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Microsoft Corporation (NASDAQ:MSFT) Not Flying Under The Radar

With a price-to-earnings (or "P/E") ratio of 25.8x Microsoft Corporation (NASDAQ:MSFT) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 14x and even P/E's lower than 8x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Microsoft could be doing better as it's been growing earnings less than most other companies lately. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Microsoft

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Keen to find out how analysts think Microsoft's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

Microsoft's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.5% last year. Pleasingly, EPS has also lifted 75% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.0% each year, which is noticeably less attractive.

In light of this, it's understandable that Microsoft's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Microsoft's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Microsoft maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Microsoft that you need to be mindful of.

If these risks are making you reconsider your opinion on Microsoft, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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