Microsoft Corp. (NASDAQ:MSFT)

Over the observed period, net operating profit after taxes (NOPAT) demonstrates a generally positive trajectory, although with some fluctuation. Invested capital consistently increased throughout the period, while the cost of capital remained relatively stable. Consequently, economic profit, while positive across all years, exhibited a more complex pattern of growth and decline.

NOPAT Trend

NOPAT increased significantly from US$46,746 million in 2020 to US$65,443 million in 2021. Growth continued to US$71,024 million in 2022, remained relatively flat at US$71,055 million in 2023, and then accelerated substantially to US$90,364 million in 2024 and US$102,672 million in 2025. This suggests a period of strong operational performance, particularly in the later years of the observation window.

Cost of Capital

The cost of capital experienced a modest, incremental increase over the six-year period, rising from 13.73% in 2020 to 14.08% in 2025. This increase, while present, was relatively small and suggests a stable financing environment for the company.

Invested Capital

Invested capital showed consistent and substantial growth throughout the period. It increased from US$107,630 million in 2020 to US$430,631 million in 2025, indicating significant reinvestment in the business and/or acquisitions. The rate of increase accelerated in the later years, mirroring the growth in NOPAT.

Economic Profit

Economic profit peaked at US$45,468 million in 2021, following the initial surge in NOPAT. It then decreased to US$43,937 million in 2022 and further to US$36,328 million in 2023. Despite the continued growth in NOPAT and invested capital, the increase in the cost of capital and the proportionally larger increase in invested capital contributed to this decline. Economic profit recovered to US$40,921 million in 2024 and US$42,038 million in 2025, driven by the substantial increase in NOPAT, but did not reach the levels observed in 2021. This suggests that while the company is generating positive economic profit, the efficiency of capital deployment has fluctuated.

In summary, the company demonstrates a pattern of increasing operational profitability and substantial investment. While economic profit remains positive, its fluctuations indicate a need for continued monitoring of capital allocation efficiency relative to the cost of capital.

Net Income

The net income demonstrates a consistent upward trend over the analyzed periods. Starting at 44,281 million US dollars in mid-2020, it increased to 61,271 million by mid-2021, marking significant growth. This positive trajectory continued in subsequent years, reaching 72,738 million in mid-2022 and slightly declining to 72,361 million in mid-2023. However, the figure rebounded strongly, climbing to 88,136 million in mid-2024 and further to 101,832 million in mid-2025, indicating robust profitability improvement over time.

Net Operating Profit After Taxes (NOPAT)

NOPAT values show a steady increase overall, reflecting operational efficiency and sustainable earnings. Beginning at 46,746 million US dollars in mid-2020, it rose consistently to 65,443 million in mid-2021 and then to 71,024 million by mid-2022. The measure remained relatively stable into mid-2023 at 71,055 million, followed by a significant increase to 90,364 million in mid-2024 and 102,672 million in mid-2025. This pattern suggests effective operational management and growing core profitability.

Overall Analysis

Both net income and NOPAT demonstrate strong growth trajectories from 2020 through 2025. The steady increases, with minor fluctuations, reveal enhanced profitability and operational performance. The convergence of net income and NOPAT rising sharply in later years suggests improved tax efficiency and successful conversion of operating profit into net earnings. The data indicates a positive financial momentum and operational resilience sustained across multiple fiscal years.

Provision for Income Taxes

The provision for income taxes shows a consistent upward trend over the six-year period. Starting from 8,755 million USD in 2020, it increases each year, reaching 21,795 million USD by 2025. Notably, the growth rate accelerates notably from 2021 onwards, with a more pronounced increase observed between 2022 and 2023, where the provision rises from 10,978 million USD to 16,950 million USD.

Cash Operating Taxes

Cash operating taxes also exhibit a significant upward trajectory, beginning at 8,771 million USD in 2020 and increasing steadily to 29,037 million USD in 2025. The most notable increase occurs between 2021 and 2022, where the cash operating taxes jump from 9,821 million USD to 16,637 million USD, and continue to climb in subsequent years, reaching nearly 30 billion USD by 2025.

Comparative Insights

While both provision for income taxes and cash operating taxes increase substantially over the period, cash operating taxes consistently exceed the provision for income taxes each year, with the gap widening over time. This suggests that actual cash payments related to taxes are growing at a faster pace than the accrued tax expense, indicating potential timing differences or changes in tax payment structures. The acceleration in increases for both metrics between 2022 and 2023 aligns with a period of notable growth in tax-related outflows.

