Microsoft Corporation ($MSFT): Do Quant Investors Feel the 0.142267 Return is Sufficient? - Wagner Review

{csv|m:251|id:21|s:Company}} (MSFT) is boasting an Return on Assets number of 0.142267. ROA tells an investor how much after-tax profit a company generated for each $1 in assets. In other words, ROA measures a company’s net earnings in relation to all of the resources it had at its disposal—the shareholders’ capital plus short and long-term borrowed funds. Thus, return on assets is the most stringent test of return to shareholders.

Sharp investors typically realize that stock returns can fluctuate, and the periods of extreme ups and downs can sometimes be quite long. It can be very difficult to predict when a big market downturn will occur. However, investors who have a plan in place will often find themselves in a better position than those who do not. Investors following an individual plan can include some preparation for the unknown. The plan may involve specific criteria, and it may be uniquely tailored to suit the individual’s goals. When markets get choppy, it can be tempting for the individual investor to go into survival mode. Some of the best stock buying opportunities will present themselves during a lengthy period of decline. Being ready to pounce on these opportunities might end up being a huge benefit to the investor when the time comes.

FCF on Debt

Another ratio S&P Analyst Richard Tortoriello recommends to use is ‘Free Cash Flow to debt’. (‘Quantitative Strategies for Achieving Alpha’) This ratio shows how long it would take a company to pay back its debt using its current level of free cash flow. In his study, Tortoriello found that investing in the top 20% companies with the highest FCF/debt ratio generated substantially higher returns compared to the market.

Formula:

FCF on Debt = (Cash Flow from Operations−Capital Expenditure) / Total Debt

The FCF on debt number for Microsoft Corporation (MSFT) stands at 0.38962.

Net Debt to Market Cap

This ratio gives a sense of how much debt a company has relative to its market value. Companies with high debt levels compared to their peers can be volatile. We calculate it as follows:

Net Debt to Market Cap = (Total Debt−Cash and ST Investments) / Market Cap

Microsoft Corporation (MSFT) has a net debt to market cap ratio of 0.38962.

FCF

Free Cash Flow Growth (FCF Growth) 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 Yield of Microsoft Corporation (MSFT) is 0.034772. 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. The 5 Year FCF Yield of Microsoft Corporation (MSFT) is 0.028629. 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.

Most investors are more familiar with P/B or Price-to-book. This is just the inverted value.

Price-to-Book Ratio = Market Cap divided by Common Shareholders Equity

Market watchers may also be following some quality ratios for Microsoft Corporation (MSFT). Robert Novy-Marx, a professor at the university of Rochester, discovered that gross profitability – a quality factor – 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 (MSFT) is 0.303748.
M-Score (Beneish)

The M-Score, conceived by accounting professor Messod Beneish, is a model for detecting whether a company has manipulated their earnings numbers or not. Microsoft Corporation (MSFT) has an M-Score of -2.327026. The M-Score is based on 8 different variables: Days’ sales in receivables index, Gross Margin Index, Asset Quality Index, Sales Growth Index, Depreciation Index, Sales, General and Administrative expenses Index, Leverage Index and Total Accruals to Total Assets. A score higher than -1.78 is an indicator that the company might be manipulating their numbers.

Checking in on some valuation rankings, Microsoft Corporation (MSFT) has a Value Composite score of 55. Developed by James O’Shaughnessy, the VC score uses five valuation ratios. These ratios are price to earnings, price to cash flow, EBITDA to EV, price to book value, and price to sales. The VC is displayed as a number between 1 and 100. In general, a company with a score closer to 0 would be seen as undervalued, and a score closer to 100 would indicate an overvalued company. Adding a sixth ratio, shareholder yield, we can view the Value Composite 2 score which is currently sitting at 46.

Top notch investors are usually adept at filtering through the constant financial headlines. Now more than ever, there is an unprecedented amount of news and data regarding publically traded companies. Most of the focus is typically on the short-term and it tends to focus around near-term forecasts. Although more information is probably a good thing when looking at the bigger picture, being able to zoom in on the proper information can be quite a challenge. Tuning out all the unnecessary noise isn’t easy, but it may help the investor make better decisions. Constantly switching investments based on the headlines of the day may end up leaving the investor wondering what went wrong. Analyzing the right information can be an essential part of any solid stock investing plan.

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