Recommendation for Oracle or Hewlett-Packard as an Investment
David Tinker, CFRE
Muskingum College, INFR607, LM3
Professor Rick Reichard
December 7, 2008
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For Learning Module 3 I was asked to research and analyze financial information
for Oracle and Hewlett-Packard (HP). I was also asked to make a recommendation of
either company as an investment based solely on financial information analysis I did.
As a result of my findings I recommend Oracle as an investment. Also as a result of my
financial analysis I cannot recommend HP as an investment at this time. These
recommendations are based on analysis of the Liquidity Ratios, Profitability Ratios, and
Solvency Ratios for both companies. I used Edward Field’s definition of ratios, each
company’s most recent annual reports for financial statements and Yahoo Finance to
find historical stock prices.
Liquidity Ratios demonstrate a company’s ability to pay off short term debt by
raising cash and how quickly their assets can be converted to cash to pay those debts.
They also indicate how likely a can borrow capital. Because of the current financial
strains in the U.S., a company’s ability to pay back debt is a very important attribute.
Oracle’s Current Ratio and Quick Ratio are above 1.0 which means that they have
positive working capital. These two ratios for HP are less than 1.0 which means they
have negative working capital. HP would have a more difficult time paying their current
liabilities if their lenders call their loans. HP is somewhat dependent on inventory sales
as indicated by a12% difference with Current Ratio and Quick Ratio. Oracle’s financial
statements did not indicate any inventory so I was unable to analyze their use of
inventory. HP has a very high Inventory Turnover Rate of 9.8 days indicating their ease
of selling inventory. However this does not make up for the Current and Quick Ratios
below 1.0.
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Profitability Ratios demonstrate how likely a company will turn a profit and how
that profit relates to other important information about the company (J. Elmerraji). They
also demonstrate how much room a company has to withstand a downturn, such as our
current recession. Oracle’s Gross Profit Margin is 56%, i.e. eight times higher than
HP’s, which is almost 7%. Oracle’s Operating Profit Margin is 20% more than HP’s and
is indicative of Oracle’s management’s decisions having more of a positive impact on
profit than HP’s management’s decisions. Oracle is squeezing more profit out of their
products than HP. Oracle’s Net Profit margin of 24% is more than three times more
than HP’s at 7%. At 11% Oracle’s Return on Assets is 30% more than HP’s at 8%.
Like the Net Profit Margin, Oracle’s Earnings Per Share are three times more than HP’s.
While both PE Ratios are near the benchmark of 15, Oracle’s PE Ratio is higher
indicating a greater vote of confidence by investors of Oracle at this time than HP.
Elmerraji defines Solvency Ratio as demonstrating how well a company can deal
with their long-term financial obligations. HP’s Debt to Asset ratio is 20% higher than
Oracle’s demonstrating that HP has taken on more debt and thus is more risky of an
investment. HP’s Debt to Equity Ratio is four times lower than Oracle’s because HP
has reduced their number of outstanding shares by buying back large quantity of stock
over the past few years. The 2007 HP Annual report details a multi-year plan to tack on
debt to buy back stock. This has increased the Stockholder’s Equity and thus reduced
their Debt to Equity Ratio. Both companies have a similar current market capitalization
of around $80.0 billion.
As a result of my analysis of the Liquidity, Profitability, and Solvency ratios, I
recommend Oracle as an investment and not Hewlett-Packard. Simply put, overall,
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Oracle’s Liquidity, Profitability, and Solvency Ratios are better than HP’s. Oracle is the
better of the two investment possibilities at this time.
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References
lmerraji, J., Analyse Investments Quickly With Ratios, (n.d.) Retrieved December 6,
2008. http://investopedia.com/printable.asp=/articles/stocks/06/ratios.asp
Fields, Edward. The Essentials of Finance and Accounting for Non-Financial Managers.
Amacom. 2002.
Hewlett Packard, 2007 Annual Report, Retrieved October 12, 2008.
http://h30261.www3.hp.com/phoenix.zhtml?c=71087&p=irol-reportsannual
Oracle, 2008 Annual Report, Retrieved October 12, 2008.
http://www.oracle.com/corporate/investor_relations/index.html
Yahoo, Historic Stock Prices, Retrieved December 5, 2008. http://finance.yahoo.com