Running head: ORACLE 1

Oracle: Financial analysis

Name:

Institution:
ORACLE 2

Oracle is one the largest software companies, based in Redwood Shores, California. The

company was founded in 1977 by Bob Miner and Ed Oates. It deals with products such as

databases, middleware, applications, enterprise management, development software, file

systems, and operating software. It also offers hardware products and services such as Oracle

Cloud (Mendelsohn, 2013). The company has 65,000 employees and operates in more than 145

countries (Mendelsohn, 2013).

Liquidity

Some companies prefer cash acquisition to avoid dilution of the ownership. Also, using

cash acquisition is safer than debt-financing. Is Oracle liquid enough to acquire Pacific Coast

Technology? Oracle, has a high current ratio, implying that it can meet its short-term obligations.

However, the working capital ratio reduced in 2019 compared to 2018. The other important

metric is the quick ratio, which measures a firm’s short-term liquidity position. Again, according

to the quick ratio, Oracle has more current assets than current liabilities. The quick ratio

increased in 2018 but deteriorated in 2019. Lastly, there is the cash ratio, which is calculated by

dividing a company’s cash and near-cash securities with its total liabilities. Oracle has a

favorable a cash ratio; hence, it can service debt and cover short-term liabilities.

Oracle 2019 2018 2017

working capital 2.49 3.96 3.08
ratio
Quick ratio 2.31 3.78 2.95
Cash asset ratio 2.03 3.50 2.273

Another important liquidity-related issue is Oracle’s cash reserves. Oracle is one of the

corporations with huge cash piles alongside Microsoft, Apple, Facebook, Alphabet, and Cisco. In

2020, Oracle had $33.4billion cash on hand which it could use to acquire Pacific Coast
ORACLE 3

Technology (Stevens, 2019). A simple comparison with the competitors, shows that it also has

above-average performance. It maintained a higher current, acid, and cash ratios in all the three

years. Also, it boasts of innovative products, strong distribution network, and strong brand

portfolio. It has teamed with Microsoft to take on Amazon, which currently dominates the cloud

business.

Computer industry 2019 2018 2017

Current asset 2.36 2.80 2.78
Acid-test ratio 2.22 2.64 2.67
Cash asset ratio 1.75 2.13 2.16

Profitability

The profitability ratios measure the efficiency with which a company turns business

activity into profits. The profit margins assess a company’s ability to turn revenue into profits.

One of the ratios that is very crucial is net profit margin. It reveals a company’s net-worth based

on earnings. Ideally, a firm should have an expanding net profit margin to achieve share price

growth. In the case of Oracle, the net profit margin reduced significantly in 2018 but then

recovered in 2019.

The ROE indicates a firm’s ability to generate returns from shareholder investment. It is

calculated by dividing net income by the average shareholder equity. It is desirable for a firm to

have high ROE. To determine if a company is doing well, its ROE should be compared with the

average ROE in the industry. In the case of Oracle, its ROE fell drastically in 2018. The

significant decline of the ROE can be attributed to the fall in net profit during that year. In 2018,

the company registered a net profit of $3.587 billion; a 62% decline from 2017 (The Wall Street

Journal, 2020).
ORACLE 4

The last important ratio is return on assets (ROA) which shows a firm’s efficiency in

using assets to generate earnings. It is calculated by dividing the net income by total assets. A

high ROA indicates more asset efficiency. In this case, Oracle had a low ROA in 2018, but it

recovered in 2019. It has a high proficiency to generate earnings from its shareholder’

investments.

Oracle 2019 2018 2017

Net profit margin 28.05% 9.60% 24.74%
ROE 50.87% 8.37% 17.33
ROA 10.20% 2.79% 6.92%

The table below shows the average profitability ratios in the computer and services

industry. Oracle’s net profit and ROE ratio were better than the industry averages except in 2018.

In 2019, the company had a very ROE, which rose to 83.94% in 2020. However, Oracle’s ROA

was lower compared to the industry average across the three years.

Computer industry 2019 2018 2017

profit margin 23.19% 18.84% 17.48%
ROE 24.79% 19.88% 17.22%
ROA 11.57% 9.46% 8.11%

Debt management

Debt management ratios measure a firm’s ability to repay long-term debt. The debt-

equity ratio is a long-term solvency ratio, which measures the riskiness of a company’s capital

structure. It is risky to invest in a compare with a high debt-equity ratio. In the case of Oracle, it

has a high debt-equity ratio compared to the competitors. It is also important to note that the D/E

ratio has been worsening.

ORACLE 5

Should Pacific Coast Technology be concerned about Oracle’s high level of

indebtedness? To answer this question, one would have to evaluate the key financial figures. The

company has a market capitalization of $173.87 billion, which means it can easily raise capital to

improve its balance sheet. Although its liabilities are high, it has cash reserves of $33.4 billion

which could be used to pay off these obligations. That notwithstanding, it is a common practice

for large companies to borrow heavily, as debt is a cheaper source of capital than equity.

Oracle’s debt-asset ratio is low, indicating that the company is financially healthy. It is

advisable for companies to maintain a debt-to-asset ratio of less than 1. Having too much debt

relative to company’s assets increases the risk of insolvency or bankruptcy. Because, Oracle has

high low debt-to-asset ratio, it could still borrow to acquire Pacific Coast Technology.

