According to Barron’s, Goldman analyst Heather Bellini believes that Salesforce.com (NYSE:CRM) will ride the wave of so-called cloud computing in which companies outsource their IT operations.

The question for investors is whether Bellini did any financial analysis to substantiate her optimism on the stock. Here are three pieces of such analysis that would justify buying the stock.

• Long-term financial strength — but weak margins and rising debt. Salesforce.com has grown steadily. Its revenue has increased at an average rate of 39.8% over the last five years, and its net income has risen at a 17.8% annual rate over that period. Its cash grew 18.5%, on
  average, between fiscal 2007 ($252 million) and fiscal 2011 ($497 million). The bad news is that Salesforce makes very little profit — its
  net margin is 2.6% — and at a debt/equity ratio of 0.4, the company has a higher debt burden than the industry average of 0.3. Salesforce had no debt two years ago and now is saddled with $473 million.
• Mixed fiscal first-quarter earnings that beat expectations. Salesforce’s adjusted net income of 28 cents a share was a penny above estimates and its $504.4 million in revenue beat expectations of $482.4 million. But the bad news was that the company’s net income fell 97% to $530,000 from $17.7 million a year earlier.

And this somewhat tarnished good news is offset by some unalloyed bad news:

• Under-earning its capital cost. Salesforce earned less operating profit than its cost of capital and it’s getting worse. The company’s EVA momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales was down 2%, based on fiscal 2010 revenue of $1.3 billion, and EVA that widened from negative $87 million in fiscal 2010 to negative $117 million in fiscal 2011, using a 10% weighted average cost of capital.
• Expensive stock. Salesforce’s price-to-earnings-to-growth ratio of 2.3 makes it overvalued (a PEG of 1.0 is considered fairly priced). Its
  P/E ratio is 444, and its earnings are expected to grow 194% to 68 cents a share in its fiscal 2013. And this earnings growth forecast is optimistic given that earnings are expected to shrink 65% in fiscal 2012 ending next January.

It doesn’t appear that Goldman Sachs’ advice is sound on this stock.

Peter Cohan has no financial interest in the securities
mentioned.