Here’s why Microsoft has debt:
Microsoft has debt because it uses tax advantages and business practices that make the debt more cost-effective than just paying out of pocket for everything.
Basically, Microsoft can invest cash for a higher interest rate than it gets charged by lenders.
That plus tax advantages makes debit an appealing option.
So if you want to learn all about why Microsoft has so much debt even if it’s well-off, then this article is for you.
Let’s get right into it!
- what does it mean when OneDrive asks ‘Always Keep on This Device’?
- Microsoft Doesn’t Have PDF Editor: Why?
- Microsoft Doesn’t Do More About Piracy: Why?
- EXE File: How to Edit?
- Deleting System32 Folder: What Happens?
Does Microsoft Have Debt?
If we’re going to get into this, then let’s start with some important qualifiers.
Does Microsoft even have debt?
It’s one of the wealthiest organizations on the planet, so why would it even need to borrow money?
I’ll get into why later.
First, let’s establish that Microsoft does in fact carry debt.
Compared to individuals like you and me, Microsoft’s debt number is staggering.
According to Investopedia, the company had $32.5 billion in long-term debt as of the end of 2019.
That number isn’t perfectly up to date, but it’s highly unlikely that Microsoft has paid all of this off in the past few years.
On the other hand, Microsoft also reported $0 in short-term debt in 2019.
So, it’s all long-term investment debt.
Is Microsoft Well Off?
Well, with more than $30 billion in debt, maybe we need to rethink the premise.
Is Microsoft actually well off, or is it drowning in debt?
The original assumption was just fine.
Microsoft is beyond well-off.
The company is currently valued at $2.13 trillion.
That’s more than enough to cover the $30 billion in debt—several times over.
Microsoft’s 2021 revenue was $168 billion, so even at a 1% profit margin, the company could pay off its debt in less than 30 years, and this is all being ultra-conservative.
On top of all of that, Microsoft is currently sitting on about $105 billion in cash.
That’s down from the $130 billion the company had in 2021, but it’s still enough to pay all of its current debt three times over.
Microsoft is definitely well off, and it clearly has a lot of debt.
With that covered, let’s talk about why.
So, Why Does Microsoft Have So Much Debt? (3 Things)
In order to fully explain what’s going on, I’ll have to take you through some economic terms and ideas.
I’ll start that in the next section.
Before that, I want to give you the most basic answer possible.
Microsoft has debt because it’s better for the bottom line.
You can trust that a company like Microsoft is interested in profits and making money.
So, one way or another, debt is a better way to make money.
It sounds counterintuitive at the surface level, but when I take you through the economics at play, you’ll see why this makes sense.
And, these things aren’t just true for Microsoft.
Most major companies have debt for the same reasons.
In fact, most wealthy people have debt, and it’s still for the same reasons.
So, Microsoft, somehow, is actually making money off of its debts.
Let’s look into how that works.
#1 Intro to Economics
In order to really get into how debt can make a company money, I need to go over some basics.
There’s a good chance that you already know most or all of this, but I don’t want to leave anyone in the dark.
Assets
So, let’s talk about a few ideas.
First is the idea of assets.
Microsoft has tons of assets, the bulk of them are in the form of company stock, and those assets have value.
When I said that Microsoft is worth $2 trillion earlier, this is based on estimates of the company’s assets.
Now, there are different kinds of assets, and we don’t really need to get into those details today.
What matters is that Microsoft has things that it could sell to raise cash if needed.
On top of that, Microsoft has a ton of cash.
So it’s hard to say that the company really even needs to raise any money to make purchases or try to expand and grow.
But, the point is that Microsoft has access to more than enough money to fund all of its projects.
From a monetary perspective, the company absolutely does not need any loans.
Liquidation
The next concept that is important is the idea of liquidation.
If Microsoft was short on cash, they could sell some assets for cash.
For a company like Microsoft, the easiest thing to do is sell some stock and quickly generate cash.
This is all still pretty basic, but the concept of liquidation will come up again.
Interest
Lastly, we need to talk about interest rates.
Interest rates can be calculated in a lot of ways.
I’m going to take you through some examples, and they’ll be based on the idea of an annualized percentage rate (APR).
Basically, I’ll be using the same type of interest in each example, so you don’t have to worry about some of the more complicated aspects of interest.
