Microsoft's adjusted 88/100 score rewards consistent growth, very high profitability, low debt pressure and controlled share count. The main counterweight is that only about half of profit converts to free cash because of heavy AI data-centre spending.
How does Microsoft make money?
Microsoft earns revenue from subscriptions such as Microsoft 365 and Dynamics, Azure cloud services, server products, LinkedIn, Windows and devices, gaming and advertising. Subscriptions improve predictability, while Azure and AI infrastructure require heavy data-centre investment.
What do the FY2026 results show?
Revenue rose 18% to $331.8 billion, while operating income increased 21% to $155.2 billion. GAAP net income was $133.7 billion. Microsoft Cloud revenue grew 27% to $214.4 billion, and Azure and other cloud-services revenue increased 41%.
Rapid service-revenue growth supported gross profit. However, the company said cloud gross margin declined to 66% because of AI infrastructure investment and growing AI-product usage. Demand is strong, but the capacity required to serve it is not cheap.
Why do the five categories produce this result?
Growth 95/100: Five-year annual revenue growth was 13.7%, net-income growth 16.4%, and revenue rose in every reviewed year. Growth is therefore not based on a single strong year.
Profitability 100/100: A 67.9% gross margin, 46.8% operating margin and approximate 26.6% return on capital are very strong. However, gains from OpenAI investments increased FY2026 GAAP net income by about $5.0 billion and should be read separately.
Cash flow 59/100: Approximately $67.0 billion of free cash and a 20.2% margin look strong. Yet free cash equals only 50.1% of net income; heavy data-centre investment reduces cash conversion.
Balance sheet 84/100: The current ratio was 1.23, net debt/free cash about 0.3 times and interest coverage 52.9 times. The debt-service buffer is strong, while receivables and inventory growth broadly track sales.
Shareholder policy 71/100: Share count declined by an average 0.1% a year and stock compensation was 3.7% of revenue. Dividends and repurchases equalled 72.7% of free cash. The approximate SEC-based 26.9-times earnings multiple should be considered alongside growth quality.
Critical combinations
- Azure growth + high operating margin
- Subscription revenue + consistent growth
- Strong balance sheet + investment capacity
- Heavy AI investment + lower cash conversion
- High expectations + capacity constraints
- Cloud growth + declining cloud margin
What signals matter next?
Microsoft said Azure revenue exceeded $100 billion for the first time in FY2026 and Microsoft 365 Copilot reached more than 30 million paid seats. The long-term test is converting strong demand into capacity while reducing the pressure of data-centre investment on margins and free cash flow.
Microsoft combines high-quality growth with strong profitability and a strong balance sheet. The 88/100 score shows financial strength; it does not guarantee the economic return on AI investment or future share performance. This is not investment advice.
Where the figures come from
- Microsoft FY 2026 Form 10-K, SEC — fiscal year ended 30 June 2026; primary score source.
- Microsoft FY2026 results — the company's official results release and segment data.
- Free cash flow is operating cash flow less capital expenditure. Approximate valuation is not a live-price measure. Gross margin, operating margin, return on capital, free cash and interest-coverage scores that exceeded their weights were capped at their assigned maximums.