Company Financial Analysis

Introduction

The sole goal of businesses is to make money at the end of the day. However, not all businesses are in the profit-making industry. This research study compares and contrasts two companies, namely; Microsoft Inc. and the American Red Cross. There is a difference between a for-profit and a non-profit-profit corporation. As the name implies, a profit corporation is in business to make money. Still, a non-profit organization/primary company’s objective is to help the community and the world as a whole. Non-profit-profit organizations are typically focused on humanitarian relief. The company background, financial statement analysis, and cash flow statement analysis are the first three sections of this research study. A ratio analysis is also carried out to grasp better the companies’ performance in comparison to one another.

Company Background

The American Red Cross is a humanitarian organization dedicated to assisting those in need. Donors, volunteers, and staff of the organization are all working to alleviate suffering in the United States and worldwide. The American Red Cross provides first aid training to volunteers and workers to respond to emergencies and provide first aid before transporting a patient to a clinic or hospital. According to Incfact.com (2022), Red Cross volunteers and staff provide vital services such as providing aid and support to those in need and assisting others in being better prepared to respond in an emergency.

Microsoft Inc. is a technology company that develops and maintains a wide range of software, services, devices, and solutions. Microsoft Inc. is the company that owns the Microsoft software that is installed on computers and other electronic devices. Using Microsoft.com as an example (2022), Gadgets like personal computers (PCs), tablets, gaming and entertainment consoles, and other intelligent devices, as well as related accessories, are created, manufactured, and distributed by the corporation. It also offers cloud-based solutions that deliver software, services, platforms, and content to customers and solution support and consulting.

Financial Statement Analysis

Assets analysis

The two companies’ current assets comprise receivables, cash, cash equivalents, and inventory. Microsoft Inc has current assets totaling $184,406,000, whereas the American Red Cross has current assets totaling $1,002,667. As seen from the two values, Microsoft Inc has a much higher value of current assets. This explains the notion of a profit-making and a non-profit-making organization. As seen, assets in these two companies may differ. In Microsoft, inventory comprises tech products, whereas inventory may include NFI’s at the American Red Cross.

Considering the non-current assets, Microsoft Inc has the edge over the American Red Cross. Most non-current assets items are similar- investments, property, land, buildings. Differences arise with Microsoft Inc having goodwill, plant, and machinery, to name a few. However, as non-current assets are long-term assets, so are they both in non-profit and profit-making organizations. Key to note is that the American Red Cross is highly dependent on donors and grants to generate income, whereas Microsoft Inc’s income comes from the sale of products and software. The total assets are valued at $3,266,999 for American Red Cross, whereas Microsoft Inc.’s total assets are $301,311,000.

Liabilities analysis

The liabilities of both companies come in two forms; current liabilities and non–current liabilities. Current liabilities are short-term, whereas the non-current are long-term. Microsoft Inc has a higher liability value as compared to American Red Cross. Precisely speaking, American Red Cross should be restricted to the USA as each country has a Red Cross organization under the country’s name. Current liabilities at the American Red Cross total $466,826,000, whereas, at Microsoft Inc, the value is $72,310,000,000. Microsoft Inc’s current liabilities are billions, whereas, at the American Red Cross, we have approximately 467 million dollars (redcross.org. 2022).

Non-current liabilities at the American Red Cross are $987858, 000 whereas Microsoft Inc the value is $110,697,000,000. The total liabilities for the two companies are $1,454,684,000 and $183,007,000,000. The American Red Cross liabilities total 1.5 billion dollars, whereas Microsoft Inc liabilities total 183.007 billion dollars. This shows that Microsoft Inc’s business is quite large compared to the American Red Cross.

Equity analysis

Microsoft Inc is a publicly-traded company meaning that most of its owners are shareholders. The company’s equity comes from common stock holding. The company shareholders partake in financing the company through share sale, bonds, or loans. Considering the American Red Cross, her wealth is from donations and grants from well-wishers. A person or entity does not own a non-profit company, and neither does it trade in the stock market. This is the significant difference between the companies.

Cash Flow Statement Analysis

A cash flow statement (CFS) is a financial statement that shows how much money is coming in and out of business. The CFS evaluates a company’s cash management capabilities and how well it earns cash. The CFS is a handy addition to the income statement and balance sheet. Microsoft Inc. deals with billions of dollars every year due to its size. The three main parts of cash flow are operating, finance, and investing operations. All three categories combine to provide free cash flow, which is the amount left over after all year-end deductions have been made. The annual cash flow is the sales, cost of sale, and production.

Microsoft Inc’s cash flow statement depicts a company performing exemplary well. The company is making billions in sales, hence the mega profit earned by shareholders. Operating activities total 60 billion dollars. This amount comprises activities from gains and losses, depreciation and amortization, deferred tax, asset impairment, and changes in working capital. Notably, working capital is the amount/capital used for the day-to-day running of operations in a company.

Additionally, we have the cash from continuing operations in the operating activities. The American Red Cross’s operating activities total up to 18.9 million dollars (redcross.org. 2022). Key to note is that this figure is a deficit denoting that the company is operating on losses. This is not a good indication as a company should operate on a positive cash flow for sustainability.

Investing activities portray all activities/operations used to generate income. These are their projects, to be precise. Investing activities in the company amount to 12 billion dollars. American Red Cross investing activities cash flows are 72.57 million dollars. This is relatively small compared to Microsoft Inc. Activities included in this category include purchasing assets, proceeds from investments and sales.