#2 Tax Advantages
Here’s one of the key ways that Microsoft literally makes more money by taking out loans.
It all comes down to taxes.
Now, I want to avoid any political arguments about dodging taxes and how things should be structured.
That’s above my pay grade.
My only point here is that this is definitely what Microsoft does, and for anyone curious, it’s all completely legal.
In fact, the current tax code encourages a lot of this behavior.
Let’s say that Microsoft needed to raise $100 billion to buy a new, emerging tech giant.
Microsoft purchases emerging tech companies all the time, so this isn’t hard to imagine, even if it is an extreme example.
Now, the company could just use its huge cash reserve to make the purchase, and I’ll talk about why that wouldn’t be ideal in the next section.
For now, let’s imagine that Microsoft doesn’t have enough cash on hand to complete the deal.
They need to raise money.
The company really has two options.
It can liquidate assets to come up with cash, or it can borrow money (or a combination of the two).
When it comes to taxes, the smart move is to borrow as much of the money as possible, and here’s why.
When Microsoft liquidates assets, it has to pay a tax.
Basically, Microsoft is selling stuff, so the government gets a cut of the sale.
You’ve paid sales tax enough times to know that’s a thing.
In the case of this kind of transaction, one of the more common taxes applied is a capital gains tax.
It’s not always in play, but there’s a good chance Microsoft is worried about this specific type of tax.
The problem is that capital gains taxes can get up to 37% (I’ll probably round up to 40% for future reference) of the revenue from the sale.
For $100 billion worth of assets, that’s a steep price tag.
On the other hand, Microsoft can borrow that money, and loans aren’t taxed at all.
Just as a comparison, would it make sense for the government to charge you a tax for taking out a mortgage on a house?
It would make buying a house pretty much impossible for a lot of people.
So, this logic is applied to companies like Microsoft too, and there is no tax at all on the borrowed money.
In fact, there are many cases where Microsoft can get deductions for interest paid on that loan.
That won’t be enough to make the loan free, but the bottom-line math is still pretty easy.
Microsoft is such a major company with incredible assets that it can get very low-interest loans.
Lenders can feel confident that they will be repaid, so they’re ok with lending to Microsoft at a below-market rate.
Let’s throw some example numbers around.
Let’s say that Microsoft borrows the whole $100 billion at a 5% APR.
If you compare that to the 40% tax on trying to raise money without a loan, borrowing makes perfect sense.
As long as Microsoft can pay off the loan within 15 years, they’re saving money when compared to getting taxed on selling assets.
#3 Loans vs. Investments
That was pretty complicated, but there’s an entire second side to this coin, and it also makes Microsoft money.
In the previous example, Microsoft was selling assets to cover a major expense, but the company has $100 billion in cash right now.
They don’t need to raise money to buy things.
Well, there’s a good reason for Microsoft to take out the loan anyway.
Let’s stick with the same example from before.
Microsoft is buying another tech company for $100 billion (it’s an easy number).
Microsoft could just pay cash, and then they wouldn’t owe any capital gains taxes, and there would be no loan interest.
That’s an easy win, right?
Well, what if Microsoft actually invests some of that cash instead of spending it on a new acquisition?
Microsoft can probably get a lower interest rate than 5% on pretty much any loan it actually needs, but we’ll stick with the 5% number.
How much money can Microsoft get if they invest their cash?
Conservatively, the company can expect to make around 8% APR by investing cash (again, this is a conservative number).
Since 8% is more than 5%, this is again easy math.
Microsoft will make more money by holding onto their cash and taking a loan than they would save by avoiding the loan altogether.
Now, this math won’t work out in Microsoft’s favor in every single situation.
That’s why Microsoft does pay cash for a lot of things, and it’s why the company also has $30 billion in loans.
Each case is unique.
So, Microsoft keeps enough cash on hand to make purchases that aren’t loan-efficient, and it takes a loan whenever that’s the better financial decision.
- what does it mean when OneDrive asks ‘Always Keep on This Device’?
- Microsoft Doesn’t Have PDF Editor: Why?
- Microsoft Doesn’t Do More About Piracy: Why?
- EXE File: How to Edit?
- Deleting System32 Folder: What Happens?
