Google and Yahoo - Profitability, Liquidity, Gearing, Investors Ratios - Statistics Project Example

Contents Contents Introduction 2 Year on year comparison 2 Profitability ratios 2 Liquidity ratios 4 Gearing ratio 5 Investor’s ratios 6 Comparisonof Google and Yahoo! 7 Profitability ratios 7 Liquidity ratios 8 Gearing ratio 9 Investor’s ratios 10 Conclusion 11 References 12 Introduction Financial ratios are one of the most used techniques to analyze the performance of the company. Financial ratios are helpful in comparing one company with the other, as it makes them comparable. Thus, the analysis and comparison becomes easier (Gibson, 2012). This report presents an analysis on the performance of Google. The report has been divided into two sections. The first section of the report analyzes the performance of Google in the year 2013 with comparison to the year 2012. Thus, a Year on Year (YoY) analysis has been presented in the first part of the report. The second part of the report analyzes the performance of Google with one of the competitors, Yahoo!. Financial ratios are used to analyze the performance of the company from the last year, as well as from the competitor (Gibson, 2012). Year on year comparison Financial ratios are divided into different categories. These ratios are calculated and presented below: Profitability ratios Operating profit margin and net profit margin are two important profitability ratios that show the performance of the company in terms of making profitability. Operating profit margin shows the profits that the company generates using its operations (Gitman, 2013). However, net profit margin shows the profit the company makes after all the expenses including taxes and interest expense. The operating profit margin of Google has reduced by approximately 2% in 2013 when compared with 2012. On the other hand, the net profit margin has increased by 0.2% in 2013 (Google, 2013). Thus, it is showing that the overall profitability of the company has improved in 2013. Return on assets and return on equity are other two important profitability ratios that analyze how the company uses its assets and equity. The return on assets of Google has slightly improved in the year 2013 when compared to 2012. On the other hand, the return on equity has reduced to some extent in 2013 when compared to 2012. Thus, these ratios are showing that the company has earned more returns in 2013 from its assets; however, when compared with the equity, the returns have slightly decreased. The four profitability ratios discussed above have been presented in the graph below: Liquidity ratios Liquidity ratios show how much the assets of the company are liquid and can be easily converted into cash if needed (Gibson, 2012). Current ratio is the first liquidity ratio used. The current ratio of Google has improved in the year 2013 and therefore, it is showing that the current assets of Google have increased in 2013 in comparison to the current liabilities. Quick ratio is another ratio that is used to analyze the liquidity and it excludes the inventory from the current ratio (McLaney, 2009). Quick ratio reflects that the company’s liquidity has improved by around 0.37 (Google, 2013; Google, 2012). Gibson (2012) stated that too high liquidity ratio can also reflect that the company has too many current assets and may not take these assets from its current liabilities, and therefore, it could influence the cash position. The following graph shows the liquidity ratios of Google for the year 2013 and 2012 Working capital shows the difference of the current assets and current liabilities. As per the balance sheet of Google, the working capital position of the company has improved drastically from 2012 to 2013 (Google, 2013). The working capital has increased by around 24%. Gearing ratio Gearing ratio analyzes the capital structure of the company. It has been found that Google has reduced the debt to equity ratio in its capital structure, thus it is showing that the ratio of debt in the year 2013 has decreased in comparison to the equity. Moreover, the ratio of debt to total assets has also decreased from 3.2% to 2%. Thus, it is showing that the company is relying more on the equity instead of debt. It is recommended that the company should have some more debt in its capital structure as it allows maximizing the wealth of the shareholders (Brealey, Myers, Allen, & Mohanty, 2007). However, this also increases the risk of the company. Therefore, identifying the right mix of the capital structure is important in increasing the wealth of the shareholders (McLaney, 2009). However, doing so, the risk of the company also needs to be considered (Ross, Westerfield, and Jordan, 2009). The following graph presents the gearing ratio of the company for the years 2013 and 2012: Investor’s ratios The ratio of earnings per share of the company shows that amount investor is earning on each share. The ratio of earnings per share of the company has increased at a rapid rate in the year 2013. Google reported earnings per share of 38.13 in the year 2013, which has increased from 32.31 in the year 2012. Thus, it is showing that the earning per share of the company has increased by 18%. The following graph presents the earnings per share of the company