Financial Analysis of Google Incorporation and Microsoft - Example

Student’s Name Professor’s Name Course Name Date Financial Analysis: Google Incorporation and Microsoft Introduction The focus of this paper is to provide a clear and distinctive analysis of two companies operating within the technological sector; Google Incorporation and Microsoft Inc. Notably; the analysis covers the financial period ending 2013 as source of financial data for both of these companies. Some of the notable ratios that are analyzed within the paper include; profitability, investment, solvency and liquidity ratios. A. Profitability Ratios Net Profit margin= net income/sales*100% For Google; (12,920/59,825)*100%= 21.5% For Microsoft: (77,849 /21,863)8100%= 356.07% ROA =net income/total assets For Google; 12,920/110,920= 0.12 For Microsoft: 77,849 / 142,431= 0.55 ROE=net income/total stockholder’s equity For Google; 12,920/87,309=0.15 For Microsoft: 77,849 /78,944= 0.99 Profit Ratio Analysis The net profit margin for Google is placed at 21.5% in comparison to one of Microsoft that stands at 356.07% within the financial year ending 2013. This is an indication that Microsoft Incorporation is able to translate a small portion of its sales into significant amount of income as opposed to Google, which has to conduct extensive levels of sales for it to post significant net income within that particular financial period. This huge discrepancy in the capacity of Google to translate few sales into significant profits might be attributed to the company’s adoption of effective marketing and price strategies for its products. For instance, it is possible that the firm engages in extensive marketing campaigns and promotions for its products hence accessing numerous potential customers. It can also mean that the firm’s pricing strategy is effective given that it is able to cover for expenses attributed to manufacturing costs and thus, post abnormal profits for that matter (Fisher, Heinkel and Zechner 20-22). The return on assets ratio for Google stands at 0.12 while that of Microsoft incorporation is fairly positioned at 0.55 in the financial year ending 2013. This is an indication that unlike Google Inc, Microsoft has been able to utilize its assets base optimally in order to post significant income. This might be attributed to Microsoft depreciation policies that allow easier and timely replacement of worn-out plant and machinery needed for production of their products. It might also be attributed to the efficient utilization of its asset-base due to their rather skilled and experienced staff personnel hence posting optimal production (Fisher, Heinkel and Zechner 30). The return on equity ratio for Google stands at 0.15 while that of Microsoft is placed at 0.99 within the same financial period ending 2013. This is an indication that unlike Google Inc, Microsoft is able to post significant after-tax profits for each of the amount contributed to the company by its immediate shareholders. B. Solvency Ratios Debt-to-total assets ratio= total debt/total assets For Google Inc= (3,009+2,236)/ 110,920= 0.05 For Microsoft: 12,601/142,431= 0.09 Debt-to-equity ratio=total debt/total stockholder’s equity For Google Inc= (3,009+2,236)/ 87,309= 0.06 For Microsoft: 12,601/87,309= 0.14 Solvency Ratio Analysis The debt-to-total assets for Google Inc stand at 0.05 while that of Microsoft is fairly placed at 0.09 in the financial year ending 2013. This indicates that Microsoft is fairly positioned in regards to this ratio given that its debt burden to the overall assets is not lesser in comparison to Google Inc. This means that Microsoft is fairly placed to pay-off its debt burden with its asset-base as opposed to Google (Covas & Haan 90-108). The debt-to-equity ratio for Google Incorporation is placed at 0.06 while that of Microsoft incorporation is fairly positioned at 0.14 within the same financial ending 2013. This is an indication that unlike Google Inc, Microsoft Incorporation has been able to strike a balance between its debt and equity funding. The firm has seen the need to depend mostly on its equity-base than on debt funds given that debt can dilute the control of operations currently being enjoyed by both the owners and the management. A balanced ratio should be attained in order to allow the company freely controls its activities (Covas & Haan 108). A company that depends on mostly debt funds is not positioned fairly to attract potential shareholders since most of its revenues will be sued to pay-off interests on the