How Is Oracle's Balance Sheet Looking Today?

| About: Oracle Corporation (ORCL)

Before selecting a stock, there are a number of things that you need to consider in order to ensure that you are buying the stock of a high-quality company whose shares are poised to grow in value over time. Some of these concerns include what the company does, its competitive advantages, valuation, dividend payouts and sustainability, and earnings consistency.

Another important thing that you need to consider is the financial condition of the company in question. You want to know if the company is able to continue paying its bills, and how much debt it carries. The balance sheet is one of the most effective tools that you can use to evaluate a company's financial condition. In this article, I will discuss the balance sheet of Oracle ORCL, in order to get some clues as to how well this company is doing.

I will go through the balance sheet, reviewing the most important items, in order to assess Oracle's financial condition. The information that I am using for this article comes from Oracle's website here. Note that this article is not a comprehensive review as to whether Oracle should be bought or sold, but rather, just an important piece of the puzzle when doing the proper due diligence.

This article might be a bit too basic for some and too long-winded for others, but I hope that some of you can derive benefit from it.


Oracle is the world's largest provider of enterprise software and a leading provider of computer hardware products and services. The company's operations are divided into three segments. They are Software, Hardware Systems and Services. The Software segment accounts for 73% of Oracle's sales. It includes new software licenses and cloud-based software subscriptions, as well as software license upgrades and product support. The company licenses its database and middleware, as well as applications software, and provides access to some of its software through subscription contracts. The Hardware Systems segment accounts for 15% of revenues and includes hardware systems products and support. Products and services here include servers, storage, networking, virtualization software and operating systems. The Services segment accounts for 12% of revenues and includes consulting services, managed cloud services, and education services.

Oracle has a market capitalization of $152B and has recorded over $37B in sales over the last 12 months. 53% of its sales come from the Americas, while 30% comes from Europe, the Middle East, and Africa. The remaining 17% of sales come from the Asia-Pacific region. The company has 115,000 employees.

Cash and Cash Equivalents

The first line in the Assets column of the balance sheet is for the amount of cash and cash equivalents that the company has in its possession. Generally speaking, the more cash the better, as a company with a lot of cash can invest more in acquisitions, repurchase stock, pay down debt, and pay out dividends. Some people also value stocks according to their cash positions. Some of the larger and more mature companies tend not to carry a lot of cash on their balance sheets, as they might be more inclined to buy back stock with it, or pay out dividends.

As of Feb. 28, 2013, Oracle had $33.4B in cash and short-term investments, which can be easily converted into cash. This is a lot of cash for a company that has a market cap of $152B. This means that the company is trading for less than five times its cash position, which can be very attractive for value-oriented investors. Over the last 12 months, Oracle repurchased $9.08B worth of stock, and paid out $1.76B in dividends. These activities are both well-supported by its trailing 12-month free cash flow of $13.0B.

In June of 2012, the company announced an expansion of its buyback program by $10B. As of now, there is still $5B available under this program. Over the last nine months, Oracle repurchased nearly 262M shares at an average price of $31.33 per share.

Of the $33.4B cash position, $27.4B is held by the company's foreign subsidiaries in other countries.

Net Receivables

Receivables constitute money that is owed to a company for products or services that have already been provided. Of course, the risk with having a lot of receivables is that some of your customers might end up not paying. For this reason, you usually like to see net receivables making up a relatively small percentage of the company's sales.

Oracle had a total of $4.17B in net receivables on its balance sheet, which represents 11.2% of its trailing 12-month sales of $37.1B. For fiscal 2012, which ended on May 31, 2012, 17.2% of its sales were booked as receivables, while that percentage was at 18.6% for fiscal 2011.

While 11.2% might be considered a relatively high percentage for receivables, it appears to be lower than what the company has reported over the last couple of years, so I'm not too worried about this.

