Examine three differences between risk and risk aversion of your company. Explain which financial data you used for your answer.
Company: Microsoft
Examine three differences between risk and risk aversion of your company. Explain which financial data you used for your answer.
Examine three differences between systematic and unsystematic risk for your company. Explain which financial data you used for your answer.
Explain the covariance and correlation and how they affect the risk of your company. Explain which financial data you used to find your answer.
Explain enterprise risk management (ERM) of your company. Explain which financial data you used to find your answer.
Please see Microsoft analysis attached and find and reference any online resource or Microsoft’s financial data used which was necessary to support the answers.
Requirements: 1.5 page
Microsoft’s Financial Analysis.
Income Statement
From the Microsoft net income it yields a profit worth $72,738 for the financial year 2022 (United States Securities and Exchange Commission, 2022).
Balance Sheet
Microsoft Company had a Total assets worth $364,840 which equates to the Total liability worth $198,298 and Total shareholders’ equity worth $166,542 (United States Securities and Exchange Commission, 2022).
Cash Flow Statement
From the cash flow provided Microsoft recorded $89,035 as cash flow from operations, a deficit of $58,876 from Financing cash flow and $13,931 from investing cash flow (United States Securities and Exchange Commission, 2022).
Analyzing Financial Ratios
a) Profitability Ratio – Net Profit Margin
Net Profit Margin = Net Income / Total Revenue
Net Profit Margin = (Revenue – Cost)/Revenue
Net Profit Margin = $72,738/ $ 198,270
Net Profit Margin = 0.3668 = 37%
Microsoft experience a lower Net profit margin indicating loss from its operation and inefficient cost management.
By analyzing the net profit margin, we can assess Microsoft’s ability to generate profits from its revenue. A higher net profit margin indicates efficient cost management and better profitability.
b) Efficiency Ratio – Asset Turnover
Asset Turnover = Total Revenue / Average Total Assets
Asset Turnover = $ 198,270/ ($364,840 + $333,779)/2)
Asset Turnover = $ 198,270/ $349,310
Asset Turnover = 0.5676 or 57%
Microsoft recorded a good asset turnover of 57% implying its effectiveness in both sales management and assets utilization
The asset turnover ratio measures how effectively a company utilizes its assets to generate sales. A higher asset turnover ratio indicates efficient asset utilization and effective sales management.
c) Liquidity Ratio or Current Ratio
Current Ratio = Current Assets / Current Liabilities
Current Ratio = $169,684/ $95,082
Current Ratio = 1.785 or 179%
Microsoft experienced a higher Current ratio implying a good liquidity and a lower risk of financial distress.
The current ratio assesses a company’s ability to meet its short-term obligations. A higher current ratio indicates better liquidity and a lower risk of financial distress.
4. Analyzing ROE using DuPont Analysis
DuPont analysis breaks down the return on equity (ROE) into its component parts to understand the drivers behind it. The DuPont formula is:
ROE = Net Profit Margin * Asset Turnover * Equity Multiplier
ROE = 0.3668 x 0.5676 x 2.191
ROE = 0.456 or 46%
Equity Multiplier = Total assets/ Total shareholders’ equity
Equity Multiplier = $364,840/ $166,542
Equity Multiplier = 2.191
By analyzing each component, we can identify areas where Microsoft excels or needs improvement in generating ROE.
For a good ROE Microsoft needs to increase Net profit margin to more than 50%
5. Investment Decision
Yes, I would decide to make both short-term and long-term investments in Microsoft based on the facts presented and the examination of the company’s financial statements. For the following reasons:
1. Profitability: Microsoft has a respectable level of profitability, as evidenced by its 37% net profit margin. It is vital to remember that Microsoft is a sizable and well-established firm, so reaching extraordinarily high profit margins may be difficult, even though it is lower than ideal. The business is still relatively profitable, though hence it is recommended to invest in Microsoft in long term.
2. Effectiveness: With an asset turnover ratio of 57%, Microsoft shows that it is efficient at turning its assets into cash. This suggests effective asset management and sales management, which is good news for me as a potential investor.
3. Liquidity: Microsoft has a high amount of liquidity and is able to pay its short-term obligations, as shown by its current ratio of 179%. This lowers the possibility of financial distress and gives investors a feeling of security. 4. Return on Equity (ROE): Microsoft has a respectable return on equity (ROE) of 46%. Despite not being very high, it shows that the business is making a respectable return on the capital made by shareholders. Microsoft exhibits solid financial health overall, profitability, effectiveness, liquidity, and a respectable return on equity. It is a successful technology corporation with a long history and a solid reputation. Given these elements, it would make sense to make both short- and long-term investments in Microsoft.
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