Inventory Turn & Average Age of Inventory
We already discovered that Microsoft carries no inventory. It is absolutely efficient. Its products are already sold before they are manufactured.
Receivable Turn and Age of Receivables
You'll notice that on the income statement excerpt, credit sales is not listed as a separate item. Instead, we have to use the less accurate total sales or revenue figure to calculate receivable turn. Take the $25.296 billion in revenues and divide it by the average receivables, $3.4605 billion ($3250 + 3671 divided by 2). You will end up with 7.30 turns. To calculate the number of days this translate into, take 365 divided by 7.3. In Microsoft's case, the answer is 50 days.*
Debt to Equity Ratio
Microsoft is debt free. It has no long or short term debt. If you take $0 (the amount of the company's debt) and divide it by the shareholder equity ($47.289 billion) you will get 0. This means that 0% of the company's equity consists of debt; the shareholders own it all.
Final Thoughts
All of our calculations have shown one thing; the company has virtually no risk of bankruptcy. Microsoft has 3x the cash it needs to survive, no long term debt, no inventory to worry about, and extremely strong current and quick ratios. Its working capital per dollar of sales is 112%, excessive by any standard (especially compared to its competitors. Adobe Software had a ratio of 36%, while Oracle Systems came in at 46.5%). The main question an investor should ask when looking at the balance sheet is, "why so much cash?". None of the company's top management has given any clues as to the plans for the growing pile of greenbacks.*You should generally calculate turns for the past several years, as well as between quarters. The numbers will almost always fluctuate during the normal course of business; regardless, a superior company will tend to have superior ratios over the long term.
Next page > Simon Transportation Services - A Sample Balance Sheet Analysis > <<back, 29, 30, 31, 32, 33, 34, 35, 36, 37 >>
This page is part of Investing Lesson 3 - Understanding the Balance Sheet. To go back to the beginning, see the Table of Contents. If you have already read this lesson, you can skip directly to the Balance Sheet Quiz.
Microsoft's Financial Statement Excerpts
| Year Ended June 30 | 1999 | 2000 | 2001 |
| Revenue | $19,747 | $22,956 | $25,296 |
| Cost of Goods Sold | $2,814 | $3,002 | $3,455 |
