Microsoft has developed into the number two cloud computing company in the world behind Amazon.
In fact, big success can lull some companies into a sense of satisfaction that makes them blind to the problems plaguing their operations. We found both good signs and bad signs but, overall, there is huge room for improvement. If Microsoft took our advice, it could revive some of its lost luster and improve its stockholder value.
The company moved back and forth between working harder for less and working less for more. Who is at the helm here? This is great for the company if it can find new products and services that increase annual revenues. Staying stagnant, however, will destroy the best thing they have going.
The gross profit margin has been flailing back and forth over the years. Microsoft was, for the most part, able to grow the gross profit in line with a bit higher revenue growth but the GP margin was declining at about a half-point annually. Ultimately, all this money would have gone right to the pre-tax bottom line.
Operating expense control We were surprised to find that Microsoft has done a great job in operating expense control in light of the poor job in gross profit margin maintenance.
This was the real financial success story for Microsoft. In other words, the company is holding an enormous, non-producing asset that is substantially lowering their overall return on assets and increasing its cost of capital.
Instead of creating new ideas, a company looks to buy new ideas Skype? Holding large cash balances produces a lazy culture for many companies.
Microsoft needs to put their cash somewhere besides their sock drawer and start innovating again! Return on assets ROA We mentioned return on assets in the prior metric so what does this mean in relation to Microsoft?
Two thirds of the adjustment in average ROA from Debt Financing Difficult as it may be to believe, Microsoft could use additional cheaper cost debt in its capital structure mix. The way Microsoft thinks, the additional funds would probably be put back into cash — exactly the wrong place.
Inefficient use of debt and holding too much cash crushes ROA and jacks up the cost of capital as we will see shortly.
This does a great job eliminating value! This is a great trend for Microsoft to continue. This high cost of capital is due to combining a consistent return on equity with too much expensive equity used to fund their capital structure.
Remember the above discussion about the ROA at While this is a healthy growth rate, it is overwhelmed by the inflated capital cost. Microsoft has, unfortunately, become a deceptive wealth destroyer in its maturity.Analyze past performance data and get a realistic picture of your company's future performance using Microsoft Excel.
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