Analysis Of International Finance And Financial Performance Of Microsoft Company - Essay.

Choose a Multinational Enterprise (MNE) listed on an internationally recognised Stock Exchange (including for example, London, Dublin, New York or Paris). You are required to:

 1. Critically discuss how recent developments in the international financial environment have impacted on your chosen company’s recent performance and development. Analyse how these developments likely to impact on the company in the near future.

2. With reference to your chosen Multinational Enterprise (and using the most recent annual report published), analyse the financial performance (in terms of profitability, liquidity and efficiency) of the company in the two most recent consecutive financial periods, e.g. 2015/16 or 2016/17, for example), using 6 different accounting ratios (prior year comparative figures will be available in the annual report).                                                                 

3.Discuss three key elements of the MNE’s international financial strategy and how they appear to have affected the financial performance of your chosen company (e.g. sources of finance, capital structure, earnings/dividend policy, risk management etc)                 

 4. Discuss the risk management strategy for your chosen company, including strategies used by the company to mitigate currency risk.

With the changes in the economy, each and every company has been expanding their business and financial performance. The financial performance of company could be analysed by using proper financial tools and analytical methods. There are several financial tools such as ratio analysis, capital budgeting, cash flow statement analysis to determine the financial performance of company. In this report, financial performance of Microsoft Company has been analysed. In the staring of this report, ratio analysis has been done. After that, international financial strategy implemented by Microsoft Company is based on its international business and international currency risk exposure has been taken. In the end, Risk management strategy for the Microsoft Company has been used to mitigate the associated risk.

It is American based company indulged in selling technical goods and services, having headquartered in Redmond, Washington. It is indulged in developing manufacturing computers and developing software’s and other technical tools for clients. This company was founded by Bill Gates and Paul Allen. The present CEO of the company is Satya Nadella. Currently, company has total revenue of 8995 crores USD which shows that company has increased its overall business functioning by increasing its turnover.  This company has been increasing overall return throughout the time (Microsoft, 2017).

With the increasing ramified economic changes and recent development of the financial market, it can be seen that there is drastic growth since last five years. The international financial is based on the effective management and trading taken place in international money and monetary assets of the organization.  Each and every organization needs to expand their business in the international market. However, they have to face to several international risk exposures such as financial risk, foreign currency risk and transnational risk. Microsoft Company has faced changes in its financial performance due to the advent of globalisation and rapid integration of the financial market.  The international financial environment is accompanied with the several factors which are described as below (Gray, & Stone, 2009).

Microsoft Company has been indulged in providing goods and services on the international level and has faced several international busienss risks. The payment received from other country lead to the conversion of one currency into another. This foreign exchange market and increased international financial risk have resulted in changes in the reporting of the financial statements and executing the future and call options (Microsoft, 2017).

The international capital market has also changed and due to the high trading of the reserve currency, Microsoft has faced high volatility in the foreign exchange risk of its cash inflow from another country. The depreciation in the foreign currency value will also decrease the inflow received by the Microsoft from another country (Bowen, 2018).

Description of the Company

It is evaluated that the international operations provides a significant portions of the company’s total revenue and expenses. After analysing the annual report of the company, it is observed that many of the revenue and expenses of the company are denominated in the currencies other than US Dollars (Lumby, and Jones, 2015).  The recent financial euro crisis has also impacted the financial performance of the Microsoft and damaged its financial results. As per the impairment test implemented in accordance with the IAS-136, Microsoft has faced impairment loss of USD $ 112 million in its books of account. In addition to this, the strengthening US dollar value over other currencies have negatively impacted the reported revenue and reduced reported expenses from its international operations (Microsoft, 2017).

