Financial Ratios Computation: Google and Microsoft - Essay Example

? Google and Microsoft Financial Ratios Computation The six heads of financial ratios for both companies, Google Inc and Microsoft Corporation have been have computed and attached at the end of this paper as an Appendix table; it also contains the pertaining financial data. 2. Comparison of Business Models A business model is a model formulated and implemented by a company in order to develop, nourish, deliver and gain value. Core Business Google: This leader in information searching on the internet is an American multinational corporation pertaining to internet and software as its core operations investing internet search and navigation, cloud computing and advertising technologies. A number of internet-based products and services have been initiated and developed by Google and it earns most of its profits from advertising through its program known as AdWords. Microsoft: This renowned name in computing is again an American multinational corporation which specializes in initiating, developing, manufacturing, licensing and also supporting an unending range of products and services pertaining mainly to computing through its various product divisions. Leading products and/or services Google: AdWords for advertising based auctions at real-time basis, AdSense program senses and enables web sites to deliver customers’ ads from AdWords, Gmail, Orkut, Google Display, DoubleClick Ad Exchange used as a real-time auction market place for trading of display space for ads and Youtube which provides video and other interactive mediums for advertisers. Microsoft: Windows and Windows Live Division Segment which offers mainly PC operating systems including Windows 7 and Windows Vista, Microsoft’s Server and Tools segment proffers mainly windows server operating system and product support services, Online Services Division Segment provides online information and content using Bing, MSN Portals, and others, Microsoft Business Division Segment offers Microsoft Office and other related products and Entertainment and Devices Division serves Xbox 360 entertainment platform including a whole lot of entertainment resources. Management/Leadership Style Google: This Company has a normal hierarchical structure and organized in the form of ‘bottoms up’ from the angle of creativity of product and ‘tops down’ from going on with the financials, the quarter and other aspects. Disagreements are encouraged along with large group conversation and in discussions, both sides of the mark are motivated and expected as well. Decision making does not involve hierarchy. Microsoft: The management style here is quite culture oriented, creating and nurturing the correct culture and relax and feel at home are two of the practices at Microsoft Corporation. Developing a clear vision, pegging to it and working hard on it is essential. Hiring of action-oriented employees is being practiced and protecting the corporate image along with ruthlessly controlling budgets form some aspects of the company’s management style. Innovation Track Record As Microsoft is quite older a company than Google, its innovation has elevated by leaps and bounds throughout its operations. But Google has proved its development and performance in a smaller time frame. Google has a policy for employees to spend 80% of their time on core projects and operations and the rest, 20% or one day a week on activities pertaining to innovation that induce their personal interests and passions. Google has created various creative internet search softwares and the Google search engine is the leader in search engines and is better than Microsoft’s Bing. Its products such as AdSense and AdWords have shunned everyone especially in the advertising sector all over the globe; Gmail is now used and favored by a considerable lot of people. This shows that Google has focused more on the consumer side which needs more innovation for satisfaction. Microsoft has worked mainly on sophisticated softwares related mainly to computing and to the business customers and corporations and not to every user at home. This shows their targeting and with the somehow strict management style at Microsoft, innovation does not seem to be at large and at high levels, at least not if compared to Google. Microsoft’s Bing has not been successful in creating a value as a search engine. Overall, Google’s innovation track record is quite impressive and better than that of Microsoft though the level of operations is smaller. 3. Financial Ratios & Major Recession Survival A company is depicted to perform satisfactorily especially in a state of a major financial turmoil or recession if it, among other factors, mainly possesses sufficient amount of working capital or is adequately liquid in its operations. This is measured mainly by the Current Ratio as done in the Appendix section under the heading of financial ratios. The Current Ratio of both companies is above the standard ratio of 2:1 used by many researchers but Google’s ratio is well above this benchmark with US$ 4.158 of current assets for every US$ 1 of current liabilities. In the case of Google Inc, the huge number of current assets is mainly comprised of two items, Cash and Cash Equivalents and Marketable Securities. The share of cash and cash equivalents for Google comes out to be almost 33%which is considerable and may signify a good aspect of the company for creditors and banks but shareholders won’t allow idle cash to be kept and not invested and earned returns. Microsoft’s ratio of cash to