Microsoft is a global software, cloud and productivity-services company that combines high-margin enterprise offerings with large-scale cash generation and very low leverage.
The company’s growth profile is notable: five‑year diluted EPS compound annual growth was 18.38% and the most recent one‑year diluted EPS growth accelerated to 28.6%, while revenue per share rose 16.7% year‑over‑year and reached $40.93 on a split‑adjusted basis; diluted EPS was $15.98 per share most recently. Profitability is a clear strength — gross margin remains near the high‑60s at 68.6%, operating margin has climbed into the mid‑40s (46.3% in the most recent comparable quarter) and net margin reached 39.0% in the latest quarter — and return on equity remains robust at 30.5%.
Cash generation is ample: trailing twelve‑month operating cash flow was $160.51 billion, free cash flow margin is 25.34%, and operating cash flow has consistently exceeded net income (OCF/Net Income ≈ 1.35).
Areas of caution include the company’s large and growing investing outlays and some signs of slowing ROE momentum. Investing cash flow has become more negative over the past year, moving from -$54.86 billion (2024‑12) to -$100.55 billion (2025‑12), indicating sizable capital deployment. ROE growth is slightly negative (-0.0042), reflecting a modest downward drift from earlier peaks even though absolute ROE remains high; EPS has also shown historical volatility, including negative swings through parts of 2022–2023 before the recent rebound.
Key fundamentals to monitor going forward are top‑line and profitability per share — watch sequential Revenue and Net Income trends and per‑share metrics in Revenue & Net Income and EPS Diluted & Revenue per Share and the underlying momentum in Revenue & EPS Growth. Track operating versus investing cash flow and financing outflows in Strategic Capital Allocation to see whether investing cash flow remains near -$100.55B while operating cash flow stays around $160.51B. Also follow margin stability and ROE in Profit Margin Trends and Return on Equity (ROE), along with the company’s earnings quality in Earnings Quality Analysis and the market multiple in Price-to-Earnings (PE) Ratio Trend (recent P/E ~30.3x with a last‑year intra‑quarter band of ~29–37x).
The foundation of business quality and long-term value creation
Microsoft Corp's revenue has increased sequentially across 2025, rising from $70.07B in Q1 to $76.44B in Q2, $77.67B in Q3 and $81.27B in Q4, showing continued top-line expansion in the most recent year.
Net income increased more markedly in the latest quarter, advancing from $27.75B in Q3 2025 to $38.46B in Q4 2025, after a steady rise through the prior quarters (Q1–Q3 2025: $25.82B, $27.23B, $27.75B). The most recent quarter therefore shows both higher revenue and a pronounced increase in profitability versus the prior quarter.
Over the multi-year series shown, both revenue and net income exhibit a persistent upward trend: revenue rose from roughly $29.08B in 2018-09 to $81.27B in 2025-12, and net income increased from about $8.82B in 2018-09 to $38.46B in 2025-12.
Notable inflection points include the sustained acceleration beginning around 2020 and continued year-over-year gains through 2025.
The most recent quarterly revenue was $81.27B. The most recent quarterly net income was $38.46B.
Why Growth Matters
Consistent revenue and earnings growth are the lifeblood of successful long-term investments. Companies that can grow their top line (revenue) and bottom line (net income) over many years demonstrate they have products or services customers value and are willing to pay for repeatedly.
Revenue Growth shows whether the company is expanding its market reach, gaining market share, or successfully launching new products.Net Income Growth demonstrates the company can convert that revenue into actual profits while managing costs effectively.
Look for steady, sustainable growth rather than erratic spikes. The best businesses compound earnings year after year, creating tremendous value for shareholders over time. Companies that can grow earnings faster than revenue are improving their profitability—a sign of operational excellence and competitive strength.
Year-over-year growth rates for revenue and earnings per share
Reading the Growth Rate Chart
This chart converts the absolute per-share figures into year-over-year percentage changes, making it easy to see whether growth is accelerating, decelerating, or reverting to trend — regardless of the company's absolute size.
Revenue per Share Growth (1-year, split-adjusted) measures how quickly the top line is expanding on a per-share basis. Sustained positive growth signals that the company continues to win customers and grow its addressable market.EPS Diluted Growth (1-year, split-adjusted) measures how quickly earnings are compounding for each shareholder. When EPS growth consistently outpaces revenue growth, operating leverage and margin expansion are at work.
