Financial ratios are used to evaluate the company's financial performance in the market. This helps in identifying the key financial areas in the organization. The ratios are also used to compare the company performance with that of its competitors. This helps management in developing strategies for improving the organization financial position over that of their competitors. The intent of this paper is to analyze the financial ratios of Google and Yahoo companies, and a comparison is made with the whole industry. The analysis of the ratio between the two companies is done for a period of five years starting from the year 2007 to the year2011.
The two companies show an improving trend for the past five years. This is evident from the ratio changes as from the year 2007 to the year 2012. This is an indication of favorable performance of the companies in the market. The Google company earnings per share has increased from $ 13.29 to $29.76. The change of earnings per share invested in the company may have been contributed by an increase in the revenue level of the company. The ratio is used to determine the value of the share in relation to the earning which is attributable to shareholders. The earning attributable to the shareholders is net of taxes and finance charges to the company from the lenders. The increase in value is an indication of improved performance in the company. This has contributed to the rise of the ratio value. Similarly, the earning per share of
Yahoo company has also increased from $ 0.47 to $ 0.82. The same condition may prevail in the company.
The difference in the value of earning per share between the two companies may have been contributed by either Yahoo company has more shareholders than the Google company or Google company performance in the industry is higher than that of Yahoo company. This may make the earnings attributable to the shareholders be smaller than that of Google company. The industry earnings per share ratio is $ 38.7, which shows that both company’s ratios are below the industry ratio. The company’s management especially Yahoo company should develop strategies that aim at improving the overall performance to raise the profitability levels of the companies.
The profit margin ratio shows the proportion of the sales that was not used to finance the cost of sales. It represents the gross gain to the company for the provision of its services or sale of its products. A high ratio is recommended since the ratio will indicate the amount of sales being used to finance its activities. The two companies, Yahoo and Google companies display an increase in their profit margins for the past five years. This shows an improved performance of the two firms. The Google company has a higher profit margin ratio than the Yahoo company. This is an indication that, the company is performing better than the Yahoo company. This may have been contributed by Google having more users than that Yahoo company. This means that, the Google market share is larger than that of the Yahoo company.
In terms of market risk, Yahoo company is more prone to market risk than the Google company since its performance in the market is lesser than that of Google company. Google company has shown a decrease in the margin level by almost $ 4, and indication that, the current performance is lower than previous performance. This management of this company should develop ways of improving their margin level to prevent the fall of their market share. Also, the Yahoo management should develop new strategies of improving the profit margin level to gain enough market share for future sustainability. The net profit margin of the industry is $ 6.40, an indication that, Google company performs better than the industry and Yahoo company. The industry can be ranked two when the three are compared in terms of the performance based on profit margin level.
Return on equity ratios is used to explain the ratio of the total revenue to the equity of the company. The ratio shows the amount of income that has been returned as shareholders' equity. It represents the owner’s interest on the total income. A higher rate of return on equity is recommended since it will attract investors to the company. This will lead to a stable capital structure that will enable the company to finance its operation from the shareholders' equity. This is known as internal financing. This is recommended since the company has a low chance of facing liquidity risk due to insufficient funds to finance its operation. The company will be able to meet its going concern goals.
The Google company is showing an almost constant return on equity. On the other hand, the Yahoo company has first shown a decrease in the rate of return and an improvement of the rate in the recent years. The Yahoo company is in a better position to attract investor than the Google company since its return on equity is increasing. The Google company return on equity is almost constant which discourages investors. In terms of value, the return on equity of Google company is higher than that of Yahoo company. The recent return on equity of Google company is 16.75 % compared to that of Yahoo company, which is 8.34 %. This is almost half of the Googles return. The industry return on equity is 14.10 %. This shows that, the Google company has a higher return on equity that the industry and Yahoo company. The Yahoo company has the least return on equity and its management should develop strategies of making the performance increase and be at par with the industry performance level.
