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MSFT - A Fundamental Financial Analysis

Before investing in any business or equity, it makes sense to take a look at the entities fundamentals; a.k.a, its operations (i.e. income statement), current financial status (i.e. balance sheet, valuation (i.e. valuation ratios)....and possibly it ability to generate cash (i.e. statement of cash flows).


Therefore, lets take a look at an established and widely owned stock, Microsoft ($MSFT).


To start, an image I like to observe is pictured below. This image allows one: 1) gain a general understanding of a particular company and 2) understand the relative relationship between the company's operations, its financial status, and valuation.



For each quarter, the 2 bars on the very right (i.e. bars #7 & #8) depict the valuation of Microsoft...or in other words, how much an investor has to dish out to gain ownership in the company. Luckily, for an inspiring investor, one isn't obliged to buy the entire company (i.e. $1.6 trillion), but rather can buy a fraction of the company via a share of stock.


Bars #5 and #6 represent the current financial status of MSFT (i.e. balance sheet). Based on the size of the bars, one can see MSFT has more cash than debt and has a cash balance equal to roughly 8% of the company's market cap.


Finally bars #1 and #2, represent the revenue and income MSFT makes on a quarterly basis relative to the value of the company; bars #3 and #4 represent annual metrics respectively. As expected, these bars are quite small; but are expected to reoccur every subsequent quarter.


In general investing lingo, the relative comparison between bars #3 and #4 to bar #8 represents a company's valuation ratios. Since bar #8 is 34.29 time larger than bar #3, MSFT trades at a price to earnings ration of 34.29. Accordingly, the relative size magnitude between bars #4 and #8, suggests MSFT trades at a price to sales ratio of 11.07.


With this data in mind, an investor has a grasp on what exactly they are buying...but do these metrics represent a good deal. Well, to be honest, the concept of a good deal vs bad deal is all relative and based entirely on opportunity cost, or what is the next best available investment. Relative to US treasuries with maturities under 10 years, where the annual yields are less than 1% (representing a P/E ratio of over 100), MSFT looks like a great values; albeit, with a bit more risk. Particularly, when it is considered, the revenues and earnings of MSFT are still growing with each passing quarter.


Per below, the data shows MSFT's quarterly revenues have been increasing at a double digit year over year rate since October 2017, with the most recent quarter's YoY increasing sitting at 12.4%. Additionally, every year, an investor's percent ownership in the company has been steadily increasing, without buying additional shares, as MSFT continues buying back it shares outstanding.



Overall, via this brief, yet data rich, overview of MSFT, hopefully one can better understand what they own and what to expect to receive via that ownership. See MSFT Dividend Analysis for insight into what percent of MSFT's earnings actually drop physically to the invest via a quarterly dividend payment.


Until next time....




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