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Microsoft: Positive outlook despite profit miss

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·4-min read
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"Evolving macroeconomic conditions and other unforeseen items," hurt Microsoft (NSQ:MSFT) in the company's fiscal fourth quarter - ended June 2022. Revenue and income fell short of expectations as the company experienced a slow down in demand across its suite of products and services alongside margin pressure.

But in challenging economic times, Microsoft (NSQ:MSFT) remains an attractive investment. A popular constituent of the United States Technology sector, Microsoft has a market capitalisation of $1.89trn and a strong capacity to generate cash for reinvestment and growth of the business. In this article we dig into the metrics which could make Microsoft a strong addition to a portfolio.


Predictable profitability

Heady revenue growth figures tend to capture the most enticing of headlines, but true quality can only be found in companies which can consistently generate strong profits from those revenues. In the last five years, Microsoft has delivered compound annual revenue growth of 13.0%, while operating and net margins in that time have averaged 34.9% and 28.0% respectively. Microsoft's earnings per share growth has averaged 24.4% in the last five years.

More important than profits is Microsoft's ability to generate reliable cash. A free cash flow to sales ratio of 33.1% is a good sign as it shows the company converted a decent chunk of its revenue into cash, which can be used for reinvestment in the business or to deliver extra returns to shareholders.

For investors, profitability ratios help to reveal if the company is making good use of the money they have investment. A five year average return on capital employed (ROCE) of 20.7% is a good sign as it shows the company is efficiently generating profits from its immediately available assets. Other interesting profitability metrics include:

  • Return on assets (ROA). A company's ability to generate profits from the assets on its balance sheet. In five years, Microsoft's ROA has averaged 14.4%.

  • Return on invested capital (ROIC). Arguably the most interesting profitability metric as ROIC showcases the amount of profits generated from the investments made by all stakeholders in the company. It is useful to compare to ROIC with cash return on invested capital (CROIC) to show how efficiently the company is converting its profits into cash flow. Last year Microsoft generated an ROIC 41.7% and a CROIC of 45.6%.

While these profitability measures reveal that Microsoft is a high quality company, it is important not to take them in isolation. Comparing the metrics to other companies in the United States Technology sector can reveal a great deal about the company's relative quality. Find out more by checking out Stockopedia's exclusive StockReport for Microsoft.

What Stockopedia’s Quality Rank says about Microsoft

High-quality companies outperform junk companies in the stock market. From Robert Novy-Marx to Joseph Piotroski, the world’s foremost investment academics have built up a body of work that confirms quality as a stock market factor that outperforms over time.

But what exactly is this quality factor?

Put simply, it represents strong cash-generation, consistent profits, high rates of return on investment, high margins and robust financial health. Quality companies are the kind of thing Warren Buffett might pick up (at the right price, of course).

Stockopedia has built its Quality Rank to quickly show investors how well every stock in the market stacks up according to three criteria.

  1. Is the company a stable, growing, cashflow generative business with high returns?

  2. In which direction are the company's fundamentals headed

  3. Is there a risk to your capital in investing in this company?

Microsoft has a Quality Rank of 99. This puts it in the top 20% of the stock market in terms of quality characteristics. High quality stocks are desirable investments but they often come at a premium - so checking Microsoft's Value Rank might be an appropriate next step to understand whether the time is ripe to add the company to your portfolio.


You should be. The screen that has helped unearth the stock idea detailed in this article is just one of the many tools available at Stockopedia that can help make you a better investor.

Powered by years of research and huge volumes of data analysis which are normally not available to private investors, we have developed the tools that will give you a better chance of beating the market.

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