Discussion and 2 replies
Brian_1234
CraigStewardJr_Microsoft_discussion.pptx
Microsoft: MSFT
Craig Steward Jr
Week 8 Discussion
Financial Leverage
| 2020 | 2019 | 2018 | |
| Debt Ratio | 0.21 | 0.25 | 0.29 |
| Debt-to Equity | 0.54 | 0.71 | 0.92 |
| Interest Coverage Ratio | 21.47 | 17.27 | 14.35 |
Table 1. Microsoft’s Financial Leverage Ratios (Microsoft Corp., 2021).
| 2020 | 2019 | 2018 | |
| Debt Ratio | 0.58 | 0.63 | 0.64 |
| Debt-to-Equity | 0.77 | 0.74 | 0.49 |
| Interest Coverage Ratio | -2.49 | -0.97 | -0.58 |
Table 2. Average Software Industry’s Financial Leverage Ratio (Software, n.d.).
Debt ratios are lower than the industry averages. A low debt ratio suggests Microsoft has a small amount of debt, which can pose some risks.
Debt-to equity ratios for Microsoft decreased for all three years and is currently below the industry average. However, the debt-to-equity ratios are good values and signifies their assets are financed by equity.
Interest coverage ratios are above the industry averages. This indicates Microsoft is in good financial health.
Bond Performance
MSFT3926358 Bond MSFT3926369 Bond
Last Price:102.933 Last Price: $111.937
Bond Purchased:1,000 x [102.933/ 100]= $1029.33 Bond Purchase: 1,000 x [111.937/100]= $1119.37
Coupon Payment:1,000 x [2.125% / 100]= $21.25 Coupon Payment::1,000 x [3.500%/100]=$35.00
Current Yield:[1,000 x 2.125%] / 1029.33=2.06% Current Yield:[1,000 x 3.500%]/1119.37=3.13%
YTM:0.205 YTM:2.761
Callable: Yes Callable: Yes
MSFT3926369 Bond is the best option to invested in as the investor would receive the par value with higher interest payment from the company overtime. Microsoft has the ability to recall the bond, which then could be refinanced at a lower rate.
(Bond, 2021)
Stock Performance
| Price/Earnings Ratio | 2020 35.87 | 2019 29.75 | 2018 41.80 |
| Market Book Ratio | 13.60 | 11.32 | 9.08 |
| Earnings Per Share | 5.76 | 5.06 | 2.13 |
| Dividends Per Share | 2.09 | 1.89 | 1.72 |
| Price/Cash Flow | 25.76 | 23.31 | 17.53 |
Table 3. Microsoft’s Market Ratios (Microsoft Corp., 2021).
Table 4. Apple’s Market Ratios (Apple, 2021).
| 2020 | 2019 | 2018 | |
| Price/Earnings Ratio | 40.45 | 24.70 | 13.24 |
| Market Book Ratio | 34.16 | 14.23 | 6.96 |
| Earnings Per Share | 3.28 | 2.97 | 2.98 |
| Dividends Per Share | 0.81 | 0.76 | 0.71 |
| Price/Cash Flow | 28.83 | 19.67 | 10.19 |
Comparing Microsoft and Apple’s Market Ratios, they both contain fluctuation throughout their ratios.
It is important to note, Apple’s market book ratio is doubled compared to Microsoft’s ratio for fiscal year 2020.
According to Morningstar, Microsoft’s return on assets was 15.07 percent for 2020 (Microsoft. Corp.,2021).
Based on the presented values and return on assets, we can conclude Microsoft’s common shareholders are receiving an adequate return on their investment.
P/E Ratio
Microsoft’s 5-year P/E ratio is 36.29.
The industry average’s P/E ratio is 28.61.
Microsoft’s P/E ratio is higher than the industry average, thus Microsoft stock is overvalued.
Based on all provided ratios and an overvalued stock, it is not reasonable to buy this stock at this time.
(Microsoft Corp.,2021)
Historical Stock
The historical stock price for Microsoft is higher than its competitor, which increases the risk level for Microsoft stock.
At this time, it is not reasonable to enter in a long term investment in Microsoft stock as the stock is overvalued, thus overpriced.
| Stock Closed Price 2020 | |
| Microsoft | 222.42 |
| Apple | 132.69 |
Final Thoughts
Taking in consideration Microsoft’s 2nd current market position, AAA and Aaa credit ratings, and payment of $0.56 in dividend per shares, the following recommendations should be followed:
Pay down any debt owed to lenders
Use debt to finance growth
Continue maintaining awareness of all spending
Increase revenue by marketing to the younger generation (i.e., promoting Microsoft Teams).
Reflection
This assignment has taught me how to calculate certain concepts to determine a company’s financial stability. I learned to calculate the financial leverages and market ratios and evaluate the bond performance of a corporation. I gained a possible real-life experience that will make me a better financial advisor.
(Market Capitalization, 2020) and (FAQ, 2021)
References:
Apple Inc. (2021). Morning Star. https://www.morningstar.com/stocks/xnas/aapl/valuation
Apple revenue eps. NASDAQ. https://www.nasdaq.com/market-activity/stocks/aapl/revenue-eps
Bond. (2021). Finra Markets. https://finra-markets.morningstar.com/MarketData/Default. jsp
FAQ. (2021). Microsoft. https://www.microsoft.com/en-us/Investor/FAQ.aspx
Market capitalization. (2020). Statista. https://www.statista.com/statistics/263264/top-companies-in-the-world-by-market-capitalization/
Microsoft Corp. (2021). Stock Analysis on Net. https://www.stock-analysis-on.net/NASDAQ/Company/Microsoft-Corp/Ratios/Long-term-Debt-and-Solvency#Debt-to-Assets
Microsoft Corp. (2021). Morning Star. https://www.morningstar.com/stocks/xnas/msft/dividends
MSFT: earning date. (2021). NASDAQ. https://www.nasdaq.com/market-activity/stocks/msft/earnings
Prepackaged software: average industry financial ratios for u.s. listed companies. (n.d.). Ready Ratios. https://www.readyratios.com/sec/industry/7372/
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