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Financial and Accounting

In: Business and Management

Submitted By kssunilkanna
Words 4059
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Content

1.0 Executive summary………………………………………………………………..…………3

2.0 Introduction………………………………………………………………………..…………4

3.0 Company profile……………………………………………………………………..……….4

3.1 Google………………………………………………………………………..……….4

3.2 Market performance…………………………………………………………..………4

3.3 Yahoo…………………………………………………………………………………5

3.4 Market performance………………………………………………………………..…5

4.0 Financial ratios………………………………………………………………………………..6

5.0 Interpretation of ratios…………………………………………………………………….….7

5.1 Profitability ratio………………………………………………………………...……7

5.1.1 Return on asset…………………………………………………………...…7

5.1.2 Return on equity…………………………………………………………....7

5.2 Efficiency ratio…………………………………………………………………….....8

5.2.1 Gross profit margin………………………………………………………….8

5.2.2 Net profit margin…………………………………………………………….8

5.3 Liquidity ratio…………………………………………………………………………9

5.3.1 Current ratio…………………………………………………………………9

5.3.2 Quick ratio…………………………………………………………………10

5.4 Leverage ratio………………………………………………………………………..10

5.4.1 Debt to equity ratio………………………………………………………...10

5.4.2 Debt ratio………………………………………………………………..…11

5.5 Investment ratio……………………………………………………………………...11

5.5.1 Price/earnings ratio………………………………………………………...11

5.5.2 Price/book value ratio……………………………………………………...12

6.0 Cash flow statement analysis………………………………………………………………...13

6.1 Cash flow data for both companies………………………………………………….13

6.2 Cash flow for Google……………………………………………………………….13

6.3 Cash flow for Yahoo…………………………………………………………..……14

7.0 Conclusion……………………………………………………………………………….….14

7.1 Recommendations……………………………………………………………….…..14

7.2 Limitations…………………………………………………………………………...15

References ……………………………………………………………………………………….16

1.0 Executive summary

The focus of this report is to analyze and get a clear picture of the market performance of the two companies and to get a clear picture of the financial information so that a possible potential investment could be made in between the two listed companies. As the investment manager of the company it will be most appropriate to analyze the annual report of the companies for the past two years so that the interpretation could be done for the positives and negatives alongside the financial and market strength.

The two competitors and rival giants that we have chosen form the IT industry for the analysis are

1. Google

2. Yahoo

Both the companies are well established and have consistently been performing in the market. The task of selecting between these two companies is a dilemma and hence we have decided to study the performance of both these giants based on finance and markets before making a possible investment.

According to an E- business report by Larry Freed in 2009 Google has retained its position in the E businesses a market leader, the report shows that in 2009 Google internet searches amounted to 63. 9% total internet searches while yahoo amounted to 21.3% of total searches. These results show that Google internet searches are triple those of the yahoo company. (Larry Freed, 2009)

The report also indicates the customer satisfaction indices for the company; in 2002 Google customer satisfaction index was 80 while in 2009 the customer satisfaction index was 86. On the other hand yahoo customer index was 76 in 2002 and 78 in 2009. This shows that yahoo the second largest E business company customer satisfaction index has remained relatively lower than the Google company value. (Larry Freed, 2009)

This paper discusses the differences and similarities of the two companies and which company would be the best investment option, a number of financial ratios are indicated to highlight the level of activity, debt, profitability and liquidity of the two companies.

2.0 Introduction

Financial ratios are a calculated to interpret the financial performance of any firm. The ratios can be calculated from the information available in the balance sheet with the help of some classical formulas. By calculating the ratios we can see the trends, patterns and behavior of the company so that it will be easy for comparing with another company or with the industry standard.

The companies selected for us are Google and Yahoo. Both the companies are form IT industry. Due to the financial crisis started by 2007 the markets have been dull. The stock market securities suffered major loss during 2008 and 2009 and investing options for the year still has some significant risk. Henceforth before investing trends of the markets have to be analyzed.

3.0 Company profile

3.1 Google

Google is a multi-national public company. Their main business streams are internet search, advertising and cloud computing. The two people Larry Page and Sergey Brin are the fathers of the company. The company was first incorporated on September 4 1998. The initial public offering for Google was by august 19 2004.

