Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2025-06-18) + Yahoo Finance
Auditor: Ernst & Young LLP — Clean opinion (auditor since 2002)
One-line verdict: Oracle grew revenue 8% to $57.4B with cloud services now 43% of total revenue, and generated $20.8B in operating cash flow. But the balance sheet is extraordinarily leveraged: $104.1B in debt against $11.2B in cash (11% coverage), goodwill plus intangibles of $66.8B equal 327% of equity, and the Z-Score of 0.24 sits deep in the distress zone. Free cash flow turned negative at -$394M as Oracle spent $21.2B on capital expenditures -- primarily data center buildout for its cloud infrastructure. The M-Score of -2.56 is safely in the clean zone, and CFFO/NI of 1.67 demonstrates real earnings power. This is a company making a massive bet on cloud infrastructure with debt-funded CapEx at a scale that dwarfs its current cash generation.
| Metric | Result |
|---|---|
| Red Flags | **3** |
| Watch Items | **5** |
| Checks Completed | **17/18** (1 N/A) |
| Beneish M-Score | **-2.56** (safe -- below -2.22 threshold) |
| F-Score (Fraud Probability) | **1.17** (0.43% probability) |
| Altman Z-Score | **0.24** (distress zone -- below 1.23) |
| Auditor | Ernst & Young LLP -- Unqualified opinion |
| Fiscal Year | 2025 (ended May 31, 2025) |
| Report Date | 2026-04-05 |
The Cloud Transformation at Hyper-Scale
Oracle's revenue composition is shifting rapidly toward cloud. Per the filing: "cloud services revenues represented 43%, 37% and 32% of our total revenues during fiscal 2025, 2024 and 2023, respectively."
Revenue by segment from the filing:
| Segment | FY2025 | FY2024 | Change |
|---|---|---|---|
| Cloud and License | $49,230M | $44,464M | +11% |
| Hardware | $2,936M | $3,066M | -4% |
| Services | $5,233M | $5,431M | -4% |
| **Total** | **$57,399M** | **$52,961M** | **+8%** |
Per the filing: "Total revenues increased by $4.4 billion in reported currency in fiscal 2025 relative to fiscal 2024 due to a $4.8 billion increase in cloud and license revenues, partially offset by a $198 million decrease in services revenues and a $130 million decrease in hardware revenues."
The cloud business is the growth engine; legacy hardware and services are declining. Net income grew to $12.4B from $10.5B.
Profitability: Margin Compression Despite Revenue Growth
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $42.4B | $50.0B | $53.0B | $57.4B | +8% YoY |
| Gross Profit | $33.6B | $36.4B | $37.8B | $40.5B | +7% |
| Gross Margin | 79.1% | 72.8% | 71.4% | 70.5% | Declining |
| Net Income | $6.7B | $8.5B | $10.5B | $12.4B | +19% |
| Net Margin | 15.8% | 17.0% | 19.8% | 21.7% | Expanding |
| ROE | -108% | 792% | 120% | 61% | Normalizing |
Gross margin has been declining from 79% to 71% as Oracle builds out its cloud infrastructure (data centers are capital-intensive and carry higher variable costs than on-premise licenses). However, operating expenses are declining: the filing notes a "$249 million decrease in services expenses" and "$239 million decrease in acquisition related and other expenses due to lower asset impairment and litigation-related charges."
Cash Flow: $20.8B CFFO, but $21.2B CapEx
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Operating Cash Flow | $17.2B | $18.7B | $20.8B |
| Net Income | $8.5B | $10.5B | $12.4B |
| **CFFO / Net Income** | **2.02** | **1.78** | **1.67** |
| CapEx | -$8.7B | -$6.9B | -$21.2B |
| Free Cash Flow | $8.5B | $11.8B | -$394M |
The CapEx surge from $6.9B to $21.2B is the defining story. Oracle is spending $21.2 billion in a single year on data center infrastructure -- more than its net income. Per the filing: "This increase was partially offset by $21.2 billion of cash used for capital expenditures."
