The microgrid is an integrated form of distributed energy resources (DERs), which are typically interfaced with load and utility grid by power electronic converters. Stability analysis plays an important role in planning the microgrid system. In this paper, the analysis of stability and power sharing is carried out for an islanded microgrid with a universal droop controller. For a small signal stability assessment, state space model is developed for the microgrid system considering the linearized model of inverters and its associated feedback controllers. The different frequency modes of the complete model are identified and an eigen value analysis is done to determine the critical values of the controller gains. The system stability is tested on a microgrid framework with three inverters functioning as DERs. The effectiveness of the model is validated and verified with time domain simulations.