Building on the past performance indicators regarding profitability, rate of returns and EPS analyzed below, Investors are relatively optimistic about the growth in earnings of MSFT in the upcoming fiscal years. While growth in operating income in 2012 versus 2011 is not satisfactory, investors have noticed the significant growth in assets i.e. 11.56% (in 2012 versus 2011) with negligible reduction in long term obligations. With the consideration of better economic conditions, satisfactory recovery, growth in the key financial indicators, favorability of investments in IT sector and significant opportunities, MSFT expects high growth in its earnings.
Expected Rate of Return
MSFT has always marked with high rate of return evident in the profitability ratios of the most recent quarter (Sep 30 2012) i.e. Profit margin is 21.71% and operating margin is 36.02%. Return on equity is highly attractive for investors i.e. 24.5%.
Risk on Investment
Microsoft uses VaR (value at risk) model which can be supposed to be relatively fair reflection on the market risks involved in investing in MSFT. With the signs of recovery from global financial crisis, MSFT has shown satisfactory trends on reduction in VaR i.e. ‘the total VaR is 26% less at June 30, 2012, and 25% less at June 30, 2011’. Further reduction is expected for the active gains over competitors for the new technologies introduced by MSFT. Collaborative approach employed by MSFT, as it partnered with Nokia, is received positively in the market, cutting risk factors to low levels. Limitations of VaR model include non-consideration of all risk factors that may affect MSFT in future for some obvious reasons, one of which is the limitation in realizing all the risk factors. Uncertainty in competitors’ moves brings considerable risk concerns for investment in MSFT. Other risk factors involved are those associated with equity, interest rates, economic conditions and foreign currency. Besides considering all these risk factors, investors may still invest in MSFT for its leading Market share in the technology sector and its performance over last 3 years.
BETA for MSFT is calculated to be 1.17 which is considered favorable as overall market condition is satisfactory. Growth in the market is positive. Henceforth, MSFT with beta value of 1.17 is expected to outperform the companies with beta value of less than one.
Expected Rate of Return (Market perspective)
Expected rate of return in the market perspective seems to be handsome considering the opportunities prevailing in the technology sector. MSFT’s materialized plans to accrue maximum benefits out of these opportunities is consistently making it strong in consumer market. The Consumer expectations are high for its anticipated plans for these opportunities. Percentage change in operating income of 2011 versus 2009 is 33.3% which is considered to be the period of recovery from global financial crisis. Meanwhile, growth in earnings/share of 2010 versus 2009 was noticed to be 30% and growth in EPS of 2011 versus 2010 was 28%. Growth in operating income and EPS is expected to be higher in upcoming fiscal years in the midst of better economic conditions.