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INTRODUCTION

Microsoft is the world’s largest computer software manufacturer. Their product profile consists of a wide range of both commercial and personal computing softwares, like: Microsoft Operating Systems (Windows XP, Windows NT, Windows Vista, etc), Microsoft Office (Microsoft Word, Microsoft Excel, Microsoft PowerPoint, Microsoft Outlook), Windows Media Player and Internet Explorer, etc. Apart from this, Microsoft also manufacturer’s hardware consumer products like MP3 players, digital cameras, mobile phones, gaming consoles (Xbox) and other computer related products. Microsoft belongs to the Application Software industry, where in their top three competitors are Oracle Corp, SAP Aktiengesell Ads and Adobe Systems. Since the company went public in 1986 their stocks have split nine times, valuating their current stock price at $142.44.

Apple is one of the premier companies that manufactures computer, music player and is a major player in the computer hardware and software industry. Apple has been competing with other major firms, such as, Microsoft Corporation, Dell, and Hewlett-Packard, etc. Apple has an edge over its competitors because of the company’s product versatility, its sleek and smart design, durability and ease of use associated with its products and their compatibility. Also, under the leadership of Steve Jobs, Apple was able to come up with a strategy of making new and innovative products, and special importance would be given to their design. This became Apple’s unique selling proposition (USP). Thus, Apple was able to differentiate and segregate itself from its rivals. Providing personal computers, iPods, iPhone, softwares and networking solutions are some of the major product or product categories that Apple has focused upon in recent years. Apple boasts massive customer loyalty and preference to their products at utmost level. Apple is one of the leading corporations dealing in electronics made to cater the consumer needs and softwares to further assist them. The company is involved in all round operations ranging from designing, manufacturing and retailing its products, expanding from its initial expertise of just selling personal computers the company has successfully explored markets of high quality portable computers, music players and recently launched cellular phones. Company not only serves in the U.S market but also serves its valued customers on international segments like in Japan, Europe through its retail stores. Company is primarily famous for its OS Macintosh which catches the confidence of the customers towards their product.  

FINANCIAL HIGHLIGHTS OF APPLE & MICROSOFT IN THE YEAR 2008

 

S.NO

RATIO

2008

2007

APPLE

MICROSOFT

APPLE

MICROSOFT

 

LIQUIDITY

 

 

 

 

Ratio 1

Current

2.46

1.45

2.25

2.18

Ratio 2

Cash flow liquidity

2.42

1.51

1.91

2.16

Ratio 3

Average collection period

26.85

80.97

18.78

65.61

Ratio 4

Days inventory held

8.59

30.58

6.13

49.76

Ratio 5

Days payable outstanding

93.15

125.24

76.99

97.95

 

 

 

 

 

 

 

ACTIVITY

 

 

 

 

Ratio 1

Account Receivable Turnover

13.41

4.45

15.43

4.75

Ratio 2

Inventory turnover

41.91

11.77

50.80

5.18

Ratio 3

Payable turnover

3.86

2.88

4.05

2.63

 

 

 

 

 

 

 

LEVERAGE

 

 

 

 

Ratio 1

Debt ratio

0.47

0.50

0.42

0.42

Ratio 2

Debt to equity

0.88

1.01

0.72

0.74

Ratio 3

Cash interest coverage

-

-

-

-

 

 

 

 

 

 

 

PROFITABILITY

 

 

 

 

Ratio 1

Gross profit margin

0.34

0.81

0.29

0.83

Ratio 2

Operating profit margin

0.19

0.37

0.13

0.36

Ratio 3

Effective tax rate

0.30

0.26

0.29

0.31

Ratio 4

Net profit margin

0.15

0.29

0.10

0.28

Ratio 5

Return on total asset

0.12

0.24

0.12

0.18

Ratio 6

Return on equity

0.23

0.49

0.20

0.31

 

 

 

 

 

 

 

MARKET

 

 

 

 

Ratio 1

Earning per common share

5.483

2.064

2.356

1.321

Ratio 2

Price to earnings

25.98

11.31

30.81

23.83

Ratio 3

Dividend payout

-

(Annual report, 2006-2008)

 

0.44

-

0.35

 

*    Both companies have not paid any interest expense in the year 2008.

*    Apple hasn't paid any dividend to its stockholders in the last 5 years.