Look for consistency, not just magnitude. A company that reliably grows EPS 10–15% per year is far more valuable than one that alternates between 50% spikes and deep contractions. Negative EPS growth during a period of positive revenue growth is a red flag — costs are rising faster than sales. Quarters where both lines converge near zero or go negative deserve close scrutiny.
How revenue converts to net income for the most recent annual period
Over the period Jan 2025 to Dec 2025, Microsoft Corp converts approximately 69¢ of every revenue dollar into gross profit (gross margin: 68.6%).After accounting for operating expenses and taxes and expenses, the company retains 39.0% as net profit margin, resulting in $119.26B in net earnings.
Period Information
Report Type: Annual (10-K)
Period: Jan 2025 to Dec 2025
Revenue composition by disclosure category for the latest period
Revenue from Microsoft 365 Commercial products and cloud services—including Office, Windows Commercial on-premises and cloud portions, Enterprise Mobility + Security, per-user Power BI, Exchange, SharePoint, Microsoft Teams, Microsoft 365 Security and Compliance, and Microsoft 365 Copilot—along with Microsoft 365 Consumer products and cloud services, LinkedIn monetized solutions such as Talent Solutions, Marketing Solutions, Premium Subscriptions, Sales Solutions, and Dynamics products and cloud services including Dynamics 365 cloud applications across ERP and CRM modules, Power Apps, Power Automate, and on-premises ERP and CRM applications.
Revenue from server products and cloud services—including Azure cloud and AI consumption-based services, GitHub cloud services, Nuance Healthcare cloud services, virtual desktop offerings, and other cloud services—along with on-premises server products like SQL Server, Windows Server, Visual Studio, System Center, and associated Client Access Licenses, as well as enterprise and partner services such as Enterprise Support Services, Industry Solutions, Nuance professional services, Microsoft Partner Network, and Learning Experience.
Revenue from Windows and Devices—including Windows OEM licensing, Surface devices, and PC accessories—Gaming, which encompasses Xbox hardware, first- and third-party game content, in-game content, subscriptions like Xbox Game Pass, Xbox Cloud Gaming, advertising, and other cloud gaming services—and Search and news advertising, including Bing, Copilot, Microsoft News, Microsoft Edge, and third-party affiliates.
Revenue generated from advertising across search, news, LinkedIn marketing solutions, and gaming advertising.
Revenue from sale and licensing of on-premises perpetual licenses, volume licensing programs, OEM pre-installation licenses, outbound licensing of patented technologies, and partner licensing programs.
Revenue from solution support, consulting services, enterprise support services, Nuance professional services, training and certification, and partner-delivered services.
Analyzing long-term margin stability and competitive positioning
Microsoft Corp's margins have been high and broadly stable over the period shown. Gross margin has remained in a narrow range around the high 60s, peaking near 69.9% in 2024-Q1 and easing modestly to the high-68s across 2025, including 68.8% in 2025-Q3 and 68.6% in 2025-Q4.
Operating margin shows a clear upward drift from low-40s in 2022–2023 into the mid-40s in 2024–2025, with sequential readings of 45.2% (2025-Q1), 45.6% (2025-Q2) and 46.3% (2025-Q3).
Net profit margin bottomed in the low-30s in 2022 and has recovered through 2023–2025, moving from the mid-30s earlier in 2025 to 39.0% in the latest quarter. Recent quarter-to-quarter data underline that recovery: net margin rose from 35.7% in 2025-Q3 to 39.0% in 2025-Q4 while gross margin declined slightly over the same interval.
Most recent gross margin: 68.6% (period end 2025-12-31)
Most recent operating margin: 46.3% (period end 2025-09-30)
Most recent net profit margin: 39.0% (period end 2025-12-31)
Understanding Profit Margins
Between Jan 2025 and Dec 2025, Microsoft Corp converts every dollar of revenue through the following stages:
Sustainable competitive advantages reveal themselves through consistently superior profit margins over extended periods. Companies with durable economic moats maintain pricing power and operational efficiency that competitors struggle to match.
A sign of durable competitive advantage is earning sustained higher margins than competitors.Look for margins that remain stable or improve over time, especially during economic downturns. Declining margins may signal increasing competition, pricing pressure, or deteriorating business fundamentals.
Comparing reported earnings to actual cash generation
Over the multi-year series, MICROSOFT CORP’s trailing twelve-month operating cash flow and net income show a clear upward trend, with operating cash flow consistently exceeding net income in every reported period. The absolute gap between cash flow and earnings has widened over time, particularly from the 2022–2023 period into 2024–2025 as both metrics increased in parallel.