Current Ratio

Another factor that I like to look at is the current ratio. This helps to provide an idea as to whether or not the company can meet its short-term financial obligations in the event of a disruption of its operations. To calculate this ratio, you need the amount of current assets and the amount of current liabilities. Current assets are the assets of a company that are either cash or assets that can be converted into cash within the fiscal year. In addition to cash and short-term investments, some of these assets include inventory, accounts receivable, and prepaid expenses. Current liabilities are expenses that the company will have to pay within the fiscal year. These might include short-term debt and long-term debt that is maturing within the year, as well as accounts payable (money owed to suppliers and others in the normal course of business). Once you have these two figures, simply divide the amount of current assets by the amount of current liabilities to get your current ratio.

If a company's operations are disrupted due to a labor strike or a natural disaster, then the current assets will need to be used to pay for the current liabilities until the company's operations can get going again. For this reason, you generally like to see a current ratio of at least 1.0, although some like to see it as high as 1.5.

The current ratio of Oracle is 3.42, which is outstanding.

Property, Plant, and Equipment

Every industry requires a certain amount of capital expenditure. Land has to be bought, factories have to be built, machinery has to be purchased, and so on. However, less may be more when it comes to outlays for property, plant and equipment, as companies that constantly have to upgrade and change facilities to keep up with competition may be at a bit of a disadvantage.

However, another way of looking at it is that large amounts of money invested in this area may present a large barrier-to-entry for competitors. Right now, Oracle has $3.03B worth of property, plant and equipment on its balance sheet. This figure is inline with the $3.02B that the company reported at the end of fiscal 2012, and the $2.86B that it reported at the end of fiscal 2011.

Given the consistency and relatively small percentage of assets here, I don't see anything to be concerned about.


Goodwill is the price paid for an acquisition that's in excess of the acquired company's book value. The problem with a lot of goodwill on the balance sheet is that if the acquisition doesn't produce the value that was originally expected, then some of that goodwill might come off of the balance sheet, which could, in turn lead to the stock going downhill. Then again, acquisitions have to be judged on a case by case basis, as good companies are rarely purchased at or below book value.

Oracle has $26.1B worth of goodwill on its most recent balance sheet, which is a bit higher than the $25.1B worth of goodwill that it reported 9 months prior, at the end of fiscal 2012. $609M of this $1.0B increase stems from its acquisition of Eloqua, a provider of cloud-based marketing automation and revenue performance management software. The remainder of this goodwill increase comes from other acquisitions that the company says are not significant on an individual basis.

The $26.1B in goodwill is well above the $21.6B that it reported at the end of fiscal 2011. $1.2B of this increase came from Oracle's 2012 acquisition of Taleo, a provider of cloud-based talent management software. $1.1B came from its acquisition of Right Now Technologies, a company that offers cloud-based customer service. Another $1.1B in goodwill came from a host of other acquisitions that the company made in fiscal 2012 that are not individually significant.

Overall, goodwill accounts for about 32.8% of Oracle's total assets of $79.5B. Usually, I don't like to see goodwill account for more than 20% of a company's total assets for the reason that I discussed above. Oracle is well above this threshold. As long as the company's acquisitions produce the value that management expects, then there is nothing to worry about. But, it is reasonable to expect that at least some of these acquisitions will not pan out, and if that happens, we may see some of this goodwill come off of the balance sheet, and that may hurt the company's share price.

Intangible Assets

Intangible assets that are listed on the balance sheet include items such as licensed technology, patents, brand names, copyrights and trademarks that have been purchased from someone else. They are listed on the balance sheet at their fair market values. Internally-developed intangible assets do not go on the balance sheet in order to keep companies from artificially inflating their net worth by slapping any old fantasy valuation onto their assets. Many intangible assets like patents have finite lives, over which their values are amortized. This amortization goes as annual subtractions from assets on the balance sheet and as charges to the income statement. If the company that you are researching has intangible assets, with finite lives, that represent a very large part of its total asset base, then you need to be aware that with time, those assets are going to go away, resulting in a reduction in net worth, which may result in a reduction in share price, unless those intangible assets are replaced with other assets.

