INTRODUCTION
With the intent to evaluate the financial
As an established manufacturer of a line of fully-integrated wireless communication products serving an international market, New Technology Incorporated (NTI) is looking to start a partnership with outside entities for a long-term software security venture. After a competitive technical product evaluation, it has been determined that MicroStrategy, Inc. (MicroStrategy), a Virginia based corporation, represents the best potential candidate for this venture. This analysis will review the income statement trends, balance sheet trends, cash flow trends, and three key financial ratio trends for the years of 2013 – 2015 to determine if this merger would adversely affect NTI’s performance and profit. Overall, this analysis will determine what the relative financial viability of MicroStrategy and make a recommendation from the financial standpoint for a partnership.
INCOME STATEMENT TRENDS
The first trends to be reviewed for the years of 2013 – 2015 are the income statement trends for MicroStrategy. Among major financial statements, the income statements are significant in shedding light on how well a company has performed in earning a profit . While looking at the Gross Profit is important, to get a clear picture of the income trends, it is vital to look at additional lines in the income statement, such as the Total Revenue and Cost of Revenue. By looking at the Gross Profit, Total Revenue, Cost of Revenue and calculating the percentage changes by dividing one year’s trend by the previous year and subtracting one, the percentage change for the income statement items will be clearly shown .
Gross Profit
2015 – 2014, ($428,761/$444,620) – 1 = -3.57%
2014 – 2013, ($444,620/$437,319) – 1= 1.67%
2013 – 2012, ($437,319/$424,648) – 1= 2.98%
Cost of Revenue
2015 – 2014, ($101,108/$135,210) – 1= -25.22%
2014 – 2013, ($135,210/$138,569) – 1= -2.42%
2013 – 2012, ($138,569/$141,076) – 1= -1.78%
Total Revenue
2015 – 2014, ($529,869/$579,830) – 1= -8.62%
2014 – 2013, ($579,830/$575,888) – 1= 6.8%
2013 – 2012, ($575,888/$565,724) – 1= 1.8%
Figure 1: MicroStrategy Company Financials
BALANCE SHEET TRENDS
The balance sheet analysis of MicroStrategy represents that there has been a significant rise of total assets from 2014 to 2015 as compared to the previous year where there was a fall from 2013 to 2014. However, total assets have actually risen over the three year period. Similarly, the overall fall in liabilities from 2013 to 2015 has been a good indicator of a healthy balance sheet. Additionally, the company has also lowered its long term debts. The company’s rise in capital has been owing to a rise in surplus that has been added back to company’s equity to be used for future business expansion.
The current asset figures of MicroStrategy shows that the current assets have risen significantly. This has been completely owing to a rise in cash and cash equivalents. Consequently, there is a marked decline in current liabilities. This shows that operating funds are being managed in a much better fashion. In other words, the company is getting higher credit facilities while collecting cash from debtors in a shorter time span. While analyzing total assets, a complete lack of inventory also highlights the case of better operational management. On the fixed asset side, the fixed assets have risen primarily owing to the deferment of long term asset charges. Also, there has been an overall decline fixed liabilities. The company has reduced its liabilities through a deferment of long term liability charges. The company does not hold any long term investment or long term liability (MicroStrategy, 2015).
A positive rise in cash and cash equivalents can also be appropriated to sale of share capital. Sale of share capital has invited more ownership capital into the company that can be used for future business purposes and indicates a growth trend for MicroStrategy.
The income for MicroStrategy has risen significantly in 2015. This shows that despite a decline in the revenue of the company he profits have risen and as the company decided to hold back the profits, the retained earnings have almost doubled. This can also indicate that the company has been working towards reducing its costs and that has contributed to such a rise on company profits. A look at the shareholding pattern shows that there has been sale of company stock in 2015. The rise in shareholding capital has come through addition of new shareholders. This speaks again of the growth story planning and investment that the company began in 2014. The trend of such growth appears to be continuing in 2015 as well owing to huge investments brought in through sale of new stock. Capital surplus has also risen and this implies that the general perception about the firm is well in the market which has yielded higher amounts over and above the par value of the amount floated. However, other stockholder equity is negative by a larger amount in 2015 as compared to the previous years.
The overall analysis of the MicroStrategy’s balance sheet reveals that the company is looking at expansion plans and is undertaking steps to bring in additional capital into the business. A better management of current accounts and introduction of new shares along with retention of company profits speaks of a sound investing story. A good market standing as revealed by the capital surplus expresses that the company has a sound future.
CASH FLOW TRENDS
While the income statement and balance sheet of the entity provided useful insights into the financial position of the company, however, since these financial statements are prepared on the accrual basis, we also focused on unearthing the trends in the cash flow statement as the same is prepared on the cash basis and provides a truer picture of the company’s financial position. . Discussed below are the trends related to the three sections of the cash flow statement of the company:
-Cash Flow from Operations (CFO)
Analyzing the CFO amount over the past three years, we found that post witnessing the decline during 2014; the company generated a significant increase in the amount of cash flow from operations, which peaked from $14.6 million in 2014 to $149.66 million during 2015. The increase in CFO amount was largely attributed to the surge in the net income figures, which surged from $5.03 million in 2014 to $150.93 million. It is considerable that during 2013, the net income of the company was higher than the CFO amount and this raised concerns over the quality of the company’s earnings; however, no such trend was witnessed during 2014 and 2015.
