Finance Ratios Analysis: Ford vs Microsoft

This document provides a detailed analysis of the financial ratios of Ford and Microsoft, including price earning ratio, market to book value, operating margin, net profit margin, return on equity, current ratio, quick ratio, and debt to equity. The analysis compares the performance of both companies with the industry and identifies their strengths and weaknesses. Based on the analysis, recommendations are provided for investors.

Finance

Table of Contents
MAIN BODY...................................................................................................................................1
1. Compute the following ratios...................................................................................................1
2. Analyse the each companies performance with industry and identify the strength as well as
weakness......................................................................................................................................4
3. Recommendation.....................................................................................................................5
REFERENCES................................................................................................................................6

MAIN BODY
1. Compute the following ratios
Price Earning ratio: PE ratio is the expected value of share which is based on the earnings so
when earning of the company increases then market value per share also increases. Formulae of
price earning ratio is share price divided by Earning per share of the company.
Price Earning Ratio = MPS/EPS
Company F MSFT
Market Price Per Share 8.08 98.61
EPS 0.92 2.13
PE Ratio 8.78 46.30
Here MPS of Ford is as of date 31.12.2018, while MPS of Microsoft is as of date
01.07.2018
Ford has reported PE Ratio is 8.78 while Microsoft has reported PE Ratio of 46.30 during
year 2018. PE ratio of both companies hows that both are providing earning on share but Ford
has lower ratio as compare to Microsoft. A lower ratio shows point out towards poor current and
potential performance. MSFT is more efficient to generate income on its share.
Market to book value: It is also called price to book ratio where organization use financial
matrix to evaluate the market value of the company in comparison to book value. It will be
calculated through market capitalization divided by total book value.
Price-to-book Ratio = MPS/BVPS
Company F MSFT
Market Price Per Share 8.08 98.61
Book Value Per Share 8.98 10.32
Price to Book Ratio 0.90 9.56
MSFT's price-to-book ratio is 9.56 while Ford Plc 's ratio is 0.90 shows that Microsoft's
share are trading at higher value as compare to its book value per share while Ford's market price
per share is lower than its book value per share.
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Operating Margin: It is the measurement of profitability which indicate that how much revenue
left after deducting cost of goods sold & expenses. It will be calculated through dividing
operating income from from net sales.
Operating Margin = Operating Profit / Turnover
Company F MSFT
Operating Profit 3203 35058
Turnover 160338 110360
Operating Margin 2.00 31.77
Here as shown in above table Ford has reported operating margin of 2% while
Microsoft's operating margin is 31.77% which shows that MSFT is more capable to provide
profit through its business operational activities.
Net profit Margin: It is the final percentage of revenue which left after deducting all the
expenses from the total sales. Organizations used to calculate this ratio in order to measure the
total profit from the business operations.
Net Margin = Net Profit / Turnover
Company F MSFT
Net Profit 3677 16571
Turnover 160338 110360
Net Profit Margin 2.29 15.02
Microsoft's net-profit margin is 15.02% while NP margin of Ford company is 2.29%
which shows that Microsoft's efficiency to generate net profit is higher than Ford. Microsoft Plc
is more effective in providing Net-profit
Return to Equity: This ratio used to evaluate the financial performance of the company with the
help of dividing net income from shareholder's equity. It will be consider as return on net assets
of the company.
Return on Equity = Net Profit / Turnover
Company F MSFT
Net Profit 3677 16571
Shareholder Equity 35932 82718
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Return on Equity 10.23 20.03
Microsoft is providing 20.03% return on its equity while Ford's return on equity ratio is
10.23 which shows that MSFT's efficiency to provide return on equity is higher than Ford.
