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Comparative Analysis of Oracle Corporation and Microsoft

Joanie Barnett ACCT 504 October 15th, 2013 Professor Jimmy Hinton

and Microsoft Corporation

Company Profiles
Oracle
Oracle Corporation is an American multinational computer technology corporation founded in 1977 by Larry Ellison, and co-founders Bob Miner and Ed Oates. Oracle has been the leader in database software for over 3 decades and is currently headquartered in Red Shores, California. Oracle develops, manufactures, markets, hosts, and supports database and middleware software, applications software, and hardware systems. It offers servers, storage, networking, virtualization software, operating systems including the Oracle Solaris Operating System, Cloud Services, and Java applications. Oracle currently employs 120,000 full-time employees and had a net income of $8,547,000 at the end of their 2011 fiscal year.

Microsoft
Microsoft Corporation develops, licenses, and supports software services and hardware devices worldwide. This company was founded in 1975 and is headquartered in Redmond, Washington. Its products include Windows Server operating systems, Windows Azure, Microsoft SQL Server, Windows Intune, Windows Embedded, Visual Studio, System Center products, Microsoft consulting services, and Premier product support services. Microsoft 's Online Services division offers online applications including Bing, Bing Ads, and MSN. The Microsoft Business produces software such as Microsoft Office, SharePoint, Exchange, Lync, Yammer, and Microsoft Office Visio. Microsoft 's Entertainment and Devices division offers products and services designed to entertain and connect people including Xbox 360 gaming and entertainment console, Kinect for Xbox 360, Xbox 360 video games, Xbox 360 accessories, Xbox LIVE, Skype, and Windows Phone. Microsoft currently employs 99,000 full-time employees and has a net income of $23,150,000 at the end of their 2011 fiscal year.

Oracle

Microsoft

The earnings per share tells us the net income earned on each share of common stock. A higher EPS is more desired, shown here

Earnings per share (basic - common)

As given in the income statement

1.69

2.73 Microsoft has a much higher EPS than Oracle.

Current ratio

Current assets Current liabilities

$39,174 $14,192

2.76

$74,918 $28,774

2.60

The current ratio is used for evaluating a companys liquidity and short-term debt-paying ability. This shows for that every dollar of Oracle's current liabilities, it has $2.76 of current assets. For Microsoft, for every dollar of liabilities, it has $2.60 of current assets. Because Oracle has a higher current ratio, it has a better chance of paying its short-debts than Microsoft does .

Gross profit ratio

Gross profit Net Sales

$27,224 $35,622

76.4%

$54,366 $69,943

77.7%

The gross profit rate indicates that both companies is selling their products at a higher price than what the products are costing them. Microsoft is doing a slightly better job of this at 77.7% than Oracle at 76.4%.

Profit margin ratio

Net Income Net Sales

$8,547 $35,622

24.0%

$23,150 $69,943

33.1%

The profit margin is a measure of the percentage of each dollar of sales that results in net income. This computations shows that Microsoft has a greater rate of return on its sales than Oracle.

Inventory turnover

Cost of Goods Sold Average Inventory

$8,398 $281

29.9 times

$15,577 $1,056

14.8 times

The inventory turnover ratio measures the number of times average inventory was sold during the period. This ratio shows that Oracle has a much higher inventory turnover than Microsoft. Therefore, Oracle is selling and restocking its inventory more effectively and frequently than Microsoft meaning it has the less cash tied up in inventory that may become useless.

Days in inventory

365 days Inventory turnover

365 29.9

12 days

365 14.8

25 days

Days in inventory gives an average number of days the company is holding their inventory in stock. Looking at this ratio, it shows that Oracle is moving their inventory 12 days faster than Microsoft is.

