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.
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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.
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