Microsoft Corporation (MSFT): Quant Investors Taking Note of the 0.297923 Gross Profitability Score - Augusta Review

In thie piece we will review the quality ratios and quant metrics for shares of Microsoft Corporation (MSFT). Avid investors might be interested in how the quality ratios are stacking up for the Information Technology firm. Robert Novy-Marx, a professor at the university of Rochester, discovered that gross profitability has as much power predicting stock returns as traditional value metrics. He found that while other quality measures had some predictive power, especially on small caps and in conjunction with value measures, gross profitability generates significant excess returns as a stand alone strategy, especially on large cap stocks.The Gross profitability for Microsoft Corporation (MSFT) is 0.297923.

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Key Stats

Microsoft Corporation (MSFT) based out of United States and resides in the Information Technology sector, has a market cap of 750443125.3 after recently touching 110.97 on a recent bid. Microsoft Corporation (MSFT) sees an average of trading volume of 2647205.901. Microsoft Corporation (MSFT) competes in the Software industry.

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FCF Yield, PI & FScore
Free Cash Flow Yield (FCF Yield) is the free cash flow of the current year minus the free cash flow from the previous year, divided by last year’s free cash flow. The FCF Growth of Microsoft Corporation (MSFT) is 0.039367. Free cash flow (FCF) is the cash produced by the company minus capital expenditure. This cash is what a company uses to meet its financial obligations, such as making payments on debt or to pay out dividends. Looking out to the 5 year FCF yield, this gives investors the overall quality of the free cash flow over a longer period of time. The FCF five year yield for Microsoft Corporation (MSFT) stands at 0.034179. Experts say the higher the value, the better, as it means that the free cash flow is high, or the variability of free cash flow is low or both.

The Price Index is a ratio that indicates the return of a share price over a past period. The price index of Microsoft Corporation (MSFT) for last month was 1.054547 while the 3m is at 1.080826. This is calculated by taking the current share price and dividing by the share price at the specifiied time frame mentioned. If the ratio is greater than 1, then that means there has been an increase in price over that timeframe. If the ratio is less than 1, then we can determine that there has been a decrease in price. Similarly, investors look up the share price over 12 month periods. The Price Index 12m for Microsoft Corporation (MSFT) is 1.230165. The Price Index 5Y stands at 3.28508.

The Piotroski F-Score is a scoring system between 1-9 that determines a firm’s financial strength. The score helps determine if a company’s stock is valuable or not. The Piotroski F-Score of Microsoft Corporation (MSFT) is 9. A score of nine indicates a high value stock, while a score of one indicates a low value stock. The score is calculated by the return on assets (ROA), Cash flow return on assets (CFROA), change in return of assets, and quality of earnings. It is also calculated by a change in gearing or leverage, liquidity, and change in shares in issue. The score is also determined by change in gross margin and change in asset turnover.

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EBITDA/EV
This multiple is similar to Earnings Yield, but here we use Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) as Nominator). By doing this, we can compare companies with a different capital structure and capital expenditures. This way it gives a much better idea of the value of a company compared to the popular P/E ratio. As O’Shaughnessy explaines:

” Stocks that have very high debt levels often have low PE ratios, but this does not necessarily mean that they are cheap in relation to other securities. Stocks that are highly leveraged tend to have far more volatile PE ratios than those that are not. A stock’s PE ratio is greatly affected by debt levels and tax rates, whereas EBITDA/EV is not. To compare valuations on a level playing field, you need to account for how a company is financing itself and then compare how relatively cheap or expensive it is after accounting for all balance sheet items.” – James P. O’Shaugnessy in What works on Wall Street

You can think of it as the taking all the revenue and subtracting the costs that solely go into running the business. The downside of EBITDA is that it can be abused by companies declaring as “one-off” costs things that should really be considered normal costs. We use the EBITDA of the last 12 months.

As denominator it uses Enterprise Value. The formula is as follows:

EBITDA/EV = EBITDA/Enterprise Value

EBITDA/EV has been identified in many academic studies as one of the most predictive valuation factors. Microsoft Corporation (MSFT) has a EBITA/EV of 16.344819.

In the 4th edition of ‘What works on Wall Street’, O’Shaughnessy reported that in his backtests, EBITDA/EV earned the best absolute return over the testing period (1963-2009), unseating all other ratios examined, and doing this with a relatively low volatility.

Gray & Vogel found the EBITDA/EV to be the best performing metric, outperforming investor favorites such as Price-to-Earnings, Free Cashflow to EV and Book-to-Market in the period 1971-2010. They also found in contrast to prior empirical work, that long-term ratios add little investment value over standard one-year valuation metrics. The ERP5 Rank is an investment tool that analysts use to discover undervalued companies. The ERP5 looks at the Price to Book ratio, Earnings Yield, ROIC and 5 year average ROIC. The ERP5 of Microsoft Corporation (MSFT) is 2742. The lower the ERP5 rank, the more undervalued a company is believed to be.

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