Assessing A Company’s Future Financial Health Essay
Assessing A Company’s Future Financial Health
Google is a multinational corporation that serves thousands of consumers worldwide. Through Internet related products such as Internet searches, maps, emails, mobile apps, and other online contents for users Google became the company it is today. Every employee of Google is different in his or her own way; making it a well-diversified organization similar to the global audience they serve. Google’s mission statement is to organize information from all around the world and make it universally accessible at a quick and orderly fashion. This means creating a search engine smart enough to understand the difference between Jaguar, the car, and jaguar, the animal. Google went public in 2004 and has been doing exceptionally well ever since. It has an estimated number of over three hundred million servers using the search engine every day. From these statistics it is easy to say that Google is number one in the Internet information industry. This industry is considered to be one of the most important economic sectors due to the fact that it is for industries that are information intensive.
Although there are many search engines similar to Google, such as Yahoo, Facebook, Groupon, Microsoft, and Pearson education, Google seems to be the one consumers use more frequently. The analysis of this paper will discuss the current financial status of Google, conditions relevant to the market, competitors, and recent news. One way to measure the financial health of Google’s current status is to analyze the S.W.O.T analysis: strengths, weaknesses, opportunities, and threats. This being said Google should maintain its current strengths of a successful audience which helped reach a high of $13,100,000,000 operating income for the current fiscal year. With the growth of the company over the last five years Google’s net income, gross profit, and revenue have gradually increased. Hitting a low point towards the end of 2008 and the beginning of 2009 then rising again in 2010. Even during a recession, a time of need, Google remained lucrative through its assets, liabilities, stable stock price, and efficiency for paying back debt.
Google’s total assets have steadily increased from 2008 to 2012. Some key figures to point out in their assets are the slow growth between the second half of 2008 to the second of 2009. This slow growth period is probably due to the economic recession. Google also saw a strong growth in assets from the second quarter of 2012 to the third quarter 2012. Google has mainly kept its liabilities relatively low compared to assets. There was some increase in liabilities in 2010 as well as an extensive increase 2012 compared to earlier years.
The stock price during the recession drastically decreased for many companies but this was not the case for Google. In 2008, the beginning of the recession, Google’s stock price increased by $7; every year since the recession the stock price has risen and is predicted to continue rising for future years. Google also remains a strong company because of their efficiency on paying back their debt with their cash received from operations. This can be shown by their operating cash flow to total debt ratio. Google’s operating cash flow to total debt ratio is 2.56%. Meaning cash is double the amount of debt issued. Therefore, Google is able to pay back their debt fairly quick. Although Google has some strength’s the company also has some weaknesses.
A key factor that contests Google’s respected reputation is its bond rating. In 2011 Google started to issue bonds; they received a rating of AA, the fourth down level of ratings a company can receive. However, the double a rating still means the company is a high credit-quality investment. According to credit rating Agency Moody’s, who gave the rating, Google received the rating due to their substantial financial flexibility as well as its conservative financial philosophy. For the year ending December 31, 2012 for Google, it finished with $60,454,000 in current assets. This is a big increase from 2011, which had $52,758,000 in current assets, a total increase of $7,696,000. The bulk of this increase is due to net receivables, which could be the result from selling advertising space on credit or one of the many products Google offers. Cash and cash equivalents also had a major jump of $4,795,000, which could be the result from selling phones, advertising, apps, and other cash generating assets Google owns. This is a promising sign to investors because if they can sustain the growth hopefully enough cash will be retained and dividends will be offered. Assets
2012 2011 2010 Current Assets
Cash and Cash Equivalents14,778,000 9,983,000 13,630,000
Short Term Investments33,310,000 34,643,000 21,345,000
Net Receivables 9,729,000 6,387,000 5,261,000
Inventory 505,000 35,000 –
Other Current Assets 2,132,000 1,710,000 1,326,000
Total Current Assets 60,454,000 52,758,000 41, 562, 00 Google’s total assets have steadily increased dating back from 2008 to 2012. Some key figures to point out in their assets are the slow growth between the second half of 2008 to the second of 2009. This slow growth period is probably due to the economic recession. Google also saw a strong growth in assets from the second quarter of 2012 to the third quarter 2012. Google has mainly kept its liabilities relatively low compared to assets. There was some increase in liabilities in 2010 as well as an extensive increase 2012 compared to earlier years. Google has a total asset turnover of .6%. The total asset turnover can be interpreted to mean the amount of sales, that each unit of assets can generate. Simply, it’s smarter to get more sales on the assets that you are deploying to a business.
The higher the total asset turnover, the better the business is doing. Therefore, Google’s percentage of .6% is an indication that the company is below the average industry of .7%. The current ratio measures a company’s ability to pay short-term liabilities. The higher the current ratio, the more capable the company is of paying its liabilities. Google has a current ratio of 3.94, in comparison to the industry average of 4.8%. Due to the fact that Google is under the industry average it means that Google can pay back its short-term debt but not as quick as other companies in the industry. The quick ratio is very similar to the current ratio; in the way it also measures the company’s ability to pay of short-term liabilities. The only difference is that it adds the inventory of the company to its calculations. Google maintains a quick ratio of 3.7, which still shows it, is efficient in paying off its short-term obligations. The debt to equity ratio indicates what proportion of equity and debt the company is using to finance its assets. Google has a debt to equity ratio of 11.61%. This is considered high and means that the company has been aggressive in financing its growth with debt.
