April 21, 2016

Oracle May No Longer Be As Cheap As Traditional Metrics Indicate


Summary

  • Using adjusted earnings, ORCL’s adjusted return on assets was 28% in 2015 – much higher than the traditional 9% ROA most financial databases report.
  • This difference is primarily caused by ORCL’s $34.1b goodwill, which significantly distorts the firm’s economic reality.
  • Also of note is the difference between ORCL’s adjusted forward value to earnings ratio of 17.1x versus the firm’s traditional forward P/E of only 14.6x.

ORCL - 2016 04 13

Performance and Valuation Prime™ Chart

Under GAAP, the as-reported financial statements and financial ratios of ORCL do not reflect economic reality. The traditional ROA computation understates the company’s profitability by incorrectly including certain items. The distortion of both profitability measures and valuation metrics of ORCL are primarily driven by the inclusion of the firm’s immense goodwill ($34.1b), which inflates the firm’s asset base, and by incorrectly expensing R&D ($6.4b) and operating leases ($290m) rather than treating them as part of the company’s investments.

After adjusting for similar issues and a host of other GAAP-based miscategorizations, Valens calculates ORCL’s adjusted return on assets as 28% in 2015. In contrast, most financial databases show a traditional ROA of only 9%. Additionally, our analysis shows that ORCL has an adjusted forward P/E of 17.1x, compared to the firm’s traditional forward P/E at 14.6x. The profitability of ORCL’s operations and its equity’s true value are therefore not what traditional metrics originally indicate.


Click here to read the article in its entirety at Seeking Alpha.