*    The calculation of average daily sales and average daily cost of sales is based on 360 days.

LIQUIDITY

The liquidity ratio of both the renowned companies suggests that Apple’s liquidity position is quite strong as compared to the industry giant Microsoft. The liquidity ratio reveals that there is a slight problem of liquidity that the Microsoft’s management faces. This problem has resulted from the liquidity crunch that faces the businesses, but on the whole due to expansion in business and the high need of cash the Average collection period and Days payable outstanding is slow, which ultimately explains why Microsoft’s operating cycle is slow. Apple’s liquidity position suggests that there is a consistent trend from years 2007-2008. Due to the market expansion year by year the need of working capital is persistent, which reflects that there is a slight liquidity problem that the company bears. Even though, Apple Inc. has increased its current assets slightly, which may indicate the fact that the company has expanded into newer dimensions, it is quite evident that no drastic change has occurred in the company’s financial policies in the years 2007 and 2008. On the whole we suggest that in both the years liquidity position of the Apple Inc. has been in a state of stability in terms of paying off its current debts and also in terms of cash generation, due to the efficient operating cycle.

ACTIVITY

Both the companies are well renowned and prestigious organizations in the software and hardware sector. Both the companies realize the fact that their receivables turnover period and inventory cycle are factors that may directly impact the performance and efficiency of the firm. In the years 2007 and 2008, Apple’s average collection period has been slightly higher than rivals Microsoft due to the high sales in that particular period. This signifies the fact that Apple believes in continuous improvement of its business processes. Continuous improvement in the average collection in the last few years makes a solid impression on the financial statements. The company is able to rotate its operating cycle quickly which signifies the fact that the management is working on strong credit sales policy. It is also evident that if a firm is able to minimize its Average collection period, then these are ominous signs that the firm will continue to out-perform itself and its competitors in the years to come. From Microsoft’s perspective Account Receivable Turnover, Inventory turnover and Payable turnover in the year 2007-08 suggests that the company's collection cycle is not as efficient as the previous years. Microsoft is working on sound receivable management practices but they lack on lines of a strong collection policy which makes a negative impact on the working capital.

LEVERAGE

Because of expansion in the business, in recent years, both Apple and Microsoft have plenty of financial obligations, most of which have been acquired through debt. In 2008 especially, Apple and Microsoft’s reliance on debt financing has increased significantly because of which the debt ratio is higher in the year 2008 and lower proportion of debt is used in the year 2007. A higher debt ratio would place the company under increased amount of risk, especially if the interest rates are rising. Hence, a lower debt ratio would be more desirable. Both Apple and Microsoft have given a lot of emphasis to managing their net working capital, and as the ratios calculated above imply that both the companies have been able to keep debt ratio and Debt to Equity Ratio stable, with a slight increase from 2007 to 2008. The balance sheet of both the companies reveals the fact that as the business expands year by year the need of short and intermediary term finance also grows simultaneously. It is very much evident that in the year 2008 both Apple and Microsoft’s balance sheet is densely populated with the debt financing which makes a signal to the debt holders that creditors have shown confidence in the company’s ability to utilize and manage debt. Since both the companies are not paying interest expense the cash coverage ratio cannot be calculated.

PROFITABILITY

The profitability ratio of Microsoft suggests that operating expenses are decreasing in the year 2008, in comparison to Apple, with respect to revenue generation. It indicates the fact that Apple’s management focuses on generating more profit which is a positive sign as far as the company's goodwill is concerned. But in the year 2007 Apple incurred high costs of Research & Development which cuts its operating profit margin in the year 2007. Control on financing and other costs make a significant impression on the profitability ratio. There is reported increase in the year 2008 in operating margin, Gross profit margin, Return on total asset, Return on equity and Net profit margin. It is evident that Microsoft is not generating more cash in response to the generation of more sales. Microsoft’s profitability ratio suggest that in the year 2008 the net profit margin is slightly high as compared with the rest of the years due the expansion in the product line, strict policies with respect to software piracy, etc. Despite Microsoft’s high R & D expense and selling expenses which really makes the company’s growth slightly vulnerable, but in the year 2008 Microsoft’s management redefines its strategy which resulted in a cut down in the major expenses which makes the net income more attractive. Microsoft’s Return on Assets (ROA) suggests that the firm uses its asset at its command and is able to generate more profits in comparison with their asset acquisition. This ratio also gives the signal that proper asset management strategy is adopted in order to generate the maximum output. The Microsoft’s return on equity (ROE) in the year 2008 suffers mainly due to macro factors like the liquidity crunch, economic recession. This is because Microsoft finances its business with debt and lower proportion of equity. Microsoft’s overall performance in the shape of net profit has improved year by year. The stockholder’s equity, which includes retained earnings, also makes a reflection on the company’s stock prices which is a good sign for Microsoft.

