Financial Statement Analysis
Balance sheet
A balance sheet is a financial statement that shows what a company is worth at a specific point in time (Griffin & Mahajan, 2020). A balance sheet is also known as the statement of financial position. It sums up a company’s assets, liabilities, and equity using the equation assets = liabilities + equity. Assets are what a company owns and can be described as resources with economic value, meaning; they are convertible into cash. In Microsoft Corporation’s balance sheet for the year ended 30th June 2020, total assets amounted to $ 301.3 billion (Microsoft, Earnings Release FY20 Q4: Balance Sheets, 2021). Assets can be either current or non-current, depending on their liquidity. Current assets can be made liquid within a year and include cash at hand, accounts receivable, and inventory. In this case, they amounted to $181.9 billion. Non-current assets cannot be converted into cash within a year and are mostly regarded as fixed assets. They may include real estate, equipment, long-term investments, bonds, and stocks. In this case, they totaled $119.3 billion.
Liabilities are what a company owes and can be either current or non-current (SEC, 2007). Microsoft Corporation had liabilities worth $ 183 billion. Current liabilities are due for payment within a year and include accounts payable, in this case, $72.3 billion (Microsoft, Earnings Release FY20 Q4: Balance Sheets, 2021). Non-current liabilities, on the other hand, include long-term debt that is not expected to be paid within a year, in this case, $110.7 billion. Equity is the value of ownership or capital contributed by the owners of a business. A company could have a single owner, which would be referred to as owner’s equity, or many investors where it becomes shareholder’s equity (SEC, 2007). The value of Microsoft Corporation’s stockholder’s equity was $118.3 billion (Microsoft, Earnings Release FY20 Q4: Balance Sheets, 2021).
At a glance, Microsoft Corporation’s balance sheet shows its financial position, business finances, liquidity, and growth trends. It also provides essential information to current and potential investors, such as where their money is used and what they should expect in returns. We can also use information from a balance sheet to determine whether or not the business can meet its operational needs in the future. It is important to note that analyzing a balance sheet depends on specific information the analyst requires. In this case, we will focus on debt. A look at its current liabilities and assets indicates that Microsoft Corporation can manage its debt safely. The company has $63.3 billion worth of debt and $136.5 billion cash, resulting in net cash of $73.2 billion (Microsoft, Earnings Release FY20 Q4: Balance Sheets, 2021). This net cash implies that its debt is not a risk, although it is still worth keeping an eye on.
Income statement
An income statement is also referred to as the income and loss statement or a statement of earnings. It shows changes in the balance sheet for a specified period (Griffin & Mahajan, 2020). This financial statement shows money that flowed in and out of the company and, therefore, determines profitability. The primary data reported in an income statement includes revenues, expenses, gains, losses, and cost of goods sold, among others, as there are variations between companies. An income statement offers insights into a company’s operations, performance (both general and in individual sectors), and how it compares to others in its industry. We can also use this financial statement to gauge the efficiency of a company’s management.
Microsoft Corporation’s products and services’ total revenue was $143 billion, while the total cost of revenue was $46.1 billion (Microsoft, Earnings Release FY20 Q4: Income statement, 2021). Thus, they made a gross profit was $96.9 billion. Its total operating income was $53 billion, and it was the same before taxes. Therefore, its net income amounted to $44 billion. This amount was positive, indicating the company made a profit.
Compared to previous years starting in 2018, Microsoft Corporation has increased its revenue, operating income, income before taxes, and net income. These statistics imply that the company has steadily increased its profitability for the last three years. Based on their income statement, one can tell that Microsoft Corporation’s spending on research and development, sales and marketing, and general and administrative costs over the last few years.
Also, from this income statement, one can tell that some costs are higher than others. Sales and marketing, for instance, cost more than research and development and general and administrative. An income statement also reveals the earning per share, which is the amount of money per share of stock that shareholders will receive if a company decides to distribute its net income for a certain period (SEC, 2007). Based on its income statement, Microsoft Corporation’s shareholders would get $5.82 for its basic and $5.76 for diluted shares (Microsoft, Earnings Release FY20 Q4: Income statement, 2021). Comparatively, these values have gone up from those registered in previous years.
Cash flow statement
A cash flow statement or statement of cash flows provides data on the amount of cash flowing in and out of a company. It shows how much a company makes and how much it utilized during a particular duration. Analysis of a cash flow statement should show how well a business can generate enough cash to offset its debt, purchase assets and finance its operating expenses (SEC, 2007). Rather than show amounts of money at a specific time, a cash flow statement shows changes over time. The categories found in this statement are operating, investing, and financing activities (SEC, 2007). The operating activities segment adjusts the net income from an income statement with actual cash received or used in a company’s operating activities. Investing activities details cash flow from a company’s investments, including purchasing property, equipment, securities, and the sale of assets. Money from financing activities is included in the financing activities segment of a cash flow statement. Cash flow statements are important because they show a company’s liquidity, changes in its balance sheet and help create cash flow predictions. Cash flow statements are increasingly being used as a basis for borrowing (Lian & Ma, 2020).
The net cash from operating, financing, and investing activities totaled $60.7 billion, $46.0 billion, and $12.2 billion, respectively (Microsoft, Earnings Release FY20 Q4: Cash Flows Statements, 2021). The cash and cash equivalents at the beginning of the period was $11.3 billion, but it increased by $2.2 billion by the end of the period to reach $13.6 billion. The bottom line in Microsoft Corporation’s cash flow statement was positive, indicating an increase in cash flow for that period. This increase implies the company was more liquid at the close of the period. It is important to note that a positive bottom line does not always mean well, as there may be negative reasons why a business has that money, including securing a considerable loan. We can tell that the most significant outflow was in repurchased stock ($23 billion) based on the cash flow statement. In contrast, Microsoft Corporation used the second largest outflow to pay shareholders’ dividends (Microsoft, Earnings Release FY20 Q4: Cash Flows Statements, 2021). Microsoft Corporation also spent a substantial amount on debt repayment.
References
Griffin, P. A., & Mahajan, S. (2020). Financial Statement Analysis. In I. T. al., & W. V. Center, Finding Alphas: A Quantitative Approach to Building Trading Strategies, Second Edition (pp. 141-148). John Wiley & Sons, Ltd.
Lian, C., & Ma, Y. (2020). © The Author(s) 2020. Published by Oxford University Press on behalf of President and Fellows of Harvard College. All rights reserved. For Permission Anatomy of Corporate Borrowing Constraints. The Quarterly Journal of Economics, 229-291.
Microsoft. (2021). Earnings Release FY20 Q4: Balance Sheets. Retrieved from Microsoft: https://www.microsoft.com/en-us/Investor/earnings/FY-2020-Q4/balance-sheets
Microsoft. (2021). Earnings Release FY20 Q4: Cash Flows Statements. Retrieved from Microsoft: https://www.microsoft.com/en-us/Investor/earnings/FY-2020-Q4/Cash-flows
Microsoft. (2021). Earnings Release FY20 Q4: The income statement. Retrieved from Microsoft: https://www.microsoft.com/en-us/Investor/earnings/FY-2020-Q4/income-statements
SEC. (2007, 5th February). Beginners’ Guide to Financial Statement. Retrieved from U.S. Security and Exchange Commission: https://www.sec.gov/reportspubs/investor-publications/investorpubsbegfinstmtguidehtm.html