Receivable turnover ratio

Net credit sales Average Net Receivables 365 Receivable Turnover Ratio

$35,622 $6,107 365 5.8

5.8

$69,943 $14,001 365 5.0

5.0

The receivable turnover ratio is used to assess the liquidity of the receivables by measuring the number of times, on average, a company collects receivables during the period. Oracle converts certain assets into to cash at a faster rate than Microsoft based on this computation. This ratio shows that the average collection period for receivables at Oracle is a little over 62 days, and at Microsoft it is about 73 days. Because Oracle has a shorter average collection period, it has a higher effectiveness of its credit and collection policies than Microsoft. The asset turnover measures how efficiently a company uses its assets to generate sales. This computation shows Microsoft more effective by generating $0.72 for each dollar it had invested in assets compared to Oracle's $0.53 per dollar. The return on assets measures the overall profitability of assets in terms of the income earned on each dollar invested in assets. A higher rate like that of Microsoft is more desirable in this ratio. This shows that Microsoft is gaining 23.8% of equity with its returns on assets for which they borrowed money for. Oracle is only gaining 12.7% on their assets, showing less profitability than Microsoft. The debt to total assets ratio measures the percentage of total financing provided by creditors. This ratio shows that Microsoft has a greater risk of not being able to pay back its maturing obligations with 47.5% than Oracle does with 45.3% because Microsoft has a smaller amount of assets to cover its liabilities.

Average collection period

62.6 days

73.1 days

Assets turnover ratio

Net Sales Average Total Assets

$35,622 $67,557

0.53

$69,943 $97,409

0.72

Return on assets ratio

Net Income Average Total Assets

$8,547 $67,557

12.7%

$23,150 $97,409

23.8%

Debt to total assets ratio

Total Liabilities Total Assets

$33,290 $73,535

45.3%

$51,621 $108,704

47.5%

Times interest earned ratio

Net Income + Int Expense + Tax Expense Interest Expense

$12,219 $808

15.1

28,366 295

96.2

The times interest earned shows the companys ability to meet interest payments as they come due. A higher rate here is desired an Microsoft has a much higher rate than Oracle meaning they have a vastly greater ability pay the interest on their credit debt on time. The payout ratio measures the percentage of earnings distributed in the form of cash dividends. Microsoft having a higher payout ratio means they are making an adequate amount of net income to pay their dividends at a greater rate than Oracle. While it's best to look at this ratio over a longer period of time to determine that net income is staying at a respectable level, Microsoft is paying dividends at a better rate for this fiscal year. The return on common stockholder's equity shows that Microsoft has a great profitability of common stockholders investment. This means that Microsoft is earning more net income for each dollar that investors have put in than Oracle is earning.

Payout ratio

Cash dividend declared on common stock Net income

$1,061 $8,547

12.4%

$5,180 $23,150

22.4%

Return on common stockholders' equity

Net income - Preferred stock dividend Average common stockholders' equity

$8,547 35,722.00

23.9%

$23,150 $51,629

44.8%

Free cash flow

Cash provided by operations minus capital expenditures minus cash dividends paid

$10,522 =

$10,522 $ 19,626.00 = $ 19,626

The free cash flow ratio depicts that Microsoft has a greater amount of cash available for paying dividends or expanding operations than Oracle. While this could mean that Microsoft is producing more net cash from its operations even after paying its CAPEX an dividends, the fact that Microsoft is a bigger company has to be considered.

Current cash debt coverage ratio

Cash provided by operations Average current liabilities

$12,033 $14,442

0.83

$27,161 $27,461

0.99

The current cash debt coverage ratio can provide a better overview of liquidity because instead of using year-end balances or current assets and liabilities, it calculates the companies current position using net cash provided by operations. This shows that at 0.83, Oracle's operating cash flow coverage of average current liabilities is less than Microsoft's at 0.99.

Cash debt coverage ratio

Cash provided by operations Average total liabilities

$12,033 $31,835

0.38

$27,161 $45,780

0.59

The cash debt coverage ratio shows a companys ability to repay its long-term liabilities using the net cash it produced from operating activities. This ratio shows that Microsoft will pay back their long-term liabilities in a shorter time than it will take for Oracle showing that Microsoft has a greater solvency based on this ratio.

