Running head: RESEARCH PAPER PROJECT: ORACLE CORPORATION Research Paper Project: Oracle Corporation 1 RESEARCH PAPER PROJECT: ORACLE CORPORATION 2 The Company's Overview................................................................................................................3 Analysis of Financial Performance Results of Oracle and Microsoft...............................................4 Financial Ratios of Oracle and Microsoft.........................................................................................6 Return on Equity and DuPont Analysis............................................................................................9 Evaluation other areas of financial analysis....................................................................................12 Stock Performance.........................................................................................................................13 Investment Recommendations........................................................................................................13 References......................................................................................................................................15 RESEARCH PAPER PROJECT: ORACLE CORPORATION 3 The Company's Overview Oracle Corporation provides products and services that address all aspects of corporate information technology (IT) environmentsapplication, platform and infrastructureand are available to customers either via cloud computing or on-premises deployment models. Oracle Corporation's products include database and middleware software, application software, cloud infrastructure software and hardware systems (Oracle Engineered Systems, servers, storage, networking and industry specific products), along with support and related services. Oracle Corporation offer over 400,000 worldwide customers a choice of deployment models to best suit their needs including: the deployment of our products via our Oracle Cloud offerings the acquisition of Oracle products and services for an on-premises IT environment a mix of these two models. For customers opting for a cloud computing model, Oracle offers a wide range of services in all three primary layers of the cloud: Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). Oracle Cloud offerings are designed to be: rapidly deployable to enable customers shorter time to innovation; easily maintainable to reduce integration and testing work; and cost effective by requiring lower upfront customer investment. Oracle Cloud offerings integrate the software, hardware and services on the customers' behalf in IT environments that Oracle Corporation deploy, support and manage for the customer. Oracle Corporation is a leader in the core technologies of cloud IT environments, including database and middleware software as well as enterprise applications, virtualization, clustering, large-scale systems management and related infrastructure. RESEARCH PAPER PROJECT: ORACLE CORPORATION 4 Analysis of Financial Performance Results of Oracle and Microsoft Oracle Corporation develops, manufactures, markets, hosts, and supports database and middleware software, application software, cloud infrastructure, hardware systems, and related services worldwide. It provides software and hardware systems, and related services to manage their cloud-based or on-premise IT environments, as well as to deploy cloud software-as-aservice, platform-as-a-service, and infrastructure-as-a-service. It helps in providing the base to manage different operations of the organization. Comparing Revenue, Net income, Working capital, Total assets, Total Liabilities, and Stockholders' Equity for the last three years with financial performance results of Oracle, I presented the table of following data: Financial Performance Results of Oracle: * All numbers in thousands Oracle Revenue 2015 38,226,000 2014 38,275,000 2013 37,180,000 Net income 9,938,000 10,955,000 10,925,000 Working capital Total Assets Total Liabilities Total Stockholders' 47,892,000 110,903,000 61,805,000 48,663,000 33,739,000 90,266,000 42,819,000 46,878,000 28,820,000 81,812,000 36,667,000 44,648,000 Equity Dividends paid (2,451,000) (2,206,000) (1,464,000) EBIT 13,977,000 14,618,000 14,695,000 The main competitor, Microsoft, also demonstrates its financial performance results annually in SEC 10K and has the following data: RESEARCH PAPER PROJECT: ORACLE CORPORATION 5 Financial Performance Results of Microsoft: * All numbers in thousands Microsoft Revenue Net income Working capital Total Assets 2015 93,580,000 12,193,000 74,854,000 176,223,000 2014 86,833,000 22,074,000 68,621,000 172,384,000 2013 77,849,000 21,863,000 64,049,000 142,431,000 Total Liabilities 96,140,000 82,600,000 63,487,000 Total 80,083,000 89,784,000 78,944,000 Equity Dividends paid (9,882,000) (8,879,000) (7,455,000) EBIT 18,507,000 27,820,000 27,052,000 Stockholders' Two tables present the difference in financial performance results of both companies. According to SEC 10K for last three years, it is noticed that the company is developing, but very slowly. Although the revenue increases year by year, the company pays much higher sum of dividends than previous years. Due to some reasons of market risks and external factors that influences on a company, Oracle is still stable and didn't reduce the volume of production. Oracle's working capital shows the high liquidity of the company available to a business. The main competitor of Oracle, Microsoft, shows much pleasant indicators of financial activity, it has higher net income. Microsoft has higher dividends to pay to its stockholders, and it also has higher sum Stockholders' Equity. Since the company is not smaller than Oracle, it also has higher Total Assets and Total Liabilities. Financial Ratios of Oracle and Microsoft The financial ratios of Oracle and Microsoft for last 2015 year are presented in the table: RESEARCH PAPER PROJECT: ORACLE CORPORATION 6 Ratios Current Ratio Quick Ratio Inventory Turnover Total Assets Turnover Account Receivables Oracle 4.13 4.11 23.987 0.3 Microsoft 2.50 2.44 11.38 0.53 Turnover ROA ROE Financial Leverage Times Interest Earned Debt - to - Equity 6.53 8.96% 20.8 2.28 12.23 0.82 5 6.92% 14.36 2.2 24.7 0.35 Formulas to calculate Ratios: Current Ratio = (Current Assets) / (Current Liabilities) Current Ratio Oracle's current ratio is increasing year after year. The company is over performing in its industry. Quick Ratio = (Cash & Equivalents + Short-term Investments + Accounts Receivable) / (Current Liabilities) The quick ratio measures the dollar amount of liquid assets available for each dollar of current liabilities. The higher the quick ratio is, the better the company's liquidity position is. Inventory Turnover = (Sales / Inventory) OR (COGS / Average Inventory) This ratio shows how many times a company's inventory is sold and replaced over a period. Oracle sells the inventory more effectively, than Microsoft does because the inventory turnover ratio of Oracle is higher. Total Assets Turnover = Net Sales / Total Assets RESEARCH PAPER PROJECT: ORACLE CORPORATION 7 The total asset turnover ratio measures the ability of a company to use its assets to efficiently generate sales. This ratio considers all assets, current and fixed. Account Receivables Turnover = Net Credit Sale / Average Account Receivables Accounts receivable turnover is the ratio of net credit sales of a business to its average accounts receivable during a given period, most usually a year. It is an activity ratio which estimates the number of times a business collects its average accounts receivable balance during a period. Return on Assets = Net Income / Total Assets An indicator of how profitable a company uses its total assets. ROA gives an idea of how efficiently management is using its assets to generate earnings and cash flows. Microsoft uses its assets less profitable than Oracle. Return on Equity (Stockholders' Equity) = Net Income / Stockholders' Equity The amount of net income returned as a percentage of stockholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money stockholders have invested. Both companies Oracle and Microsoft show good ratios, which means their net income is returned effectively as a percentage of stockholders' equity. Times Interest Earned = EBIT / Total Interest payable RESEARCH PAPER PROJECT: ORACLE CORPORATION 8 A metric used to measure a company's ability to meet its debt obligations. A ratio that indicates how many times a company can cover its interest charges on a pretax basis. Oracle generates more effectively cash flow for covering its debt obligations. Microsoft also has good ratio. Financial Leverage = Total Debt / Stockholders' Equity Financial leverage indicates the reliability of a business on its debts in order to operate earnings. Both companies have good ratios for operating earnings besides the debts. Debt - to - Equity is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. Oracle has higher percent of total liabilities than Microsoft does. Return on Equity and DuPont Analysis DuPont analysis was created in 1920s, and it tells us that ROE is affected by three things: - Operating efficiency, which is measured by profit margin - Asset use efficiency, which is measured by total asset turnover - Financial leverage, which is measured by the equity multiplier. The first step is calculated by following formula: ROE = (net income/sales)*(sales/stockholders' equity) The second step is calculated by following formula: ROE = (net income/sales)*(sales/assets) * RESEARCH PAPER PROJECT: ORACLE CORPORATION 9 (assets/stockholders' equity) The third step is calculated by following formula: ROE = (net profit margin) * (assets turnover) * (equity multiplier) Oracle (2013): ROE = 0.24469181 Net profit margin = net income/revenue = 0.29384077 Assets turnover = revenue/total assets = 0.45445656 Equity multiplier = total assets/ shareholders' equity = 1.83237771 Oracle (2014): ROE = 0.23369171 Net profit margin = net income/revenue = 0.28621816 Assets turnover = revenue/total assets = 0.42402455 Equity multiplier = total assets/ shareholders' equity = 1.92555143 Oracle (2015): ROE = 0.20422087 Net profit margin = net income/revenue = 0.25998012 Assets turnover = revenue/total assets = 0.34467958 Equity multiplier = total assets/ shareholders' equity = 2.27900047 RESEARCH PAPER PROJECT: ORACLE CORPORATION 10 The major competitor, Microsoft, has another ratios of ROE: Microsoft (2013): ROE = 0.27694315 Net profit margin = net income/revenue = 0.28083855 Assets turnover = revenue/total assets = 0.54657343 Equity multiplier = total assets/ shareholders' equity = 1.80420298 Microsoft (2014): ROE = 0.24585672 Net profit margin = net income/revenue = 0.25421211 Assets turnover = revenue/total assets = 0.50371844 Equity multiplier = total assets/ shareholders' equity = 1.91998574 Microsoft (2015): ROE = 0.15225454 Net profit margin = net income/revenue = 0.1302949 Assets turnover = revenue/total assets = 0.5310317 Equity multiplier = total assets/ shareholders' equity = 2.20050448 This analysis helps to see what is happening in the company in all details. Many managers are RESEARCH PAPER PROJECT: ORACLE CORPORATION 11 mistaken when they see ROE staying stable, and they do not understand that something goes wrong. When the Company made the analysis they all need to observe net profit margin, assets turnover, and equity multiplier. If the company uses DuPont analysis it can see that, for example, net profit margin and assets turnover decreased, and ROE didn't changed just because of increased equity multiplier. This is not very good situation. As for Oracle, it is vividly seen that ROE decreased since 2013 because net profit margin and assets turnover decreased, despite the fact that equity multiplier increased. As for competitors, such as Microsoft, ROE also decreased year by year. Evaluation other areas of financial analysis There are other important financial characteristics, such as growth and stock beta values. They also help to evaluate the company's financial position on market. Over the past three years 01/01/13 the company's stock was worth $34.86 and 01/01/16 share price was at $36.01, representing an increase of $1.15. Beta of company Oracle is 1.16, which is a high rate than the beta of treasures, which are considered as more risky then common stocks. Companies with high beta are less protected from big losses when the market goes down. In order to obtain the clearest picture, it is necessary to compare the financial performance of the company Oracle and its chief rival company Microsoft. The value of the shares of the company Microsoft on 01/01/13 $26.74, and on 01/01/16 price was $52.33 per share, which had become higher during three years. Microsoft has a beta of 1.06; the company is less risky than Oracle. RESEARCH PAPER PROJECT: ORACLE CORPORATION 12 Strengths Oracle is that its shares are worth more than the shares of a competitor. The weakness might be that company shares can be called more risky, if we are speaking about a stable trend in the stock price over the past three years, and high beta of the company. Stock Performance As mentioned previously, shares of Oracle raised $1.15 for the last three years, but the largest increase came in the last two years. On the whole the year was a positive trend. At the same time, the shares of the company PepsiCo raised $25.59 last three year. Investment Recommendations The financial ratios and other indicators, which were discussed in this course paper allow us to make a conclusion about the company, its perspectives and developed recommendation for the company regarding its financial and stock performance. Analyzing the ratios we can say that Oracle has a high level of liquidity, but not high enough than her main competitor company Microsoft. This indicates a not stable position of the company for last couple years. Comparing all ratios with Microsoft's, it can be vividly seen that Oracle is not as much competitive as its main competitors. An important indicator is the beta of a company that is at the level of 1.16, which increase the risk for the investors, but the company has strong widespread products and recognizable brand. There are several things on which the company should pay attention to make the longterm perspectives even more positive. Firstly the company