Profitability Analysis: Microsoft Inc
i) Profit Margins:
Referring to the profit margin ratios of the company, we can infer that the fiscal year of 2013 was favorable for Apple Inc with 5.05% increase in profit margins of the company in comparison with the previous year of 2012. The company has improved its net profit margins after its fall in 2012. The improvement in the profit trend of the company seems sustainable as the increase in profit margins of the company was attributable to fall in operating expenses of the company. Although during 2013, the proportion of cost of revenue to the sales was increased from 24% to 26%, but Microsoft Inc was successful in reducing the proportion of operating expenses to sales from 46.70% to 40%. Furthermore, increased proportion of operating income from 30% to 34%, improved the bottom line profits of the company. By the end of the fiscal year of 2013, Microsoft Inc had recorded a 29% increase in its profit margins.
ii) Return on Assets:
Just as the profit margins, the company was successfully able to improve its Return on Asset Multiple. During the year, the ROA multiple of the company has improved by 1.35% after suffering significant decrease during 2012. Increase in ROA multiple of the company was attributed to increase in net profit margins of the company and increase in total assets figures. As already discussed in the previous section, the profit margins of the company increased by 28%, with 17.5% increase in total assets figures, it was able to increase its ROA multiple in a sustainable manner.
iii) Return on Equity:
After significant fall in 2012, the ROE multiple of the company, during 2013, has improved marginally from 25.58% to 27.69%. Although, the equity investors of the company might be relieved with this outcome but they would be still expecting a higher ROE. The increase in ROE multiple was achieved with 28% growth in the net income of the company and 19% increase in shareholder equity value i.e, net 9% growth to increase ROE.
Conclusion:
The analysis of profitability ratios of Microsoft Inc indicates that the financial position of the company has improved from its poor performance during 2011-2012. The Net profit margins, ROA and ROE multiple of the company has increased in a sustained manner primarily with growth in net income of the company. However, the investors of the company shall be expecting ROE levels of 2011.
Du-Pont Decomposition:
ROE: Net Profit Margin*Asset Turnover* Equity Multiplier
ROE: (Net Profit/Sales)*(Sales/Assets)*(Assets/Shareholder Equity)
Net Profit Margin: 0.28
Asset Turnover: 77849/142431*100= 0.5465
Equity Multiplier: 142431/78944*100= 1.8
Thus, as per Du-Pont Decomposition, ROE= .28*.5465*1.8= 27.54%
So, our analysis indicates that major contributor to increased ROE multiple is equity multiplier while net margins have a very small portion in ROE of the company. This means that the things can get more risky in Microsoft Inc as the company seems to be over-leveraged now.
Profitability Analysis: Apple Inc
i) Net Profit Margin:
Referring to the above analysis for Apple Inc, the company has reduced profit margins during 2013. During the year, the net margin of the company was recorded to be 21.67% which was 5% less than the previous year. Although the profit margins of the company improved during 2012, but with high cost of sales and decreased non-operating income of the company, the profit margins declined during 2013. While the proportion of cost of sales to revenue of the company increased from 56% to 62%, the share of non-operating income decreased from 36% to 29%. Thus, although the company was successfully able to maintain the proportion of operating expenses at 9%, but the above discussed factors forced the decline in net profit margins of the company.
ii) Return on Assets:
Just as the profit margins, the ROA multiple of the company has also declined during 2013 from 23.70% to 17.89%. The decline in ROA multiple of the company was attributed to increase in total assets by 17.56% which was further supported by decline in net margins and resulted in low ROA multiple.iii) Return on Equity (ROE):
Investors of Apple Inc will not be satisfied with financial results of 2013 as the ROE of the company has decreased significantly during 2013 from 35.30% to 29.98%. Just as previously discussed profitability ratios, even ROE of the company was affected with declined net profit margin. Hence, 5% decline in profit margins and 4.5% increase in shareholder equity, together contributed in declining ROE of the company.
Conclusion:
Our above analysis indicates that 2013 was not a good financial year for Apple Inc. All of its profitability ratios were in declining trend because of decreased net profit margins. As a result, both ROA and ROE multiple experienced decreasing trend indicating inefficiency of Apple Inc’s management to generate margins from the funds invested in the assets and for the investors of the company.
ii) Du-Pont Analysis:
ROE: Net Profit Margin*Asset Turnover* Equity Multiplier
ROE: (Net Profit/Sales)*(Sales/Assets)*(Assets/Shareholder Equity)
Net Profit Margin= 21.67%
Asset Turnover= 170910/83451= 2.04
Equity Multiplier= 83451/123549= 0.67
So, ROE= .2167*2.04*.67= 29.61%
Above Du-Pont analysis indicates that although the profitability margins of the company were on declining trend during 2013 but the ROE multiple of the company is sustainable with high net margins and high asset turnover contributing to the major portion to the ROE multiple.
