Has Microsoft Corporation's (NASDAQ:MSFT) Earnings Momentum Changed Recently?

Measuring Microsoft Corporation’s (NASDAQ:MSFT) track record of past performance is a useful exercise for investors. It enables us to understand whether or not the company has met or exceed expectations, which is an insightful signal for future performance. Today I will assess MSFT’s recent performance announced on 30 June 2018 and weigh these figures against its long-term trend and industry movements.

Check out our latest analysis for Microsoft

Did MSFT perform worse than its track record and industry?

MSFT’s trailing twelve-month earnings (from 30 June 2018) of US$16.57b has declined by -35.0% compared to the previous year. Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of -4.3%, indicating the rate at which MSFT is growing has slowed down. Why is this? Let’s examine what’s transpiring with margins and if the rest of the industry is feeling the heat.

Revenue growth over the past couple of years, has been positive, however earnings growth has been falling. This implies that Microsoft has been ramping up expenses, which is hurting margins and earnings, and is not a sustainable practice. Viewing growth from a sector-level, the US software industry has been growing, albeit, at a unexciting single-digit rate of 9.0% over the past twelve months, and 5.5% over the past five. This growth is a median of profitable companies of 24 Software companies in US including NetSol Technologies, Aware and ACI Worldwide. This means any uplift the industry is profiting from, Microsoft has not been able to reap as much as its industry peers.

NasdaqGS:MSFT Income Statement Export September 1st 18

In terms of returns from investment, Microsoft has invested its equity funds well leading to a 20.0% return on equity (ROE), above the sensible minimum of 20%. Furthermore, its return on assets (ROA) of 6.6% exceeds the US Software industry of 5.5%, indicating Microsoft has used its assets more efficiently. However, its return on capital (ROC), which also accounts for Microsoft’s debt level, has declined over the past 3 years from 22.3% to 17.0%. This correlates with an increase in debt holding, with debt-to-equity ratio rising from 20.6% to 106% over the past 5 years.

What does this mean?

While past data is useful, it doesn’t tell the whole story. Typically companies that experience a prolonged period of reduction in earnings are undergoing some sort of reinvestment phase with the aim of keeping up with the recent industry disruption and expansion. You should continue to research Microsoft to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for MSFT’s future growth? Take a look at our free research report of analyst consensus for MSFT’s outlook.
2. Financial Health: Are MSFT’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2018. This may not be consistent with full year annual report figures.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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