Financial Statement Analysis of Microsoft

Part 1 Summary of the economics and current conditions in the industry
The industry that MSFT is mainly in is IT services and application software. This industry is dynamic and highly competitive because of the continuing technology evolution. Every company in this industry spends much on research and development and new innovative technology is the key factor drives the industry growth and change.
Financial characteristics of IT software industry could be reflected by major financial ratios. According to table 1, the P/E ratio is reasonable low, and ROE ratio is high, long-term debt to equity is also high, which means the leverage in this industry is not low, and from the price to book value, most companies in this industry is overvalued and indicates that people expected high return from their investments. Profitability is also high from the number of profit margin and price to free cash flow. This market is also shaped by low supplier power and buyer power, low threat of new entrants, and low threat of substitutes so that the profitability of the industry is high.
Industry: Application Software

Market Cap
663.0B
P/E
17.5
ROE %
24.9
Div. Yield %
1.98
Long-Term Debt to Equity
28.2
Price to Book Value
10.51
Net Profit Margin % (mrq)
23.2
Price to Free Cash Flow (mrq)
20.5
Table 1 Industry financial ratios
Source: Yahoo Finance
With the growth of IT service and software, we cannot imagine life without computers, software, and data, which means that the development of the industry changes our lives. According to table 1, the global spending on software and IT service increase all the way from 2009 and software spending is projected to increase by a rate twice the rate in 2012 and IT service spending will increase by 3.4% in 2013.
Graph 1 Worldwide IT spending (annual % change) on software and IT service
Source: Economist
The new trend for the industry is all about cloud computing. Almost every company in this industry are investing huge amount of money in this particular area. According to market research firm IDC, worldwide revenues from public cloud services totaled around $21.5 billion in 2010. IDC projects such revenues will grow at a compound annual growth rate of 27.6%, to reach $72.9 billion by 2015. The growth rate for cloud services is expected to be about four times the projected growth for worldwide IT spending over the same period.

Part 2 Strategies that MSFT pursue
To understand the strategies of MSFT, we need to ask three questions: Where we are now? Where do we want to go? And how will we get there?
1. Where are we now?
We can assess the current situation of MSFT in terms of analyzing nature of products and services, degree of integration in value chain, degree of geographical diversification, degree of industry diversification and management quality.
a. Nature of Product or Service
Founded in 1975, MSFT is a worldwide leader in software, services and solutions that help people and businesses realize their full potential. The company has five operating business divisions: Windows and Windows Live, Server and Tools, Online Services Business, MSFT Business, and Entertainment and Devices.

Graph 2 Segment composition of revenue of 06/30/12
Windows and Windows Live is responsible for the development of the Windows product family. The division generated over 75% of its revenue from original equipment manufacturers pre-installing versions of Windows operating systems. Despite some market share loss to Apple and the Linux operating system in recent years, MSFT Windows operating systems still run more than 90% of all PCs currently in use. Its near-monopoly position in desktop operating systems and its Office productivity suite enable MSFT to use the strong cash flows from these businesses to fund research and development of other markets, including home entertainment consoles and Internet