Google Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its various marketing programs embedded in its search engine. The largest portion of Google’s revenue comes from advertising and marketing. To be more specific, Google provides third party entities with the means to display ads targeted to specific users depending on factors such as search criteria, online viewing content, and residency.
The company uses a system called the cost-per-click basis, requiring the creator of the ad to pay Google when a consumer clicks on an advertisement. Google not only provides services for the common user, but also designs specific products for corporate settings, such as non-profit organizations, government, businesses and schools. Most of its online products are free to use and are supported by text ads that are displayed within the interface. This begs the question of whether Google has a sustainable business model if in the future people begin to ignore internet-based advertisements.
For my report, I used two different reports to financially analyze Google Incorporated, which were the 2012 10K form filed with the Securities and Exchange Commission and the Annual report which is posted on it’s website and sent to it’s investors. The 10K report is a document that contains a more detailed explanation of business activity. The 10K is generated annually and has the same financial statements as the annual report, but it is much more detailed and business oriented. Therefore, most of my analysis came from the 10K report.
The main purpose of the 10K is to provide detailed data regarding of the nature and success of the business for potential investors. This report offers more technical detail than the average business professional would understand. Without finance or accounting experience, potential stakeholders would have a difficult time deciphering the true benefit or costs of investing in Google. Through graphs of cumulative return, in depth financial statements, and current trends and developments, Google’s 10K filing demonstrates to financial and accounting professionals whether or not if it is a company that should be invested in.
While both the 10K and the annual report are detailed summaries of Google’s business activity, they each have their separate purposes and uses. Both do a great job appealing to the report’s target audience. The annual report offers an overall view for anyone potential investors regardless of background or knowledge of the stock market. The 10K provides a detailed report for the finance and accounting professionals who feel the annual report is not sufficient. My first analysis of Google begins with the Balance Sheet.
The balance sheet is sometimes referred to as a financial snapshot, because it represents the business only at specific time periods. Firstly, I think that it is essential to evaluate what the business is worth. This brings up what is known as the value problem, which involves the conflicting issue between the book value and the market value. The book value of the company is simply the shareholder’s equity, which is found on the balance sheet. This is because the accounting equation, A=L+OE refers to the assets minus the claims against the assets to equal the book value of the company.
However, this does not represent Google’s actual value. The market value of the company more accurately reflects the true worth of the corporation. There are two reasons for the discrepancy. Firstly, financial statements are transaction based. The transaction figures are recorded when they occurred and entered into the balance sheet. The figures are never adjusted for the time value of money so there is very little relevance. Also, depreciation does not accurately reflect the true worth of assets. Secondly, investors buy the stock for expectations of future earnings, not for the underlying value of investors.
This is an important distinction, especially in a technology company like Google’s where investors rely so heavily on intangible assets, which are very difficult to assign an intrinsic value to. The market value of Google was found to be $284. 4 Billion at the end of 2012 fiscal year. The market value is calculated by multiplying shares outstanding by the price per share. This is also referred to as market capitalization. To continue, I think it is also important to see how liquid the business is. Having short-term liquidity will aid the company to meet its short-term obligations when the business is in financial distress.
We can use the current ratio, or the quick ratio to measure this. The current ratio includes all current assets divided by all current liabilities. The quick ratio, or acid test, is the more conservative approach because it excludes inventory due to its low resale value. However in this case, it turns out that the two ratios are the same because Google does not carry any inventory. By avoiding the use of inventory, Google is able to save substantial carrying costs, such as storage in warehouse and shipping. The quick ratio turns out to be 10. 0, which is extremely liquid.
Generally a ratio above 2. 0 is considered positive. However, generally the ratio only has meaning when compared to others in its industry. In this case, Google would have to be compared with Microsoft and it’s most direct competitor, Yahoo Incorporated. Next, I analyzed how much working capital Google has. Working capital is used to measure both a company’s efficiency and its financial health. Potential suppliers and creditors may choose to examine Google’s ability to meet its current obligations in order to determine the risk associated with having business relations with the company.
Working capital is calculated by subtracting current liabilities from current assets. Google’s working capital is found to be $49. 56 Billion. Although, by itself this figure is insignificant. We can conclude that the large working capital signifies that Google is not in danger of having trouble paying off current liabilities. For further meaning to the working capital figure, I compared it to previous years. This is because working capital provides insight into how efficient the operations are. If money is tied up in inventory or accounts receivable, the company lacks liquidity to pay off its obligations.
However, I think that it also can indicate that a company is not operating efficiently. This suggests further analysis into the collection of the company’s current assets or accounts receivable. In fact, its accounts receivable don’t show a great picture with 35. 96 days worth of outstanding sales. This verifies my previous hypothesis that revenues are not being collected in an efficient manner. However, I think it should be noted that Google is a large firm and the processes and controls tat are in place for account receivables may take longer.