Microsoft Corp. (NASDAQ:MSFT)

The analysis of the financial ratios over the periods from 2020 to 2025 reveals notable trends in the management of inventory, receivables, payables, and working capital efficiency.

Inventory Turnover

The inventory turnover ratio exhibits a fluctuating but overall increasing trend, starting at 24.32 in 2020 and rising sharply to 93.64 by 2025. This increase suggests a significant improvement in inventory management, indicating that the company is selling and replenishing inventory much more rapidly in recent years.

Receivables Turnover

The receivables turnover ratio remains relatively stable, with only a slight decline from 4.47 in 2020 to 4.03 in 2025. This consistency implies that the company’s effectiveness in collecting receivables has been steady, although there is a minor indication of elongation in collection periods.

Payables Turnover

The payables turnover ratio shows a declining trend from 3.68 in 2020 to 3.17 in 2025, indicating that the company may be taking longer to pay its suppliers over time, which could be a working capital management strategy to optimize cash flow.

Working Capital Turnover

The working capital turnover ratio improves substantially, rising from 1.3 in 2020 to a peak of 7.12 in 2024 before slightly moderating to 5.64 in 2025. This suggests enhanced efficiency in utilizing working capital to generate revenue, markedly increasing in the mid-period before a minor decrease.

Average Inventory Processing Period

The average inventory processing period first increases from 15 days in 2020 to 22 days in 2022, then drops sharply to 4 days by 2025. This pattern aligns with the inventory turnover changes and indicates a faster conversion of inventory into sales, particularly evident after 2022.

Average Receivable Collection Period

The average receivable collection period is slightly prolonged, from 82 days in 2020 to 91 days in 2025. This subtle increase suggests that the company takes a bit longer to collect payments from customers.

Operating Cycle

The operating cycle, which encompasses inventory processing and receivable collections, fluctuates modestly between 97 and 103 days initially, then declines to around 95 days in 2025. This reflects a moderate improvement in overall operational efficiency over the period.

Average Payables Payment Period

The average payables payment period increases steadily from 99 days in 2020 to 115 days in 2025, confirming a tendency to extend payment terms with suppliers, which could aid cash conservation but might affect supplier relations.

Cash Conversion Cycle

The cash conversion cycle is negative throughout all years, with values ranging from -2 days in 2020 to -20 days in 2025. A negative cash conversion cycle indicates that the company collects cash from sales before it pays its suppliers. The increasing negativity of this metric signals improved cash flow efficiency and working capital management over time.

Cost of Revenue

The cost of revenue demonstrates a consistent upward trend over the six-year period. Starting at 46,078 million USD in June 2020, it increased steadily each year, reaching 87,831 million USD by June 2025. This indicates a growing scale of operations or increased expenses related to goods sold or services rendered.

Inventories

The inventory levels fluctuate notably across the years. Initially, inventories increased from 1,895 million USD in 2020 to a peak of 3,742 million USD in 2022. Following this, there is a marked decline, dropping to as low as 938 million USD by 2025. This suggests improved inventory management or possibly a shift in the business model reducing the inventory holding requirement.

Inventory Turnover

Inventory turnover ratio exhibits volatile but generally increasing behavior during the examined period. After declining from 24.32 in 2020 to 16.74 in 2022, the ratio surged significantly to 93.64 by 2025. High inventory turnover towards the end indicates faster movement of inventory relative to its level, pointing to enhanced efficiency in inventory usage or sales.

Overall Insights

While the cost of revenue rises steadily, inventory levels show a peak followed by a significant reduction, accompanied by a substantial increase in inventory turnover. This combination indicates that despite growing operational costs, inventory management appears to have become more efficient, with inventory turning over much faster and levels being maintained at lower amounts. These trends may reflect strategic adjustments in supply chain or inventory policies, contributing to operational effectiveness over time.

The financial data reveals a consistent upward trend in revenue over the examined periods. Revenue increased steadily from $143,015 million in 2020 to $281,724 million projected by 2025, indicating substantial growth in the company's income generation capabilities.

Accounts receivable, net of allowance for doubtful accounts, also demonstrated a significant increase during the same period. The amount rose from $32,011 million in 2020 to a projected $69,905 million in 2025, which aligns with the growing revenue but may suggest an increasing amount of credit extended to customers or slower collection processes.

Receivables turnover ratio, which measures how efficiently the company collects its receivables, showed a declining trend from 4.47 in 2020 to a projected 4.03 in 2025. This downward trend may indicate that although sales and receivables are increasing, the company is taking progressively longer to collect its outstanding receivables or is allowing more lenient credit terms.

