Each company must prepare financial statements to provide a comprehensive picture about its past performance and situation for the owners, the managers, the state and other stakeholders as well. In the case of enormous, international public limited companies like Ford and Microsoft these statements and data are public, so anybody can reach them through the internet.
Moreover, we can also compute a lot of financial ratios based on these data. If we want to get an authentic frame about the firms, we have to know what these statement and ratios mean. In addition, it’s difficult for the companies that they want to give other picture about their financial status to the owners and shareholders and an other to the state, namely in the former case the firm is interested in showing high profit to retain the older and win newer investors, whereas in the latter case it wants to give a worse picture in order to pay as little tax as possible.
Below, we analyse the above mentioned two companies (Ford and Microsoft) for leverage, profitability and growth purpose with some ratios.
Ford Motor Co: As we can see in the income statement, the total net income was fluctuating yearly, until 2008 it was negative that means Ford’s expenses exceeded its revenues. Over the past four years, this amount was the least, in number -14,672.00 million $ in 2008, thank to the financial crises. So the in 2009 reached, in number 2,717.00 million $ net income rates a good result.
As the total net income was negative or relative low, the ratios of profitability like ROE, ROA or ROIC, which give that how much percentage shares the net income of the equity, the assets or the capital. We can’t say that it’s good if these indicators are high, namely in 2006 ROE was more than 300%, in 2008 more than 80 %by Ford, because both the net income and the equity were negative, so in this case this high ratio meant problems, not success.
In 2007 and 2009 this ratio was positive, because the sign of the net income and the equity differed (plus and minus). In 2009, the net income covered the 30 percentage of the debt of the stockholders equity, which cannot be said too high. ROA and ROIC were also negative from 2006 to 2008 because of the negative income, but in 2009 the net income came out at slightly more than 1% of the total assets and 2% of the capitalization. Until last year it didn’t worth to buy Ford shares, namely the earnings per shares (EPS ratios) were also negative, so it was in fact loss.
A year ago, this number was 0,91$ per shares. We can state that Ford’s profitability is quite low; its total net income is very low compared to its equity, assets or capitalization. However, the firm produce a loss for years and also the book value remained also negative, its market value exceeded that and stayed over 5 million $ all the time. This amount was the least two years ago, when the financial crisis hit the automotive industry.
The number of shares increased yearly, mainly last year, but their worth didn’t, even in 2008 the current market price of a Ford share was 2,29$. After the crises, the prices was getting higher, in 2009 a shares cost 10$. As the historical prices, the market value fluctuated also, namely the number of shares increased slowly, so the market capitalization was influenced by the market price of the shares. In 2009, Ford’s market capitalization was slightly less than 30000 million $, which is almost 400% of the book value.
This number in not too surprising, namely the market value contain a lot of factors, which cannot be quantified like the reputation of the company, the expertise of the employees and managers, the social values of the firm. We can realize that Ford reached a quite high market value through its shareholders after an enough strong oscillation. Nowadays, Ford ranked fourth among the leaders in market capitalization in the automobile industry beyond Toyota, Honda and Daimler. However, Ford has the second best P/E ratio in the industry, which means that its market value is multiple of its net income.
This isn’t surprising, namely its market capitalization could be said high, also within the industry, but its income is lagging behind the main competitors. About the rate of Ford’s growth we can say it decreases. From 2007 the operating revenue, the gross operating profit and also the EBITDA reduced strongly from year to year. In 2007, its operating revenue was more than 170 million $, whereas just 118 million $ last year. However, the rate of the depreciation and the interest expenses lessened in the recent years, so Ford could realize raising net income.
Its free cash flow growth was also negative last year, and 6 companies had passed Ford in this aspect in the industry. Also its revenue and net profit margin are less than the main competitors’ ones in the recent years, by the former GM and Toyota come before the Ford, by the latter also the Toyota, Honda, SORL and Tata. In conclusion, we can state that Ford’s ratios shows a lot about the situation of the company. It’s clear, that also its book value equity and the net income were negative in the last years, it can realize a less than 3000 million $ net income only in 2009. I
n addition, its sales fall short of the previous ones, the operating revenue decreases continually. Besides, the total debt of the company is also very high, over the past 4 years it remained over 100 billion $ all the time, but it lessens yearly, as the interests too. The amount of Ford’s total equity is fluctuating, but the Debt-Equity ratio, which shows the relative size of debt and equity, is tremendous, it changed from 900 to almost 5000% in the recent years.
