Calculate or identify from each company's most recent annual report the six (6) specific financial ratios listed and provide as an appendix to the paper.
Liquidity ratios are responsible for measuring a firm's performance regarding the availability of cash to pay its debt obligations (Rashid & Abbas, 2011, p. 9). A common type of liquid ratio is the current ratio. The current ratio is responsible for comparing and contrasting current assets to current liabilities. This information is useful to executives in that they become aware whether or not the firm will be able to pay its current debt as it matures (Kurtz, 2011, p. 540). Dividing current assets to current liabilities gives the liquidity ratio. As a result, Google's liquidity ratio can be calculated by dividing 41,562 into 9,996. The liquidity ratio equals to 4.15. Microsoft's liquidity ratio can be calculated by dividing 49,280 into 27.034. The liquidity ratio equals to 1.82.
Profitability ratios are responsible for measuring the organization's overall financial performance by evaluating its ability to generate revenues in excess of operating costs and other expenses (Kurtz, 2011, p. 542). The return on assets, or the ROA ratio, reveals how well management is employing the total assets of the company to make a profit. The ROA ratio can be calculated by comparing the net income to the average total assets (Investopedia Ulc., 2011). Therefore, the ROA ratio of Google can be expressed as 8,505 / (57, 851+40,497) / 2 which equals to 17.2%. The ROA ratio of Microsoft can be expressed as 18,760 / (86, 113+77,888) / 2 which equals to 21.8%.
The return on equity ratio, or the ROE, is responsible for measuring how much the shareholders earned for their investment in the company (Investopedia Ulc., 2011). The ROE ratio is calculated by comparing the net income to the average equity. Therefore, the ROE ratio of Google can be expressed as 8,505 / (36,004+46,241) / 2 which equals to 20.6%. The ROE ratio of Microsoft can be expressed as 18,760 / (46,175+39,558) / 2 which equals to 43.7%.
The debt ratio is responsible for comparing a company's total liabilities to its total assets. This information is used to calculate the amount of leverage that is being used by a company (Loth, 2011). The debt ratio can be calculated by comparing the total liabilities to the total assets. Therefore, the debt ratio of Google can be expressed as 11,610 / 57,851 which equals to 20%. The debt ratio of Microsoft can be expressed as 39,938 / 86,113 which equals to 46.37%.
The fixed assets turnover ratio is a rough measure of the productivity of a company's fixed assets (property, plant and equipment) with respect to generating sales. It is designed to reflect a company's efficiency in managing these significant assets (Investopedia Ulc., 2011). It is calculated by comparing revenue to fixed assets. Therefore, the fixed assets turnover ratio of Google can be expressed as 29,321 / 7,759 which equals to 3.77. The fixed assets turnover ratio of Microsoft can be expressed as 62,484 / 7,630 which equals to 8.18.
Cash flow indicators focus on the cash being generated in terms of how much is being generated and the safety net that it provides to the company. Dividend payout ratio identifies the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders (Loth, 2011). It is calculated by comparing dividends for common share to earnings per share. Either Google Inc. Or Microsoft Corp. pays dividends to its shareholders so there is not an amount for dividends for common share in their financial documents.
Investment valuation ratio is using to estimate the attractiveness of a potential or existing investment and get an idea of its valuation. The price/earnings ratio (P/E) is the best known of the investment valuation indicators (Loth, 2011). It is calculated by comparing stock price per share to earnings per share. Therefore, the price/earnings ratio of Google can be expressed as 625.8/29.34 which equals to 21.33. The price/earnings ratio of Microsoft can be expressed 25.6/2.75 which equals to 9.34.
2. Compare and contrast each company's business model: (1) core business, (2) leading products and/or services, (3) management/leadership style, (4) innovation track record.
Google is one of the major internet technology and advertising companies in the world which's headquarter is in Mountain View, California and employs 24,400 people. The company specializes in internet search engines and related advertising services. Microsoft is a company which develops, manufactures, licenses, and supports software products for many computing devices. The company mainly operates in the U.S. Its headquarters is located in Redmond, Washington. It employs about 89,000 people (The Datamonitor Group, 2011).
Google holds a large index of websites and other online content, which are freely available through its search engine. Revenue is created by Google by providing online advertising. Google's brand image along with its strong market position grants it a competitive advantage among its peers. Microsoft's software products involve operating systems, server applications, information worker productivity applications, business solution applications, high-performance computing applications, and software development tools. Also the MSN network of internet products and services are developed by Microsoft. Strong brand image of the company raise their demand because it promotes greater trust its product and services (The Datamonitor Group, 2011). The leading products of Google are Google search, YouTube, Google Maps while Microsoft's leading products are Microsoft Office, Windows Server, Windows Client.
Google Inc.'s management team is comprised of 9 board of directors and 6 executive officers. According to the ex-CEO and current chairman of the company (2011), Eric Schmidt, "The company is organized 'bottoms up' in product creativity and 'tops down' from running the quarter and the financials and so forth" (Ahmed, 2011, para. 6). Google encourages employees to spend 20% of time on self-directed projects. The company supports large group conversation and appreciates for diversity of ideas. Once a key decision is reached, all parties that are interested are invited to the decision making process and are encouraged to share their opinions. It prevents hierarchical decision making. Listening to each other is core to its culture (Ahmed, 2011). Microsoft is divided into eight customer-oriented divisions, each under a top manager who is supposed to exercise delegated, autonomous power over his field.
According to their innovation track records, even though each company has dozen of successful innovation, they both have failed products too. But of course those failed products don't have big amount of numbers. Failed Google innovations include the following: Google Lively, Orkut, and Google Web Page Creator. Some examples for failed Microsoft products are Tablet PCs and Microsoft Bob.
3. Use the financial ratio analysis and explain which company is better able to withstand a major recession.
A recession can be defined as an extended period of significant decline in economic activity including negative gross domestic product growth, faltering confidence on the part of consumers and businesses, weakening employment, falling real incomes, and weakening sales and production (Investopedia Ulc., 2011). Comparing current ratio, debt ratio, fixed asset turnover ratio of both companies is helpful to see which company can handle a recession better.
Interpretation of current ratio: Increasing liquidity reduces the likelihood that a firm will face emergencies caused by the need to raise funds to repay loans (Kurtz, 2011, p. 539). If a current ratio is 2 to 1, it means there is a satisfactory liquidity in that company. If current ratio is bellow than 1, then the company may have problems paying its bills on time. The numbers shows that both two companies' current ratio is lower than 1. However, the higher the current ratio is, the more capable the company is to pay its obligations. Higher current ratio could give more chance to survive to Google Inc. If there were a major recession.
Interpretation of debt ratio: If debt ratio is greater than 50%, it means that a firm is depending more on borrowed money than owner's equity (Kurtz, 2011). According to both companies percentage of debt ratios, they rely more on owner's equity than borrowed money. But Google Inc.'s debt ratio is less than Microsoft Corporation's which gives more advantage to Google Inc. during a possible recession. Interpretation of fixed assets turnover ratio: A higher fixed asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. According to the numbers, Microsoft Corp. is using its working capital more efficiently than Google Inc.
Comparing of those ratios shows that if there were a recession, Google Inc. could handle it better. Even though Microsoft's fixed assets turnover ratio is higher than Google Inc.'s, Google's current ratio is higher and debt ratio is lower than Microsoft's. Those are more important at a potential recession.
4. Explain what the profitability ratios can tell about Google and Microsoft's performance and how that information would influence investing decisions.
Return on assets (ROA) tells what earnings were created from assets. The ROA figure gives investors an idea of how effectively…