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Financial Statements

Discuss about the Receivables Management on Profitability.

Financial analysis focus on evaluating financial position of the company. It is done with the use of final accounts of the company which are prepared at the end of the financial year. This analysis shows the profitability, efficiency, liquidity and overall fiancé structure of a company. This report is all about the critical examination of the performance and position of the two companies which are Microsoft and Oracle. A comparative analysis of the financial position of these two companies is done to know which company is more profitable and efficient form investor’s point of view (Vogel, 2014).

Microsoft Corporation is a multinational information technology company. It is an America based company whose founder is Bill Gates and Paul Allen. It manufactures, licenses, and sells a wide range of software products and services. Its known software products are Microsoft Windows, Microsoft Office Suite and Internet Explorer. It also designs and sell hardware devices such as Xbox, Windows phone and so on (Microsoft.com, 2017).

Oracle Corporation is a computer technology corporation which basically deals in developing database software, cloud engineered systems and enterprise software products. It is considered to be the largest software developer after Microsoft and is also amongst Microsoft’s main competitors. Larry Ellison, Bob Miner and Ed Qates are the founders of this corporation. Oracle Applications, Oracle database, servers are some products produced and deliver by the corporation (Oracle.com, 2017).

In this report, Ratio analysis of the final accounts of both the companies is done so to let the investors know about the better performing company to invest in.

To measure company’s profitability, efficiency, liquidity and to know about its overall finance structure, the method of ratio analysis is used. It includes measurement for several categorized ratios to know about the different aspects of an organisation. They are classified as liquidity ratios, solvency ratios, activity ratios, efficiency ratios, and profitability ratios. To analyse the final accounts of both the companies, ratio analysis is done (Fraser, Ormiston and Fraser, 2010).

Microsoft Corporation

Liquidity Ratios

2016

2017

Current ratio

2.352881716

2.477273079

Quick ratio

2.31495864

2.443473275

Working capital

80,303.0

95,324.0

These ratios are used to show how quickly a company can converts its assets into liquid form that is cash. There are two type of liquidity ratios named as current ratio and quick ratio (Zainudin and Hashim, 2016).

Oracle Corporation

Liquidity ratio

2016

2017

Current ratio

3.737389586

3.08193399

Quick ratio

3.725069735

3.069526015

Working capital

47,105.0

50,337.0

Current ratio: It is used to know about the amount of current liabilities in proportion to current assets. It also shows the capability of the company to meet its short term debts. 2:1 is considered an ideal ratio.

Liquidity Ratios

Microsoft Corporation ratio has raised from 2016 to 2017 while there is a decrease in Oracle’s current ratio during 2016-2017.  It clearly indicates that Microsoft has enough assets to pay off its liabilities in comparison with oracle because a large portion of its current assets comprises of cash and less is involved in inventory which enable it to make other investments with its assets and providing the investors a better view of the performance.

Quick ratio: An acid test ratio used to measure potential of the company in paying its debts with se of most liquid assets like cash. It also means how quickly a company can convert its current assets into liquid form. 1:1 is treated as an ideal ratio.

There is an increase in the quick ratio of Microsoft and a decrease in the ratio of Oracle. Both the companies have capability to pay off their short term debt with their quick assets but Microsoft can perform this task more efficiently as compare to Oracle. The reason being, it has high portion of liquid cash in comparison to its current liabilities, which can be easily used to pay them off (Saleem and Rehman, 2011).

These ratios helps in analysing that in what manner company is utilising its resources. They indicate the potentiality of the company to use its assets and manage its liabilities in an effective and efficient manner. The efficiency ratios are:

  1. Debtors’ turnover ratio: It shows how well a company can collect the cash from its trade debtors. A high ratio states that debt collection of the company is efficient.
  2. Creditors’ turnover ratio: It evaluates that how frequently a company pay to its trade creditors. A high ratio means that the company is capable enough to pay back its account payables on a regular basis.
  3. Inventory turnover ratio: Efficient management of the inventory and the number of times a company sold its inventory during a year can be observed by this ratio.
  4. Assets turnover ratio: It a ratio between the revenues and the assets of the company. It shows the effective employment of the assets by the company to make or generate revenue. A higher ratio indicates better company performance.

