I have just finished my finance 1 coursework which was quite open ended but very interesting. In 1,200 words or less we had to conduct a credit rating of a company of our choice.

I picked Oracle as it is a company I am familiar with and has a very interesting position in the market. I mainly followed Moody’s credit methodology for global software industry and included some aspects from the S&P credit methodology.

You can download my whole report here.

Oracle overview

Oracle sell a wide range of enterprise IT solutions, including databases, middleware, applications, and hardware. Software license updates and support, (its most profitable segments), account for about 50% of revenues. An active acquisition program is a fundamental component of the company’s strategy. Oracle has issued $27.8bn of debt, which accounts for almost 50% of the total rated debt in the sector.

Business risk

	Band	My Rating
Market	Competitive young market with high margins and strong growth	AA
Competition	Very strong competition but Oracle is ranked number 1 or 2 in its key markets	A
Management	Stable, experienced management	AA
Other risks	Minor	AA

Business profile

Diversification	Band	My Rating
Product Line Diversity	Operates a broad portfolio with limited products in only one segment	AA
Geographic Diversity	Globally diversified; no single region has more than 45% of revenue	A
End-Market Diversity	Largest market up to 20% of sales	A
Market position
Market Share	#1 or #2 market share in all key markets	AA

Financial risk

Scale and flexibility	Value	My Rating
Revenue	$26,820m	A
Free Cash flow	$7,447m	A
Profitability and coverage
Operating profit	33.79%	AAA
Operating income ROA (net cash)	20.12%	A
Debt coverage and liquidity
Debt / EBITDA	0.88	A
EBITDA – CAPEX / Interest	16.83x	AA
Free cash flow / Debt	50.82%	AA
Cash + Mkt Sec / Debt	126.03%	AA
Interest cover	12.02x	AA
Capital structure
Long-term debt to equity	36.89%	BBB
Debt to equity	46.97%	BBB

Oracle credit rating assessment

I concluded that Oracle is a global leader with large with dependable cash flows and excellent growth prospects. It is easily the second largest company in the industry after Microsoft (AAA).

Oracle is rated A2 by Moody’s and A by S&P, the second highest rating in the industry after Microsoft . My analysis rates Oracle AA; so some reasons for the differences might be:

• Ratings need to be forward looking whereas I have used historical data.
• Moody state ratings might depend on confidential information they cannot publish.
• Some hard-to-measure qualitative factors affect ratings.
• Oracle’s high debt levels relative to the industry may bring the rating down.
• I used a small sample of interviews to validate qualitative findings, which introduces subjectivity and bias.

You can download my whole report here.

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Tags: credit analysis, credit rating, oracle

This entry was posted on Monday, February 7th, 2011 at 11:09 am and is filed under Featured, General.
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