February 5, 2016

Oracle’s $34.1 Billion Goodwill Masks Their True Profitability


Summary

  • Using Adjusted Earnings, ORCL’s Adjusted Return on Assets is at 28% in 2015 – much higher than the traditional 9% ROA most financial databases report.
  • One culprit behind this major distortion is the GAAP accounting for ORCL’s $34.1bn goodwill, which leads to a significant distortion of the firm’s economic reality.
  • Also of note is the difference between ORCL’s Adjusted Forward Price-to-Earnings ratio of 15.4x versus the firm’s traditional forward P/E of 13.5x.

ORCL - 2016 01 29

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 inclusion of goodwill ($34.1bn) and the company’s massive liquidity profile (without adjusting for excess cash) inflates ORCL’s assets, resulting in a distortion of performance measures.

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, analysis shows that ORCL has an Adjusted Forward P/E of 15.4x, when the firm’s traditional forward P/E is smaller at 13.5x. The profitability of ORCL’s operations and their equity’s true value are therefore not what traditional metrics originally indicate.


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