The initial name given to the search engine was backrub by the two Google guys Page and Brin as it checked the back link for the websites. But later they changed the name to Google form googol which means the number one followed by hundred zeros symbolizing the amount of information handled by the search engine. When the company first got incorporated it was running based in a garage in Menlo Park, California.

The company’s mission” Our mission is to organize the world’s information and make it universally accessible and useful”. As they said they have been very successful in doing so. The company provides many services and products for the users in the internet and some of the most famous products and services are Google search, Gmail, Gtalk, Google maps/Earth, Orkut, Youtube, Google chrome, Picasa and many more. Google is now leading the industry for search engines, advertising and cloud computing services. The company got reincorporated in 2003 and its HQ based at Mountain view, California.

3.2 Market Performance

Google was first funded by Andy Bechtolsheim during 1998 with a contribution of USD 100,000. The IPO of Google took place by august 19, 2004. Google offered a total number of 19,605,052 shares at a price of $85 per share. This gave the company $1.67 billion worth sale and gained market capitalization value worth $23 billion. Most of the shares remained under the company control making the employees instant paper millionaires.

The performance of the stock after the IPO went well with shares reaching price of $700 for the first time on October 31 2007. The present market capitalization of the company is 183.23 billion with the total number of share of 319.78 million and the share price in the market is $573.00.

3.3 Yahoo

Yahoo is a public corporation with its headquarters based in Sunnyvale (Silicon Valley), California. The main business streams for the company are email services, search engine, directory services, web portal, and many more. The company was founded by Jerry Yang and David Filo by January 1994. The company was incorporated by March 1 1995.

Yang and Filo were electrical engineering graduates from Stanford University. The website was first name as “Jerry's Guide to the World Wide Web” and then renamed to Yahoo. The domain was registered on January 18 1995. The company grew rapidly during the 90’s like the other search engines and diversified into web portal and web directory services

Yahoo started using Google for search results during 2000 but eventually they developed their own search engine and started using by 2004. The company had major layoff during 2008. Microsoft Corp made a bid for Yahoo during 2008 but Yahoo declined the offer.

3.4 Market Performance

Yahoo raised $3 million by two rounds of venture capital through Michael Moritz from Sequoia Capital by the April 5, 2005. The company made its IPO by April 12, 1996 and raised $33.8 million by selling 2.6 million shares at the price of $13 per share. By the end of 1999 Yahoo stocks closed at a high rate of $118.75 per share and by then shares in Yahoo japan became the first to trade at over ¥1,000,000,000 and reaching over 101.4 million yen.

In February 2008 Yahoo acquired Cambridge, Massachusetts- based Maven network for an approximate price of $160 million. By May 2, 2008 the company stock went down by 15% to a price of $23.02 per share trimming $6 billion of the market capitalization. Ten months later the shares dropped again to a price of $8.94 per share. By July 20 2009 the price per share was $15.14. The present data for yahoo is $16.35 per share with a market capitalization of 21.31 billion and with the total number of shares of 1.3 billion.

4.0 Financial ratios

|Ratios |Google Inc |Yahoo Inc |
| |2008 |2009 |2008 |2009 |
| | | | | |
|Profitability | | | | |
|Return on Assets Ratio |0.133 |0.161 |0.03 |0.04 |
|Return on Equity Ratio |0.14 |0.18 |0.037 |0.047 |
| | | | | |
|Efficiency | | | | |
|Gross profit margin |0.6 |0.62 |0.58 |0.555 |
|Net profit margin |0.275 |0.193 |0.092 |0.05 |
| | | | | |
|Liquidity | | | | |
|Current Ratio |8.76 |10.61 |2.67 |2.78 |
|Quick Asset Ratio |8.03 |10.068 |2.64 |2.5 |
| | | | | |
|Leverage | | | | |
|debt to equity Ratio |0.124 |0.124 |0.193 |0.214 |
|Debt Ratio |0.11 |0.11 |0.176 |0.161 |
| | | | | |
|Investment | | | | |
|Price earnings ratio |29.87 |30.06 |39.8 |38.8 |
|Price to book ratio |4.65 |5.52 |2.14 |2.02 |

Table 1.1

5.0 Interpretation of ratios

5.1 Profitability ratio

5.1.1 Return on asset (ROA)

• This ratio indicates how profitable the company is in relation to the total asset it has

• The ratio gives a picture of how efficient the management is using the asset to generate earning.