Oracle currently has $6.66B worth of intangible assets on its balance sheet. This is down from the $7.90B that the company reported nine months prior. This decline is due mostly to amortization. Most of the intangible assets are in software support agreements and relationships, developed technology, and cloud software subscriptions and related relationships. All of the company's intangible assets have finite lives, with the average being six years. While the amortization of $6.66B worth of intangible assets over the next six years isn't a good thing for the balance sheet, I am not too concerned about it, as these assets account for just 8% of the company's total assets.

Return on Assets

The return on assets is simply a measure of the efficiency in which management is using the company's assets. It tells you how much earnings management is generating for every dollar of assets at its disposal. For the most part, the higher, the better, although lower returns due to large asset totals can serve as effective barriers to entry for would-be competitors. The formula for calculating return on assets looks like this:

Return on Assets = (Net Income) / (Total Assets).

For Oracle, the return on assets would be $12.9B in core earnings over the last 12 months, divided by $79.5B in total assets. This gives a return on assets for the trailing 12 months of about 16.2%, which is really good in absolute terms. I also calculated Oracle's returns on assets over fiscal years 2012, 2011 and 2010 for comparative purposes. This can be seen in the table below.











Table 1: Nice Returns On Assets From Oracle

These are really good returns on assets that are fairly consistent, and they have been growing, which is what we like to see. However, the growth is slowing a little bit, so we should keep an eye on this going forward.

Short-Term Debt Versus Long-Term Debt

In general, you don't want to invest in a company that has a large amount of short-term debt when compared with the company's long-term debt. If the company in question has an exorbitant amount of debt due in the coming year, then there may be questions as to whether the company is prepared to handle it.

However, Oracle doesn't have much to worry about here, as it reported just $1.25B of short-term debt on its most recent balance sheet. And, as I discussed earlier, Oracle has more than enough current assets on hand to meet this, along with other current obligations.

Long-Term Debt

Long-term debt is debt that is due more than a year from now. However, an excessive amount of it can be crippling in some cases. For this reason, the less of it, the better. Companies that have sustainable competitive advantages in their fields usually don't need much debt in order to finance their operations. Their earnings are usually enough to take care of that. A company should generally be able to pay off its long-term debt with three-four years' worth of earnings.

Right now, Oracle carries $18.5B of long-term debt. This is higher than the $13.5B that the company reported at the end of fiscal 2012, and the $14.8B that it reported at the end of fiscal 2011. This is due to the fact that Oracle issued $5.0B in fixed-rate senior notes over the last nine months. This money will be used for what the company calls "general corporate purposes," which include buybacks, repayment of other debt and acquisitions. Of this $5.0B, half of it comes due in 2017, with an interest rate of just 1.2%. The other half doesn't come due until 2022, and carries an interest rate of 2.5%.

In determining how many years' worth of earnings it will take to pay off the long-term debt, I use the average of the company's core earnings over the last three fiscal years. The average core earnings of Oracle over this period is $10.8B. When you divide the long-term debt by the average earnings of the company, here is what we find.

Years of Earnings to Pay off LT Debt = LT Debt / Average Earnings

For Oracle, here is how it looks: $18.5B / $10.8B = 1.71 years

This is fantastic for Oracle, in that it can pay off its long-term debt with less than two years' worth of earnings. This shows that the company's long-term debt is very manageable, as it has substantial earnings power.

Debt-To-Equity Ratio

The debt-to-equity ratio is simply the total liabilities divided by the amount of shareholder equity. The lower this number, the better. Companies with sustainable competitive advantages can finance most of their operations with their earnings power rather than by debt, giving many of them a lower debt-to-equity ratio. I usually like to see companies with this ratio below 1.0, although some raise the bar (or lower the bar if you're playing limbo) with a maximum of 0.8. Let's see how Oracle stacks up here.