On the other hand, Apple’s profitability ratio suggest that due to expansion in the business volume, net profit margin of Apple Inc. has increased from 2007 to 2008, but the increase hasn’t been as drastic as Microsoft because Apple has made a strong strategy to reduce their price not only in the domestic markets but also in the international market and also introduce new products throughout the year, which would also result in higher R & D costs. Apple’s ROA suggests that the firm has not used its assets very efficiently. The management should try to use its assets and resources in an appropriate manner in order to generate more profits in comparison with their asset acquisition. This ratio also gives the signal that Apple has not placed a proper asset management strategy. ROE of the years 2007 and 2008 indicates the efficiency under which the management has utilized the assets under its control, regardless of whether their assets were financed with debt or equity. Because of less dependency on equity financing and attainment of profit in 2008, a positive effect is evident on the ROE. This ROE then impacts the stockholder equity, which includes Retained earnings. Thus higher retained earnings will ultimately result in an increase in the stock prices.

MARKET

Due to the reporting of slightly lower net income, as compared to previous years, a significant impact on the EPS of both the companies is quite evident. This is mainly due to the prevailing recession in the economy and also due to the less dependency on equity financing, which makes the EPS slightly volatile in both the years. The price earning ratio of Microsoft has dropped in the year 2008, it was much higher in the year 2007. This is because of the tough economic conditions that have had a toll on the industry’s earning power, growth and market price. Moreover, Apple has not paid any dividends in the last few years but Microsoft has paid dividends to its shareholder in order to strengthen its stock price and also this strategy helps to uplift the image and goodwill of the company in the industry and market.     

A Review of Document Filed By Apple with the Sec

The review of the report is stated below at a glance:

  • 888,935,123 shares of Common Stock Issued and Outstanding as of October 24, 2008. The aggregate market value of the stock is $118,441,000,000 as per the closing prices (Apple, SEC10K).
  • The company has attached the documents of consolidated balance sheet, consolidated statements of operations, consolidated statements of shareholders’ equity, and consolidated statements of cash flows. All these documents provide an overview regarding the firm’s business operations, liquidity position, cash and cash equivalent position, current equity standings.   
  • According to the reported balance sheet the total assets of the company in the year 2008 is $39,572m and $25,347m in the year 2007. Total Liabilities stands at $18,542m in the year 2008 and $10,815m in the year 2007. The firm’s equity position is $21,030m in the year 2008 and $14,532m in the year 2007 (Apple, SEC10K).
  • According to the reported consolidated statements of operations the net income of the company in the year 2008 is $4,834m and $3,496m in the year 2007 (Apple, SEC10K).
  • According to the reported consolidated statements of cash flows the cash and cash equivalents of the company in the year 2008 were $11,875m and $9,352m in the year 2007 (Apple, SEC10K).

A Review of Document Filed By Microsoft with the SEC

The review of the report is stated below at a glance:

  • 9,130,293,074 shares of common stock outstanding in the end of 2008 (Microsoft, SEC10K).
  • The company has attached the documents of consolidated balance sheets, consolidated statements of operations, consolidated statements of shareholders’ equity, and consolidated statements of cash flows. All these documents provide an overview regarding the firm business operation, liquidity position, cash and cash equivalent position, current equity standings.  
  • According to the reported consolidated statements of operations the net income of the company in the year 2008 is $ 17,681m and $ 14,065m in the year 2007 (Microsoft, SEC10K).
  • According to the reported balance sheet the total assets of the company in the year 2008 is $ 72,793m and $ 63,171m in the year 2007. Total current Liabilities stands at $29,886m in the year 2008 and $23,754m in the year 2007. The firm equity position is $36,286m in the year 2008 and $31,097m in the year 2007 (Microsoft, SEC10K).
  • According to the reported consolidated statements of cash flows the cash and cash equivalents of the company in the year 2008 are $ 10,339m and $ 6,111m in the year 2007 (Microsoft, SEC10K).

