Investors pursuing a solid, dependable stock investment can often be led to Microsoft Corporation (NASDAQ:MSFT), a large-cap worth US$806.04b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, its financial health remains the key to continued success. Today we will look at Microsoft’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into MSFT here.
See our latest analysis for Microsoft
Does MSFT produce enough cash relative to debt?
MSFT’s debt level has been constant at around US$88.62b over the previous year made up of current and long term debt. At this stable level of debt, MSFT’s cash and short-term investments stands at US$132.27b , ready to deploy into the business. Additionally, MSFT has generated cash from operations of US$43.47b over the same time period, leading to an operating cash to total debt ratio of 49.05%, meaning that MSFT’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MSFT’s case, it is able to generate 0.49x cash from its debt capital.
Can MSFT meet its short-term obligations with the cash in hand?
At the current liabilities level of US$46.13b liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$156.66b, with a current ratio of 3.4x. Though, anything above 3x is considered high and could mean that MSFT has too much idle capital in low-earning investments.
Can MSFT service its debt comfortably?
Considering Microsoft’s total debt outweighs its equity, the company is deemed highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can assess the sustainability of MSFT’s debt levels to the test by looking at how well interest payments are covered by earnings. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In MSFT’s case, the ratio of 35.33x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes MSFT and other large-cap investments thought to be safe.
Next Steps:
MSFT’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around MSFT’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure MSFT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Microsoft to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MSFT’s future growth? Take a look at our free research report of analyst consensus for MSFT’s outlook.
- Valuation: What is MSFT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MSFT is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
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