Microsoft Corporation (NASDAQ: MSFT) is a large software company known for its Windows operating system and Microsoft Office suite of products. The company's capital structure relies more heavily on equity capital than debt for financing, though debt has grown to play an increasingly large role. In this capital structure analysis of Microsoft, we'll review the company's equity capital, debt capital, financial leverage, and enterprise value.
- There are four factors we can review when analyzing Microsoft's capital structure: equity capital, debt capital, financial leverage, and enterprise value.
- Microsoft's shareholders' equity increased from $68.8 billion in 2016 to $106.1 billion in 2019.
- Microsoft's long-term debt increased from $27.8 billion in 2015 to $66.7 billion at the end of the fiscal year 2019.
- Microsoft's enterprise value has grown from $602 billion in Nov. 2017 to almost $1.1 trillion as of Nov. 2019.
Microsoft Equity Capital
Equity capital refers to the financing a business receives from the sale of equity and the net profits attributable to equity holders. It can include balance sheet items such as common stock at par value, retained earnings, additional paid-in capital, and accumulated other comprehensive income. As of Sept. 30, 2019, Microsoft's quarterly shareholders' equity was approximately $106.1 billion, consisting of $78.9 billion of common stock and paid-in capital at $0.00000625 par value per share, and $27.2 billion in retained earnings.
Microsoft's total shareholder equity was $92.1 billion on Dec. 31, 2018, $78.4 billion on Dec. 31, 2017, and $68.8 billion on Dec. 31, 2016. The increase in Microsoft's shareholder equity value has been driven primarily by increased retained earnings. Although Microsoft was generating positive net earnings over those years, significant amounts of capital were returned to shareholders in the form of cash dividends and share repurchases.
In fiscal 2017, the company spent $10.2 billion on buybacks and issued $12 billion of cash dividends. In fiscal 2018, the company repurchased $8.6 billion of common stock and paid $12.9 billion in dividends. In fiscal 2019, Microsoft spent $16.8 billion on share repurchases and paid $14.1 billion on dividends.
Microsoft Debt Capital
Debt capital includes short- and long-term debt such as bonds, unsecured notes, and term loans. Over the past three years, Microsoft has significantly reduced its amount of 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 short-term liabilities.
At the end of the fiscal year 2015, Microsoft had long-term debt of $27.8 billion. Since then, the company has significantly increased its amount of long-term debt, some of which can be attributed to its acquisition of LinkedIn for $26.2 billion in 2016. In its 2017 annual report, the company listed $76 billion in long-term debt. The company had long-term debt of $72.2 billion at the end of the fiscal year 2018 and $66.7 billion at the end of the fiscal year 2019.
Microsoft Financial Leverage
To analyze the amount of debt in a company's capital structure, it is necessary to use a financial leverage ratio, such as the total debt-to-capital ratio. This allows investors to track debt relative to equity capital over time and in comparison to other firms. Microsoft's debt-to-capital ratio was 7.8% as of June 2019, down from 10.4% at the end of the fiscal year June 2018 and 15.2% in June 2017. The company's declining use of leverage indicates that management is reducing its use of debt capital.
Microsoft Enterprise Value
Enterprise value (EV) is a measurement of total firm value based on the market values of equity and debt, less cash and investments. As of Nov. 2019, Microsoft had an EV of almost $1.1 trillion. The company's EV grew from $797 billion in Nov. 2018 and $602 billion in Nov. 2017. EV growth for Microsoft has been driven by market price appreciation of equity.