The paper will analyze a corporation to determine whether a financial advisor should recommend the company to an investor. The paper will, first, give the company background. Second, the paper will discuss the type of investor the company would appeal to. Third, the paper will go over the financial health of the company. Fourth, after analyzing the financial information, the paper will discuss the company risk. Fifth, the paper will discuss final recommendations as to whether the company is the right fit for the investor.
Google, Incorporated was originally a search engine company founded in 1998 by Larry Page and Sergey Brin (Google, n.d.). The company went public in 2004 and has since broadened their horizons in the amount of products and services they offer. According to Alexa, a website analytics program, Google.com is ranked #1 popular website in the U.S. and in the world. Google currently has a vast number of products and services that people use daily. Google has stated that the have “Over 1 billion users per week. Over 100 billion searches per month. Over 1 billion Android activations. Over 1 billion YouTube users per month” (Mohan, 2014).
Some popular Google products are: Google.com – A search engine
Google+ – A social sharing site
Gmail – Webmail
Google Chrome – A web browser
Google Play Store – A digital application distribution platform for Android Google Play Music – A platform to upload music and share music on Android devices YouTube – A website to share music
Google Maps – A digital navigation system to find local businesses and residential areas Android Software – Operating software for mobile devices
Google Wallet – An application that allows the user to shop online with payment cards Picasa – Application that organizes, edits and shares photos
Google believes in innovation and is constantly trying to evolve with the mission of people using Google products in all aspects of their lives. Some products the company is currently working on are: Google Smart Watch – Wearable computers that connect to the user’s mobile devices Google Glass – Glasses that act as a computer and connect to the user’s mobile devices Google Fiber – A device used to provide users with faster, more reliable internet service Project Loon – A means of internet service through balloons as opposed to cables and telephone lines Google Home Automation – A smart home service where the homeowner can control the home through mobile devices Google Smart Contact Lens – A contact lens that can monitor glucose levels for diabetics Google Self-Driving Car – A car that can drive by itself with robotics technology Chrome Tablet – A mobile tablet with Android software (Amadeo, 2014).
Currently, Larry Page, one of the founders of the company, is CEO of the company. He has graced Forbes Magazine’s Most Powerful People list twice at #17 in 2013 and #20 in 2012, Forbes 400 Richest People in America Category at #13, and Forbes World’s Billionaires list at #20 in 2013 and #13 in the United States (Forbes, 2013). This young mogul has a net worth of $24.9 billion dollars (Forbes, 2013). With his vision he helped turn a 2 person operation to a business with over 30,000 employees worldwide. (Google, n.d.) He helped expand Google from merely being a search engine to creating computer software, phones and making way for new technology such as driverless cars and teleport machines. Larry Page’s management style can be described as someone who is running his business like a startup. He believes in innovation and staying ahead of his competition. As a technology based company, you are only as good as your next big idea. Page encourages his employees to think of crazy ideas and cultivate the best of them. “When no one else is crazy enough to do it, you have little competition,” he says. (Elmer, 2011).
The client is a young investor. She is interested in seeing her money grow over 10 – 15 years. She is a multi-millionaire and has the desire to be an aggressive investor. She wants to accumulate a substantial amount of wealth in the future and is open to investing in a start- up company. Though the company has been around for approximately 16 years, Google is run like a start-up company and is relatively young compared to some of its competitors (i.e.: Microsoft and Apple). The company is always trying to reinvent itself with a diverse portfolio of products and services. They spend a lot of money on research and development to cultivate innovation and improve their products already on the market. Google does not pay stockholders dividends. It uses the dividend money for R&D, data centers, legal issues and diversification (Rosoff, 2012). Since the client is not interested in an instant money maker and can afford fluctuations in the market, Google may be a good fit for her to invest in.
The financial advisor must use a number of ratios to determine the financial health of the company. Five ratios what will be used are current ratios, quick ratio, earnings per share, price earnings ratio, and debt to equity ratio.
Current ratios give the investor the opportunity to see the company’s ability to pay back its short-term liabilities with its short-term assets (Current Ratios, n.d.). The higher the current ratio, the more capable the company is to pay back its debts which would be great for a bank lender. But a high current ratio could also mean the company has a lot tied up in nonproductive assets (Brigham & Ehrhardt, p. 99, 2014). Current ratios are determined by dividing total assets by total liabilities (Brigham & Ehrhardt).