• The asset comprises of debt and equity where both the type of finances are used to fund for the operations of the company.

• The figure obtained from the ratio gives the investor an idea how the company is converting the money it has into the net income.

• If the ROA is high that means the company is managing to earn more money just by investing less.

The formula to calculate the ratio:

[pic]

|Ratios |Google Inc |Yahoo Inc |
| |2008 |2009 |2008 |2009 |
| | | | | |
|Return on Assets Ratio |0.133 |0.161 |0.03 |0.04 |

Table 1.2

From the table above table 1.2 we can infer that the ROA for both the companies has increased accordingly for the two years and it is substantially high for Google. Though there is a difference between the amounts of asset for both the companies the ratio is substantially high for Google than Yahoo.

5.1.2 Return on equity (ROE)

• This ratio measures the company’s profitability.

• This ratio shows what is the company profit generated with the stockholder’s invested money.

• This ratio can be used to measure the efficiency of generating profit from the shareholders equity.

• The desirable ratio for ROE is usually in between 15% to 20%.

The formula to calculate this ratio:

[pic]

|Ratios |Google Inc |Yahoo Inc |
| |2008 |2009 |2008 |2009 |
| | | | | |
|Return on Equity Ratio |0.14 |0.18 |0.037 |0.047 |

Table 1.3

From the above table the ROE for Google is approximately in between the desirable ratio. There is a substantial growth in the ratio from the two years when comparing to Yahoo.

5.2 EFFICIENCY ratio

5.2.1 Gross profit margin

• This ratio reveals the proportion of money left over from the revenues after accounting for the cost of goods sold.

• It show how much of money is remaining per-dollar value at the end of the day.

Formula to calculate this ratio:

[pic]

|Ratios |Google Inc |Yahoo Inc |
| |2008 |2009 |2008 |2009 |
| | | | | |
|Gross profit margin |0.60 |0.62 |0.58 |0.555 |

Table 1.4

From the above table the gross profit margin for the Google is higher than Yahoo and it is sustaining the same level. The reason for decrease in the ratio for yahoo is due to the financial crisis. The numbers for yahoo started going down after Microsoft made a bid for yahoo.

5.2.2 Net profit margin

• This ratio shows how much of money the company actually keeps out of the earnings

• If the profit margin is high that means the company is making actual profit.

• It means the company has better control over the cost.

• If the cost is greater than sales it leads to lower profit margin which signifies that the company needs to control the cost.

Formula to calculate this ratio:

[pic]

|Ratios |Google Inc |Yahoo Inc |
| |2008 |2009 |2008 |2009 |
| | | | | |
|Net profit margin |0.275 |0.193 |0.092 |0.05 |

Table 1.5

From the above table for both the companies the ratio has gone down substantially. Though the projected margin for Google was presumed stable the ratio has fallen down. This is due to financial crisis. It is perceived that comparing this ratio with different entities will not be accurate as the expenditure rate is usually different.

5.3 Liquidity ratio

5.3.1 Current ratio

• This ratio is used calculated to find the company’s ability to pay back the short term liabilities such as debt and payables.

• If the current ratio is high then the company’s ability to manage the short term liabilities is also high.

• This ratio can also give a picture of the efficiency of the company’s operating cycle.

• This ratio can also be used to derive the working capital of the firm.

• In some way this ratio is similar to acid-test ratio.

Formula to calculate this ratio:

[pic]

|Ratios |Google Inc |Yahoo Inc |
| |2008 |2009 |2008 |2009 |
| | | | | |
|Current Ratio |8.76 |10.61 |2.67 |2.78 |

Table 1.6

From the above table the inference would be that the ability to pay back and manage short term liabilities is better for Google than Yahoo. The lesser value of this ratio for Yahoo does not mean that the company will go bankrupt but from the inference the odds are better for Google.

5.3.2 Quick ratio

• This ratio is used to evaluate the corporates ability to level with the short-term obligations with its most liquid asset.

• This is a more conservative measure than current ratio.

• If the quick ratio is high then the company is in a better position.

