values represent the most recent quarter (MRQ), Trailing Twelve Months

(TTM) or a 5year average as found available on reuters.com


4

When calculating ROIC for the company a 35% tax rate on Taxable Profit is assumed.

Fis Malsori

2/1/2016

2) Enterprise Value

a) Ford Motors
When looking at the Enterprise Value Increase for Ford Motors (see Exhibit 1.0), we can see
that it has steadily increased throughout the four-year period, with a more significant increase in
the second year from $141.39 Billion to $163.28 Billion. The overall number of shares
outstanding for Ford Motors has not significantly changed and thus, cannot be the main driver of
the trend of its Enterprise Value Increase. Therefore, we can conclude that this increase can be
attributed to both Stock Price Increase as well as Net Debt Increase trends in the four-year
period. Fords Total Cash has also not had any substantial changes and, therefore, had no
significant impact on the Enterprise Value Increase.
b) Microsoft
On the other hand, when looking at Microsoft (see Exhibit 1.1) we can see a difference here in
what made its Enterprise Value Increase significantly over the course of 4 years. Considering a
number of factors such as the consistent number of shares outstanding, its Net Debt being
relatively low and any significant growth, combined with an increase in Total Cash from $52
Billion to $86 Billion (which would cause Enterprise Value to decrease), we can conclude that
the major driver of Microsofts Enterprise Value Growth is by far the substantial increases in
Stock Price over the four-year period.
Overall, when comparing the two firms, the composition of their enterprise values is quite
different with one thing in common being the substantial Stock Price increase. However, the
major difference is in the Net Debt of the companies, which is an indicator that the companies
finance their business in vastly different ways, which will be explained in the Ratio Analysis.

3) Liquidity Ratios
a) Ford
Fords Current Ratio shows a steady increase until last year (2014) when it dipped by only
0.03. Being above 2, the ratio indicates that Ford is able to meet its Current Liabilities with
enough Current Assets and still have some money left (Working Capital) for daily operations.
Similarly, when taking Inventory out of the equation, the Quick Ratio shows a similar trend, thus
indicating that Inventories are not Fords major component of Current Assets. On the other
hand, when looking at the companys Cash Ratio we can see that its Total Cash is not sufficient
to meet its current liabilities, yet, its trend is similar to the other two Liquidity Ratios. Comparing
3

Fis Malsori

2/1/2016

Fords Liquidity Ratios with the Industry Average tells us that Ford is better at meeting its current
liabilities than the average competitor is. An interesting observation to mention is the 0.1
decrease from the Current to the Quick Ratio of Ford after Inventories are taken out of the
equation, that is half the decrease when the same is done for the Industry Average Current and
Quick Ratios, thus, indicating that the average competitor has significantly more Inventory than
Ford does and that the average competitors Total Current Assets consist of a higher relative
dollar amount of Inventories than Fords Assets do.
b) Microsoft
Microsofts Liquidity Ratios showed an increase in 2013 and then a relatively significant
decrease in the following year. This can be explained by the big increase in Short-Term
Investments in 2013 and the slowing growth pace of these Investments in the last year
observed in the Balance sheet as opposed to the Total Current Liabilities that have kept their
growing pace without any slowing down in the last year. Similar to the Current Ratio, the Quick
and Cash Ratio have experienced the same trend overall. Interestingly, before taking out
Inventories, when comparing Microsofts Current Ratio we can see that the Industry Average is
Higher than the tech giants, and following the calculation and comparison of the Quick Ratio we
can then see that Microsofts Quick Ratio is higher than that of the Industry Average, and this
strongly suggests that the average competitor has substantial amounts of inventory on hand as
opposed to Microsoft.

4) Debt Management
a) Ford
The Car manufacturing giant has a very high Debt to Equity Ratio when compared to the
Industry Average. This indicates that Ford finances its business primarily with debt. Fords Debt
to Enterprise Ratio has continuously been decreasing mainly driven by inconsistent paces of
growth in Net Debt & Enterprise Value. The significant difference in comparing Ford with the
Industry is in its Debt to Equity Ratio being vastly higher than the industry average and,
therefore, indicating that its competitors finance themselves with less Debt than Ford does.
Its Interest Coverage Ratio, however, shows that Ford is better at managing its Debt than the
average Competitor in the car manufacturing industry.
b) Microsoft
Microsoft Corporation, on the other hand, is obviously less leveraged than Ford Motors. Its Debt
to Equity Ratio is as low as 0.25 in the most recent year (2014). When comparing this Ratio to
4

Fis Malsori

2/1/2016

its competitors, Microsoft is slightly more leveraged than the average competitor, however, its
Interest Coverage Ratio clearly shows that paying back debt and managing it is not a major
issue. It has the ability to pay 3 times the Interest expense that the average competitor can with
its Operating Income. Its Debt to Enterprise Ratio is also a positive indicator that the tech giant
is not highly leveraged. We can conclude that Microsoft manages its debt very well.

5) Profitability of Operations & Return on Capital


We have to be cautious when comparing the two companies for the fact that they operate in
different industries. However, looking at their Profit Margins, we can see that Microsoft is
notably more efficient in their daily operations than Ford is. Oddly, in 2011 and 2013, Ford
shows a lower EBIT Margin than its Net Margin which is explained by a so-called Tax
Provision for income taxes account in their Income Statement that has artificially grown
Fords bottom line. When comparing Ford with the industry average, we can conclude that the
average car manufacturing company is around four to five times more efficient in generating
taxable income.
Microsofts Profitability Margins and Returns on Capital, despite the decreasing trend, remain
significantly higher than the Industry Average. The notable plunge in Microsofts ROE & ROIC is
mainly due to a decrease in Operating profit which has been caused by a non-recurring other
operating expenses of roughly $6 Billion. A more suited measure of comparison between the
two companies would be the operating margins, since the equity related valuations will capture
debt financing risk.
6) Valuation Ratios
To compare Microsoft and Ford, a more suitable Valuation Ratio to use would be the EV/EBIT
Ratio, for the following reason:
If we would choose to compare them with the P/E Ratio, which takes into account EPS that is
comprised of Net Income that is derived after Income Expense and Taxes are taken out of
EBIT, we would have a financing component in our comparison for the simple fact that the two
companies finance themselves very differently.
On the other hand, the Enterprise Value/EBIT Ratio adds the Income and Tax expense back
into the equation to give a more isolated Operational perspective to the Valuation of the
company.
5

Fis Malsori

2/1/2016

Exhibits
Exhibit 1.0 Ford Motors

Ford Motors
180
160
140
120
100
80
60
40
20
0
Market Value Net Debt ($Billion)
2011

Enterprise Value ($Billion)


2012

2013

2014

Exhibit 1.1 Microsoft Corporation

Microsoft Corporation
400
350
300
250
200
150
100
50
0
Market Value Net Debt ($Billion)
2011

Enterprise Value ($Billion)


2012

2013

2014