Debt-To-Equity Ratio = Total Liabilities / Shareholder Equity

For Oracle, it looks like this: $36.2B / $43.3B = 0.84

Oracle's debt-to-equity ratio looks pretty decent. To see how this figure has changed over time, I have included it from the ends of the last three fiscal years in the table below.











Table 2: Debt-To-Equity Ratios Of Oracle

From the looks of this table, the debt-to-equity ratio of Oracle has been consistently good. There is nothing here to suggest that Oracle is a financially-distressed company. So, from a debt-to-equity standpoint, I don't see anything to be worried about at the moment.

Return On Equity

Like the return on assets, the return on equity helps to give you an idea as to how efficient management is with the assets that it has at its disposal. It is calculated by using this formula.

Return On Equity = Net Income / Shareholder Equity

Generally speaking, the higher this figure, the better. However, it can be misleading, as management can juice this figure by taking on lots of debt, reducing the equity. This is why the return on equity should be used in conjunction with other metrics when determining whether a stock makes a good investment. Also, it should be mentioned that some companies are so profitable that they don't need to retain their earnings, so they buy back stock, reducing the equity, making the return on equity higher than it really should be. Some of these companies even have negative equity on account of buybacks. However, Oracle is not one of these companies.

So, the return on equity for Oracle is as follows:

$12.9B / $43.3B = 29.8%

This is a pretty solid return on equity. In the table below, you can see how the return on equity has fared over the past three years.











Table 3: Returns On Equity At Oracle

The return on equity at Oracle has been consistently solid over the last few years, just like its return on assets.

Retained Earnings

Retained earnings are earnings that management chooses to reinvest into the company as opposed to paying it out to shareholders through dividends or buybacks. It is simply calculated as:

Retained Earnings = Net Income - Dividend Payments - Stock Buybacks

On the balance sheet, retained earnings is an accumulated number, as it adds up the retained earnings from every year. Growth in this area means that the net worth of the company is growing. You generally want to see a strong growth rate in this area, especially if you're dealing with a growth stock that doesn't pay much in dividends or buybacks. More mature companies, however, tend to have lower growth rates in this area, as they are more likely to pay out higher dividends.

In the table below, you can see how the retained earnings at Oracle have changed over the last three years.


Q3 2013

Q3 2012

Q3 2011

Q3 2010






Table 4: Retained Earnings At Oracle

Overall, we see a cumulative 71.3% jump in retained earnings over the last three years. However, most of this jump came between 2010 and 2011. During this time, the company wasn't buying back much stock or paying much in the way of dividends. However, this changed during fiscal 2012, when the company repurchased more than $5B worth of stock. At this point, you can see the retained earnings level is off a bit. It actually declined a little bit since then, as the company spent another $8.2B on buybacks over the last nine months. However, a figure of $24.5B in retained earnings is still impressive.


After reviewing the most recent balance sheet, it can be concluded that there is much to like about the financial condition of Oracle. It has a large cash position, particularly overseas that it can use to finance its international operations. The company also has very strong cash flows, giving Oracle the ability to make acquisitions and buy back stock. An excellent current ratio shows that the company can meet its short-term financial obligations, even in the event of an unlikely disruption of its operations. Oracle's short and long-term debt positions are easily managed by its large cash flows and earnings power. The company has shown very good returns on assets and returns on equity, along with very good growth in retained earnings over the last three years that the company can invest for future growth.

The only concern that I have with Oracle's balance sheet is the large amount of goodwill, which accounts for nearly a third of the company's total assets. If some of the company's many acquisitions don't pan out like management expects, then there may be writedowns in this area, which can hurt the stock price going forward.

While this is not a comprehensive review as to whether Oracle should be bought or sold, it can certainly be said that Oracle is currently in very good financial condition.

To learn more about how I analyze financial statements, please visit my new website at this link. It's a new site that I created just for fun, as well as for the purpose of helping others make good financial decisions.

Thanks for reading and I look forward to your comments!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.