The Microsoft corporation is a household name around the world. As one of the
largest, if not the largest, producer of computer software worldwide the firm as done
amazing things to change the way people today work, play and interact with each other.
However, this does not tell investors whether or not the future of the company is going to
be strong or bleak. To be able to make an educated guess as to the firm’s future prospects
a savvy investor must do their research into the firm. According to (Marcus, Myers, &
Brealey, 2007), “Managers use a few salient ratios to summarize the firm's liquidity,
efficiency, and profitability.” One of the best ways to get started researching a firm is to
calculate the firm’s financial ratios.
The first type of ratio an investor may want to determine are the liquidity ratios.
In order to wade through all the financial data about a company these ratios are vital.
According to (Marcus, Myers, & Brealey, 2007), “If you are extending credit to a
customer or making a short-term bank loan, you are interested in more than the
company's leverage.” The firm’s liquidity is also important in this case as it helps
determine the firm’s ability to pay it’s obligations. One measure of a firm’s liquidity is
the current ratio which for Microsoft in 2006 was 2.184, and in 2007 was 1.691.
According to (Marcus, Myers, & Brealey, 2007), “Rapid decreases in the current ratio
sometimes signify trouble. For example, a firm that drags out its payables by delaying
payment of its bills will suffer an increase in current liabilities and a decrease in the
current ratio. Another important liquidity ratio is the debt ratio which compares the firm’s
debt to assets. According to (Marcus, Myers, & Brealey, 2007), “Debt Ratio Financial