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Strategies & Market Trends : Value Investing

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To: Jurgis Bekepuris who wrote (18203)	12/18/2003 8:57:30 PM
From: Bob Rudd	Read Replies (1) of 78476

Jurgis: I'm not really an ROE investor but I decided to break it down and see why MSFT's ROE is declining. ROE breaks down into NetIncome/Revenues X Rev/assets X Assets/Equity. The most important part of that to me is the 1st componant, NetIncome/Revenues, since deteriorating margins are definitely a sign of problems. Looking out over 10 years I found margins have actually improved with net margin up from 24.5% 10 years ago to 31% last year. The steps along the way like gross margin, operating margin & EBT margin are also stable to improving. The main culprit to the decline in ROE appears to be the growth in assets since there's no net debt....and the asset that's really grown is cash from $3.6B in 94 to $49B in 03. So the problem is they're generating and retaining too much cash. The solution appears to be to gradually give it back by increasing dividends. Maybe I'm missing something, but I don't see too much cash as a deal killer.

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