In the most recent four quarters both series rose consecutively: operating cash flow climbed from $130.71B (2025-03-31) to $136.16B (2025-06-30) to $147.04B (2025-09-30) and to $160.51B (2025-12-31); net income moved from $96.64B to $101.83B to $104.91B and then to $119.26B, with the largest net income increase occurring in the latest quarter. The most recent trailing twelve-month operating cash flow was $160.51B and the most recent trailing twelve-month net income was $119.26B.
The Earnings vs. Cash Flow Gap
Reported earnings (Net Income) doesn't always reflect actual cash generation. Companies use accrual accounting, which recognizes revenue when earned and expenses when incurred—not when cash actually changes hands. This creates timing differences and opportunities for accounting discretion that can mask underlying business health.
Net Income (the "earnings" number) can be influenced by non-cash items like depreciation, stock-based compensation, and changes in accounting estimates.Operating Cash Flow, however, shows the actual cash the business generates from its core operations—a harder number to manipulate.
Trailing Twelve Months
What to Look For
Key Insight: Companies with durable competitive advantages typically show operating cash flow that meets or exceeds net income over time, demonstrating they convert accounting profits into actual cash that can be returned to shareholders or reinvested in the business.
Measuring management's efficiency at generating profits from shareholder capital
Microsoft Corp's trailing twelve-month ROE has been in the high‑20s to low‑30s over the past year, moving from 30.6% at 2024‑12 to 30.0% (2025‑03), 29.6% (2025‑06), 28.9% (2025‑09) and back to 30.5% in 2025‑12. Recent quarters show a modest mid‑year dip followed by a rebound in the most recent quarter, indicating relative stability around the 29–31% range.
On a longer horizon, the metric was substantially higher in 2020–2021 (peaking at 44.7% in 2021‑09) and has trended downward since that peak through 2024, while an earlier notable inflection occurred at 2017‑12 when ROE fell to 14.8% before recovering in subsequent years. The most recent return on equity was 30.5%.
The Gold Standard of Profitability
Return on Equity (ROE) is a powerful measure of how effectively a company's management is using the money shareholders have invested. Calculated by dividing Net Income by Shareholders' Equity, it reveals how much profit is generated for every dollar of equity capital.
A consistently high ROE (typically above 15-20%) is often the signature of a "quality" business with a durable competitive advantage. It indicates that the company can generate high returns on its own capital, which it can then reinvest at these high rates to compound value over time.
What to Look For:
How the company generates and deploys its cash
Microsoft Corp's trailing twelve-month operating cash flow has trended upward in recent quarters, rising from $125.58B at 2024-12 through $130.71B (2025-03), $136.16B (2025-06) and $147.04B (2025-09) to $160.51B at 2025-12. This shows a steady quarter-by-quarter increase in operating cash generation over the past year.
Investing cash flow has been consistently negative and became more negative through 2024–2025, moving from -$54.86B (2024-12) to -$56.88B (2025-03), -$72.60B (2025-06), -$91.96B (2025-09) and -$100.55B (2025-12).
Financing cash flow shows persistent net outflows with variability: relatively small negatives in late 2023 (e.g., -$17.09B at 2023-12) widened to -$70.19B at 2024-12, then moderated to -$46.92B at 2025-09 before shifting to -$53.30B at 2025-12. The most recent trailing twelve-month values are: Operating Cash Flow $160.51B, Investing Cash Flow -$100.55B, Financing Cash Flow -$53.30B.
Understanding Company Strategy
Capital allocation refers to how management decides to spend and invest the company's cash. Analyzing the three primary categories of cash flow reveals a company's true operational strategy:
What to look for: Is the company bootstrapping (funding growth solely from operating cash)? Are they borrowing to fund aggressive expansion or dividends? Or are they capital raising by issuing new shares, potentially diluting your ownership? A healthy, mature company typically generates strong operating cash, moderately invests in growth, and returns the surplus to shareholders through financing activities.
Trailing Twelve Months
Net assets attributable to each share — the accounting floor of intrinsic value
Why Book Value per Share Matters
Book value per share is the net worth of the company — total assets minus total liabilities — divided by shares outstanding (split-adjusted). It represents the theoretical liquidation value per share if every asset were sold and every liability repaid at balance-sheet carrying values. It is the accounting foundation upon which much of equity valuation is built.