201120122013 52,758 / 8,913 = 5.960,454 / 14,337 = 4.272,886 / 15,908 = 4.6
Companies generally aim for a ratio of 1 to ensure their current assets can at least cover the short term obligations. Having a ratio greater than 1 gives the company a better contingency to be able to cover those obligations. The company started out with a high current ratio of 5.9 in 2011. This means, in 2011, the company was able to cover 5.9 times their short term obligations. It dropped down to 4.2 in 2012, but rose by .4 points in 2013. The drastic fluctuation may be due to the acquisition of Motorola Mobile in 2011 (Goldman, 2012). Both current assets and current liabilities would increase due to the increase of inventory and debt. The technology industry average current ratio is 2.33 (Reuters, n.d.). For all three years, the current ratio is almost twice the industry’s average. Due to the high current ratio, the company is not at risk of bankruptcy.
Quick ratios tell the investor what the company’s liquidity position is or how quickly it can be converted to cash at the going market price (Brigham & Ehrhardt). To calculate quick ratios the formula is current assets minus inventories divided by current liabilities. 201120122013
52,758 – 35 /8,913 = 5.960,454 – 505 / 14,337 = 4.272,886 – 426 /15,908 = 4.6
As of 2013, the current technology industry quick ratio average is 1.26 (Technology Sector, 2014). The past three years has been higher than the industry average. The higher the quick ratio in comparison to the industry average shows that the company is less likely to be overwhelmed by debt in the near future. A higher ratio is safer than a lower one because it means the company has excess cash. This is a favorable consideration for an investor. Prior to 2011, Google, Inc. did not have any inventories listed on their balance sheets. Google started as a search engine in 1998 and have provided technology services that did not require inventory.
In 2011, Google acquired Motorola Mobility, taking it from a strictly software company to a software and hardware company (Goldman, 2012). This puts Google in direct competition with technology companies such as Apple, Inc. and Microsoft, Corp. In partnership with HTC and Samsung, Google has created their line of Nexus smartphones and tablets. They also have Google Glass that is expected to launch for consumer purchase by the end of 2014 as well as the Google Smart Watch. Other items Google is working on for the near future are the self-driving car, Project Loom, and Google Home Automation.
Total Assets Turnover Ratio
Total assets turnover ratio determines how productive the company is. It shows how much revenue the company generates for each dollar in assets. Total assets turnover ratio is calculated by dividing total revenue from the income statement by total assets from the balance statement. 201120122013
37,905 / 72,574 = 0.5250,175 / 93,798 = 0.5359,825 / 110,920 = 0.54
The average turnover ratio for Google is 0.53. This means for every dollar worth in assets, the company generates 53 cents in revenue. Some companies have less assets than others, in which the total assets turnover ratio will be lower than a more assets-intensive company. Google is primarily a service related company, so it has less assets than the majority of its competitors who produce a vast number of products. Some of Google’s most popular products are the Google search engine, Google+, Gmail, Google Maps, Google Play Store, Android software, and YouTube. The company does not require as many physical assets. The technology industry total assets turnover ratio is 1.07 (Reuters, n.d.). Though Google’s ratio is lower than the industry average, it is not necessarily a bad thing considering most technology based companies sell a physical product and Google mainly sells services, thus less assets than its competitors.
Debt to Equity
Debt to equity ratio is a leverage ratio which explains how much of the company’s assets are financed by debt and stockholders’ equity. The debt to equity ratio is calculated by dividing the total debt by the total common equity. The total debt is determined by adding current liabilities with long term debt.
14,429 / 58,145 = .2522,083 / 71,715 = .3123,611 / 87,309 = .27 From the three years, the average debt to equity ratio is .28. This ratio translates that Google has 28 cents of debt for every dollar of equity. The technology industry average is 31 cents. The lower number is more favorable because it shows that the company is less risky. The lower numbers indicate that the company relies on less external lenders than other companies. In 2012, the ratio increased by .06.
In May 2012, Google, Inc. completed its acquisition of Motorola Mobility in which it acquired the company’s debts as well as its assets. The following year, Google may have paid some of the debt. Stockholders’ equity increased by having a significant increase in retained earnings. Retained earnings are part of the net income that goes back into the company instead of the company distributing dividends to the stockholders (Brigham & Ehrhardt, p. 1114, 2014).