CFFO of $20.8B grew 12% and exceeds net income by 1.67x, which is healthy. The filing states: "Net cash provided by operating activities increased by $2.1 billion in fiscal 2025 relative to fiscal 2024 primarily due to higher net income adjusted for certain non-cash charges."
But CapEx consumed essentially all of the operating cash flow, flipping FCF from $11.8B positive to $394M negative. Oracle funded the gap with $13.9B in new debt issuance.
The $104B Debt Mountain
Oracle's debt load is staggering. Per the filing: "As of May 31, 2025, we had an aggregate of $92.6 billion of outstanding indebtedness that will mature between calendar year 2025 and calendar year 2065." (The screening engine reports $104.1B total debt including current portion.)
To finance the cloud buildout, Oracle issued "$13.9 billion in net proceeds from the issuance of senior notes" during fiscal 2025. The filing shows "Property, plant and equipment, net $43,522M" up from $21,536M -- a doubling. Oracle is building data centers at unprecedented scale.
Cash of $11.2B covers only 11% of total debt. Debt/EBITDA of 4.4x is elevated and triggers a D2 watch. The Z-Score of 0.24 is in the distress zone.
Despite this, Oracle returned $5.3B to shareholders: "$4.7 billion of cash used to pay dividends to our stockholders" and "$600 million of cash used for repurchases of our common stock." Paying $5.3B in dividends and buybacks while FCF is negative is funded entirely by new debt.
Goodwill: The Cerner Legacy
Goodwill of $62.2B is essentially unchanged year-over-year (from $62.2B), mostly from the 2022 Cerner acquisition. Per the filing, goodwill by segment: "Cloud and License $57,049M, Hardware $2,732M, Services $2,426M." No impairment was recorded.
Intangible assets of $4.6B (down from $6.9B) are amortizing. "Fiscal 2026 amortization estimated at $1,639M" indicates substantial near-term charges. Combined goodwill plus intangibles of $66.8B equal 327% of equity.
The 18-Point Screening
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 54 days, flat YoY |
| A2 | AR vs Revenue Growth | **FAIL** | **AR outpaced revenue for 2 consecutive years** |
| A3 | Revenue vs CFFO | PASS | Revenue +8.4%, CFFO +11.5% |
| B1 | Inventory vs COGS | PASS | No material inventory |
| B2 | CapEx vs Revenue | WATCH | CapEx +209% is >2x revenue growth |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 25.3% |
| B4 | Gross Margin | PASS | Gross margin 70.5%, -0.9pp |
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.67 |
| C2 | Free Cash Flow | WATCH | FCF is negative (-$394M) |
| C3 | Accruals Ratio | PASS | -5.0%. Low accruals |
| C4 | Cash vs Debt | **FAIL** | **Cash $11.2B covers only 11% of $104.1B debt** |
| D1 | Goodwill + Intangibles | **FAIL** | **$66.8B = 327% of equity** |
| D2 | Leverage | WATCH | Debt/EBITDA = 4.4x |
| D3 | Soft Asset Growth | WATCH | Other assets +39.3% vs revenue +8.4% |
| D4 | Asset Impairment | N/A | No write-off data |
| E1 | Serial Acquirer FCF | WATCH | FCF after acquisitions negative for 2/3 years |
| E2 | Goodwill Surge | PASS | Goodwill -3% YoY |
| F1 | Beneish M-Score | PASS | M-Score = -2.56 |
Beneish M-Score Component Breakdown:
| Component | Value | What It Measures | Concern? |
|---|---|---|---|
| DSRI | 1.003 | Days Sales in Receivables | Normal |
| GMI | 1.013 | Gross Margin Index | Normal |
| AQI | 0.867 | Asset Quality Index | Good |
| SGI | 1.084 | Sales Growth Index | Normal |
| **DEPI** | **1.786** | **Depreciation Index** | **Elevated** |
| SGAI | 0.963 | SG&A Index | Good |
| TATA | -0.050 | Total Accruals to Assets | Good |
| LVGI | 0.916 | Leverage Index -- deleveraging ratio | Good |
The elevated DEPI of 1.786 indicates depreciation is slowing relative to assets -- likely because the massive new PP&E ($43.5B) has long useful lives and early-year depreciation is low relative to the asset base. This warrants monitoring but is consistent with a company in a heavy capital investment phase.