KEY INFORMATION OF APPLE

  • Apple’s stock price was $142.44, as reported on June 26, 2009 by Google.
  • Apple is a licensee of Imagination technologies due to which Apple uplifts its stake in UK chip designer Imagination Technologies Plc up to 9.5% and also subscribes its shares of 2.2 million at 1.4275 per share (Google Finance, 2009).  
  • North Carolina's General Assembly has changed its corporate tax laws in favor of Apple Inc (Google Finance, 2009).
  • HSBC offers internet banking services to its valuable customers by using Apple’s iPhone and iPod touch (Google Finance, 2009).

KEY INFORMATION OF MICROSOFT

  • According to Google, the Microsoft’s stock price reported on June 26, 2009 is $23.35
  • In the near future it is expected that both Yahoo and Microsoft might join hands in order to give a tough time to the industry’s giant Google (Google Finance, 2009).
  • Microsoft offers Windows 7 operating system at a price that is 8% less in comparison with the former Windows Vista (Google Finance, 2009).
  • French advertising company and Microsoft enter into a deal regarding digital advertising agreement in order to target the digital advertising audiences (Google, 2009).

POSITION IN FAVOR OF APPLE

Apple portrays a very strong and positive position in the market place and without doubt this company has an ability to challenge its rivals and dominate the market. There are certain areas where Apple should focus more like, working capital, net profit margin, reduction in revenue expenditures on consistent basis. Improvement in these areas would translate into an increase in investor’s confidence. On the whole after the analysis of 10k report the following facts were discovered:

  • Company has adopted the proper accounting methods and prepares accounts in accordance with the accounting standards.
  • Accounts are made in conformity with accounting principles generally accepted in the United States of America.
  • Financial statements present a fair and material value.
  • Financial statements are free of material misstatement
  • Apple has been effective in devising a strategy to maintain the internal control system over financial reporting.
  • Testing and evaluating risk to help the management design and formulate strategies for future.
  • Company also supervises its legal and ethical conduct and also the annual performance evaluation.

All in all, after reviewing the annual reports from 2007 to 2008, one can evaluate that the directors and senior management of Apple keenly practice the corporate governance, abiding by the SEC rules and regulations, and a lot of emphasis is given on meeting the accounting and auditing standards in accordance with the international laws, and compliance affairs.

CONCLUSION

        Although Microsoft portrays a very strong and positive position in the market place and without doubt is the market leader, there are certain areas where in Microsoft should pay attention to. Microsoft is loosing the patronages of its investors. Although the investor’s confidence in the company is in considerably good position, there is a huge drop in the indication levels of investor confidence. For any public organization investors are the key to their success, Microsoft should become aware of this fluctuation and increase its investor’s confidence towards the organization.

      Microsoft needs to pay attention to its inventory management efficiency. Microsoft’s inventory turnover is below that of the industry average. More efforts need to be concentrated towards improving Microsoft’s distribution, marketing and sales processes. This includes almost the whole functionality of the logistics department. If properly managed Microsoft could see an increase in sales for ever $1.00 of inventory.

     On the whole the organization is extremely profitable and in an excellent position. Since Microsoft is the market leader its influence over the industries performance is paramount. With the introduction of their new operating system (Windows Vista), Microsoft is bound to maintain its position as the industry’s leader.  

            Apple Inc has a huge business volume and due to high business volume the level of risk associated with the company is also high so in order to reduce the risk audit firm formulates and designs techniques like adaptation to managing risk. The risk would include:

  • Interest rate risk
  • Foreign currency exchange risk
  • Dependency on third party agreements
  • Operational risk
  • International Economic situation

Apple management also needs to address these issues. It should try to minimize the dependency on third party agreements and in this regard management should redefine its role. Different Government policies exist in different parts of the world and customer preferences may also vary from place to place, so Apple would require policies and strategies to counter these issues. Due to the rapid change in the global markets and the product innovation that goes along with customer’s desire, Apple modifies and upgrades their products and services. This causes fluctuations in their share price.

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