Oracle 2019 2018 2017

Debt-Equity ratio 2.58 1.33 1.08
Debt Asset ratio 0.52 0.44 0.43
Interest coverage
6.97 7.43 7.47
ratio

The other important metric as shown in the table is debt-asset ratio, which has been

worsening from year to year. However, Pacific Coast Technology should not be worried because

Oracle has a healthy interest coverage ratio. This ratio measures the number of times a firm’s

earnings can cover interest payments. Oracle’s level of debt is sustainable as its EBIT is 3 times

more its earnings. Since it has a strong interest coverage, Oracle can actually borrow more to

acquire Pacific Coast Technology.

Computer industry 2019 2018 2017

D/E ratio 0.44 0.47 0.53
D/A ratio 0.21 0.24 0.22
Times interest 21.61 22.25 20.27
earned (TIE) ratio
ORACLE 6

Asset turnover
How effective is Oracle in converting assets into sales or revenue? Well, the table below

shows the company’s critical asset turnover ratios: inventory, receivables, payables, and working

capital turnover. The inventory turnover shows a firm efficiency in controlling its stock. In this

regard, Oracle’s inventory turnover level is acceptable. It shows that company is selling enough

products, without overstocking. On the other hand, the receivable turnover manifests the

company’s ability to collect credit from customers. A high receivable turnover is favorable as it

shows the firm is collecting receivables more frequently throughout the year. Oracle’s receivable

turnover has been increasing as shown in the table below. The company receivables turnover was

higher than the industry average in all the years.

Oracle 2019 2018 2017

Inventory turnover 24.98 20.30 24.90
Receivables
7.69 7.55 7.12
turnover
Payables/creditors’
13.78 15.28 12.47
turnover ratio
Working capital
1.42 0.70 0.75
turnover

Based on the table below, Oracle’s payable turnover was higher than the industry

average. However, the company’s working capital turnover capital was lower compared to the

industry average. Consequently, Oracle needs to use its short-term assets and liabilities more

efficiently to support sales. Overall, Oracle’s asset turnover ratios are favorable and comparable

to those of other competitors such as Adobe, Alphabet, Facebook, IBM, and Microsoft.

Computer and 2019 2018 2017

industry
Inventory 36.72 28.03 29.22
Receivables 6.02 6.13 6.04
Payables turnover
8.18 7.67 7.67
ratio
ORACLE 7

Working capital
1.76 1.40 1.25
turnover

Market values

The table below shows Oracle’s Price-Earnings (P/E) ratio and Price-to-book value

(P/BV). The company’s P/E ratio was high in 2018, an indication that investors expect higher

earnings growth in future. However, Oracle’s ratio was lower in 2019 and 2017, compared to the

industry average. Overall, Oracle’s P/BV ratio has been improving over the years. Considering

that Oracle is the leader in software business and one of the largest corporations, its stock is

undervalued.

Microsoft 2019 2018 2017

Oracle Computer Oracle Computers Oracle Computer
s and and and
service service service
Price/Earnings
16.89 28.83 45.90 32.15 22.49 36.74
ratio
Price /Book Value 8.59 7.14 3.84 6.39 3.90 6.32

Valuation
Based on the analysis above, Oracle is undervalued compared to its fair price and its price

relative to the market. However, the company’s valuation is likely to improve as it continues to

expand into the lucrative cloud business. The company’s future is positive as businesses are

increasingly foregoing traditional on-premises platforms for cloud-base systems. To further

improve the P/BV ratio, the company should start giving regular dividends and return capital to

shareholders through share buybacks.

Strengths and weaknesses

ORACLE 8

Based on the analysis, Oracle is a solvent company, with huge cash reserves. Also, the

company is highly profitable and its future outlook is positive. Another key strength is that it has

global presence and dominates the enterprise database business. However, Oracle’s financial

performance is likely to be affected by stiff competition from IT and consulting companies.

Another weakness is that Oracle depends heavily in the American and European markets.

Recommendation

Oracle has made strategic acquisitions to strengthen its product offerings and meet

customer demands. It also has huge cash reserves, which it could use to acquire Pacific Coast

technology. Alternatively, the company could use debt-financing to finance the acquisition

process, as it has a favorable interest coverage ratio. However, it seems the company is only

acquiring firms dealing with cloud-based applications. The acquisition of Pacific Coast

Technology is further complicated by the ongoing coronavirus epidemic. In light of these

happenings, Pacific Coast Technology should wait until the current business environment

improves.
ORACLE 9

References

Mendelsohn, A. (2013). The Oracle Story: 1984–2001. IEEE Annals of the History of

Computing, 35 (2): 10–23.

Stevens, P. (2019). Here are the 10 companies with the most cash on hand. Retrieved from

https://www.cnbc.com/2019/11/07/microsoft-apple-and-alphabet-are-sitting-on-more-

than-100-billion-in-cash.html

The Wall Street Journal (2020). Oracle.

https://www.wsj.com/market-data/quotes/ORCL/financials/annual/income-statement