Nonetheless, apart from the on-going integration and globalisation, international financial markets experienced increased securitisation. This recent trend has been spurred by the surge in the merger acquisition and leveraged buy-outs that have taken place in the financial market (Bruno, and Shin, 2015).  The Euro crisis is the recent emerged case which will negatively impact the financial performance of the Microsoft in the near future. It is observed that due to the decrease in the value of the Euro on the international level, Microsoft has to face transactional, transaction and other foreign exposure risk which will not only reduce the overall value of the revenue amount but also destruct the machineries and investment made in the Europe.  In addition to this, with the increased use of the advance technologies, Microsoft needs to adopt more advance technologies in its operation system with a view to cope up with the international market. Therefore, it may require high amount of capital investment in is business. It will not only increase the overall cost of capital but also block its high amount of investment in its operation activities (Lustig, Roussanov, andVerdelhan, 2014).

This ratio analysis assists in evaluating the financial performance of the company by establishing the relation between two financial factors of the organization (Microsoft, 2016).

Liquidity ratio

This ratio measures company’s ability to pay off its short term and long term debts by using its current assets (Schick, 2018).

Current ratio

The current ratio of the Microsoft Company has decreased to 2.48 in 2017 which is .23% lower as compared to last five year data. It shows that company has reduced its investment in its operational activities with a view to increasing the overall return on capital employed (Du, and Schreger, 2016).

1.

Quick ratio

This ratio shows the immediate short term and long term payment capacity of the company. It is analyzed that the quick ratio of the company has decreased by .20% since last five years. The current quick ratio of the company is 2.44 which are already too high (McKinney, 2015). The quick ratio has also decreased due to decrease in its overall amount blockage in its inventory.

This ratio shows company's ability to measure its profit earning capacity throughout the time. It is analyzed that the profit earning capacity of the company has increased with the drastic rate which shows the positive indicator for the organization (Craze, and Malliaris, G. (2015).

It shows the ability of the company to earn profit from the overall sales of the company. It has reduced its net profit margin by 5% in 2017 since last five years. However, 2016, it had 19.69% net profit margin which increased by 5% in 2017 (Burnside, Eichenbaum, and Rebelo, 2016). It has increased due to increase in its overall revenue.

The return on equity of the company is the amount of return given by company to its shareholders. It is observed that return on equity of the company has increased by 2% in 2017 as compared to last five year data. In addition to this, in 2016, it had earnings of 23.33% which increased by 4% and resulted to 29.99% return on equity in 2017. However, as compared to market industry, this return on equity is too low (Du, and Schreger, 2016). The increased market return and positive factors has resulted to increase in the overall profit.

Gross profit margin ratio- This ratio shows that company's ability to earn gross profit from its overall sales. It is observed that company has decreased its gross profit margin to 61.79% which is 12% lower as compared to last five year data. However, in 2016 and 2017, Microsoft Company has maintained stable gross profit margin ratio (Céspedes, et al. 2014). The gross profit has increased due to increase in its overall total revenue.

This ratio shows Microsoft Company’s efficiency to deploy the funds in its business functioning.

Receivable turnover ratio- It is observed that company has maintained high receivable turnover ratio which is the good indicator of the efficient business functioning. However, the receivable turnover ratios since last five years are stable which shows that company has managed its capital efficiently. However, in 2016, the company has maintained 78.96 receivable turnover ratios then after this ratio increased to 78.73% (Du, and Schreger, 2016).

Foreign exchange market

This ratio shows how well the company has managed its cash in its payable cycle period. It is analyzed that company has reduced its payable collection period which is the good indicator for the efficient business functioning of the organization. If a company reduces its payable cycle period then it will improve its cost efficiency at large.  The payable collection period of the company was 78.73 points in 2017 which is 2% higher as compared to last year data. It has reduced its overall blockage of funds which have shown the positive factors for the business improvement.

This ratio shows Microsoft Company's efficiency to deploy the funds in its current assets. It is observed that company has maintained effective assets turnover ratio which is the good indicator for the efficient business functioning. However, assets turnover ratios since last five years have gone down which shows that company has reduced its overall sales as compared to its total assets (Gray, and Stone, 2015).

This ratio shows company capital structure and financial risk of the organization.