Financing activities present activities that a company uses to finance/sponsor its projects/investments. Microsoft Inc financing activities amount to 46 billion dollars in 2020, whereas the American Red Cross financing activities are 80 million dollars. Financing activities could be through equity holding for profit-making companies or donations for non-profit non-profit-making companies.

Internal and External Financing

Every company has internal and external financing. Internal financing involves financing from parties involved with the day-to-day operations, such as shareholders. In contrast, external financing involves non-partisan members such as banks and other financial lenders. American Red Cross is no different from this. Referencing Incfact.com. (2022), the organization is financed internally through IGA’s and own investments, whereas external financing is through donations and grants. Being a non-profit organization with its major scope of work being to help the community, the organization receives a lot of funds from like-minded companies or people through donations and grants. These funds are used to run their projects and help alleviate human suffering. Microsoft Inc also is subject to both types of financing. The major discrepancy between the two companies is that profit-making companies are externally financed through loans. Rarely do we have grants and donations in such companies. Internal financing involves shareholders and the sale of assets.

Ratio Analysis

• Liquidity ratios

A liquidity ratio is a financial indicator that evaluates a company’s ability to meet short-term borrowing obligations. The statistic is used to see if a company’s current assets, also known as liquid assets, cover its current liabilities. A ratio greater than one shows that a company can meet its current obligations. In actuality, a ratio greater than one suggests that a company’s existing liabilities are likely to be covered by more than a dollar margin. This indicates that the company is financially self-sufficient (Macrotrends.net. 2021).

Both businesses have a healthy liquidity ratio. On the other hand, Microsoft Inc is in far better financial shape than the American Red Cross. Liquidity ratios of 2 indicate that both corporations ws1’are able to meet their existing debts with current assets.

• Solvency ratios

A solvency ratio is a performance metric used to analyze a company’s financial health. Solvency ratios, according to Corporate Finance Institute. (2022) indicate whether a corporation will meet its financial obligations in the long run. In this case, a higher or stronger solvency ratio is preferred because it measures financial strength. On the other hand, a low ratio denotes potential financial troubles in the future.

Solvency ratios are used to assess how much debt is financed by assets or equity. The two companies have a debt ratio of 0.61 and 0.45, respectively, from the above. This means that 60% of assets are financed by debt. For every dollar in assets, 0.6 dollars is debt. 44% of the American Red Cross is financed through debt and 56% through other means. Looking at the debt to equity ratio, a ratio higher than one is recommended. Both companies have ratios more significant than one. However, as earlier indicated, Microsoft Inc has the edge over the American Red Cross.

• Profitability ratios

Profitability ratios are financial metrics used by companies and investors to evaluate a company’s ability to generate income. According to Corporate Finance Institute. (2022), this ratio shows how companies utilize their assets to generate profits. Most firms seek a higher ratio or value since it implies that their revenues, profitability, and cash flow are all on track.

This ratio represents how much a company returns to shareholders and assets in relation to investments. The higher the ratio, the better (Corporate Finance Institute. 2022). As seen above, ROA is 14.7% and 7.2%, respectively, whereas ROE is 37.4% and 16.5%, respectively. Microsoft Inc still has the edge over the American Red Cross partly due to its description as a profit and non-profit company.

Accounting Scandals and Remedies

Financial scandals harm corporations and ruin people’s lives, resulting in billions of dollars in losses. Many of these accounting scandals are the product of a few people’s overwhelming greed, which has severe effects. According to Awolowo, et al., (2018), excessive greed for quick money, lack of transparency in financial reporting, very lavish performance-linked bonus program, poor quality of management information, lack of independence of the internal audit team, and lack of proper control on financial reporting/ accounting system are some of the significant causes of accounting scandals. These are only a handful of the reasons. To avoid these dangers, businesses must have strong ICSs and adhere to the IFRS accounting regulations.

References

Awolowo, I.F., Garrow, N., Clark, M.C. and Chan, D., 2018. Accounting scandals: Beyond corporate governance. In 9th Conference on Financial Markets and Corporate Governance (FMCG).

Corporate Finance Institute. 2022. Ratio Analysis. [online] Available at: <https://corporatefinanceinstitute.com/resources/knowledge/finance/ratio-analysis/> [Accessed 25 January 2022].

Incfact.com. 2022. Annual Report on American National Red Cross’s Revenue, Growth, SWOT Analysis & Competitor Intelligence – IncFact. [online] Available at: <https://incfact.com/company/americannationalredcross-washington-dc/> [Accessed 25 January 2022].

Macrotrends.net. 2022. Microsoft Financial Ratios for Analysis 2005-2021 | MSFT. [online] Available at: <https://www.macrotrends.net/stocks/charts/MSFT/microsoft/financial-ratios> [Accessed 25 January 2022].

Microsoft.com. 2022. About – Microsoft. [online] Available at: <https://www.microsoft.com/en-us/about> [Accessed 25 January 2022].

Referenceforbusiness.com. 2022. American Red Cross – Company Profile, Information, Business Description, History, Background Information on American Red Cross. [Online] Available at: <https://www.referenceforbusiness.com/history2/92/American-Red-Cross.html> [Accessed 25 January 2022].

www.redcross.org. 2022. American Red Cross financial statements. [Online] Available at: <https://www.redcross.org/content/dam/redcross/about-us/publications/2020-publications/FY20_ARC_audited_financial_statement-FINAL.pdf> [Accessed 25 January 2022].