Microsoft Corporation

Efficiency ratio

2016

2017

Debtor turnover ratio

4.725629778

Creditor turnover ratio

4.795772676

Inventory turnover ratio

15.46074007

Assets turnover ratio

0.413772483

Oracle Corporation

Efficiency ratio

2016

2017

Receivable turnover ratio

7.061862424

Creditor turnover ratio

13.54306437

Inventory turnover ratio

29.17578125

Assets turnover ratio

0.305278532

The debtor turnover for Microsoft is 4.7 and for oracle, it is 7.06. As it has been said that a high account receivable ratio is more favourable for the company. Oracle has higher ratio as compare to Microsoft which means it collects its receivables more efficiently and regularly during the year. It can convert its debtors into cash faster than Microsoft and is able to pay its liabilities sooner (Jindal and Jain, 2017)

Higher creditor’s turnover ratio proves to be good for the company. In comparison with Microsoft, Oracle has high payable turnover ratio of 13.54, which implies that it pay off to its creditors very frequently and also have a stable liquidity. This ratio is generally used by the creditors and from their point of view a company who can pay them back frequently and regularly is much better than the company who make delays in the payment. So in terms of this, Oracle is performing better than Microsoft.

As compare to industry standards, companies prefer higher inventory turnover ratio. Comparatively, Microsoft has low ratio which means it has purchased more inventory and may lead to over stocking, whereas Oracle’s ratio shows that it has managed its inventory in a well-planned manner. Inventory ratio is important for the investors and having a high ratio tells the investor that the company is not buying the stock unnecessarily and is very effective in selling it (Barman and Sengupta, 2017).

Efficiency Ratios

Asset turnover ratio of Microsoft is a little bit more than Oracle. It implies that Microsoft is good at generating its revenue by using its assets efficiently and also gives an indication to the investors that the company is managing its assets very well to develop sales.

Detail study of the financial accounts of a company to know about its profitability or in other words to have an idea about its ability to generate profits from its operations, is done with the help of Profitability ratios. These ratio give an overview of the company’s profits being made during the fiscal year. Types of profitability ratios are net profit ratio, gross profit ratio, operating profit ratio and so on (Camilleri and Camilleri, 2017).

Microsoft Corporation

Profitability Ratios

2016

2017

Operating Profit Margin

0.246061885

0.282056698

Net Profit Margin

0.196882325

0.235730962

Return on Capital Employed

0.2

0.1

Return on Equity

0.233315277

0.292897201

Return on Total assets

0.086724421

0.087952017

Oracle Corporation

Profitability Ratios

2016

2017

Operating Profit Margin

0.348449267

0.352920908

Net Profit Margin

0.240262369

0.247428965

Return on Capital Employed

0.1

0.1

Return on Equity

0.188225592

0.173319718

Return on Total assets

0.079345694

0.069152758

Operating Profit Ratio: This ratio shows how systematically a company can control its cost and make profits after meeting its all operating expenses. A higher ratio is more favourable as compare to a lower ratio.

Calculation of this ratio gives a clear idea that operating margin of Oracle is more than Microsoft and it has also increased during the year. This means Oracle has enough capacity to make revenue from its operations and for investors, it is a good option to invest in as it makes the proper use of its ongoing operations to generate revenues.

Net Profit Ratio: It is calculated to know about the profits earned by the company during a fiscal year. A high ratio indicates the proper and efficient management of business’s operations in order to raise profits from annual sales.

As per the calculations done above, it can be seen that net profit margin of Microsoft Corporation has been increased from 19.68% to 23.57% whereas on the other side Oracle’s profit margin almost same as compare to the previous year which is 24.74%. Although, the profit percentage of Microsoft has risen during the year but it is less than that of Oracle’s margin. This clearly means Oracle Corporation has high profitability and is able to maintain its profits at an increased level during the fiscal year.

Return on Capital Employed: It shows the effective utilisation of assets in long term financing. Investors generally prefer this ratio, as it provides them the information about company’s effective and efficient use of its capital employed.

As far as Microsoft is concerned, the ratio is 0.2 in 2016 and 0.1 in 2017 and on the other side ratio of Oracle is same during the year 2016-2017 that is 0.1, which implies that they have used its capital employed in an efficient manner and maintained a stability in their profits (Kartio, Mirza and Shaikh, 2017).

Profitability Ratios

Return on Equity: This ratio measures how well a company make use of its shareholders’ investment in generating profits. A higher return on equity is favourable for the company.

In comparison to Oracle Corporation, return on equity of Microsoft is higher and has also increased during the year. This means that the company is performing better and investors can invest in it as they will get higher returns on their investment. Getting high and increasing returns is one of the factors, investors look for in a company (Penman, Reggiani, Richardson and Tuna, 2017).

Return on Total assets ratio:  It shows the efficient management of all assets to produce revenues. A higher ROA is good from investors’ view point.

There is a slightest increase in the ROA of Microsoft while ROA of Oracle has decreased. It indicates that Microsoft is using its assets to make profits more effectively. It can easily convert its assets’ investment into revenues. A positive ROA generally shows the increasing trend of profits (Jenter and Lewellen, 2015).

These are the ratios used to know about the capital structure of a company. They give an idea of the arrangement of funds for business operations. One of the capital ratio is debt-equity. Debt comprises of long term creditors, issuing of bond while equity means investment done by investors, earnings retained by the company.