The high number can result in inconsistent earnings as a result of additional interest expense. Google has a return on assets of 10.5%. This is an indicator of how profitable a company is relative to its total assets. Since Google maintains an ROA below the industry average, of 15.6%, this shows that the company is earning less money on investments. Google has ‘day’s sales outstanding’ or DSO of 49.8. This means that Google takes a relatively long time to receive revenue once a sale has been made. This could be because most of their sales could be done on credit. With the expansion of the industry, Google has an opportunity for growth. The current growth rate for 2012 for Google is 11.29% and it is predicted to increase to 17.43% in 2013. The reason Google is predicted to grow over the next year or so is because the demand for online use is more predominant. With the growth of this industry it is vital that Google is aware of the threats it may encounter.
One of Google’s biggest competitors, Microsoft, has introduced a newly organized search engine called Bing. The search engine Bing is gradually growing and advancing their technology making them a threat towards Google. Whenever Google advances their technology Bing turns around and does something to make their search engine better, creating a war between the two. Google is generally strong in its ability to cover debt. It has a current ratio of 3.94%, meaning it can efficiently cover its short-term liabilities. The company also has a debt to assets ratio of .07%. This number measures the company’s financial risk by determining how much of the company’s assets have been financed by debt. Since Google’s number is equal to industry average it is easy to infer that Google has average financial risk because its assets are significantly higher than its short and long term debt.
Google also shows a strong ability to pay off their interest because their EBITDA to interest ratio is extremely high at 154.64. The operating cash flow to total debt ratio measures how well the cash generated from Google’s operations covers current liabilities. Google’s operating cash flow to total debt ratio is also high at 2.56. This is a good sign and means Google is able to generate a large sum of cash to pay off debts. When a company with operating cash flow is considerably higher than its net income the company is considered to have high quality. This is the case with Google. In 2008 Google’s net income was $6,632,000,000 and its operating cash flow was $7,853,000,000. Over the last five years both net income and operating cash flows have increased. Net income increased to $13,339,000,000 and the cash from operating activities increase to $15,874,000,000. Since Google is generating a good amount of their money back they have been able to reduce debt along with buying backs some of their stock.
Google investing activities primarily consist of information technology, consumer discretionary, and financials. In 2008 Google’s investing activity started out at $5,319,000,000 and gradually increased over the last five years till it reached $19,041,000,000 in 2011. In the beginning of 2012 Google’s investing activities decreased to a $12,101,000,000. In 2012 Google’s main investment was information technology with a hint utility research. Over the last few years Google has spent an exceptional amount of money on capital expenditures, items that last a long time to keep the company running. Over the last three years Google spent an average of $2,755,333,000 on capital expenditures. Cash from financing activities measures the movement of cash between a firm, its owners, and creditors.
Financing activities consist of issuing dividends and issuing or selling stock. In 2008 and 2009 there was no long-term or short-term debt issued but in 2010 Google issue over $5,246,000,000 worth of debt and only paid back $1,783,000,000 of the debt. The following year Google issued $10,179,000,000 dollars’ worth of debt and repaid more then 2/3s of the debt, making them a credible company. Over the last few years Google did not have any dividends. In 2010 Google repurchased a stock of $801,000,000 because they felt their stocks were undervalued. When a company buys back stock they increase their earnings per share and increase the market value of the outstanding shares.
From 2009 to 2010 cash from financing increased drastically, from $233,000,000,000 to $3,050,000,000,000. With a CAPM beta of 1.23 and a P/E ratio of 21.65 Google is a riskier firm. Google’s beta of 1.23 is above average making it riskier than other firms in the industry due to the amount of debt issued. However, firms with higher risk have higher return. Google’s P/E ratio is also currently under the industry average of 28.70% making the stock undervalued. Over the next year Google had predicted that their P/E ratio would decrease to 17.88.
Return on equity or ROE, shows a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. Relative to the industry average of 15.30% Google has a relatively high ROE of 17.18%. Meaning Google generates a strong profit with the money shareholders invested in the company. In comparison to Google, Microsoft has a ROE of 24.5%, EBay has a ROE of 21.28%, Akamai Technologies has a ROE of 8.94%, and Baidu with an exceptionally high ROE of 53.6%. Another way to compare Google to its competitors is to compare benchmarks. Benchmarking of Google’s competitors would be measured in terms of profit margin. The higher the profit margin the more profitable a company is. Google has a profit margin of 59.92 % while its biggest competitor Microsoft has a profit margin of 75.23% and Apple has a profit margin of 43.87%. This means that Microsoft has a competitive advantage of cost control compared to Google, Apple, and other competitors in this industry.
Throughout the years Google has remained a strong well-known company that supplies organized information from all around the world to thousands of consumers every day. Through exploiting strengths, executing opportunities, fixing weaknesses, and distinguishing threats Google can remain a top-notch company and continue to dominate the Internet Information system.
Some recent news for this company is the mind-blowing lawsuit between Apple and Google. Within the last year Apple had sewed Google for seeking unreasonably high license fees for patent use on wireless technology. Apple claimed that Motorola was in violation of their patent by seeking a license fee of 2.25 percent of the price of devices. Over the last week Google was pleased to hear that this lawsuit was dropped due to the fact that there was no basis for the claim.
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