Debt to equity ratio-It is observed that debt to equity ratio of the company has increased to 2.33 points in 2017 which is 1.6 points higher as compared to last five year data. 

This ratio reflects how well the company has managed its debt portion to deploy the funds in the assets of the company. The debt to assets has increased to .70 points which shows that most of its assets are funded by its debt funding (Microsoft, 2017).

This ratio shows company’s ability to cover its interest payment from its earning. It is observed that company has increased its earning capital. The gearing ratio of the company has decreased to 10 points in 2017 which is 50 points lower as compared to last five year data (Arbalester, 2014). It has decreased due to decrease in its overall profitability and increased operating expenses.

It is observed that company has managed good divided policy. It is analyzed that Microsoft has throughout the time increased dividend payment to its shareholders. Company has increased its overall dividend payment since last five year which is the good indicator for attracting more capital in business (Aulenbach, 2016).

Three key elements of the international financial strategy implemented by Microsoft Company are based on its international business and international currency risk exposure. It is observed that most of the revenue and expenses of the company comes from the other countries and due to the strengthening US dollars company has to face the high amount of financial loss in its business (Baños-Caballero, García-Teruel and Martínez-Solano, 2014.

International capital market

It is one of the best financial strategies which are ideally used by the organization, having the high financial risk. It is observed that company could use this option to create hedge funding option to maintain an effective shield for all types of the foreign exchange risk exposure. It is observed that company could use forward contract and future contract to mitigate its foreign exchange risk and volatility in the international market (Burtonshaw-Gunn, 2017).

It is observed that Microsoft has the strong brand image on the domestic and international level. It is analyzed that company could raise funds from the market by issue of shares and debentures in the market. However, Microsoft has least financial leverage and risk in its business. Therefore, by using proper debt funding it could increase its overall funding with the effective amount (Bekaert, and  Hodrick, 2016).

It is observed that Microsoft will face several financial and non-financial risks in its business. It is analyzed that with the changes in the economic structure, Microsoft will have to evaluate all the internal and external factors. It could use forward and future contract to mitigate the transactional can transaction risks arise in the organization. Therefore, it could be inferred that company should mitigate the organization risk by using proper funding and put and call shield options. Nonetheless, it could also diversify its business by increasing its business in other sectors (Brown, 2016).

Therefore, by considering givens strategy, Microsoft could easily increase its overall efficiency of the business and also result to increase overall turnover of the organization (Brigham, and Ehrhardt, 2013).

There are several risks have been faced by the Microsoft company in its business. However, the main risk which has been found in the company is related to the cash management. Due to the large volume of the cash which company often holds, shows that treasury's investment policy, strategic business planning and foreign exchange risk exposure strategy planning are quite less effective (Jacque, 2014). However, with the increased demand of its products company needs to keep high liquidity in its business but with the increased complex issues and Challenges Company may face issue in the handling of the business. Therefore, it is observed that Microsoft has kept high liquidity in its business which not only increases the overall cost of capital of the organization but also increases the complexity of the business (Clark, et al. 2014

There are following risk management strategy for the Microsoft Company that is given as below (Lumby, and Jones, 2015).

2.Ratio analysis of Microsoft

It is observed that Microsoft has another business risk such as high costing, theft of its valuable software, damage in its research and development department. Therefore, by using the proper surveillance program and effective internal control system, it could easily mitigate the operational risk in an effective manner.

This above-given graph shows the annual events of the risk and sensitivity of the happening of the risk in the business functioning of the organization.

Conclusion

After analyzing all the details and annual report of the company, it could be inferred that Microsoft has an efficient business functioning and increased its overall return on capital employed. It is analyzed that company needs to focus on increasing its debt funding which will reduce the overall cost of its capital. The main problem of business is based on its high costly services. The profitability of the Microsoft is already too high. The company should lower down the price of its products and services with a view to cover more international and domestic market share. Nonetheless, foreign currency swap, forward contract, and foreign currency risk exposure plan could be used by the organization to mitigate the international financial risk of the organization.

References

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