This paper is about Google and Yahoo. This is a financial analysis of the two companies, albeit a guided one , as opposed to a perfect one. The questions lead us towards a DuPont analysis of the two companies, and we must come to conclusions about how we can make these two companies more profitable.
Goog Yhoo
Google and Yahoo are two of the leaders in Internet search and advertising, and the flagship site of both ranks among the top sites on the Internet. This paper will take a look at the financial statements of these two companies, and analyze them.
The first section starts with the balance sheet. The capital accounts of both companies are predominantly based on equity. Google has $3 billion in long-term debt, while Yahoo has none. Otherwise, the companies both just have operating liabilities in their capital structure. Stock prices are not part of the balance sheet and are a different metric altogether. The market cap of Google is $265 billion compared with book value equity of $71 billion, a ratio of 3.7. The market cap of Yahoo is $27 billion compared with a book value of $14 billion, a ratio of 1.9. The market clearly thinks more of Google's growth potential than it does of Yahoo's. Given Yahoo's history of sales declines, it is amazing it has a Price/Book ratio that high.
2. The fixed assets of Google are around $33 billion, while for Yahoo they are around $12 billion. Thus, they are much higher for Yahoo. This is because Google's amount of cash represents a distortion. Yahoo keeps its cash ($5.5 billion of it, anyway) as a long-term investment, which takes it out of current assets. So the way the two companies treat and record their cash is quite a bit different.
3. Google's non-current assets include plant/property/equipment and goodwill. Yahoo of course has the abovementioned long-term investments. Otherwise, p/p/e and goodwill are the two biggest categories at Yahoo as well. Trademarks and other intellectual property would be intangible assets for companies as large as Google and Yahoo.
4. Google has $1.8 billion in deferred taxes. Yahoo has $675 million in deferred taxes. These companies are going to pay such taxes during the present fiscal year but are likely to accrue more deferred taxes.
5. As noted, Google has $48 billion in cash. This pretty much answers the question about liquidity. Yahoo has $4.1 billion in cash, compared with current liabilities of $1.3 billion, so Yahoo also has good liquidity. Even though it holds some cash as a long-term asset, it keeps enough in cash to keep the company very liquid.
6. Neither company has too much debt. Only Google knows why it took out $3 billion in debt but it could pay that back tomorrow. Yahoo has no long-term debt so its position with respect to debt is quite good. Both companies could take out substantially more debt on top of their current levels, not just because of cash in the bank but because each has healthy free cash flow as well.
7. There does not appear to be any hidden assets. Probably because they are hidden.
Income Statement
1. Ratios do not tell us what the profit potential of the company is. They do tell us how profitable the company is. In this case, Google is wildly profitable. Three ratios are key to analyzing profitability, the gross, operating and net margins. Google's gross margin is 59% and its net margin is 21%. Both are very healthy ratios. Yahoo's gross margin is 67% and its net margin is 79%. This is an interesting quirk, but reflects a gain of $4.6 billion on the sale of assets. The net margin in 2011 was 11.7%, a more realistic number for the company. Yahoo is not as profitable as Google, despite they deriving most of their revenues from the same business.
2. If we could make Google more profitable, we would be smart enough to work for Google. Let's not give one of the best -- run companies in the world lessons today. If it could find a way to invest those billions at a higher rate than 1%, that would be nice, but right now the only business that makes Google money is advertising -- it doesn't even make money with its large market shares in Android and Chrome. So finding ways to invest that capital profitably are easier said than done.
Yahoo, on the other hand, does have room for improvement. It is facing declining revenues, and that has affected its profitability. Faced with ongoing cuts to staff and to R&D, Yahoo is in a bit of a death spiral for such a successful company. To restore profitability, Yahoo needs to stabilize the decline in its business and start thinking about growth. The company has suffered in the past several years because it is not the best at anything anymore -- Google, Microsoft and Apple all beat Yahoo at different elements of the company's business. Yahoo needs new revenue sources, preferably ones where those other companies are not operating right now.
DuPont
The DuPont formula is a reflection of the different elements of ROE. For Google, the profit margin as noted is 21%, its total asset turnover is 0.53 and its equity multiplier is 3.24. Yahoo's DuPont is a profit margin (we'll use the continuing one of 11.3, its total asset turnover is 0.29 and its equity multiplier is 5.72. Google's ROE is 16.36% while Yahoo's is skewed by that asset sale, but has a five-year average of 11.9.
From this analysis, we can see that Google has a higher ROE than Yahoo for several reasons. The first is that Google has higher margins. This is a positive way to earn ROE. Additionally, Google has a better total asset turnover. Both companies have a relatively low total asset turnover because they are carrying so much money in cash. Both firms have low amount of debt, so their capital structure also contributes positively to the ROE.
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