Total reported debt & leases

Over the six-year period, total reported debt and leases display a generally upward trend. Starting at $82,110 million in mid-2020, the figure remains relatively stable through mid-2021 and 2022, with a slight dip in 2022 to $78,400 million. From mid-2023 onward, there is a noticeable increase, rising to $97,852 million by mid-2024 and reaching $112,184 million by mid-2025. This indicates increased financial leverage or borrowing activity, particularly in the last two years.

Stockholders’ equity

Stockholders’ equity consistently expands throughout the entire timeframe. Beginning at $118,304 million in June 2020, it shows steady growth each year, accelerating after mid-2022. Equity reaches $141,988 million in 2021, $166,542 million in 2022, and experiences a stronger rise to $206,223 million in 2023. By 2024 and 2025, the growth becomes more pronounced, escalating to $268,477 million and $343,479 million respectively. This reflects substantial accumulation of retained earnings or equity injections over the period, strengthening the company's financial foundation.

Invested capital

Invested capital demonstrates a strong and consistent upward trajectory across the six years. Starting at $107,630 million in 2020, it grows considerably each year, surpassing $140 billion in 2021 and reaching $194,094 million in 2022. The increase accelerates over the ensuing years, hitting $247,490 million in 2023, $351,567 million in 2024, and culminating at $430,631 million in 2025. This rise indicates expanding total capital employed in the business, which includes equity and debt, reflecting an increase in the scale of operations or investments.

Overall trends and insights

The data reveal a pattern of expanding financial scale coupled with increased leverage. While stockholders’ equity grows substantially, indicating enhanced net worth and reinvested earnings, total debt and leases also increase, particularly in the latter years, implying a greater use of borrowed funds. Invested capital's growth outpaces both debt and equity individually, signaling that the company is significantly scaling up its capital base. This expansion may support increased operational capabilities or strategic investments. The balance between rising equity and rising debt suggests an approach that combines internal funding strength with external financing to fuel growth.

The economic spread ratio demonstrates a consistent decline over the observed six-year period. While economic profit generally increased from 2020 to 2021, the rate of increase in invested capital outpaced it, initiating a downward trend in the economic spread ratio. This trend continued through 2025, despite absolute increases in both economic profit and invested capital in later years.

Economic Spread Ratio Trend

The economic spread ratio began at 29.70% in 2020 and experienced a slight increase to 31.66% in 2021. However, a substantial decrease was observed in 2022, falling to 22.64%. This decline accelerated in subsequent years, reaching 14.68% in 2023, 11.64% in 2024, and finally 9.76% in 2025. This indicates a diminishing ability to generate returns exceeding the cost of capital.

Invested capital exhibited consistent growth throughout the period, increasing from US$107,630 million in 2020 to US$430,631 million in 2025. Economic profit also generally increased, moving from US$31,964 million in 2020 to US$42,038 million in 2025. However, the proportional growth of invested capital consistently exceeded that of economic profit, driving the observed reduction in the economic spread ratio.

Relationship between Economic Profit and Invested Capital

The increasing invested capital base, while contributing to higher absolute economic profit, suggests that each additional dollar invested yielded progressively lower returns, as reflected in the declining economic spread ratio. This could be due to factors such as diminishing returns to scale, less efficient allocation of capital, or increased competition.

The consistent decline in the economic spread ratio warrants further investigation. While the company continues to generate positive economic profit, the decreasing ratio suggests a potential erosion of competitive advantage and a need to evaluate capital allocation strategies to improve return on invested capital.

The economic profit margin demonstrates a fluctuating pattern over the observed six-year period. Initially, a positive trend is evident, followed by a period of decline. Economic profit itself increased substantially from 2020 to 2021, and remained relatively high through 2022 before decreasing in 2023.

Economic Profit Margin Trend

The economic profit margin began at 22.05% in 2020, increasing to a peak of 26.27% in 2021. A subsequent decrease was observed in 2022, with the margin falling to 21.69%. This downward trend continued through 2023 and 2024, reaching 16.72% and 16.27% respectively. The latest year, 2025, shows a further decline to 14.56%, indicating a consistent erosion of profitability relative to revenue.

Adjusted revenue consistently increased throughout the period, moving from US$144,989 million in 2020 to US$288,805 million in 2025. However, the growth in economic profit did not keep pace with revenue growth in the later years, contributing to the declining economic profit margin.

Relationship between Economic Profit and Adjusted Revenue

While both economic profit and adjusted revenue generally increased over the period, the rate of increase in economic profit slowed considerably after 2021. The substantial revenue growth in 2024 and 2025 was not matched by a proportional increase in economic profit, resulting in a lower economic profit margin. This suggests increasing costs or decreasing efficiency in generating profit from revenue.

The observed decline in the economic profit margin warrants further investigation to identify the underlying drivers. Potential areas of focus include cost of capital, operating expenses, and revenue mix.