Microsoft Stock: Capital Structure Analysis (MSFT)

Microsoft Corporation (NASDAQ: MSFT) is a large software company known for its Windows operating system and suite of Microsoft Office products. The company’s capital structure relies more on equity than debt for financing, although debt has grown to play an increasingly important role. In this analysis of Microsoft’s capital structure, we will look at equity, debt capital, financial leverage, and enterprise value of the company.

Microsoft Equity Capital

Equity refers to the funding a company receives from the sale of shares and the net profits attributable to shareholders. It may include balance sheet items such as common stock at par, retained earnings, additional contributed capital, and accumulated other comprehensive income. As of April 29, 2020, Microsoft’s quarterly shareholders’ equity was approximately $114.5 billion, consisting of $79.8 billion in common stock and paid-up capital, and $32 billion in retained earnings .

Microsoft’s total equity was $102.3 billion as of June 30, 2019, $82.7 billion as of July 19, 2018, and $72.4 billion as of July 20, 2017. The increase in value Microsoft’s equity is mainly due to the increase in retained earnings. Although Microsoft generated positive net profits during those years, significant amounts of capital were returned to shareholders in the form of cash dividends and stock buybacks.

In fiscal 2017, the company spent $11.78 billion on buybacks and issued $11.84 billion in cash dividends.In fiscal 2018, the company repurchased $10.72 billion in common stock and paid $12.69 billion in dividends.In fiscal 2019, Microsoft spent $19.5 billion on stock buybacks and paid $13.8 billion in dividends.

Microsoft loan capital

Debt principal includes short-term and long-term debt such as bonds, unsecured notes and term loans. Over the past three years, Microsoft has significantly reduced the amount of its short-term debt. In its 2017 annual report, the company listed $9.07 billion in short-term debt. In 2018 and 2019, the company reported no current liabilities.

According to its annual report for fiscal year 2015, Microsoft had long-term debt of $17.9 billion.Since then, the company has significantly increased the amount of its long-term debt, part of which can be attributed to its acquisition of LinkedIn for $26.2 billion in 2016.In its 2017 annual report, the company listed $22.1 billion in long-term debt.The company had long-term debt of $31 billion at the end of fiscal 2018 and $32.5 billion at the end of fiscal 2019.

Microsoft’s Financial Leverage

To analyze the amount of debt in a company’s capital structure, it is necessary to use a leverage ratio, such as the total debt-to-equity ratio. This allows investors to track debt versus equity over time and against other companies. Microsoft’s debt ratio was 7.8% in June 2019, compared to 10.5% at the end of the June 2018 fiscal year and 13.9% in June 2017.The decreasing use of leverage by the company indicates that management is reducing its use of debt capital.

Microsoft Enterprise Value

Enterprise value (EV) is a measure of the total value of the business based on the market values ​​of equity and debt less cash and investments. In June 2020, Microsoft had an EV of nearly $1.5 trillion. The company’s EV grew from $968 billion in June 2019 to $705 billion in June 2018. EV growth for Microsoft was driven by equity market price appreciation.