THE STOCK MARKET PART II (case) - Essay Example

All investments contain risk and investors could not hide nor run away from it since its presence is universal. Thus, it is much better to acknowledge such risk and reduces it to acceptable level and defines if the potential earnings deserved the risk. There are a lot of parameters that could be used in analyzing investment risk and one of those is fundamental analysis. This “involves the study of various factors that affect a company’s earnings and dividends which, in turn, influence its stock price.

About 90% of investors use fundamental analysis” (Khan & Zuberi, 1999, p. 85). Industry and Business ConditionBased on the three companies’ financial statements and historical data, the best company to invest in is Oracle. Oracle is the highest in terms of revenue growth, net income growth, net profit margin, growth rate and dividend growth (see figure 1). Compared to Darden and Sony, Oracle’s performance is more impressive, thus making it the best candidate that would be able to generate more income in the future.

Figure 1: Financial AnalysisRevenue Growth (12 months)Net Income GrowthDividend GrowthGrowth RateNet Profit MarginOracle+15.34%15.34%300.00%32.46%22.87%Darden-1.45%8.68%25.00%17.18%5.69%Sony-6.68%1.35%----17.75%-3.61% Source: Oracle Corporation (n.d.)Based on stock price forecast for the next 12 months, Oracle will have a high estimate of $42.00 or +32.8% while its median price forecast will be $38.00 or +21.9%; however, the investment would be risky considering that the lowest forecast is $26.

00 or a decreased of -17.8% (Oracle Corp., n.d.). Furthermore, it is expected that from 2008 to 2012, the annual growth of earnings per share will be 30.73% and the annual growth of sales will be 32.16%. On the other hand, Oracle’s financial ratios are above average for its industry such as the industry median for price/sales ratio (3.81), price/earnings ratio (14.25), and price/cash flow ratio (11.01) (see figure 2). Figure 2: Financial AnalysisCompanyP/E ratio (%)Price/Sales Ratio (%)Price/Cash Flow ratioDebt/Equity RatioReturn on EquityQuick ratioCurrent RatioOracle20.754.6516.05%37.37%23.66%1.64%1.

84Darden14.680.918.27%77.42%24.12%0.24%0.54Sony-9.000.070.66%31.88%-1.38%0.66%1.02Source: Oracle Corporation (n.d)Also, the current ratio and quick ratio of Oracle is high and this is a good sign that the company has the ability to meet and alleviate its short term obligations when they are due, thus the company is in good financial health. It also shows that Oracle is safe from liquidity problems and its position is much better compared to Darden and Sony. In addition, the stock P/E ratio of Oracle is traded at higher rate than the other two companies because its forecasted earnings growth is also high, making the investment more risky.

However, “rational investors generally require riskier investments to offer higher returns than less risky investments” (Easterling, 2006, p. 82).General Condition of the CompanyFigure 3 below illustrates that Oracle has been profitable for five years (2006 to 2010). Figure 3: Oracle Historical data (2006-2010) $billionOracle20062007200820092010Net Revenues14.418.022.323.326.8Total Assets29.034.546.947.360.3Total Shareholder Equity--16.923.025.130.8Net Profit Margin23.51%23.75%24.61%24.05%22.

87%Stock Price14.2219.3822.8419.5922.57Source: Oracle Corp (n.d)The high net profit margin of the company implied that the business is doing well and that they have the capacity to control their expenses or liabilities in the company. Investing in Oracle will be safe from valuation risk because their stock price is not that too high given the company’s earnings. In fact, the forecast both for earnings and sales are increasing (see figure 4). Figure 4: Earnings and Sales Forecast (Annual)Oracle20082009201020112012Earnings per share1.251.441.672.182.

39Sales$22.4B$23.3B$27.0B$35.7B$40.4B Source: Oracle Corp (n.d.)Ratio Analysis The top competitors of Oracle are IBM, Microsoft and SAP. Figure 6 below shows that Oracle is the leading company in terms of profitability, valuation, operations, financial and growth ratios. It has a net profit margin of 22.42% which means that the company generates more revenue or sales in each dollar compared to IBM and SAP, and the higher the profit margin, the better is the position of Oracle. The 0.48% debt ratio shows that the company’s assets are financed mostly by equity and not by borrowed funds.

Figure 4: Competitors Ratio AnalysisFactorsOracleIBMMicrosoftSAPNet Profit Margin22.42%14.85%31.76%14.08%Return on Equity23.66%67.53%43.96%19.20%Price/Earnings Ratio20.7513.799.5226.95Book Value per Share$7.24$18.72$6.34$11.99Quick Ratio1.640.981.901.332Current Ratio1.841.192.1311.39Total Debt/Equity0.481.240.13