A steadily rising book value per share is one of the most reliable signals of compounding wealth creation. It means the company is retaining earnings and building net worth faster than it is returning capital or eroding it. Warren Buffett famously tracked Berkshire Hathaway's book value per share for decades as his primary measure of intrinsic value growth.
Context is essential. Asset-heavy businesses (banks, manufacturers, utilities) should be judged by book value more directly than asset-light businesses (software, consumer brands), where intangible assets like intellectual property and customer loyalty may far exceed their balance-sheet carrying values. A company trading at a large premium to book value is not necessarily overvalued — it may simply possess competitive advantages that accounting rules do not capture. Conversely, a declining book value per share — especially over multiple years — is a serious warning sign of capital destruction.
How much of the company is financed by debt versus shareholders' equity
Reading the Debt-to-Equity Ratio
The debt-to-equity (D/E) ratio compares total financial debt to shareholders' equity. A ratio of 1.0 means the company has borrowed one dollar for every dollar of equity; a ratio of 2.0 means it has borrowed twice as much as it owns. Financial leverage amplifies both returns and risk: in good times, debt turbocharges equity returns; in bad times, it accelerates losses and can threaten solvency.
Trends matter more than a single number. A rising D/E ratio can mean the company is taking on debt to fund growth — potentially value-creating if returns exceed the cost of capital. But it can also mean equity is being eroded through losses or that the business is borrowing simply to sustain operations. A falling D/E ratio generally reflects strengthening financial health: earnings are being retained, debt maturities are being paid down, or both.
Industry norms vary enormously. Capital-intensive sectors (utilities, real estate, financials) routinely carry high D/E ratios that would be alarming in, say, a technology company. Always compare against sector peers. As a rough rule of thumb, a D/E above 2× in a cyclical business warrants careful scrutiny of interest coverage and refinancing risk.
Short-term liquidity — can the company cover its near-term obligations?
Liquidity: Can the Business Pay Its Bills?
The current ratio is calculated as current assets divided by current liabilities. A ratio of 1.5 means the company has $1.50 of short-term assets — cash, receivables, inventory — for every $1.00 of obligations due within the next twelve months. It is the most direct measure of near-term financial resilience: can the business meet its obligations without needing to raise new capital or sell long-term assets at a discount?
A ratio above 1.0 is generally healthy, meaning current assets exceed current liabilities. A ratio consistently above 2.0 may indicate the company is holding excess cash or inventory that could be deployed more productively. A ratio below 1.0 is a warning sign — the company is relying on future cash generation or external financing to cover its near-term obligations, which is manageable in normal conditions but dangerous during a downturn.
Trends and context matter.A declining current ratio isn't always alarming — highly efficient businesses (e.g., large retailers with reliable daily cash flows) often run leaner balance sheets intentionally. Conversely, a rapidly rising current ratio can signal slowing sales causing inventory to build, or customers taking longer to pay. Always compare the trend against industry peers and cross-reference with the cash flow statement to assess whether the business is genuinely liquid or just holding non-cash current assets.
How much the market is paying for each dollar of company earnings
Over the past four quarters MICROSOFT CORP's trailing twelve-month P/E has moved within a roughly 29x–37x band. It rose from 29.0x on 2025-03-31 to 36.4x on 2025-06-30 and 36.8x on 2025-09-30, then declined to 30.3x by 2025-12-31. The most notable recent inflection was the increase through Q2–Q3 2025 followed by a moderation in Q4 2025.
Viewed over a multi-year span, the P/E expanded from low‑teens in the early 2010s to mid‑30s across recent years, with historical peaks such as 55.3x at 2017-12-31 and the mid‑40s in 2018. The most recent Price-to-Earnings (P/E) ratio was 30.3x as of 2025-12-31.
What Is the PE Ratio?
The Price-to-Earnings (PE) ratio is one of the most widely used valuation metrics in investing. It divides the current stock price by the company's earnings per share (EPS), revealing how much investors are willing to pay for each dollar of earnings. A high PE can signal that the market expects strong future growth, while a low PE may suggest undervaluation—or reflect genuine concerns about the company's prospects.
Context matters:PE ratios vary significantly across industries. High-growth technology companies routinely trade at PE ratios above 30x or 40x, while mature, low-growth sectors like utilities or financials often trade closer to 10–15x. Always compare a company's PE to its own history and its industry peers, not just an absolute number.
What to Look For:
Key Insight:The PE ratio is a snapshot of market sentiment and expectations. Tracking it over time alongside earnings trends reveals whether the market's valuation has expanded or contracted—and whether that change is justified by fundamentals.