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Fiscal Year vs Calendar Year-The importance of data consistency in Valuation

When companies report financial results, they use a calendar year or decide their own "fiscal year." Apple, for example, uses a fiscal year starting in September and ending in September next year since they usually release new iPhones or have Apple meetings in September. It is essential to make sure the data matches in valuation for consistency.

To see how significant the differences can be, I will use part of my Oracle valuation to illustrate. 

When valuing Oracle stock, I found that the company will have high growth whenever it has significant acquisitions and flat operating income when it does not. My judegemg is that this company growing mainly with M&A no matter how they advertise their technology. So you cannot do Oracle valuation without valuing each acquisition and calculating the return on capital. 

Figure 1 and 2 below shows Oracle's M&A cost and my adjusted annual operating income. But as you can see, the M&A cost does not match the active growth. With commonsense, we should expect higher operating income growth when they have significant acquisitions (of course, this is only for Oracle specifically rather than a universal rule since 60-70% of M&A lose money.) But take 2017 and 2016, for example. The company had a much larger acquisition in 2016 than in 2017 but had an 8% income decrease in 2016 but 1% positive growth in 2017.

Figure 1







Figure 2







Then I found that the company fiscal year ends May 31 every year, but the acquisition year I record is based on the calendar year. For example, Oracle bought Netsuite on July 26, 2016. I regarded it as a 2016 acquisition by calendar year, but I should categorize it as a 2017 acquisition by fiscal year. After the adjustment, you can tell that the operating income growth rate matched the acquisition. 

Figure 3






But you may wonder why Oracle did not grow well in the 2022 fiscal year when it spent $28.3 billion on Cerner. Oracle bought Cerner on June 8, 2022, while accountants prepared 10k on June 21st. It is too early to show up the revenue and income from Cerner.

So next time you see some stock has a significant decline, don't panic too early. Sometimes it may be due to the accountant's inconsistency, which can be a windfall for you.
















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