Financial Accounting 504 Final Project

As noted in Wikipedia Oracle is headquartered in Redwood, California. It was founded in 1977 and is the world’s third largest soft wear developer in sales. According to Yahoo Finance Oracle is a multi-faceted operation. Oracle provides a vast amount of services for the internet and computer. It provides cloud applications, IT consulting services, licenses middleware software which includes database and database management. It has 115,000 full time employees and is run by co-founder, CEO Larry Ellison who has been the only CEO of the company since it’s inception. Also noted in Wikipedia he is the top paid CEO in the world. In 2013 Oracle currently has an operating cash flow of 13.72B with revenues of 37.15B which can be found in Yahoo Finance.

Microsoft is a leading software company started by Bill Gates and Paul Allen in 1975. The company’s headquarters is located in Redmond, Washington where like Oracle it develops, licenses, manufactures and support a wide range of computing sources, as documented in Wikipedia. Yahoo finance reports that in addition to licensing and manufacturing software over the globe it also designs hardware and has recently entered into the hardware industry with it’s new tablet. It also has a entertainment division which is responsible for the manufacturing of Xbox360 gaming and consoles, Kinect for Xbox and video games among other products. It has a total of 94,000 full time employees and can be credited for creating 3 billionaires and 12 millionaires from the company’s operations. Microsoft currently has a cash flow of 73.79B with revenues of 76.01B for 2013.

Interpretation and Comparison between the two companies’ ratios (Reading the Appendix of Chapter 13 will help you prepare the commentary) Oracle Corporation Microsoft Corporation

Earnings per share

As given in the income statement

$1.69

Basic Common

$2.73

Microsoft has shown to have a higher EPS than Oracle.

Current ratio

Current assets Current liabilities

$39,174 $14,192

=

2.76

$74,918 $28,774

2.60

Oracle is showing more favorable current ratio than Microsoft. This ratio depicts for every dollar of current liabilites it has the respective amount in current assets.

Gross Profit Ratio

Gross profit Net Sales Gross Profit = net sales – COGS Oracle: 35,622 – 8,398 = 27,224 Microsoft: 69,943 15,577 = 54,366

$27,224 $35,622

=

76.4%

$54,366 $69,943

77.7%

Microsoft’s Gross Profit Ratio is slightly better than Oracle.

Profit margin ratio

Net Income Net Sales

$8,547 $35,622

=

24.0%

$23,150 $69,943

33.1%

Microsoft has a better Profit Margin Ratio than Oracle.

Inventory Turnover

Cost of Goods Sold Average Inventory Average Inventory: 2011 + 2010/2 Oracle: 303 + 259/2 = 281 Microsoft: 1,372 + 740/2 = 1056

$8,398 $281

29.9 times

$15,577 $1,056

14.8 times

Oracle shows a significantly higher turnover than Microsoft.

Days in Inventory

365 days Inventory turnover

365 29.9

=

12 days

365 14.8

25 days

Oracle has better result than Microsoft

Receivable Turnover Ratio

Net credit sales Average Net Receivables Average Net Receivables: 2011 +2010/2 Oracle: 6628 + 5585/2 = 6107 Avg NR Microsoft:14987 + 13014/2 = 14001 Avg N

$35,622 $6,107

=

5.8

$69,943 $14,001

5.0

Microsofts Receivable Turnover is faster than Oracle.

Average Collection Period

365 Receivable Turnover Ratio

365 5.8

=

62.6 days

365 5.0

73.1

Oracle has a better result on the collection period.

Assets Turnover Ratio

Net Sales Average Total Assets Average Total Assets = 2011+2010/2 Oracle: 73535 + 61578/2 = 67557 Microsoft: 108704 + 86113 = 97409

$35,622 $67,557

=

0.53

$69,943 $97,409

0.72

Microsoft shows a better ratio.

Return on Assets Ratio

Net Income Average Total Assets

$8,547 $67,557

=

12.7%

$23,150 $97,409

23.8%

Microsoft has a better return on their assets.

Debt to Total Assets Ratio

Total Liabilities Total Assets

$33,290 $73,535

=

45.3%

$51,621 $108,704

47.5%

Microsoft is slightly higher so Oracle has a better ratio.

Times Interest Earned Ratio

Net Income + Int Expense + Tax Expense Interest Expense

$12,219 $808

=

15.1

28,366 295

96.2

Microsoft has a much healthier ratio than Oracle.