Microsoft Corporation

Capital structure ratio

2016

2017

Debt- equity

1.690306541

2.33019311

Interest coverage ratio

16.88978278

11.41809181

Oracle Corporation

Capital structure ratio

2016

2017

Debt- equity

  1.37222187

1.506331229

Interest coverage ratio

8.799591002

7.405450501

Debt-Equity Ratio: It compares the company’s total debt and total equity. It shows the proportion of company funds raised from debt and equity. A higher ratio indicates that the more funds are been raised through creditors as compare to investors so a lower ratio is more favourable (Levi and Segal, 2015).

Microsoft’s debt equity ratio is higher than Oracle and has also raised during the year. It is riskier for the investors and creditors to invest in this corporation. Generally creditors does not prefer higher debt equity ratio as it gives them an indication that the portion of investment done by investors is less than that of done by them. Whereas oracle has more stable business and investors can invest in it.

Interest Coverage Ratio: It gives an idea about the interest payments done by the company in a given period of time. Creditors generally used this to know about the risk taking factor of the business. A coverage ratio of more than 1 is always considered good.

As compare to Microsoft, Oracle’s ratio is less while Microsoft has better coverage ratio and is capable of paying its interest payments time to time. Proper funds can be raised from creditors as they don’t have to worry about their payments. Investors should also invest as the risk factor of Microsoft is low as compare to Oracle (Ferrarini, Hinojales and Scaramozzino, 2017).

Conclusion

As per the above analysis and interpretation, it can be concluded that the profitability and efficiency of Oracle Corporation is much better than Microsoft Corporation. Microsoft is good at maintaining its liquidity, return on equity and assets at an increased level as compare to Oracle. But doing the overall comparison of the financial performance of both the companies, it can be said that Oracle is performing better than Microsoft at all grounds and as investors always look for a company which has better profitability, efficiency and a good financial structure. Oracle is proved to be a good option for them in order to invest their money in it.

References

Penman, S.H., Reggiani, F., Richardson, S.A. and Tuna, A., 2017. A Framework for Identifying Accounting Characteristics for Asset Pricing Models, with an Evaluation of Book-To-Price.

Barman, A.N. and Sengupta, P.P., 2017. DETERMINANTS OF PROFITABILITY IN INDIAN TELECOM INDUSTRY USING FINANCIAL RATIO ANALYSIS. International Journal of Research in Management & Social Science, p.25.

Camilleri, E. and Camilleri, R., 2017. Accounting for Financial Instruments: A Guide to Valuation and Risk Management. Taylor & Francis.

Ferrarini, B., Hinojales, M. and Scaramozzino, P., 2017. Leverage and Capital Structure Determinants of Chinese Listed Companies.

Financials.morningstar.com. (2017). Balance Sheet for Microsoft Corp (MSFT) from Morningstar.com. [Online] Available at: https://financials.morningstar.com/balance-sheet/bs.html?t=MSFT&region=usa&culture=en-US [Accessed 25 Oct. 2017].

Financials.morningstar.com. (2017). Income Statement for Oracle Corp (ORCL) from Morningstar.com. [Online] Available at: https://financials.morningstar.com/income-statement/is.html?t=ORCL&region=usa&culture=en-US [Accessed 25 Oct. 2017].

Fraser, L.M., Ormiston, A. and Fraser, L.M., 2010. Understanding financial statements. Pearson.

Jenter, D. and Lewellen, K., 2015. CEO preferences and acquisitions. The Journal of Finance, 70(6), pp.2813-2852.

Jindal, D. And Jain, S., 2017. Effect of Receivables Management on Profitability: A Study of Commercial Vehicle Industry in India. Management, 2(2), pp.246-255.

Kartio, M.A., Mirza, A. and Shaikh, F., 2017. Impact of Global Financial Crisis on the Performance of Commercial Banks of Pakistan–A Case Study of MCB Bank Limited.

Levi, S. and Segal, B., 2015. The Impact of Debt-Equity Reporting Classifications on the Firm's Decision to Issue Hybrid Securities. European Accounting Review, 24(4), pp.801-822.

Microsoft.com. (2017). Microsoft - Official Home Page. [Online] Available at: https://www.microsoft.com/en-in [Accessed 25 Oct. 2017].

Oracle.com. (2017). Oracle | Integrated Cloud Applications and Platform Services. [Online] Available at: https://www.oracle.com/index.html [Accessed 25 Oct. 2017].

Saleem, Q. and Rehman, R.U., 2011. Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.

Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

Zainudin, E.F., Zainudin, E.F., Hashim, H.A. and Hashim, H.A., 2016. Detecting fraudulent financial reporting using financial ratio. Journal of Financial Reporting and Accounting, 14(2), pp.266-278.

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