In the year to June 2026, Microsoft made 35.9% after tax on the money at work in its business. That figure is its Return on Invested Capital (ROIC).
The number matters most next to what that capital costs. Microsoft's cost of capital is about 9.7% a year, on our estimate. That is the yearly return its shareholders and lenders require. This guide works out ROIC from the annual report. It then compares Microsoft's with that cost. Last, it shows why the figure has fallen from 77.0% ten years ago.
What is ROIC? Return on Invested Capital (ROIC) is a company's yearly operating profit after tax, divided by the money at work in the business. That money is what shareholders and lenders have put in, less the cash the company holds.
A company earns more than its investors require when its ROIC is above its cost of capital, which is the yearly return those investors expect.
Microsoft's ROIC was 35.9% in its fiscal year to June 2026. Its cost of capital is about 9.7%.
Its ROIC was 77.0% in fiscal 2017. It has fallen because the capital at work in the business grew about 11 times, while profit after tax grew about 5 times.
The ROIC formula
ROIC = Net Operating Profit After Tax (NOPAT) ÷ invested capital
NOPAT is the profit the business makes from its operations, after tax. Start with operating income. That is sales minus the costs of running the business, before interest and tax. We explain it in How to Read an Income Statement. Then take off tax at the company's tax rate. Interest is left out, so NOPAT is the same whether a company borrows or not.
Invested capital is the money at work in the business. One simple way to measure it:
Invested capital = shareholders' equity + debt − cash and short-term investments
Shareholders' equity is the money owners have put in, plus the profits kept in the business over the years. Cash is taken off, because cash sitting in the bank is not yet at work in the business. Profit is earned through the year, so we divide by the average of invested capital at the start and end of the year.
Every input comes from a US company's annual report, the Form 10-K. All figures here follow the US accounting rules, Generally Accepted Accounting Principles (GAAP), as filed.
How to calculate ROIC from a 10-K: Microsoft's fiscal 2026
Microsoft's financial year ends on 30 June. Its 10-K for fiscal 2026 was filed on 29 July 2026.
Line | Fiscal 2026 | Where it comes from |
|---|---|---|
Operating income | $155,237 million | Income statement |
Income before tax | $165,934 million | Income statement |
Income tax | $32,185 million | Income statement |
Tax rate | 19.4% | Tax ÷ income before tax |
NOPAT | $125,127 million | Operating income × (1 − tax rate) |
Shareholders' equity, 30 June 2026 | $442,387 million | Balance sheet |
Debt, 30 June 2026 | $40,294 million | Balance sheet (long-term debt, including the part due within a year) |
Cash and short-term investments, 30 June 2026 | $76,843 million | Balance sheet |
Invested capital, 30 June 2026 | $405,838 million | Equity + debt − cash |
Invested capital, 30 June 2025 | $292,065 million | Same sum, a year earlier |
Average invested capital | $348,952 million | Mean of the two |
ROIC | 35.9% | NOPAT ÷ average invested capital |
Source: Microsoft Form 10-K, fiscal year to 30 June 2026 (SEC XBRL); YX Insights
Step 1: NOPAT. Operating income was $155.2 billion. Tax was $32.2 billion on profit before tax of $165.9 billion, a tax rate of 19.4%. So NOPAT was $155.2 billion × (1 − 0.194) = $125.1 billion.
Step 2: invested capital. The sums use unrounded figures. On 30 June 2026, equity was $442.4 billion and debt was $40.3 billion. Cash and short-term investments were $76.8 billion. That leaves $405.8 billion. A year earlier, the same sum gave $292.1 billion. The average is $349.0 billion.
Step 3: divide. $125.1 billion ÷ $349.0 billion = 35.9%.
ROIC vs the cost of capital: the spread
The cost of capital is the yearly return that shareholders and lenders require, blended by how much each provides. It is called the Weighted Average Cost of Capital (WACC). We worked out Microsoft's in What Is WACC?. It was 9.72% on 24 September 2026, or about 9.7%.
ROIC minus WACC is the spread. For Microsoft in fiscal 2026, it was 26.1 percentage points. That is 35.86% less 9.72%, before rounding.