borrowed funds rather than on paying dividends to potential shareholders. C. Liquidity Ratios Current ratio=current assets/current liabilities For Google Inc; 72,886/ 15,908= 4.58 For Microsoft; 101,466/37,417= 2.71 Quick Ratio= (current assets-inventories)/current liabilities For Google Inc; (72,886-426)/15,908= 4.55 For Microsoft; (101,466-1,938)/37,417=2.66 Liquidity Ratio Analysis The current ratio for Google Incorporation stands at 4.58 while that of Microsoft is placed at 2.71 within the same financial period that ends in 2013. It is important to understand that a standard current ratio is placed at 2:1, which means that for every liability held there are two assets that can be used to cover them at any given moment. For this case, even though the two companies depict a favorable ratio, Google Incorporation depicts a much stronger ratio meaning that the firm has invested heavily on its assets base. Significantly, it also means that the firm’s capacity to pay for its immediate short-term commitments as they fall due is highly placed in comparison to Microsoft that seems to be operating under a standard ratio. The strength of the ratio as depicted by Google Incorporation might however; be detrimental given that cash resources that would have otherwise been spent to increase sales hence profits is withheld in assets (Helfert 123-145). The quick ratio for Google Incorporation is also fairly positioned in comparison to the Microsoft’s ratio. Google’s ratio stands at 4.55 while that of Microsoft is placed at 2.66 within the same financial period ending 2013. This is an indication that Google Incorporation is fairly positioned, in terms of capacity, to meet its short-term commitments even without having to sale its inventories. However, it does not mean that Microsoft’s ratio is unfavorable only that it’s operating within a standard and recommended ratio figure (Helfert 145). C. Investment Ratios Earnings per share= net profit after tax and preference dividends/ no. of ordinary shares For Google; 12,920,000/9,000,000= 1.44 For Microsoft; 77,849,000 / 24,000,000= 3.24 Price/ Earnings ratio = market price/ EPS For Google Inc = 214.39/1.44= 148.88 For Microsoft = 7.33/3.24= 2.26 Investment Ratio Analysis The earnings per share for Google stand at 1.44 while that of Microsoft is fairly placed at 3.24 within the financial year ending 2013. This is an indication that the firm’s immediate profitability level is favorably positioned within the year hence a probable item that could attract potential investor to the firm in comparison to Google Incorporation (Benninga and Oded 214-223). The price/earnings ratio for Google Incorporation is placed at 148.88 while Microsoft’s ratio stands at 2.26 within the same financial period ending 2013. This is an indication that potential investors in Microsoft will be able to receive their investments within a shorter period of time in case there the firm does not opt for retentions while a shareholder in Google will get back their investments is a relatively larger period of time (Benninga and Oded 214-223). In conclusion, it can be seen that Microsoft’s profitability and investment ratios are fairly placed in comparison to Google Incorporation’s ratios. This is due to the fact the firm is able to post significant amounts of profits for its size of assets and stockholder’s base. Even though Google Inc’s liquidity ratios are highly placed, Microsoft is able to maintain standard ratios hence utilizing most of its resources in affecting significant sales revenues. The firm is also able to maintain an effective solvency ratio that allows for striking a balance between debt and equity funds hence being able to enjoy control of its immediate operations. Works Cited Benninga, S, and Oded S. Corporate finance: A Valuation Approach, (1997), McGraw-Hill, New York Covas, F & Haan, W, J. The role of debt and equity finance over the business cycle, Bank of Canada Working Paper, (2006), Retrieved on May 21, 2014 from http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp06-45.pdf Fisher, E, Heinkel, R and Zechner, J. Dynamic capital structure choice: Theory and tests, Journal of Finance, (1989), 44: 19–40 Google Inc. 2013 annual report. Retrieved fromhttps://investor.google.com/pdf/20131231_google_10K.pdf Helfert, E. A. Techniques of financial analysis: A guide to value creation (11th ed.), (2002), New York, McGraw-Hill/Irwin. Microsoft Inc. 2013 annual report. Retrieved from http://www.microsoft.com/investor/reports/ar13/download-center/index.html Read More