Financial Case Study

Disclaimer: The content of this research is for educational purposes only and does not constitute financial advice. The information provided is based on my own research and analysis, and may not be accurate, complete, or up-to-date. You should always do your own due diligence before making any financial decisions and seek a professional. I am not responsible for any losses or damages that may arise from your use of this content.

TLDR;

This project compares Nvidia and Microsoft, two software companies, based on their financial performance during the end of the fiscal year 2021 using Form 10-K from the SEC filing to determine which company is the best return on my investment.

To calculate ratios and metrics to measure the liquidity, efficiency, and solvency of both companies I created an Excel Sheet that calculated Acid, Current, Debt, Equity, Profit & Gross Margins Ratios

In summary, Nvidia is more liquid, but Microsoft is more efficient and has a higher operating income. Both companies are profitable and have grown their revenue and I chose to invest my money in Microsoft.

INTRODUCTION

The software sector has become an important part of modern life. From phones, AI, Cloud-based systems, and entertainment, Microsoft and Nvidia have been at the forefront of innovation. Software companies have seen tremendous growth because their products are able to reach a large scale and create an increasing demand for solutions. NVIDIA Corporation was founded in 1993 and is headquartered in Santa Clara, California. Their products include GeForce Gaming, Nvidia Artificial Intelligence, and cloud services to name a few. Similarly, Microsoft was founded in 1975 and is headquartered in Redmond, Washington. Their products include Microsoft 365, Xbox, and Windows (Yahoo Finance n.d.). This case will conduct a ratio analysis by comparing Nvidia (NVDA) and Microsoft Corporation (MSFT) to determine which company is the better investment. These companies are both in the software industry, publicly traded on NASDAQ, and make for the perfect comparison.

After reviewing Forms 10-K for the fiscal year 2021, here are the findings. NVDA's annual 10k form was filed on January 31st for 2021. All calculations are measured in millions: $16,055 assets divided by $3925 liabilities equals 4.09. Therefore the current ratio for NVDA 2021 is 4.09. The acid ratio for NVDA in millions was $847 in cash plus, $10,714 in Short-term investments plus, $2429 in current receivables, divided by $3925 in current liabilities equals 3.6. On the other hand, MSFT's annual 10k was filed June 30th, 2021. MSFT has a current ratio of 184,406/88,657=2.08. The acid ratio for MSFT is 14224+116110+39043/191791=1.9. Clearly, both companies can meet their current obligations many times over. In 2021, Nvidia was more liquid because it has a higher current ratio of 4.09. In addition, NVDA has an acid ratio of 3.6, so it is more efficient during the pandemic. Indeed, looking at cash on hand, MSFT corporation had $14,224 million dollars for the year 2021. On the other hand, NVDA had $847 million for the year 2021. After carefully reviewing both companies, NVDA was more liquid in the short term and both companies are able to pay their current liabilities.

Next, using the Cash Conversion Cycle formula (CCC): Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding we can determine which company is more efficient. For MSFT the Cash Conversion Cycle calculates is 3.85 or 4 days. For NVDA calculated Cash Conversion Cycle is 79.82 days 04 80. Based on the calculations, we can see that MSFT is more efficient in managing its cash conversion cycle. More specifically, MSFT takes less time to generate cash and effectively make the conversion. In contrast, NVDA has a longer CCC and takes roughly 80 days. Clearly, MSFT is able to convert inventory and sales more quickly. Therefore, MSFT is more efficient in collecting receivables, payments, and inventory.

As far as comparing how easy it is for both companies to meet their long-term obligations we must take a look at their debt-to-equity ratio, interest coverage ratio, and operating income. First, NVDA has a debt-to-equity ratio of .41 for the year 2021, and MSFT’s was 1.35. Also, taking a look at both companies' times interest earned (TIE) for the same year, NVDA had a TIE of 24.63. MSFT had a TIE of 30.31. From what I have gathered, both companies are able to pay their interest expenses accordingly. In fact, both companies would be able to grow and reinvest because they have a high TIE for 2021. Furthermore, to determine which company is likely to sustain itself can also take a look at their operating incomes before interest and taxes or EBIT. Undoubtedly, both companies are profitable and will find it easy in the long run. However, MSFT has a higher TIE and EBIT which means it is more efficient long-term.

Not only are both companies profitable, but have increased their revenue every year. For example, NVDA from the year 2020 to 2021 had a revenue increase of about $5,757 million or $5.757B. Also, MSFT from 2020 to 2021 saw revenue growth of $25,073 million or $25.073 billion. There was a significant increase during the pandemic which skyrocketed both companies to see growth. The trend here can be explained by the companies expanding their cloud, gaming, and software products. As more people stayed home during 2020, these companies saw a dramatic increase in consumer spending. Given that both companies are able to innovate and effectively adapt. According to NASDAQ, in the last 6 months of 2023, NVDA has seen an increase of 104.58% and had a share price of $296.56 on April 26, 2023. MSFT has seen an increase of 7.24% in the last 6 months and has a share price of $295.37 on April 26th, 2023. Without a doubt, their future earning potential has a positive outlook. As highlighted earlier, both companies are well-equipped to perform and see success.

In summary, Nivida and Microsoft are both great companies and have positively contributed to the market. I would invest in Microsoft because it has remained consistent and would be a great investment in the long run. Indeed, NVDA was more liquid in the short term, MSFT is able to effectively manage its cash conversion cycle in only 4 days and has seen greater returns and profit. More specifically, MSFT saw an increase of $25, 073 billion from 2020 to 2021. Additionally, Microsoft's debt-to-equity ratio was 1.35, and times interest earned of 30.31 clearly highlights their ability to sustain manage payments, debts, and inventory effectively. Especially, the company's revenue growth in the last 6 months indicates that it is well for many years. It should be noted, during the pandemic it saw a dramatic increase in EBIT which would suggest that the company is able to effectively produce cash cow products. After comparing which company has a higher dividend yield for 2021, NVDA had a yield of 0.12% and MSFT had a yield of 1.03%. I have used and enjoyed products offered by both companies and in the long term, Microsoft is the stronger investment opportunity and has the potential to consistently provide profits.

Works Cited

U.S. Securities and Exchange Commission. (2021, January 31). Form 10-K: NVIDIA Corporation. Retrieved from https://www.sec.gov/Archives/edgar/data/1045810/000104581021000010/nvda-20210131.htm

U.S. Securities and Exchange Commission. (2021, June 30). Form 10-K: Microsoft Corporation. Retrieved from https://www.sec.gov/ix?doc=/Archives/edgar/data/789019/000156459021039151/msft-10k_20210630.htm

Yahoo Finance. (n.d.). NVIDIA Corporation (NVDA). Retrieved April 26, 2023, from https://finance.yahoo.com/quote/NVDA/profile?p=NVDA

Yahoo Finance. (n.d.). Microsoft Corporation (MSFT). Retrieved April 26, 2023, from https://finance.yahoo.com/quote/MSFT/profile?p=MSFT