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There are a number of reasons that attract investors towards large-cap companies such as Microsoft Corporation (NASDAQ:MSFT), with a market cap of US$1.0t. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the key to extending previous success is in the health of the company’s financials. 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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into MSFT here.
Does MSFT Produce Much Cash Relative To Its Debt?
MSFT has sustained its debt level by about US$86b over the last 12 months – this includes long-term debt. At this stable level of debt, MSFT currently has US$132b remaining in cash and short-term investments , ready to be used for running the business. Additionally, MSFT has produced US$47b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 55%, meaning that MSFT’s current level of operating cash is high enough to cover debt.
Does MSFT’s liquid assets cover its short-term commitments?
With current liabilities at US$54b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.97x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Software companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does MSFT face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 83%, MSFT can be considered as an above-average leveraged company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital.
Although MSFT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure MSFT has company-specific issues impacting its capital structure decisions. I suggest 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.