Most readers will already know that Microsoft (NASDAQ:MSFT) stock is up a notable 9.1% over the past month. Since the market usually pays attention to a company’s long-term fundamentals, we decided to study a company’s key performance indicators to see if they can influence the market. Specifically, we decided to study Microsoft’s ROE in this article.Thank you for reading this post, don't forget to subscribe!
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investments it receives from its shareholders. In simple terms, it measures the profitability of a company in relation to shareholder’s equity.
See our latest analysis for Microsoft
How to calculate return on equity?
Return on Equity Formula Is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Microsoft is:
35% = US$77b ÷ US$221b (based on trailing twelve months to September 2023).
‘Returns’ reflect the company’s earnings over the past year. This means that for every $1 worth of shareholders’ equity, the company made $0.35 in profit.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate the company’s ability to generate profits in the future. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that do not necessarily possess these characteristics.
Microsoft’s earnings growth and 35% ROE
First things first, we like that Microsoft has an impressive ROE. Additionally, the company’s ROE is higher than the industry average of 9.8% which is quite remarkable. Possibly as a result of this, Microsoft was able to see a healthy net income growth of 18% over the last five years.
Next, when comparing Microsoft’s net income growth with the industry, we found that the company’s reported growth is similar to the industry’s average growth rate of 19% over the past few years.
past earnings growth
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish that the expected growth or decline in earnings, as the case may be, has been priced in. This helps them determine whether the stock is positioned for a bright or disappointing future. Has the market priced in MSFT’s future outlook? You can find out in our latest intrinsic value infographic research report.
Is Microsoft using its profits efficiently?
With a three-year average payout ratio of 28% (which means the company retains 72% of its profits), it looks like Microsoft is reinvesting efficiently in such a way that it’s seeing its earnings grow by respectable amounts. and pay well covered dividends. ,
Furthermore, Microsoft has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analyst estimates, we found that the company’s future payout ratio is expected to remain stable at 23% over the next three years. As a result, Microsoft’s ROE is also not expected to change much, as we estimate from analyst estimates of 30% for future ROE.
Overall we feel that Microsoft’s performance has been quite good. In particular, it is great to see that the company is investing heavily in its business and has seen its earnings grow significantly along with a high rate of returns. That said, the latest industry analyst forecasts suggest that the company’s earnings growth is expected to slow. Take a look at this to learn more about the company’s future earnings growth forecasts Free Report on the company’s analyst forecasts to learn more.
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This article from Simply Wall St is of a general nature. We only provide commentary based on historical data and analyst forecasts using unbiased methodology and our articles are not intended to provide financial advice. It does not recommend buying or selling any stock, and does not take into account your objectives, or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.