Current ratio: It is also known as liquidity ratio which help the organization to measure their
company's ability to pay their short term obligation. Basically these informations are useful for
investors that analyse how company maximise current assets in order to meet current dent of the
business. Ideal ration is 2:1, so company have to make sure that they manage their assets and
liability according to it.
Current Ratio = Current Assets / Current Liabilities
Company F MSFT
Current Assets 114649 169662
Current Liabilities 95569 58488
Current Ratio 1.20 2.90
Generally minimum acceptable current ratio is 2:1 below which shows that company is
not capable to payout its all current liabilities by utilising current assets. Here as exhibited in
above table MSFT's current ratio is 2.90 while Ford's current ratio is 1.2, which shows that
Ford's liquidity position is not so good while Microsoft's current ratio is above the minimum
acceptable criteria.
Quick ratio: This ratio used to measure how organization able to meet their financial liability
and it is also called acid test ratio. It exclude those current assets which take longer time to
converted into cash such as inventory or prepayments. In this ratio also, idea ratio is 1:1 and
management have to formulate their strategy accordingly.
Quick Ratio= Quick Assets / Current Liabilities
Company F MSFT
Quick Assets 103429 167000
Current Liabilities 95569 58488
Current Ratio 1.08 2.86
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Here MSFT has reported 2.86 of quick ratio while Ford Plc's quick ratio is 1.08 which
indicates that Ford company is not capable to pay out its all current liabilities by using its more
liquid assets or quick assets.
Debt to Equity: It is the financial ratio which used to indicate the proportion of shareholder's
equity and debt used the company. High debt equity indicate that company not able to generate
high cash in order to meet their obligations.
Debt To Equity Ratio = Debt / Shareholder's Fund
Company F MSFT
Total Debts 220608 176130
Shareholder Equity 35932 82718
Debt To Equity Ratio 6.140 2.129
1:1 is minimum debt to equity ratio above which exhibits that company's liquidity
position is very poor. Ford's debt-equity ratio is 6.140 while MSFT's debt-equity ratio is 2.129
which shows that Ford's current and non current debt are considerably higher than its equity.
2. Analyse the each companies performance with industry and identify the strength as well as
weakness
Ford:
Ratios Company
performance (Ford)
Auto-mobile
Industry
Strength /
Weakness
Price Earning Ratio 8.08 15 to 20% Weakness
Market to Book
Ratio
0.90 19.38% Weakness
Operating Margin 2.00 10.7% Weakness
Net profit margin: 2.29 6% Weakness
Return to Equity 10.23 12 to 15% Weakness
Current Ratio 1.20 2:1 Weakness
Quick Ratio 1.08 1:1 Strength
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Debt to Equity 6.140 1:1 Weakness
Performance of Ford company will be compared with industry performance and it will
analysed that overall performance of Ford not match with the industry. Company required to
focus on their financial data and make sure to improve it according to the auto-mobile industry
basis.
Microsoft:
Ratios Company
performance
(Microsoft)
Software Industry Strength /
Weakness
Price Earning Ratio 46.30 30% Strength
Market to Book
Ratio
9.56 12.75% Weakness
Operating Margin 31.77 20% Strength
Net profit margin: 15.02 12% Strength
Return to Equity 20.03 20% Strength
Current Ratio 2.90 2:1 Strength
Quick Ratio 2.86 2:2 Weakness
Debt to Equity 2.129 0.06 Weakness
From the above comparison, performance of Microsoft company meet with the overall
industry performance. Most of the financial ratios such as PE, Operating margin, Net profit etc.
are the strength and Debt to equity, quick ratio and market to book are weakness.
3. Recommendation
From above ratio analysis of Ford and Microsoft it has been evaluated that Microsoft's
position is more better than Ford. Microsoft's all ratios are favourable and effective as compare
to Ford's. It is advisable to investors to not buy shares of Ford Plc ans also already held shares
should be sold as market price of shares are below the book value of share. Whereas in case of
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Microsoft it is advisable for investors to retain or hold shares of company also for investment
purpose shares of company can be buy.
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REFERENCES
Books & Journals
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