Key Risks from the 10-K
1. CapEx Sustainability and Returns
$21.2B in CapEx in a single year -- nearly doubling PP&E from $21.5B to $43.5B -- is the largest capital investment story among the companies we screen. If cloud demand does not materialize at sufficient scale, these data centers become stranded assets. The filing acknowledges this is a bet on cloud infrastructure market share.
2. Debt Maturity Wall
$92.6B in outstanding debt maturing through 2065. With $7.3B in current notes payable, Oracle needs to continuously refinance. Per the filing, the company "reclassified $4.9 billion of long-term borrowings to current liabilities" -- these near-term maturities require market access.
3. Negative Free Cash Flow Sustainability
FCF went from +$11.8B to -$394M in one year. Oracle is funding CapEx plus dividends plus debt service by issuing new debt. If interest rates rise or debt markets tighten, this financing model becomes constrained.
4. Legacy Business Decline
Hardware revenue declined 4% and services declined 4%. As cloud grows, these legacy businesses generate less cash to offset the infrastructure buildout. The transition period is the highest-risk phase.
5. Dividend Commitment During Cash Burn
$4.7B in dividends while FCF is negative represents a commitment that constrains financial flexibility. Oracle prioritized shareholder returns over balance sheet health during its most capital-intensive period.
Key Financial Trends (4-Year)
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Revenue | $42.4B | $50.0B | $53.0B | $57.4B |
| Net Income | $6.7B | $8.5B | $10.5B | $12.4B |
| Gross Margin | 79.1% | 72.8% | 71.4% | 70.5% |
| CFFO | $9.5B | $17.2B | $18.7B | $20.8B |
| FCF | $5.0B | $8.5B | $11.8B | -$394M |
| Cash | $21.9B | $10.2B | $10.7B | $11.2B |
| Total Debt | $75.9B | $90.5B | $93.1B | $104.1B |
Summary
Grade: F. Three red flags, five watch items, driven by Oracle's massive debt-funded cloud infrastructure bet.
Oracle is arguably the most extreme balance sheet story in our screening universe. $104B in debt, $21.2B in annual CapEx, negative FCF, a Z-Score in the distress zone -- yet the underlying business generates $20.8B in operating cash flow and $12.4B in net income. The M-Score of -2.56 shows no manipulation; the accruals ratio of -5.0% is clean.
The F grade reflects the financial engineering: Oracle is building a cloud infrastructure empire funded almost entirely by debt, while simultaneously paying $4.7B in dividends and $600M in buybacks. This strategy works if cloud revenue continues growing at 11%+ and eventually generates sufficient returns on the $43.5B PP&E base. If cloud competition intensifies (AWS, Azure, GCP), pricing pressure could make the returns insufficient to service the debt.
What to watch: (1) the pace of cloud revenue growth relative to the $21.2B CapEx investment, (2) whether FCF returns to positive in FY2026 as CapEx moderates, (3) debt market access for refinancing the $7.3B in current maturities, (4) gross margin trajectory as cloud scales (whether economics improve with utilization), and (5) whether Oracle maintains its dividend during the most capital-intensive phase of its transformation.
**Disclaimer**: This report is based on Oracle's fiscal year 2025 10-K filed with the SEC on June 18, 2025. This is NOT investment advice.
**About EarningsGrade**: We screen earnings reports for financial red flags using an 18-point forensic framework. Grade F means major red flags were detected that warrant thorough investigation.