Microsoft And Ibm Financial Performance

Running Head: MICROSOFT AND IBM FINANCIAL PERFORMANCE

Microsoft and IBM Financial Performance

Team E

Managerial Finance I FIN/475

University of Phoenix

Rene Niese

April 7, 2008

Microsoft and IBM Financial Performance

Introduction

Team E has been charge with the task of preparing an analysis to evaluate Microsoft and IBM’s financial performance. This will be done by using trends, financial ratio analysis, and the firms’ most recent statements of cash flow. Team E will evaluate each firm’s financial performance for the last two years by (1) performing financial ratio analysis, (2) performing trend analysis, and (3) compare and contrast the findings. Team E’s analysis will include:

Current Ratio вЂ" is an indication of a company's ability to meet the company’s short-term debt obligations.

Quick Ratio вЂ" measures a company's liquidity and ability to meet the company’s short-term obligations with its most liquid assets; the higher the numbers, the better the position of the company.

Debt-To-Equity Ratio вЂ" measures a company's financial leverage and indicates what proportion of equity and debt the company is using to finance its assets. Net Profit Margin - indicates how much profit a company makes for every $1 it generates in revenue.

Net profit margin вЂ" measures profitability by comparing net profit after taxes to revenue.

Return On Equity вЂ" measures a corporation's rate of return and reveals how much profit a company generates with the money shareholders have invested.

Total Asset Turnover вЂ" measures how well a company uses assets to produce revenue.

Return On Assets вЂ" indicates how profitable a company is related to its total assets and tells an investor how much profit a company generated for each dollar of assets.

Price Earnings Ratio - measures of how expensive a company’s stock is.

The numbers are shown in the charts below.

Current Ratios

Microsoft

Current Ratio (In Millions) 2007 2006

Current Assets 40,168 49,010

Current Liabilities 23,754 22,442

1.69 2.18

IBM

Current Ratio (In Millions) 2007 2006

Current Assets 53,177 44,569

Current Liabilities 44,310 40,090

1.2 1.11

Team E begins by examining each firm’s current ratio and quick (acid-test) ratio. The current ratio is an indication of a company’s ability to meet short-term debt obligations and is determined by dividing current assets by current liabilities. According to InvestorWords (2007), “if the current assets of a company are more than twice the current liabilities, then that company is generally considered to have good short-term financial strength. If current liabilities exceed current assets, then the company may have problems meeting its short-term obligations.” The current ratio of Microsoft was 2.18 in 2006 and 1.69 in 2007. The numbers for Microsoft indicate the company has good short-term financial strength, but fell a bit from 2006 to 2007. IBM’s current ratio was 1.11 in 2006 and 1.20 in 2007. The indicators are close for both years and show a slight increase in 2007 over 2006. IBM’s current assets and current liabilities are close and indicate that the company may be struggling a bit, but still making a profit.

Quick Ratios

Microsoft

Quick (Acid-Test) Ratio (In Millions) 2007 2006

Current Assets-Inventory 39,041 47,532

Current Liabilities 23,754 22,442

1.64 2.12

IBM

Quick (Acid-Test) Ratio (In Millions) 2007 2006

Current Assets-Inventory 50,533 41,759

Current Liabilities 44310 40,090

1.4 1.04

Next, Team E examines the quick ratio. The quick ratio measures a company's ability to meet short-term obligations; the larger the quick ratio, the better the position of the company.

Quick determines a company's financial strength or weakness. The quick ratio for Microsoft is 2.12 in 2006 and 1.64 in 2007. Microsoft’s numbers fell slightly in 2007, but the company’s overall strength remains strong. IBM’s numbers were 1.04 in 2006 and 1.40 in 2007. This indicated the company is gaining strength and moving in the right direction.

Debt-To-Equity Ratio

The Debt to Equity Ratio reviews financial leverage of a company by determining how much of their equity and debt is used by the company to finance its assets. The closer the number to one (1), the more leveraged