needs to monitor the level of liquidity, RESEARCH PAPER PROJECT: ORACLE CORPORATION 13 and at the moment it is at a high level and the company can pay its debts, but it should not be too high because this may indicate not efficient resource management. Secondly, the company should pay attention to the level of free cash flow. However, performance remains at an acceptable level and the investment in the company looks attractive. RESEARCH PAPER PROJECT: ORACLE CORPORATION 14 References Finance.yahoo.com. (2016). MSFT Income Statement | Microsoft Corporation Stock - Yahoo! Finance. [online] Available at: http://finance.yahoo.com/q/is? s=MSFT+Income+Statement&annual [Accessed 1 May 2016]. Finance.yahoo.com. (2016). ORCL Balance Sheet | Oracle Corporation Common Stock Stock - Yahoo! Finance. [online] Available at: http://finance.yahoo.com/q/bs? s=ORCL+Balance+Sheet&annual [Accessed 1 May 2016]. Financials.morningstar.com. (2016). Growth, Profitability, and Financial Ratios for Oracle Corp (ORCL) from Morningstar.com. [online] Available at: http://financials.morningstar.com/ratios/r.html?t=ORCL [Accessed 1 May 2016]. Stock Analysis on Net. (2016). Oracle Corp. (ORCL) | Short-term (Operating) Activity. [online] Available at: https://www.stock-analysis-on.net/NYSE/Company/Oracle-Corp/Ratios/Shortterm-Operating-Activity [Accessed 1 May 2016]. Dear Professor, as I have Russian Excel, there are some changes in interpreting data in my Excel (no commas, no periods). Oracle Revenue Net income Working capital Total Assets Total Liabilities Total Stockholders' Equity Dividends paid EBIT Current Assets Current Liabilities Inventory COGS 2015 38,226,000 9,938,000 47,892,000 110,903,000 61,805,000 48,663,000 2,451,000 13,977,000 63,183,000 15,291,000 314,000 7,532,000 2014 38,275,000 10,955,000 33,739,000 90,266,000 42819000 46,878,000 2,206,000 2013 37,180,000 10,925,000 28,820,000 81,812,000 36,667,000 44,648,000 1,464,000 14,618,000 48,128,000 14,389,000 189,000 7,236,000 14,695,000 41,692,000 12,872,000 240,000 7,379,000 Finance.yahoo.com. (2016). ORCL Balance Sheet | Oracle Corporation Common Stock Stock - Yahoo! Finance. [online] Available at: http://finance.yahoo.com/q/bs? s=ORCL+Balance+Sheet&annual [Accessed 1 May 2016]. Microsoft Revenue Net income Working capital Total Assets Total Liabilities Total Stockholders' Equity Dividends paid 2015 2014 2013 93,580,000 86,833,000 77,849,000 12,193,000 22,074,000 21,863,000 74,854,000 68,621,000 64,049,000 176,223,000 172,384,000 142,431,000 96,140,000 82,600,000 63,487,000 80,083,000 89,784,000 78,944,000 9,882,000 8,879,000 7,455,000 EBIT Current Assets Current Liabilities Inventory COGS 18,507,000 124,712,000 49,858,000 2,902,000 33,038,000 27,820,000 114,246,000 45,625,000 2,660,000 27,078,000 27,052,000 101,466,000 37,417,000 1,938,000 20,385,000 Finance.yahoo.com. (2016). MSFT Income Statement | Microsoft Corporation Stock - Yahoo! Finance. [online] Available at: http://finance.yahoo.com/q/is?s=MSFT+Income+Statement&annual [Accessed 1 May 2016]. Ratios (2015 year): Oracle Current Ratio Quick Ratio Inventory Turnover Total Assets Turnover Account Receivable Turnover ROA ROE Financial Leverage Times Interest Earned Debt-to-Equity Microsoft 4.13 2.50 4.11 2.44 23.987 11.38 0.3 0.53 6.53 5 8.96% 6.92% 20.8 14.36 2.28 2.2 12.23 24.7 0.82 0.35 Some ratios were prepared on website: http://financials.morningstar.com/ratios/r.html?t=ORCL STEP 1: ROE = (net income/sales)*(sales/stockholders' equity) Oracle 2013: Microsoft 2013: ROE = ROE = 0.244691812 0.27694315 STEP 2: ROE = (net income/sales)*(sales/assets) * (assets/stockholders' equity) Oracle 2013: Microsoft 2013: ROE = ROE = 0.244691812 0.27694315 STEP 3: ROE = (net profit margin) * (assets turnover) * (equity multiplier) Oracle 2013: net profit margin assets turnover equity multiplier ROE = = = = 0.244691812 0.293840775 0.454456559 1.83237771 Oracle 2014: net profit margin assets turnover equity multiplier ROE = = = = Microsoft 2013: net profit margin assets turnover equity multiplier ROE = = = = 0.27694315 0.280838546 0.546573429 1.804202979 Microsoft 2014: net profit margin assets turnover equity multiplier ROE = = = = Oracle 2014: Microsoft 2014: Oracle 2014: Microsoft 2014: ROE = ROE = ROE = ROE = 0.23369171 0.245856723 Oracle 2015: Microsoft 2015: ROE = ROE = 0.204220866 0.152254536 0.23369171 0.245856723 Oracle 2015: Microsoft 2015: ROE = ROE = 0.204220866 0.152254536 0.23369171 0.286218158 0.42402455 1.925551431 Oracle 2015: net profit margin assets turnover equity multiplier ROE = = = = 0.204220866 0.259980118 0.344679585 2.279000473 0.245856723 0.254212108 0.503718443 1.919985744 Microsoft 2015: net profit margin assets turnover equity multiplier ROE = = = = 0.152254536 0.130294935 0.531031704 2.200504477 olders' equity) multiplier)