for the two years in discussion Comparison of Google and Yahoo! This part of the report presents and compares the performance of Google with the performance of Yahoo! in the year 2013. Profitability ratios The profitability ratios reflect that the operating profit margin of Google is higher than Yahoo!. Google has reported an operating profit margin of 23% whereas Yahoo! has reported an operating profit margin of 12.6%. Thus, from the operations profitability, Google is a better company than Yahoo!. On the other hand, the net profit margin of Google is 21.6% when compared to 29.2% of Yahoo! (Yahoo!, 2013). Thus, the net profit margin shows that Yahoo! has a better net profit margin than Google. Google is a better company in terms of generating returns on the basis of assets and equity when compared with Yahoo!. Google has reported return on assets of 11.65% and return on equity of 14.80%. On the other hand, Yahoo! has reported return on assets of 8.13% and return on equity of 10.4%. Thus, Google is a better company in terms of generating returns from its assets and equity than its competitor, Yahoo!. The following graph reflects the profitability ratios of the two companies for the year 2013: Liquidity ratios Liquidity ratios also portray similar position as Google has a better ratio of its current assets to current liabilities. Google has a current ratio of 4.58 whereas Yahoo! has a current ratio of 3.75. Similarly, quick ratio of Google is 4.55 in comparison to 3.75 of Yahoo!. Even though, the current and quick ratio of Yahoo! is good when analyze is isolation, however, when compared with Google, it can be stated that the liquidity position of Google is better. Liquidity ratios for Google and Yahoo! are presented in the graph below: Gearing ratio Gearing ratio reflects that Yahoo! has much more debt in its capital structure than Google. Debt to equity ratio of Yahoo! is 28% in comparison to only 2.6% of Google. Thus, it can be stated that Yahoo! is making use of the concept of leverage and is trying to maximize the wealth of the shareholders. On the other hand, if the capital structure policy of Google is analyzed, then it can be identified that the company is planning to include more shareholders and trying to be risk averse and it does not want to use more of debt and pay fixed financial charges (Besley, & Brigham, 2007). Therefore, only a limited debt has been included in the capital structure of Google. Debt to total assets of Google is only 2% whereas debt to total assets of Yahoo is 22%. Thus, it is showing that Yahoo! has higher debt in its capital structure in comparison to Google. The following graph reflects the gearing ratio of two companies for the year 2013: Investor’s ratios Earnings per share of the two companies show drastic difference. Google offers very high returns to its shareholders in comparison to Yahoo!. The shareholders of Google make around $38 per share whereas the shareholders of Yahoo! make only $1.26 per share. Therefore, it reflects that the investors would like to invest in Google’s share in comparison to the shares of Yahoo! as they will yield higher earnings per share. Conclusion Google is one of the fastest growing organizations in the world. The company has been growing at a rapid pace. The financial analysis showed that the year 2013 was a successful year for Google. The company improved its profitability and increased its revenues. The financial ratios of the company have improved from the last year. Google has been able to make higher returns on its investment and on its assets. Moreover, Google has performed better when compared with the other players in the industry as well. The report analyzed and presented the performance of Google with one of its competitor, Yahoo!. The report revealed that the profitability ratio of Google is better than Yahoo!. In addition to this, the liquidity position of Google is much better than its competitor. Moreover, the company is less risky and yields higher earnings per share to its shareholders than its competitor. References Besley, S., & Brigham, E. (2007). Essentials of Managerial Finance 14 edn. USA: Thomson Higher Education. Brealey, R., Myers, S., Allen, F., & Mohanty, P. (2007). Principles of corporate finance. New York: McGraw-Hill. Gibson, C. H. (2012). Financial reporting & analysis: Using financial accounting information. South-Western Pub. Gitman, L. (2003). Principles of Managerial Finance. Boston: Addison-Wesley Publishing. Google. (2012). Annual Report. Available from https://investor.google.com/pdf/20121231_google_10K.pdf [Accessed 22nd April, 2015] Google. (2013). Annual Report. Available from https://investor.google.com/pdf/20131231_google_10K.pdf [Accessed 22nd April, 2015] Hilton, R.W. (2010). Managerial Accounting – Creating Value in a dynamic business environment. (9th ed.).McGraw – Hill, New York. McLaney, E. (2009). Business Finance: Theory and Practice. Pearson Education: New Jersey. Ross, S., Westerfield, R., and Jordan, B. (2009). Fundamentals Of Corporate Finance Standard Edition. New York, McGraw-Hill. Yahoo!. (2013). Annual Report. Available from http://files.shareholder.com/downloads/YHOO/0x0x752008/75d278b5-61ee-4d30-a184-7f4dfdf33e12/636872_018_AR_BMK_Final.pdf [Accessed 22nd April, 2015] Read More