Revenue

Exhibited continuous growth across all periods, approximately doubling from 2020 to 2025.

Accounts Receivable

Increased markedly, consistent with higher revenues but potentially signaling increased credit risk or collection delays.

Receivables Turnover

Decreased gradually over time, suggesting a reduction in collection efficiency.

Overall, the data suggest robust revenue expansion accompanied by growing receivables and slightly diminishing collection efficiency, which may warrant attention to credit management practices to ensure sustained cash flow quality.

Cost of Revenue

The cost of revenue shows a consistent upward trend across the periods evaluated. Beginning at 46,078 million USD in mid-2020, it increased steadily each year, reaching 87,831 million USD by mid-2025. This reflects a significant rise, nearly doubling over the five-year span, indicating increased operational costs potentially driven by higher sales volume, inflationary pressures, or expanded business activities.

Accounts Payable

Accounts payable figures also demonstrate a marked increase from 12,530 million USD in mid-2020 to 27,724 million USD by mid-2025. Although the growth is not strictly linear—there is a slight decrease from 19,000 million USD in 2022 to 18,095 million USD in 2023—the overall upward movement suggests a growing reliance on supplier credit or increased purchasing activity consistent with the rising cost of revenue.

Payables Turnover Ratio

The payables turnover ratio has generally declined over the period under review, beginning at 3.68 in 2020 and decreasing to 3.17 in 2025. This declining ratio indicates that payables are being turned over less frequently, implying a lengthening in the average payment period. This could be interpreted as a strategic use of supplier credit to manage cash flow or changes in payment terms negotiated with suppliers.

The financial data over the analyzed years exhibit notable trends in working capital, revenue, and working capital turnover ratios.

Working Capital

Working capital shows a decreasing trend from 109,605 million US dollars in June 2020 to 34,448 million in June 2024, indicating a reduction in the company's liquid assets relative to current liabilities over this period. There is a slight recovery in June 2025, where working capital increases to 49,913 million US dollars. Overall, this decline could reflect increasing current liabilities, reductions in current assets, or both.

Revenue

Revenue demonstrates a consistent upward trajectory each year, rising from 143,015 million US dollars in June 2020 to 281,724 million by June 2025. This continuous growth in revenue suggests strong sales performance and expanding business operations during the period analyzed.

Working Capital Turnover

The working capital turnover ratio, which measures how efficiently the company uses its working capital to generate revenue, shows significant improvement across the years. Starting at 1.3 in June 2020, the ratio increases steadily, peaking at 7.12 in June 2024 before slightly decreasing to 5.64 in June 2025. This pattern indicates improved efficiency in generating sales from the working capital despite the reduction in the absolute value of working capital.

In summary, while the company's working capital has declined notably, the substantial increase in revenue combined with improved working capital turnover suggests enhanced operational efficiency and revenue generation capacity relative to the company's working capital base.

Inventory Turnover

The inventory turnover ratio shows a fluctuating yet overall increasing trend over the observed periods. Starting at 24.32 in mid-2020, it declined to 16.74 by mid-2022, indicating slower inventory movement during this interval. However, from mid-2022 onward, there is a notable and sharp increase, reaching 93.64 by mid-2025. This suggests a significant improvement in the efficiency of inventory utilization and sales turnover in the most recent years.

Average Inventory Processing Period

The average inventory processing period, measured in days, inversely mirrors the inventory turnover trend. It increased from 15 days in mid-2020 to 22 days in mid-2022, reflecting longer inventory holding and slower turnover during those years. From mid-2022 onward, this period drastically shortened, dropping to just 4 days by mid-2025. This reduction aligns with the improved inventory turnover ratio and implies an enhanced ability to convert inventory into sales more quickly, contributing positively to operational efficiency.

Overall Observations

The data indicates a period of declining inventory efficiency up to 2022 followed by a sharp turnaround characterized by increased turnover and reduced inventory holding times. The improvements after 2022 may be indicative of changes in inventory management practices, supply chain optimization, sales growth, or a combination of these factors. The extreme values in the most recent years suggest a markedly accelerated inventory cycle, which if sustainable, could contribute to better cash flow and profitability.

The analysis of the receivables turnover ratio over the reported periods reveals a gradual decline. The ratio decreased from 4.47 in June 2020 to 4.03 in June 2025, indicating that the company's efficiency in collecting receivables has weakened slightly over time. This trend suggests it takes longer to convert receivables into cash.

This trend is corroborated by the average receivable collection period, which shows a corresponding increase. The number of days taken to collect receivables rose from 82 days in June 2020 to 91 days in June 2025. The increase in days reflects a longer cash conversion cycle, implying that customers are taking more time to pay their outstanding balances.