Net Profit Margin
Net profit margin measures a company’s profitability. The net profit margin is calculated by dividing the net income by sales. This ratio can determine if a company earns enough money to cover its operating costs. If it does not, the company could eventually shut down which would make it a bad investment. 201120122013
9,737 / 37,905 = .2610,737 / 50,175 = .2112,920 / 59,825 = .22 Based on the past three years, Google’s profit margin dropped by 5% between 2011 and 2012. It slightly increased by 1% between 2012 and 2013. In all three years, the profit margins were higher than the technology industry averages for those years. In 2011, the industry average was 19%; in 2012, the industry average was 16%; and in 2013, the industry average was 19% (Profitability Analysis, 2014). If the company’s net profit margin is higher than the industry’s profit margin, it is a good investment.
Company Risk Level
Based on the financial analysis for Google, the company has a low risk level based on the industry’s averages. The current ratio average for the technology industry is 2.33. Google’s average is 4.9. This means that the company has a contingency to be able to take care of their short-term obligations over twice the industry average. The industry average for quick ratios is 1.26. Google’s quick ratio average over the past 3 years is 4.9. This shows that the company is least likely to be overwhelmed by debt in the future compared to its competitors. The average turnover ratio for Google is .53 indicating that for every dollar the company has in assets, it generates 53 cents. This is a low number mainly because the company has a low amount of assets unlike its competitors. Google is mainly a service company and does not have a vast number of assets like its competitors that produce products such as tablets, phones, computers, etc.
The technology industry’s average for debt to equity is 31. Google’s debt to equity average is 28. This means that there is 28 cents of debt for every dollar of equity. The lower number is more favorable because it means that the company depends less on external lenders. The industry’s profit margin average was 18%. Google’s profit margin average over the course of the past three years was 23%. This shows that compared to most of its competitors, it is generating more of a profit. A company’s “beta” measures the company’s volatility in the stock market. A company’s beta depends on how much the company fluctuates within the market. The stock market itself has a beta of 1.0 (McClure, 2012). Anything above 1.0 is considered risky. Anything below 1.0 is considered more stable.According to Yahoo Finance, Google has a beta of 1.14. This means it is 14% above the stock market average and is considered a risky investment. Though the company is considered risky, it has the potential for high returns. The downfall of betas is that they only calculate what happened in the past. Its assessment does not calculate for the future of the company.
Despite the market risk of the technology based company, Google has shown growth over the past year. According to the Financial Post, Google’s shares have risen 58% in 2013. In January 2014, the company’s stock rose U.S. $2.37 to U.S. $1,141.23 (Ratner, 2014). Of the 48 analysts covering Google, 35 of them recommend buying the stock whereas 13 of them recommend holding it (Ratner, 2014). Google maintains a strong position in the driving the market share on online advertising in the mobile and video departments. The company has strong control over four pillars of the mobile department: operating system, apps, app store, and payment. YouTube is a leading advertising and video sharing medium. Unlike its competitors, Google has had a steady 20% growth annually (Ratner, 2014). Under the direction of CEO Larry Page, the company constantly improves already existing products as well as produce innovative products.
Larry Page wants to make Google a household name so that a person would need to use Google products several times throughout the course of their day. Currently, Google has well over 100 products that, in some cases, have become a necessity in everyday life. There are a number of phones and tablets that have been uploaded with Android software as an operating system. Google’s search engine has become so increasingly popular that when a person wants to do a web search on a topic they simply “Google it”. The website has become the #1 site globally and nationally according to Alexa.com. YouTube is a popular video website where people upload everything from home videos, tutorials, music videos, and ad campaigns. Also, one of the most reliable mobile navigation applications is Google Maps. The company is constantly updating its maps to provide better locations and directions. The company has a number of future products that will diversify their product portfolio.
For example, Google Glass is a mobile device used as glasses which is like a personal computer or tablet and also interfaces with the consumer’s mobile phone. So far the product is generating a lot of attention with the public. Google is also working on the driverless car, Google Contacts, Project Loom, Google Fiber, and the Google Home Automation. Google is expanding their spectrum from a search engine and mobile apps to automobiles, health care, the internet, and home security. All of these projects show a promising future for the company. For an aggressive investor who does not mind investing in a risky company and is looking to invest for the long-term, Google is a good investment to have. The company has seen a consistent increase in growth and has shown financial stability over the years. Google does not pay stockholders dividends but companies that have a high risk, have the ability to have larger payouts in the long run.
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