The spread can also be turned into dollars. Charge 9.72% on the $349.0 billion of capital, which is $33.9 billion. Take that from NOPAT of $125.1 billion. What is left, $91.2 billion, is called economic profit. It is the profit earned above what investors required.
If ROIC were below WACC, the capital in the business would earn less than its investors require.
What is a good ROIC?
A good ROIC is one that stays above the cost of capital. A 2022 paper by Michael Mauboussin and Dan Callahan of Morgan Stanley Investment Management gives a sense of scale. It covers the Russell 3000, a broad index of US shares, leaving out financial and real estate companies. Taken together, those companies earned an ROIC of 11.4% in 2021. For a single company, the most common range was 5% to 10%.
Microsoft's 35.9% is far above that. On our method, Alphabet's ROIC was 37.0% in its year to December 2025.
Microsoft's ROIC over ten years
Source: Microsoft Form 10-K filings (SEC XBRL); YX Insights
Microsoft's ROIC was 77.0% in fiscal 2017. It peaked at 117.1% in fiscal 2019. It was 104.9% in fiscal 2021. It then fell every year, to 35.9% in fiscal 2026. It stayed above the WACC line throughout. The smallest gap, 26.1 points, came in fiscal 2026.
The WACC line uses the September 2026 figure for every year. For fiscal 2018, we leave out a one-off $13.7 billion tax charge from the 2017 US tax reform. It came from a change in tax law. It says nothing about that year's trading.
Why Microsoft's ROIC fell
Source: Microsoft Form 10-K filings (SEC XBRL); YX Insights
NOPAT grew from $24.7 billion in fiscal 2017 to $125.1 billion in fiscal 2026, about 5 times. Average invested capital grew from $32.1 billion to $349.0 billion, about 11 times. Capital grew faster than profit, so ROIC fell.
Three things drove the rise in capital:
A smaller cash pile. On 30 June 2017, Microsoft held $133.0 billion of cash and short-term investments. That was most of its equity and debt combined. It left only $40.9 billion of invested capital at that date. The chart uses the average across fiscal 2017, $32.1 billion. By June 2026, cash was down to $76.8 billion while equity had grown to $442.4 billion.
Property and equipment. After wear and tear, it rose from $23.7 billion in June 2017 to $313.1 billion in June 2026, about 13 times as much. Microsoft's fiscal 2026 10-K says its spending on datacentres for AI and cloud services is "in advance of fully developed revenue streams". The money counts as capital as soon as it is spent. The profit from it comes later.
Activision Blizzard. Microsoft completed the $75.4 billion purchase of the games company on 13 October 2023. Goodwill, the part of a purchase price above the value of the assets bought, rose from $67.9 billion to $119.2 billion in fiscal 2024.
The judgement calls in ROIC
ROIC has no single official formula. Each choice moves the answer, as the chart shows.
Source: Microsoft Form 10-K filings (SEC XBRL); YX Insights
The top bar is the main definition used above, at 35.9%. The next three each change one choice:
Leases. Microsoft owed $88.5 billion on leases on 30 June 2026. Counting them as debt lowers its ROIC to 29.3%.
Cash. Counting cash as invested capital lowers ROIC to 28.8%.
Goodwill. Taking goodwill out of invested capital raises ROIC to 54.6%. That shows the return on the business's own assets, without the premium paid for acquisitions.
In every version, Microsoft earns well above its 9.7% WACC.
How to read ROIC
Compare it with the cost of capital. Riskier companies have a higher WACC. So the same ROIC can clear one company's bar and miss another's.
Use one method across companies. On the choices above, Microsoft's ROIC runs from 28.8% to 54.6%. Comparing two companies on different methods tells you little.
Do not confuse it with Return on Equity (ROE). ROE divides net income by shareholders' equity alone, so borrowing can lift it. Microsoft borrows little, so its fiscal 2026 ROE of 34.0% is close to its ROIC.
Price is a separate question. A high ROIC says the business earns well on its capital. It does not say the shares are cheap. Our Discounted Cash Flow (DCF) valuation of Microsoft shows how value and price can differ.
ROIC is after-tax operating profit divided by the money at work in the business. Microsoft earned 35.9% in fiscal 2026. That is about 26 points above its 9.7% cost of capital, even after ten years in which its capital grew faster than its profit.
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