Benzinga | Jan 26, 2022 09:51AM EST

Looking Into Microsoft's Return On Invested Capital

According to Benzinga Pro data Microsoft (NASDAQ:MSFT) posted a 8.49% decrease in earnings from Q1. Sales, however, increased by 14.15% over the previous quarter to $51.73 billion. Despite the increase in sales this quarter, the decrease in earnings may suggest Microsoft is not utilizing their capital as effectively as possible. Microsoft reached earnings of $20.50 billion and sales of $45.32 billion in Q1.

What Is Return On Invested Capital?

Return on Invested Capital is a measure of yearly pre-tax profit relative to capital invested by a business. Changes in earnings and sales indicate shifts in a company's ROIC. A higher ROIC is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROIC suggests the opposite. In Q2, Microsoft posted an ROIC of 9.86%.

Keep in mind, while ROIC is a good measure of a company's recent performance, it is not a highly reliable predictor of a company's earnings or sales in the near future.

Return on Invested Capital is a measure of yearly pre-tax profit relative to capital invested by a business. Changes in earnings and sales indicate shifts in a company's ROIC. A higher ROIC is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROIC suggests the opposite. In Q2, Microsoft posted an ROIC of 9.86%.

Keep in mind, while ROIC is a good measure of a company's recent performance, it is not a highly reliable predictor of a company's earnings or sales in the near future.

For Microsoft, the positive return on invested capital ratio of 9.86% suggests that management is allocating their capital effectively. Effective capital allocation is a positive indicator that a company will achieve more durable success and favorable long-term returns.

Analyst Predictions

Microsoft reported Q2 earnings per share at $2.48/share, which beat analyst predictions of $2.31/share.

This article was generated by Benzinga's automated content engine and reviewed by an editor.