Formula to calculate the quick ratio:

[pic]

|Ratios |Google Inc |Yahoo Inc |
| |2008 |2009 |2008 |2009 |
| | | | | |
|Quick Asset Ratio |8.03 |10.068 |2.64 |2.5 |

Table 1.7

From the above table we can infer that this ratio is also high for Google which proves that the company has the ability to meet the short term obligations with the most liquid asset.

5.4 Leverage ratios

5.4.1 Debt to equity ratio

• This ratio shows us at what percentage or proportion of equity and debt the corporate is using to finance its asset.

• If this ratio is high then it means that the company has an aggressive strategy in financing its growth with debt.

• This may lead to volatile earning due to addition of expenses in the interest.

Formula to calculate this ratio:

[pic]

|Ratios |Google Inc |Yahoo Inc |
| |2008 |2009 |2008 |2009 |
| | | | | |
|debt to equity Ratio |0.124 |0.124 |0.193 |0.214 |

Table 1.8

From the above table we can see that Google has been maintaining the level and holding off for the past couple of years where as there is a slight increase in Yahoo meaning that they have been aggressive but in order to stabilize the company has to form new strategies.

5.4.2 Debt ratio

• This ratio shows the proportion of debt in relation to the assets.

• It shows the leverage for the firm.

• It also shows the potential risk factor involved in terms of debt-load.

Formula to calculate this ratio:

[pic]

|Ratios |Google Inc |Yahoo Inc |
| |2008 |2009 |2008 |2009 |
| | | | | |
|Debt Ratio |0.11 |0.11 |0.176 |0.161 |

Table 1.9

From the above table Google is holding off on the same percentage while Yahoo has brought down the ratio. Yahoo by decreasing the ratio has made the equity position stronger slightly but comparatively the ratio is better for Google.

5.5 Investment ratio

5.5.1 Price/earnings ratio

• This ratio shows the firms share price to the per share earnings.

• It shows how much the investors are willing to pay per dollar of earning.

• This ratio uses the EPS value where it the based on the earnings from the four quarters of the year.

Formula to calculate this ratio:

[pic]

|Ratios |Google Inc |Yahoo Inc |
| |2008 |2009 |2008 |2009 |
| | | | | |
|Price earnings ratio |29.87 |30.06 |39.8 |38.8 |

Table1.10

The industry standard for this ratio is usually in between 15-25 it varies from industry to industry and it’s higher for both firms while both the companies are holding off approximately in the same level.

5.5.2 Price/book value

• This ratio is used to compare the stack market value to the book value per share.

• If this ratio is low then it means that the stocks are undervalued.

• If this ratio is low it means that there is something fundamentally wrong with the company.

• It also shows that when the company goes bankrupt what is remaining out of what is paying too much for the stocks.

• This ratio again varies according to the industry.

Formula to calculate this ratio:

[pic]

| |Google Inc |Yahoo Inc |
|Ratios | | |
| |2008 |2009 |2008 |2009 |
| | | | | |
|Price to book ratio |4.65 |5.52 |2.14 |2.02 |

Table 1.11

From the above table it shows that the stocks have been undervalue for Yahoo this down fall started due to the bid made by Microsoft Corporation during 2009. The value for Google seems to be at an increase for the past two years.

6.0 Cash flow statement analysis

Cash flow statement shows us the actual cash the company has generated. The cash flow statement is very important to understanding the company’s performance. It clearly shows if the company could pay for the operations and further future growth. Before any potential investment it is a must to analyze the cash flow of the company.

There are three sections in cash flow

• Cash flow from operating activities

• Cash flow from investment activities

• Cash flow from financial activities

6.1 Cash flow data for both companies

|Cash Flow |Google Inc |Yahoo Inc |
| |2008 |2009 |2008 |2009 |
| | | | | |
|Operating activities |7,852,857 |9,316,198 |1,880,241 |1,310,346 |
|Investment activities |5,319,422 |8,019,205 |1,311,783 |2,419,238 |
|Financial activities |87,567 |233,412 |332,406 |34,597 |
|Cash/Cash equivalent at the end |8,656,672 |10,197,588 |2,292,296 |1,275,430 |
|of the year | | | | |

Table 1.12

6.2 Cash flow for Google

From the above table we can infer that the cash flow from the operating activity is more than the net income and there is an increase in cash flow for the fiscal year meaning the company is selling the product and services at an efficient price on the market. The cash flow from investment activities is also good. Google has invested generous amount of money on capital expenditure during the years and on acquisition thus substantially spreading the business. The cash flow from financial activities is higher during the year of 2009 for Google meaning they have been paying up for the dividends and common stock repurchases. The present free cash flow (FCF) for Google is $23.97 which is a positive number meaning the company despite the recession and crisis the company is holding off and doing well in business.