Receivables Turnover Ratio

There is a consistent decline from 4.47 to 4.03 over the six-year span, pointing towards less frequent collection of receivables within the year.

Average Receivable Collection Period

An incremental increase from 82 to 91 days shows a lengthening period for accounts receivable collection, which may impact the company’s cash flow management.

The combination of these trends suggests a potential area of concern related to the management of credit policies or customer payment behavior. Increased monitoring of receivables and strategies to improve collection efficiency may be warranted to mitigate any adverse effects on liquidity.

Average Inventory Processing Period

The average inventory processing period shows fluctuations over the analyzed years. It increased from 15 days in 2020 to a peak of 22 days in 2022, indicating slower inventory turnover. Subsequently, there is a marked improvement with the period decreasing significantly to 14 days in 2023, and further reducing to 6 days in 2024 and 4 days in 2025. This trend suggests enhanced inventory management and faster processing times in the most recent years.

Average Receivable Collection Period

The average receivable collection period remains relatively stable over the period, with minor fluctuations around the low eighties. It starts at 82 days in 2020, slightly increases to 83 days in 2021, dips marginally to 81 days in 2022, then rises steadily to 84 days in 2023, 85 days in 2024, and reaches 91 days in 2025. This gradual upward trend indicates that the company is taking longer to collect receivables, potentially reflecting changes in credit policy or customer payment behavior.

Operating Cycle

The operating cycle, which combines the inventory processing and receivable collection periods, shows a general pattern of increase followed by improvement. The cycle lengthened from 97 days in 2020 to a peak of 103 days in 2022, suggesting an extended time to convert inventory to cash. After 2022, the operating cycle shortens to 98 days in 2023 and further to 91 days in 2024, but then slightly lengthens again to 95 days in 2025. This pattern aligns with the trends observed in the individual components, reflecting both improved inventory turnover and slightly lengthening receivable collections.

Payables Turnover

The payables turnover ratio demonstrates a generally declining trend over the observed periods. Starting from 3.68 in mid-2020, it decreased to 3.44 in 2021 and further to 3.3 in 2022. Although there was a slight recovery to 3.64 in 2023, the ratio again declined to 3.37 in 2024 and 3.17 in 2025. This pattern indicates a gradual decrease in the efficiency with which the company is paying off its suppliers over time, especially notable in the later years.

Average Payables Payment Period

The average payables payment period, expressed in days, exhibited a largely increasing trend. From 99 days in 2020, the period extended to 106 days in 2021 and further increased to 111 days in 2022. Although there was a decrease to 100 days in 2023, the period again lengthened to 108 days in 2024 and reached 115 days in 2025. This increasing duration reflects a tendency for the company to take longer to settle its payables, which aligns with the observed decrease in the payables turnover ratio.

Overall Analysis

The inverse relationship between the payables turnover ratio and the average payables payment period is consistent with typical financial behavior: as the company takes longer to pay its bills, the turnover ratio decreases. The data suggests a deliberate or necessary extension of payment terms in recent years, which might be due to cash flow management strategies or changing supplier agreements. The temporary improvements seen in 2023 do not appear to have resulted in a sustained reversal of the overall trend.

Average Inventory Processing Period

The average inventory processing period exhibited fluctuations over the observed years, starting at 15 days in 2020 and rising to 22 days by 2022. A marked decrease is noted thereafter, dropping sharply to 14 days in 2023, then continuing to decline to 6 days in 2024 and reaching 4 days in 2025. This trend suggests an increased efficiency in inventory management and turnover in the later years.

Average Receivable Collection Period

The average receivable collection period remained relatively stable, with minor variations. Beginning at 82 days in 2020, it rose slightly to 83 days in 2021, then dipped to 81 days in 2022 before gradually increasing again to 91 days by 2025. This indicates a modest lengthening in the time taken to collect receivables, potentially impacting cash inflow timing.

Average Payables Payment Period

A gradual increasing trend is observed in the average payables payment period, starting from 99 days in 2020 and increasing to 115 days by 2025. There are some fluctuations within the period, such as a decrease to 100 days in 2023, but the overall pattern points to a tendency to extend payables duration, possibly to optimize cash outflow management.

Cash Conversion Cycle

The cash conversion cycle has consistently been negative, improving from -2 days in 2020 to -20 days in 2025. The most notable improvement occurred after 2022, with the cash conversion cycle shortening significantly from -8 to -20 days by 2025. This indicates an enhanced efficiency in turning investments in inventory and other resources into cash flows, suggesting strong operational cash management.