Return on assets shows the efficiency of asset utilization by a company. A high rate shows that, the company is more efficient in utilizing its assets in the realization of its revenue. For both companies, the rate seems to follow almost the same trend. The rate of return on assets is increasing then decreasing. This is an indication of uncertainty in pre-determining the actual trend followed in the utilization of a company’s assets. The Google company shows a more asset utilization efficiency than the Yahoo company. This is evident from the rates of asset returns, where the Google return on asset is 13.42 % whereas that of Yahoo company is 7.09 %. The management of both companies should develop ways of having a stable rate of return since it is crucial in decision making of the company regarding investment portfolio. The rate of return should be maintained, as well as be improved to improve the company performance thus profitability improvement.
Price/ sales ratio is the ratio of per share price divided by per share revenue. It indicates the value the investor should pay per share invested in the company. A low ratio is recommended since it shows that an investor will pay a low price to invest in the company. The two companies show a decreasing price per share ratio an indication that, the investment level in the companies is increasing. This is evident as the Google ratio decreases from 10.16 in the year 2007 to 4.70 in the year2011. Similarly, the Yahoo company ratio decreases from 5.28 in the year 2007 to 4.14 in the year 2011. The Google company shows a larger decrease than the Yahoo company. This is an indication that, the rate of investment in the Google company is more than that of Yahoo company. The industry ratio is 6.2. This shows that, the Google company has the lowest ratio, followed by Yahoo, and the last is the industry. The rate of investment in the industry ranks as the lowest among the three institutions.
The price / earning is a ratio obtained by dividing the market price per share by the annual earnings per share. A high ratio indicates that, investors are paying more per unit of share invested thus the stock is expensive. Expensive stocks discourage the level of investment in the company. From the two companies, there is a decreasing trend of the value of this ratio. This is evident as Google had a ratio of 40.54 in the year 2007 and the current ratio is 19.12 in the year 2011. Similarly, Yahoo company has shown a similar trend by having a ratio of 58.17 in the year 2007 to 19.01 in the year 2011. The current rate of the two companies is almost similar indicating that, the value of their shares almost equally. The industry ratio is 5.7. This shows that, the industry stock is cheaper compared to Google and Yahoo stocks. This is as a result of lower price / earning ratio than the Google and Yahoo companies.
The Price/book ratio is used to compare the company’s market price to the book price. The ratio is used to determine the value expected by shareholders from the management action. The ratio is thus important to the company’s investors in determining the value of their investment in the company. A high ratio indicates more value for the investment of the shareholders. This means that, the investors will be attracted when the ratio is high. It is the role of management to develop strategies for improving this value. Both companies are showing a decline in the value of this ratio an indication that low value of shareholders' investment. This may lead loss of shareholders since the expected value is decreasing. When compared to the industry, the ratio of industry is higher than that of Google and Yahoo companies. The companies may lose their investment to other companies in the same industry if the management fails to improve this value.
In conclusion, from the general analysis of ratios of the two companies, there is an improving trend observed in both companies. Their performance trend is recommendable. On the specific analysis, Google company has a higher performance level than the Yahoo company.
This is evident from the ratios calculated above, as well as analyzed above. This shows that, the market share of Google company is more than that of Yahoo company. Although Yahoo company has a lower performance, it shows chances of improvement and able to meet its future sustainability goals. The Google company also shows a better performance when compared with the industry and the Yahoo company. The Google performance is, therefore, recommended. There are chances of high profitability levels in the future as indicated by the calculated ratios. Yahoo company has also shown chances of high profit levels in the future.
References
Barchart. (2012, November 9). Barchart.com Inc. Retrieved from http://www.barchart.com/profile.php?sym=YHOO&view=ratios
Barchart.com. (2012, November 9). Barchart.com. Retrieved from http://www.barchart.com/profile.php?sym=GOOG&view=ratiosStice, J. D., & Albrecht, W. S. (2010). Accounting: Concepts and Applications. London: Cengage Learning.
Stickney, C. P., Weil, R. L., Schipper, K., & Francis, J. (2009). Financial Accounting: An Introduction to Concepts, Methods, and Uses. New york: Cengage Learning .
