Many investors are always looking for smaller companies or ‘the next big thing’ to incorporate into their portfolio, however there are an increasing number of investors who are looking to get involved with some of the biggest names in the markets. There are a plethora of reasons that would attract any investor towards these larger cap companies such as Microsoft that have a market cap of 1 trillion USD.
Big corporations are often sought after by those investors who are averse to risk, and who are looking for diversified revenue generation and strong capital returns. However there is a glaringly obvious factor to consider when investing in a company that has previous success and is looking to extend it, and that of course is the health of the company’s financial reports.
Looking at Microsoft some key elements to look at with a company of this scale is their liquidity and debt levels, as these can be strong indicators as to whether or not the company can stay strong during an economic crisis or fund acquisitions for the future growth of the company as a whole.
Over the course of the last financial year, Microsoft have sustained a relatively stable debt level of $86 Billion USD which includes long term debt. With the level of debt Microsoft has, the company currently is sitting with $132 Billion USD in liquid capital and short term investments, which the company has available for them to use for operating costs. In addition to this, the company has generated $47 Billion USD in operating cash flow over the same length of time, which put all together leaves Microsoft with an operating cash to debt ratio of around 55%, which in simple terms means that the company’s current level of available capital is more than enough to cover their debt.
Microsoft is not new to the industry by any means, and they have shown that as the company has consistently kept a safe level of current assets, that meet its obligations to short term commitments, with the company’s ratio standing at a respectable 2.97x. This ratio is calculated by dividing Microsoft’s current assets by their outstanding liabilities. Commonly in the software sector the current ratio upheld by Microsoft is more than reasonable as there is a soft cushion of capital for the company without leaving too much capital stagnant or in a low income investment. Currently as the company stands Microsoft has a debt to equity ratio of 83% and with this figure the company can be seen as an over average leveraged company, which is no surprise to seasoned investors as large cap companies find that issuing equity to be marginally more expensive than issuing debt. Since large cap companies are seen as a safer bet than their smaller competitions, companies like Microsoft enjoy a lower cost of capital.
In summary although Microsoft has a considerable debt level, which is towards the higher end when it comes to large cap companies, their arrangement of capital seems to be more than adequate enough to meet their short and long term obligations, which in simple terms means their debt is being utilized efficiently.
David Li – AMT Associates