current assets turns out to be only 10% which is relatively weak (Microsoft Corporation., 2011). As liquidity is the major requirement for recession survival, Google possesses this ability to use its idle cash and sell off its marketable securities to collect cash and use it in favorable operations (Google Inc., 2011). Whereas on the other hand, Microsoft, having a lesser current ratio and cash ratio, will face difficulties and hurdles to prove itself worthy of investing in at times of financial crises. Moreover, Microsoft’s Debt Ratio is more than double than that of Google so this elevates the financial risk and insolvency risk for Microsoft. Only one point goes in the side of Microsoft that at bad times, it can stop paying out 24% of its earnings as dividends and reinvest them in the company and earn profits and increase the cash base but this won’t be enough. 4. Analysis of Profitability Ratios Profitability ratios are one of the most imperative ratios computed to analyze a company’s performance relative to its peer firm, compared historically or with the industry average figures. In this facet of ratio analysis, Microsoft gives out a rosy picture as it wins in attaining both a higher Return on Assets (ROA), almost 50% higher as well as Return on Equity (ROE), more than double in the year 2010. The shareholders’ equity (SHE) of both the companies’ is almost the same but the net profit of Microsoft is more than double than that of Google. Google is a newly formed company and is not paying dividends currently as well as in the near future as per their 2010 annual report. Google has only 9 million common shares outstanding whereas Microsoft has around 8.8 billion shares outstanding and with Microsoft paying out a dividend as well of US$ 0.52 per share; a huge shareholder base is benefiting from this incentive. More profits also mean more dividend payments so all investors especially those in their retirement stages opt for fixed growing dividends as a form of fixed income for them. Google’s no dividends and low profitability will definitely affect investing decisions quite adversely. 5. Primary Financial-Based Guidelines Investing in companies should be followed by proper research and calculative analysis and some imperative factors have to be considered before investing in any company’s shares. Three primary financial-based guidelines are listed as follows: 1. Price of the share: It has to be noted that whether the stock in which the investment is decided upon is not overvalued that is valued above its acumen in the market. This means that the share is expensive and is depicted through a higher P/E Ratio of normally more than 20. These shares should not be bought; shares with lower P/E Ratios are normally traded on discounts and are undervalued leading to increase in the future and yielding capital gains. 2. Dividend or the Price Return on Investment (ROI): For investors, a favorable and attracting dividend yield is important so a dividend payment which is regular, continuous and growing is essential. An erratic or no dividend bearing share is often disregarded by investors other than speculators. Shareholders think of reinvesting their growing dividends and earn more. 3. Financial position of the company: Financial risk of the company must be analyzed mainly through the leverage factor which is portrayed through its extent of external financing or debt level. If this is higher, the financial risk elevates leading to financial distress costs and ultimately insolvency pressures. An appropriate level of debt should be there but it should be monitored. The matching of long-term assets with long-term financing and vice versa should also be noted for companies (Parsons, 2011). Appendix Section Financial Ratios Computation (For the year ended 2010) Source: Annual Reports, 2010 of Google and Microsoft Google (Dec 31) (In US$ millions) Microsoft (June 30) (In US$ millions) FINANCIAL DATA Current Assets 41,562 55,676 Current Liabilities 9,996 26,147 Net Profit 8,505 18,760 Total Assets 57,851 86,113 Total Shareholders' Equity (SHE) 46,241 46,175 Total Long-Term Debt 379 4,939 Total Liabilities 11,610 39,938 Net Sales 29,321 62,484 Fixed Assets (Net of Depreciation) 7,759 7,630 Dividend Per Share (DPS) - 0.52 Earnings Per Share (EPS) - Basic 26.69 2.13 Market Price as of Dec 31 & June 30, 2010* 593.970 22.16 *Source: Yahoo! Finance, 2011 FINANCIAL RATIOS Liquidity Measurement Ratio Current Ratio 4.158 2.129 Profitability Indicator Ratios Return on Assets (ROA) (NP/Total Assets) 14.702% 21.785% Return on Equity (ROE) (NP/SHE) 18.393% 40.628% Debt Ratio Debt Ratio (Total Liabilities/Total Assets) 20.069% 46.379% Operating Performance Ratio Fixed Asset Turnover Ratio (Net Sales/FA) 3.779 8.189 Cash Flow Indicator Ratio Dividend Payout Ratio (DPS/EPS) 0% 24% Investment Valuation Ratio Price / Earnings (P/E) Ratio (Mkt Price/EPS) 22.254 10.404 References Google Inc., 2011. Annual Report 2010. Retrieved December 18, 2011, online, from, http://investor.google.com/proxy.html Microsoft Corporation, 2011. Annual Report 2010. Retrieved December 18, 2011, online, from, http://www.microsoft.com/investor/reports/ar10/10k_dl_dow.html Parsons, Chris, 2011. The Five Key Factors that I Consider in Stock Investments. Retrieved December 18, 2011, online, from, http://www.smallbizbigdreams.com/money-finances/the-four-key-factors-that-i-consider-in-stock-investments/ Yahoo! Finance, 2011. Google Inc. (GOOG) Historical Prices. Retrieved December 18, 2011, online, from, http://finance.yahoo.com/q/hp?s=GOOG+Historical+Prices Read More