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List of Case Questions: Case #1 Oracle Systems Corporation Questions For Case Preparation

The document provides a list of case questions for Oracle Systems Corporation. The questions analyze Oracle's financial statements from 1985-1990, identify trends in key financial ratios over time, compare Oracle's performance to peers, and assess whether Oracle was financially healthy in September 1990 following a decline in share price. Specifically, the questions raise whether high accounts receivable and a first-time loss in Q1 1990 may have contributed to issues, and whether metrics like EPS, ROE, equity, and cash flow provide insight into Oracle's intrinsic value.

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Arnold Tampubolon
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226 views

List of Case Questions: Case #1 Oracle Systems Corporation Questions For Case Preparation

The document provides a list of case questions for Oracle Systems Corporation. The questions analyze Oracle's financial statements from 1985-1990, identify trends in key financial ratios over time, compare Oracle's performance to peers, and assess whether Oracle was financially healthy in September 1990 following a decline in share price. Specifically, the questions raise whether high accounts receivable and a first-time loss in Q1 1990 may have contributed to issues, and whether metrics like EPS, ROE, equity, and cash flow provide insight into Oracle's intrinsic value.

Uploaded by

Arnold Tampubolon
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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LIST OF CASE QUESTIONS

Case #1 Oracle Systems Corporation

Questions for Case Preparation:


The following questions will help you in the preparation and analysis of this case. Use these
questions as a guide in your study of the case. However, do not limit yourselves to these
questions only, but rather allow yourselves to expand your thinking and analysis of this case.
1. What can the historical income statements (case Exhibit 1) and balance sheets (case
Exhibit 2) tell you about the health and current condition of Oracle Systems?

Annual report showed that oracle had grown significantly since the time it went
public in 1986 until the end of May 1990. Total revenue had increased from 12,715 in
1984 to 970,844 on May 1990 with CAGR (Compound Annual Growth Rate) of
106%. Net income also grew rapidly from 1,389 in 1984 to 117,410 on May 1990
(CAGR of 109%). However, on August 1990, Oracle experienced loss for the first
time with the net loss of 43,283. Trade receivable has the main contribution to its total
revenue with contribution around 39% until 48%. However, because account
receivable had main contribution to its total revenue, there will be bad debt potential
in the future to Oracle. Based on balance sheet, Oracle use equity more than liabilities
to run its business. Total asset increased significantly from 15,463 in 1985 to 787,247
on May 1990 but decreased slightly to 521,274 on August 1990. Shareholder’s equity
also increased rapidly from 7,367 in 1985 to 387,585 on May 1990 but then decreased
slightly to 358,676 on August 1190. Based on annual report from 1985 to 1990, we
think Oracle was still a healthy company at that time although they experienced losses
on August, 1990. That is because its current ratio was 2.01 in 1990 which indicated
Oracle had good liquidity. Debt to equity ratio was still below 1 that indicated they
had a lot of equity to cover their losses on the first quarter of 1990. They had high
return on equity of 30.29% and high return on asset of 14.91% in 1990. Their
profitability until the end of May 1990 was also high as reflected from operating
profit margin of 19.55% and net profit margin of 14.91%. However, the main concern
for Oracle was its trade receivable where the allowance for its account receivable was
14% of trade receivable. The account receivable will potentially create bad debt to
Oracle if it can not be collected.

2. How can financial ratios extend your understanding of financial statements? What
questions do the time series of ratios in case Exhibit 3 raise? What questions do the
ratios on peer firms in the case Exhibits 4 and 5 raise.

Financial ratio can tell us about the liquidity, profitability, and solvability of the
company. To look at the profitability of Oracle, we can look at its OPM (19.55% in
1990), NPM (12.09% in 1990), ROE (30.29% in 1990) and ROA (14.91% in 1990).
All that ratio showed that Oracle had good profitability on May 1990. The liquidity of
Oracle can be found from its current ratio of 2.1 in 1990. It means the current asset of
Oracle was twice higher than its current liabilities. The solvability of Oracle can be
seen from debt to equity ratio of 0.35 in 1990. That means Oracle had more equity
than liabilities which means it was good.
Time interest earned means how many times the net income before income and tax
(EBIT) could pay company’s interest. Times interest earned was calculated by
dividing EBIT by interest payments.
From exhibit 4, we can see that Oracle is the leader of DBMS market in 1991 with
market share of 40% of total market share. And if we look at exhibit 7, we can
compare Oracle’s profitability, liquidity and solvability to its competitors to see
whether Oracle is the best in DBMS industry.

3. Is Oracle Systems Corporation financially healthy in September 1990?


By looking just at financial report of Oracle on August 31, 1990. We can say that
Oracle was not healthy at the first quarter of fiscal year of May 1990 - May 1991.
That is because they experienced losses at that time. And that was also because its
account receivable that had high contribution to its total revenue that will potentially
create bad debt in the future.

4. In light of your answer to question 3, what might account for the firm’s recent decline
in share price?
The price decreased could be caused by the Q1 financial report that showed Oracle
got losses for the first time. We think that losses played significant impact on why the
price plummeted so high on September 1990. The revised allowance of bad account to
14% of trade receivable also could be the factor of worry from the market. Allowance
of bad account of 14% was considered really high for a company.

5. What is the source of intrinsic investment value in this company? Does this source
appear on the financial statements?
The source of intrinsic value can be found in company’s annual report. The source
that can be used to calculate company’s intrinsic value are listed below:
 EPS (earning per share) and ROE (Return on Equity)
EPS and ROE can be used to calculate company’s intrinsic value by using
equity bond method.
 Equity (book value)
We can use the book value to calculate the real value of company. Book value
can be calculated by dividing company’s equity by number of shares.
 Cash flow
We also can use cash flow to find intrinsic value of a company by using
discounted cash flow method.

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