Price/earnings ratio

12/31/2011 EPS as of 12/31/2011

$34.22 $1.69

20

$26.41 $2.73

10

The price-earnings ratio measures the ratio of the market price of each share of common stock to the earnings per share. Investors will look at this ratio to determine what the company will be earning in the future. Oracle has double the price-earning than that of Microsoft meaning that Oracle looks to do better in the market than Microsoft as long as the price they are selling their stock is not overly priced.

Performance Ratios
Liquidity: Oracle has better performance for the current ratio, although Microsoft has the
upper hand in current cash debt coverage ratio. Oracle has $2.76 in current assets for every dollar in current liabilities while Microsoft has only $2.60 in current assets for every dollar in current liabilities. Oracle has a big advantage for inventory turnover, 29.9 times to Microsoft's 14.8, while keeping inventory for only 12 days versus Microsoft's 25. Oracle also has a slight lead in the receivable turnover ratio with 5.8 to 5.

Solvency: Microsoft has the advantage in times interest earned as they can cover their
interest expense 96.2 times with income before interest and taxes while Oracle can only cover their interest expense 15.1. Microsoft has positive free cash flow of $19,626 million while Oracle only has free cash flow of $10,522 million. Microsoft also has a higher cash debt coverage ratio giving them a better opportunity to pay back their obligations. Aside from Oracle having a lower debt to total assets ratio making them less reliant on debt financing than Microsoft, Microsoft has better solvency in most ratios.

Profitability: Microsoft has the advantage for each of the profitability ratios with the
exception of the Price-Earnings ratio. Microsoft offers a higher earnings per share with $2.73 per share against Oracle's $1.69 per share. Microsoft has a better lead in return on common stockholders' equity with 44.8% compared to Oracle's 23.9%. Microsoft also has a higher gross profit rate at 77.7% to Oracle's 76.4%, and higher profit margin ratio 33.1% to Oracle's 24%. Microsoft is using their assets more efficiently than Oracle with a 0.72 asset turnover ratio in relation to Oracle's 0.53. Oracle shows better chance of higher future earnings with its price-earnings ratio at 20 versus Microsoft's 10.

Conclusion: Microsoft looks to be a more solid investment on a long-term basis as they


very strong in the solvency and profitability ratios, with the exceptions of a higher debt to total assets ratio and low price-earnings ratio. Microsoft is more likely to pay back their debt obligations and have more profitable operations. On the other hand, Oracle does show higher future earnings with its price-earning profitability ratio and looks to be a safer option for short-term creditors based on its solid liquidity ratios. If I were to recommend one of these companies for investment based on the performance ratios, I would suggest Microsoft. Microsoft shows a greater chance of having sustainability and growth over a long period of time. Creditors and investors can have more confidence in the operations success in the future because of their solid profitability ratios.

References
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2013). Financial accounting: Tools for business decision making, 7th ed. Danvers, MA: John Wiley & Sons, Inc. Microsoft Investor Relations (2013). Company Overview Retrieved October 15, 2013 from http://www.microsoft.com/investor/CompanyInfo/Overview/default.aspx Microsoft Investor Relations (2013). Microsoft SEC Filings Retrieved October 6, 2013 from http://www.microsoft.com/investor/SEC/default.aspx?year=2011&filing=annual

Oracle (2013). SEC Filings Retrieved October 6, 2013 from http://www.oracle.com/us/corporate/investor-relations/s Oracle Timeline (n.d). Retrieved October 17, 2013 from http://oracle.com.edgesuite.net/timeline/oracle/ Yahoo Finance (2013). Oracle Corporation Profile Retrieved October 15, 2013 from http://finance.yahoo.com/q/pr?s=ORCL+Profile

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