Highlighted below is the data and graph comparing the net income and CFO amount over the past three years:
Cash Flow from Investing (CFI):
This section of the cash flow statement reveals information relating to the capital investment made by the company on cash basis. Referring to the cash flow statement of the company, we found that over the period of past three years, the company has been consistently invested in the purchase of securities. However, during 2015, the amount of cash flow outflow from investing was reduced significantly on account of maturity of existing investments worth $419 million. Overall, we can witness that there is a defensive approach of the company in terms of capital investment as even when it generated $149.69 million in CFO amount; it opted for minimal investment in capital assets. Highlighted below is the amount of cash flow from investing activities:
Cash Flow from Financing Activities
This section of the cash flow statement reveals the transaction relating to funding activities of the company. Analyzing the cash flow statement of the company, we witness tidal trends in the cash flow from financing activities as while during 2014, the company recorded cash outflow of -$1.47 million, during 2015, it generated cash inflow of $9.16 million, which it collected primarily through the additional stock issue amounting to $9.52 million. Highlighted below is the amount of cash flow from financing activities over the period of past three years:
Overall change in cash flow amount
Over the period of three years, the amount of cash reserves of the company has increased from $220.17 million in 2013 to $292.34 million in 2015. However, the increase here cannot be rated as sustainable. Even though the company has been generating positive operating cash flow throughout, it has not reinvested in the company by purchasing capital asset but rather has focused on increasing its cash pocket through additional issue of stock.
KEY FINANCIAL RATIO TRENDS
This section identifies key financial ratios which determine the financial stability of MicroStrategy and determine if this is a good partnership for New Technology Incorporated (NTI).
Quick Ratio:
The first ratio to be analyzed is Quick Ratio. The quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities. For example a quick ratio of 1.5
means that a company has $1.50 of liquid assets available to cover each $1 of current liabilities.
2013 – 2.06%
2014 – 2.34%
2015- 3.27%
As can be seen by the above trend, MicroStrategy is in an excellent liquidity position.
Net Profit Margin:
The net profit margin is a number which indicates the efficiency of MicroStrategy at its cost control. A higher net profit margin shows more efficiency at converting revenue into actual profit.
2013 – 14%
2014 – .86%
2015 - 20%
The percentages indicated above reflect that MicroStrategy is very efficient at converting revenue to actual profit which is a good indicator that they would be a good company to have as a partner.
Debt to Equity Ratio:
The Debt to Equity Ratio is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. A lower number means that a company is using less leverage and has a stronger equity position.
2013 – .89%
2014 – .72%
2015 - .44%
MicroStrategy has consistently lowered its debt to equity ratio which indicates the company is in a stronger equity position.
RECOMMENDATIONS
Considering the overall financial standing of the company, we witnessed that even though the company lost a significant percentage in the revenue figures during 2015, however, owing to prudent cost structure, the company was able to register a strong trend in the profitability. Even though this is not a sustainable consideration as every company should look for revenue increase and not just cost control, we will recommend a buy strategy for the company on the basis of positive operating cash flow being generated by the company and strong cash position. The trend shows that rather than spending the cash amount on dividends or acquisitions of the capital assets, the company is creating cash reserve,which signals towards a probable investment in a near future.
Our recommendation is also in alignment with other market analysts following the stock.Highlighted below is the opinion of the market analysts on the company’s stock:
Works Cited
MicroStrategy MSRT Company Financials. (2016, April 11). Retrieved April 11, 2016, from Nasdaq: http://www.nasdaq.com/symbol/mstr/financials?query=income-statement
Analyst Opinion: Microstrategy. (n.d.). Retrieved April 20, 2016, from Yahoo Finance: https://in.finance.yahoo.com/q/ao?s=MSTR
MicroStrategy. (2015). SEC 10K. MicroStrategy.
Saint-Leger, R. (2016). How to use an income statement for a trend analysis. Retrieved April 11, 2016, from Chron: http://smallbusiness.chron.com/use-income-statement-trend-analysis-44129.html
Wall Street Prep Team. (2012, April 4). “Why is the cash flow statement important and how does it compare to the income statement?”. Retrieved November 5, 2015, from https://www.wallstreetprep.com/blog/why-is-the-cash-flow-statement-important-and-how-does-it-compare-to-the-income-statement/
Works Cited
Investopedia. (2016). Quick Ratios. Retrieved April 15, 2016 from http://www.investopedia.com/terms/q/quickratio.asp
MicroStrategy MSRT Company Financials. (2016, April 11). Retrieved April 11, 2016, from Nasdaq: http://www.nasdaq.com/symbol/mstr/financials?query=income-statement
MicroStrategy. "SEC 10K." Annual Filing. 2015.
Saint-Leger, R. (2016). How to use an income statement for a trend analysis. Retrieved April 11, 2016, from Chron: http://smallbusiness.chron.com/use-income-statement-trend-analysis-44129.html
Wall Street Prep Team. “Why is the cash flow statement important and how does it compare to the income statement?”. 4 April 2012. 5 November 2015. <https://www.wallstreetprep.com/blog/why-is-the-cash-flow-statement-important-and-how-does-it-compare-to-the-income-statement/>.
