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Assignment Working Capital Essay

Abstract

In this paper I’ll analyze the fundamental differences between the working capital structures and components for Google and Oracle, and speculate upon the main reasons why such differences exist; how each company could improve its working capital positions. As a Wall Street Analyst who has to recommend one of the companies as an investment to a company’s clients; based solely on that company’s working capital; as an Investment Banker who has to recommend loaning a substantial amount of capital to one company based solely on that company’s working capital.

Working capital structures

The selected companies that I have selected to compare are Google and Oracle. Google Inc. is a company that specializes on providing online tools such as search, differences between the working capital structures and components for each chosen company. Oracle Corporation is responsible for developing, marketing, and servicing of database and middleware software, system hardware and software applications. The company also offers consulting services in areas such as business architecture planning and design, and enterprise and information technology alignment. Both Google Inc. and Oracle Corporation have been performing well thus investments can be made in the companies. In the financial year 2014 Google Inc. had a net income of $16.86 million, an increase of 17% compared to the previous year. The net profit margin for the company was registered at 29%. (morningstar.com)The balance sheet provides that the Morningstar.com had total asset amounting to 72.89 million which is an increase from previous year.

Total organizational profits were amounting to 110.9 million and shareholders’ equity of 87.31millions. The financial ratios for the company indicate that the company had a debt to equity ratio 0.05 indicating that its equity is enough to cover debt. The current ratio for the year 2014 was 8.0 showing that current liabilities cannot be fully covered by the current assets. Another financial ratio indicating company financial condition is book value per share which amounted to $145.68. Investment return ratios include return on equity of 14.80%, return on assets of 11.65% and return of capital of 18.1 indicating that the company is adequate using its assets and equity to generate returns for the company. Morningstar (2014) provides that Google had a price earning of 18.88 and earnings per share of 27.72 indicating that income is high.

In order to determine the risk of investing in the company I identified the beta value which is provided at 0.91. (morningstar.com) On the other hand Oracle Corporation registered 28.62% decrease in net income in 2014 which is .7% increase compared to 2013. The net profit margin for the compared is established at 81.09%. The total assets in the company as at 31st May 2014 was $ 99,726.00 indicating a strong asset base while the total liabilities amounted to $13,377.00 and shareholders’ equity was valued at $ 47.93 million.

The financial condition in Oracle can be identified using financial analysis such as current ratio which is determined to be 2.8 for the company showing that current liabilities are greater compared to current assets. The debt to equity ratio is determined to be 0.40 thus the company is able to meet its debts as and when it arises. Interest coverage is provided at 16.4 while book value per share is 10.50. Oracle’s return on equity for the financial year 2014 was 23.4, return on assets 12.13% was while return on capital was 17.42 thus the company is effective in generating returns for equity. The diluted earnings per share is 2.38 and the beta value is provided at 2.39. (Morningstar.com) Improve working capital

Improving working capital position, a company is able to compare from year to year any increase in revenue; increase in production due to a decrease in variable or fixed costs, increase in sales due to a new sales workforce and any increase in liabilities; new short term creditors, a higher accounts payable account due to the need to purchase new materials. A company can improve its working capital by trying to keep a healthy balance between the two accounts, cutting costs, and analyzing its current short-term debt in terms of how to decrease it or find alternative ways to avoid it such as restructuring production procedures. (Schroeder, el. 2014)

Role of a Wall Street Analyst

As Wall Street Analyst deciding which company to invest in I would determine whether the company is stable financially, investment returns and risks associated with the investments. Gross working capital means the amount invested in the current assets of the company.Net working capital means the difference between the current assets and current liabilities. If the current assets are more than the current liabilities, then it is positive working capital. Otherwise, it is negative working capital. Working capital is the measure of company’s solvency, its ability to pay its suppliers without any delay. Considering these factors I would invest in Google since it has higher earnings per share and an investor is likely to receive higher returns when dividend is paid. Google has registered stronger growth compared to Oracle evidenced by increase in profit levels. (Schroeder, el. 2014)

Investment Bank

As an Investment Bank whom with solely working capital by increase in current assets is the outflow of cash and when the company increases its current liabilities, it is inflow of cash. If the changes in working capital are negative, it means the company is heavily investing on current assets or reducing the current liabilities. When the changes in working capital is positive, it means the company is selling of current assets or increasing its current liabilities. I would especially invest in Google’s bonds compared to stock since bonds have a guaranteed rate of interest thus I would be receiving returns after an agreed period. Selection of bonds over stock is supported by the fact that the company has a lower beta vale compared to Oracle thus it has less risk to default on the loan. (Schroeder, el. 2014)

References
Google Inc. Financials Report Retrieved November 16, 2014 http://financials.morningstar.com/ratios/r.html?t=GOOG Msn. (2014). Oracle Corporation. Financial Results. Retrieved November 16, 2014 from Http://Moneycentral.Msn.Com/Investor/Invsub/Results/Statemnt.Aspx?Lststatement=Balance&Symbol=Us%3aorcl&Stmtview=Qtr Oracle Corporation Financials Report Retrieved November 16, 2014 http://financials.morningstar.com/ratios/r.html?t=ORCL Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2014). Financial Accounting Theory And


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