Financial Analysis: Google Inc
Introduction:
In order to ascertain the real financial position of Google Inc, we will be conducting the ratio analysis of the company for the year 2011, 2012 and 2013. As part of this analysis, we will look into the liquidity, profitability, solvency and efficiency analysis of the company and the same is detailed below:
a)Liquidity Analysis:
Also known as Pure Balance Sheet Ratios, liquidity ratios indicate the short term solvency of the company, i.e. if the company will be able to honor its short term obligations. In other words, it indicates the current working capital position of the company. Below discussed are the two popular liquidity ratios:
i)Current Ratio=Current Ratio/Current Liabilities
ii) Quick Ratio= (Current Ratio-Inventory)/ Current Liabilities
Profitability Analysis:
These ratios carry great significance is it indicates the level of profit margins being earned by the company from its business activities. Profitability ratios have a significant capacity to influence the investor’s investment decision. Below discussed are the profitability ratios of the company:
i)Net Profit Margin= Net Income/ Revenue
ii) Operating Margin Ratio= Earnings before Interest and Taxes/ Revenue
iii) Return on Equity= Net Income/ Total Equity
C) Solvency Ratios:
These ratios indicate the proportion of debt/equity in the capital structure of the company which leads to conclusion relating to long term solvency of the company, i.e. if the company will be able to honor its long term obligations. Below discussed is the gearing ratio of the company:
i)Debt-Equity Ratio=Debt/ Equity
ii) Interest Coverage Ratio= EBIT/ Interest Expense
d) Efficiency Ratios:
Also known as Asset Management Ratios, these ratios indicate the efficiency of the management to generate revenue for the company using assets of the company. Below discussed are some of the efficiency ratios of the company:
i)Receivable Turnover Ratio= Net Credit Sales/ Average Receivables
ii) Fixed Asset Turnover Ratio:
Concluding Analysis:
a) Liquidity Analysis:
Referring to above calculated liquidity ratios, the liquidity trend of the company has been bump as during 2012, the current ratio of the company declined significantly from 5.92 to 4.22 and a similar trend was witnessed in the quick ratios also which decreased from 5.70 to 3.95. However, during 2013, both of the liquidity ratios indicated an increasing trend. Overall, till date the company seems to have a sustainable liquidity position.
b)Profitability Analysis:
The profitability position of the company is not very strong as over the years, the net profit and operating profit margins of the company has declined consistently. During 2012, the net profit margins declined from 25.69% to 21.4%, while the operating margins declined from 30.98% to 25.43%. This was the result of consistent increase in proportion of COGS and operating expenses to total sales, which eroded the profit margins of the company. The trend continued during 2013 also, when the operating profit margins declined from 25.53% to 23.34%. Important to note that the net margin of the company improved marginally from 21.40% to 21.60%, however, this increase was only possible because of low tax rates during 2013(15.74%) and because of any business related income statement item.
Even the shareholders of the company will not be satisfied to witness consistent decline in the ROE multiple over the years. During 2012, the ROE of the company declined from 18.66% to 16.54% which again decreased to 16.25% during 2013. Overall, Google Inc seems to be losing on its profitability and if such trend continues, the company might face unfavorable situations.
c) Solvency Analysis:
This section of ratio analysis is somehow favorable for the company because of the trend witnessed in its debt/equity and interest coverage ratios. The debt-equity ratio of the company has declined consistently over the years. During 2011, the debt-equity ratio of the company was 0.05 which decreased to 0.03 during 2013. On the other hand, the interest coverage ratio declined from 213.52 to 160.36 during 2012, however, a year later the ratio increased from 160.36 to 175.65, indicating strong solvency roots of the company.
d)Efficiency Analysis:
Referring to the efficiency ratios of the company, we can infer that the management of the company has been inefficient in generating revenues from the available assets. For Instance, the receivables turnover ratio of the company has consistently declined over the years from 7.83 in 2011 to 7.14 in 2013. This indicates that the debtors of the company were slow in making their payments and capital was tied up in receivables for a longer period of time.
On the other hand, the fixed asset turnover ratio of the company although increased from 4.37 to 4.68 during 2012, however, the ratio again declined to 4.22 during 2013, indicating inefficiency of the management to generate revenue using its fixed assets base.
Works Cited
Yahoo Finance. Google Inc. (GOOG). 2 June 2014 <https://in.finance.yahoo.com/q?s=GOOG>.