Payout ratio

Cash dividend declared on common stock Net income

$1,061 $8,547

=

12.4%

$5,180 $23,150

22.4%

Microsoft has a higher rate of dividend pay outs

Return on Common Stockholders’ Equity

Net income – Preferred stock dividend Average common stockholders’ equity Oracle Avg SE: 40245 + 31199/2 Microsoft Avg SE: 57083 + 46175/2

8,547 35,722.00

=

23.9%

$23,150 $51,629

44.8%

Microsoft earned more on the dollar of their net income for each dollar of the stockholder’s equity.

Free cash flow

Cash provided by operations minus capital expenditures minus cash dividends paid

$9,703

=

$9,703

$19,459

$

Microsoft has a considerable amount more Free cash 19,459 flow than Oracle

Current cash debt coverage ratio

Cash provided by operations Average current liabilities

$11,214 $14,442

=

0.78

$26,994 $27,461

0.98

Microsoft has a better ratio of paying debt within the year.

Cash debt coverage ratio

Cash provided by operations Average total liabilities

$11,214 $31,835

=

0.35

$26,994 $45,780

0.59

Microsoft has a better ratio.

Price/Earnings ratio

Market price as of 06/30/2011 EPS as of 06/30/2011

$34.22 $1.69

=

20

$26.87 $2.73

10

Oracle fairs better than Microsoft with the investor’s projection of the strength of future earnings

Liquidity: Overall Oracle has shown to a better liquidity ratio than Microsoft. Some areas the two companies are relatively close in liquidity performance as depicted in the current ratio. In other areas Oracle proves to have much better performance than Microsoft as depicted in the inventory and days in inventory ratios however and current ratio. Oracle also has a faster collection period than Microsoft as reflected in the average collection period ratio. I would declare Oracle as having a better liquidity standing than Microsoft.

Solvency: Microsoft is superior to Oracle in this ratio category. Although Microsoft has a little more risk than Oracle in the debt to current assest ratio which means that if necessary Oracle has a better opportunity to convert assets in to cash with a 45.3% while Microsoft is at 47.5% however; this is the only ratio that Oracle is more favorable than Microsoft. With Microsoft’s free cash flow of $19,459 billion versus Oracle’s $9,703, Microsoft is least likely to have the need to liquidate their assets.

Free cash flow ratio gives insight to a company’s acquisition power, ability to eliminate or minimize debt and allows for a higher dividend payout. Microsoft has a better current cash debt to current liability ratio as well. For evey $1 in liability Microsoft as .98 cash from operating activities while Oracle has .78 from operating activities for every $1 of current liability. Given these analysis Microsoft has a better overall solvency status than Oracle.

Profitability: This category of ratios is the more focused one by investors because it gives the most accurate prognosis of a company’s most gain out of investmens from investors. Beginning with Gross Profit ratio the two companies are very close with Microsoft showing a 77.7% and Oracle showing a 76.4% they both fair pretty well in gross profits. Microsoft has an advantage over Oracle in all ratios in this category except for Price earning sharing ratio. The payout ratio and the return on common stockholder’s equity ratio are significantly higher than Oracle’s but Oracle has a higer price earnings per share ratio as stated earlier which signifies that investors believe that Oracle’s stock is going to increase over a period of time.

Conclusion: Although based on the ratios Oracle seems to be a safer investment and deemed by investors for the fiscal year of 2011 to have higher potential in the market and as noted by Eddie Beverage in an online article on Five Capital website Oracle has shown consistency over the past decade than Microsoft with trending increases. However; given that Microsoft has a substantially higher payout and higher return on stockholder’s equity I would take the risk and go with Microsoft.

Beverage, E. (2011, Oct 21). Microsoft V Oracle: You know you want one. Retrieved from Seeking Alpha. Oracle Corporation. (n.d.). Retrieved from Wikipedia: http://en.wikipedia.org/wiki/Oracle_Corporation Weygandt, J., Kimmel, & Kleso, D. (2011). Financial Accounting. Hoboken: John Wiley & Sons, Inc. Yahoo Finance. (n.d.). Retrieved June 22, 2013, from Yahoo: http://finance.yahoo.com/q?s=ORCL Yahoo Finance. (n.d.). Retrieved June 22, 2013, from Yahoo: http://finance.yahoo.com/q?s=MSFT Wikipedia. (n.d.). Retrieved June 22, 2013, from Microsoft: http://en.wikipedia.org/wiki/Microsoft Wikipedia Oracle Corporation. (n.d.). Retrieved June 22, 2013, from Wikipedia: