Analysis of the financial information of a company follows three steps. Initially, the company’s financial records and information are analyzed. The information includes sales recorded or the company’s earnings from one year to another (Saylor 2012). The analysis should employ two techniques, trend analysis and common-size analysis. Secondly, a comparison between the financial measures of the company and those of its competitors is conducted. Lastly, financial ratios are analyzed against the averages of the industry.
Microsoft Corporation, a publicly-traded software company, was the focus of my research. The company’s financial records showed that the earnings in net income in the year ended June 2020 stood at $44,281,000,000, while the net income for the year ended June 2021 was $61,271,000,000. The net sales of the year ended June 2020 were $143,015,000,000 while those of the year ended June 2021 stood at $168,088,000,000 (Financial Statements, 2022). As a result, the common size ratio stood at 36.45% in 2021 against 30.96% in 2020. This shows Microsoft posted a slight improvement between the reviewed periods.
The second step was to compare the financial measures of Microsoft against Oracle, as the main competitor. Using the common size analysis technique, the net income was compared against the net sales for each of the companies. Microsoft’s cost of goods sold for the year ended 2021 was 36.45% of the net sales as compared to 33.96% posted by Oracle (Financial Statements, 2022). Microsoft’s net income as a percentage of net sales in the year ended June 2021 was higher than that of the previous financial year. Microsoft’s net income as a percentage of net sales was also compared to that of Oracle, where it also outperformed its rival. These financial indicators show that Microsoft is a financially stable company.
Financial Ratio in Evaluating a Company’s Financial Health
The Financial Ratio, a relative magnitude of two selected numerical values from a company’s financial statement, is a metric used to evaluate a company’s financial health. It indicates where a company stands compared to its rivals and shows how efficiently a company is being operated among others. Financial Ratio has several ratios within it; these ratios include Current Ratio, Quick Ratio, Cash Ratio and Cash Conversion Cycle.
The current Ratio is used to determine how well a company can pay off its short-term liabilities with current assets. The ratio is derived by dividing the company’s current assets by current liabilities. On the other hand, Quick Ratio measures the capacity to pay its current liabilities without needing to sell its inventory or obtain additional cash, while the Cash Ratio measures the ability of a company to pay its short-term debt with only cash and cash equivalent. The last measure is the Cash Conversion Cycle which is a metric that expresses the length of time (in days) that it takes a company to convert its investment in inventory and other resources into cash flows from sales.
I chose Pepsi Co. and Coca-Cola as my sample companies. They belong to the same industry and are easy to compare. Pepsi has a total of $92,377,000,000 in current assets against $94,354,000,000 of Coca-Cola, giving Pepsi a Current Ratio of 0.83 and a Quick Ratio of 0.66 against Coca-Cola’s Current Ratio of 1.13 and a Quick ratio of 0.96. The Cash Ratio is compared as 0.08 for Pepsi and 0.17 for Coca-Cola (Financial Ratios, 2022). A financially stable company ought to have ratios above one, indicating a company’s ability to effectively clear its short-term liabilities. According to these ratios, Coca-Cola has a better chance of clearing its short-term liabilities as compared to Pepsi, signaling Coca-Cola is a much more stable company.
Market Capitalization in Companies
Market capitalization, often referred to as a market cap, measures the value of a given company at a particular point in time. It is determined by multiplying the number of outstanding shares by the current market price of the shares (Saylor 2012). Most publicly traded companies fall in one of three categories, large-cap, mid-cap, or small-cap Company. Large-cap companies have a threshold market value of more than $12,000,000,000. Midcap companies, on the other hand, have a market cap value of $1,000,000,000 to $12,000,000,000, whereas small-cap companies have a value of less than $1,000,000,000 in valuation.
An example of a large-cap company is Oracle Corp. which has a market value of $212,780,000,000. Lawson Software Inc. belongs to the midcap category with a total market capitalization value of $3,790,000,000. Finally, Advent Technologies belongs to the small-cap category with a market cap value of $110,000,000 (Market Cap Statements, 2022). Being aware of the market capitalization of a company is important to any serious investor as it helps them to determine the volatility of the company’s stocks. A small-cap company would be more volatile as compared to a mid-cap company, whereas a mid-cap company would be more volatile when compared to a large-cap corporation. Using market cap as a metric would mean that small-cap companies carry the most risk while large-cap companies carry less risk.
As an investor, I would rather choose to buy stocks in Oracle Inc. as compared to Lawson Software Inc. and Advent Technologies. This is because Oracle Inc. holds the highest market capitalization value of $212,780,000,000 compared to the market value of both Lawson Software Inc. and Advent Technologies. A higher market capitalization is an indicator that a given company’s share is less volatile to the market.
Saylor, Academy. (2012). Managerial Accounting. How do managers use financial and non-financial measures? Microsoft Corporation Financial Statements. (2022). Stock Analysis on Net. Web.
Oracle Corporation Financial Statement. (2022). Stock Analysis on Net. Web.
Market Capitalization Statement. (2022). Companies Market Cap. Web.