The interest coverage ratio is also fluctuating, that represents how much percentage of the interest expenses can the EBIT or EBITDA cover, so it’s also clear, that the position of company uncertain and vulnerable. The high total debt itself doesn’t mean danger, but it couples with low total income and decreasing revenues and profits. Ford is located roughly in the middle of the industry, mainly Toyota, Honda and Daimler passes the firm nowadays.
Microsoft Corporation: As we talk about one of the biggest software company all over the world, it seems to be natural that Microsoft is a successful by the financials, too. Whereas, in the case of Ford the total net income was negative, by Microsoft it’s positive over the past four years. Net income increased mildly from 2006 to 2008, with 4000 million $, but in 2009 it fell back with 3000 million $, Microsoft realized in number 14569 million $ net income.
By the analysis of the profitability of the firm, we use also the ROE, ROA and ROIC ratios in this case, also. As both of the net income and the stockholders’ equity are positive here, these ratios interpret the true percentages. The net income totalled the 30-50% of the stockholders’ equity, so we can say the return on equity is quite moderate, only the half or one third of the invested capital returned over the past years. Roughly 20% of the total assets and 40-60% of the invested capital returned in the firm in the most recent years.
The former is not so bad, namely the total income could cover one fifth of the total assets, but the latter means that only the half of the invested capital were returned, which could be better. But the shareholders could be satisfied, namely the earnings per share almost increased yearly, however, the number of the shareholders fell from year to year, the net income fluctuated mildly, so the EPS also undulated a little, too. The P/E ration of the firm is very high, it changed between 2000 and 1500%, which is not too attractive for the shareholders, namely they pay almost twenty times more for the shares than the earnings per shares.
But it also means that the market value (which contains a lot of intangible elements that we mentioned above by Ford) is multiple of the net income. However, we say Microsoft’s P/E ratio is high, but in the application software industry this number counts low, namely the firm doesn’t belong to the leaders in the P/E ratio among the competitors, a lot of companies, for examples Salesforce, RightNow and OPNET has more higher, in number more than 10000%, P/E ratios.
However, Microsoft lifts in the aspect of market capitalization, now its market value reached the 270 billion $, but also their net income exceed the competitors’ ones. So based on the market capitalization Microsoft would have one of the highest P/E ratios in the industry, but the firm has also high net income, so this rate is lower than the industrial average. As we already mentioned, Microsoft possess an exceptionally high market capitalization, so it’s not surprising that its market value is more than fivefold or even nine fold of its book value.
The book value moved around 30-40 billion $ in the recent years, whereas the market value among 212-287 billion $. In the industry, the average market value is 211 billion $, Microsoft could exceed this all the time. All the big competitors like Apple and Google have lower market capitalization than Microsoft.
But not its market value is the single advantage of Microsoft in the industry, its main rivals possess lower net income, revenue, EBITDA and gross margin than Apple and Google, too. However, the rate of growth of Microsoft lagged behind the Apple, Google and even Oracle, these firms grow at a faster rate, around 15-20%, whereas Microsoft only 14%. In summary, we can see, that Microsoft lifted in the industry over the world, any of their competitors could reached them in the area of market value, operating revenue and net income.
It’s also a great advantage that Microsoft didn’t have any debt until the last years, but in 2009 the debt came out only at 15% of the total equity, so the financial position of the company could be said enough strong, balanced and independent. In this case the interest coverage ratio doesn’t have any sense, namely there aren’t any interest. Compared to other companies in the industry, Microsoft has a laggard position by the EPS and P/E ratios, by the former because of the relative lots of shares, by the latter because of the high market value and net income. The result of the financial statements confirmed the above mentioned.