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, exhibits 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 indicates a period of strong operational performance, particularly in the later years.

Cost of Capital

The cost of capital experienced a modest, consistent increase over the six-year period, rising from 15.70% in 2020 to 16.11% in 2025. This incremental rise suggests a slightly increasing risk profile or changes in market conditions affecting funding costs.

Invested Capital

Invested capital shows a consistent upward trend, more than doubling from US$107,630 million in 2020 to US$430,631 million in 2025. This substantial growth suggests significant reinvestment in the business and expansion of operations.

Economic Profit

Economic profit peaked at US$42,591 million in 2021, following the initial surge in NOPAT. It then decreased to US$40,029 million in 2022 and further to US$31,313 million in 2023. Despite the substantial increase in NOPAT in 2024 and 2025, economic profit only saw moderate increases to US$33,787 million and US$33,285 million respectively. This suggests that the growth in invested capital, coupled with the rising cost of capital, partially offset the gains from increased profitability. The stabilization of economic profit in the final two years, despite substantial NOPAT growth, warrants further investigation.

In summary, while the organization demonstrates strong operational profitability and significant investment, the economic profit trend indicates that the returns on those investments are not increasing at the same rate as the investments themselves, particularly when considering the cost of capital. The recent stabilization of economic profit despite continued NOPAT growth suggests a potential diminishing return on invested 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 fluctuated, the invested capital consistently increased, driving the observed trend in the economic spread ratio.

Economic Spread Ratio Trend

The economic spread ratio began at 27.73% in 2020 and experienced a slight increase to 29.65% in 2021. Following this peak, a marked downward trend commenced. The ratio decreased to 20.62% in 2022, then to 12.65% in 2023. This decline continued, reaching 9.61% in 2024 and further decreasing to 7.73% in 2025.

The relationship between economic profit and invested capital is crucial to understanding this trend. Although economic profit remained substantial throughout the period, its rate of growth did not keep pace with the growth of invested capital. This disparity resulted in a diminishing economic spread ratio.

Economic Profit and Invested Capital Relationship

Invested capital increased significantly from US$107,630 million in 2020 to US$430,631 million in 2025, representing substantial growth. Economic profit also increased initially, from US$29,845 million in 2020 to US$42,591 million in 2021, but subsequently experienced a decrease to US$31,313 million in 2023 before stabilizing around US$33 million in the later years. The faster growth of invested capital relative to economic profit is the primary driver of the declining economic spread ratio.

The decreasing economic spread ratio suggests that, while the entity continues to generate economic profit, it is doing so with progressively less efficiency relative to the capital employed. This warrants further investigation into the drivers of invested capital growth and the factors influencing economic profit generation.

The economic profit exhibited fluctuations over the observed period, beginning at US$29,845 million in 2020 and peaking at US$42,591 million in 2021. Subsequent years witnessed a decline, reaching US$31,313 million in 2023, before a modest recovery to US$33,787 million in 2024 and stabilizing at US$33,285 million in 2025.

Adjusted revenue demonstrated consistent growth throughout the period. Starting at US$144,989 million in 2020, it increased to US$288,805 million in 2025, indicating a strong revenue trajectory.

Economic Profit Margin

The economic profit margin initially increased from 20.58% in 2020 to 24.61% in 2021, coinciding with the peak in economic profit. However, a clear downward trend is then observed. The margin decreased to 19.76% in 2022, then further to 14.41% in 2023. This decline continued, albeit at a slower pace, reaching 13.43% in 2024 and 11.52% in 2025. This suggests that while revenue increased substantially, the growth in economic profit did not keep pace, resulting in diminishing profitability relative to revenue.

The divergence between the increasing adjusted revenue and the declining economic profit margin suggests potential pressures on cost structures or pricing strategies. While the company continues to generate higher sales, its ability to translate those sales into economic profit is decreasing. Further investigation into the underlying drivers of these trends would be warranted.