6.3 Cash flow for Yahoo

From the above table we can infer that the cash flow from the operating activities has fallen down comparing with Google. Though the cash flow is higher than the net income and the company has been selling efficiently, the value is falling compared to earlier period. The cash flow for the investment activities have gone up or doubled for the year for the year 2009 meaning the company is investing in capital expenditure and expanding the business. The cash flow for the financial activities has fallen down during 2009 meaning that Yahoo has to face the issues related to long term debt and short term investment and the dividends have also increased. The present free cash flow for the company is $0.43 at present which is not an appreciable value.

7.0 Conclusions

Both the companies are giants in the industry. Since the boom in the dot com industry both the companies have grown exponentially.

Based on the financial analysis Google is stronger in most aspects. The profitability ratio shows that the ROE and ROA has shown reasonable growth for the past two years which means that the company is doing well even after the financial crisis. By looking at the efficiency ratio we can infer that the net profit margin fell during the year 2009 for Google while holding the gross profit. The liquidity ratio has also increased for the year 2009 showing the increased business activity. From the leverage ratio we can infer that the company is maintaining its leverage meaning its meeting the obligation from the business side. The investment ratio also shows that there is a consistent rise in the percentage meaning the company is paying more for every dollar it earns which is a good sing for investing in the company.

From the analysis Yahoo has slower growth rate or fluctuating market showing that it had setbacks and downfall due to the crisis. The ROE and ROA has shown growth rate but comparatively it’s lower than Google. The efficiency of the company has fallen down since Microsoft started biding for Yahoo. The liquidity for the company is also fluctuating for the two years. The overall leverage is also fluctuating for the company. From the investment aspect the ratios are fluctuating for the company.

7.1 Recommendations

Looking at the analysis investing in Google on a long term basis seems to be a better option. Qualitatively speaking the company has many customers in many of the branches. Most of the market shares are still controlled by the company and the employees making it a major player in the industry. Considering the growth aspect Google is performing very well in the market. The introduction of Android phone OS is becoming a success. Google is spending generous amount of money in R&D for finding many new streams of business. For example it is specializing in the field of voice recognition which is the next step to meeting consumers and customers’ expectations. Though there are many competitors for Google in the market it has become a legend when it comes to providing service in the internet based services such as Google search, Gmail etc.

Alongside the advantages the company is stronger and consistent in the market. Though the share price has gone down in the past three years the trend projected is that there will be a hike. With all the bail out plans and projected recovery of the economy the value for Google is also proposed to become stronger.

The current share price for Google is $573.00 with a market capitalization of $183.23 billion and the total number of share 319.78, EPS of 24.71 and P/E of 23.19 the statistics seems to be strong for Google.

7.2 Limitations

There are certain possible limitations for the analysis. There are possibilities that the information in the financial statement might be window dressed. Different companies use different standards for inventory. There is also a need to look beyond the financial statement and numbers. There are possibilities that the Yahoo may come up with new strategies, new technologies and products which might change the market upside down.

References

http://investor.google.com/pdf/2009_google_annual_report.pdf (Google financial statement)

http://yhoo.client.shareholder.com/annuals.cfm (yahoo annual report)

http://www.investopedia.com/

http://www.investorwords.com/

http://www.netmba.com/finance/financial/ratios/

http://www.slideshare.net/gurjeit/analysis-and-interpretation-of-financial-statements

http://www.accountingformanagement.com/accounting_ratios.html

http://en.wikipedia.org/wiki/History_of_Google

http://docs.yahoo.com/info/misc/history.html

http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=GOOG

http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=yhoo

http://www.google.com/finance?q=NASDAQ:GOOG

http://www.google.com/finance?q=NASDAQ:YHOO

-----------------------
Financial analysis for Investment plan

Arun kumar Thirumarai selvan

018800008092

Informatics

UOW-MBA

December 6, 2010

To analyze the financial statement of the two companies Google and Yahoo and thereby identify on which we can invest.

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