Google vs. Microsoft: Financial Ratio Analysis & Investment
This paper compares Google and Microsoft across two dimensions: business model structure and financial performance. It begins by outlining each company's core revenue streams, competitive position, and growth prospects, noting that while both firms target mass markets with differentiated products, Google's dominance in search and Android's expansion in mobile set it apart. The financial analysis applies ratio analysis—current ratio, return on assets, return on equity, debt ratio, fixed asset turnover, dividend payout, and price/earnings ratio—to FY 2011 data for both companies. The paper concludes by weighing these metrics against each firm's growth trajectory to recommend Google as the stronger investment, primarily due to Android's untapped global growth potential.
- Business Models Overview: Google and Microsoft core businesses compared
- Financial Ratio Analysis: Purpose and method of ratio analysis
- Liquidity and Capital Structure: Current ratio, ROA, ROE, and debt ratios
- Operating Performance and Dividends: Asset turnover, dividend payout, and P/E ratios
- The Investment Decision: Synthesis of ratios into stock recommendation
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What makes this paper effective
- Grounds abstract financial concepts in concrete company examples, making ratio definitions immediately applicable to real data.
- Systematically works through multiple ratio categories—liquidity, profitability, leverage, operating efficiency, and market valuation—before synthesizing them into a single investment recommendation.
- Connects quantitative findings to qualitative business model analysis, explaining why ratios differ rather than simply reporting the numbers.
Key academic technique demonstrated
The paper demonstrates comparative financial analysis: it pairs ratio calculation with interpretive context, noting, for example, that Microsoft's higher leverage is a deliberate capital-structure choice rather than a sign of financial distress. This moves the argument from description to evaluation, which is essential for undergraduate finance writing.
Structure breakdown
The paper opens with a side-by-side business model comparison that establishes each company's competitive position. It then moves through a ratio analysis section organized by ratio type, with each ratio defined before figures are presented. A final investment-decision section synthesizes the financial data with growth-potential arguments to arrive at a reasoned conclusion. The overall flow—context → analysis → recommendation—mirrors a standard equity research report.
Business Models Overview
Google and Microsoft are competitors in two different businesses: search engines and mobile operating systems. Google is the industry leader in search engines, garnering massive amounts of traffic across its various sites. Google operates a number of search properties—maps, scholar, images, and translate—that align with its mandate to make information more freely accessible. The company's Android mobile operating system has become a major product for the firm, spurring strong growth in recent years. Android is licensed by OEM companies (smartphone and tablet makers) for use as an operating system. Much of Google's revenue comes from advertising sales, which are based on search terms and customer information that has been gathered. The company holds a dominant position in this market.
Microsoft's main businesses are the Windows operating system and the company's suite of software products. These generate revenue both from OEM computer makers and from end users. The company also serves a major corporate market, offering both software and a range of enterprise solutions. Microsoft launched Bing as one of its online properties, but Bing remains far smaller than Google in terms of market share. Microsoft also has a mobile operating system that trails Android by a significant margin. The other major Microsoft business—one in which it does not compete with Google—is gaming, centered on its Xbox property.
Both companies target broad audiences with mass-market products, yet both are also focused on earning high margins through differentiation. Both are global companies, though each earns the bulk of its revenue from the American market. Both firms have moved into entirely different product segments in order to augment their core businesses and deploy excess capital. There are, therefore, many structural similarities between these two companies.
Financial Ratio Analysis
Financial ratio analysis is a means of comparing different companies. Ratios are derived from financial statements compiled in accordance with generally accepted accounting principles (GAAP), which makes those statements roughly comparable across firms. This is especially true of companies that compete in the same industry. Google and Microsoft are close enough competitors that ratio analysis is a fair method for assessing the differences between them and determining which company is financially stronger and which represents the better investment.
Liquidity and Capital Structure
The first category to be analyzed is the liquidity ratio group. The most important liquidity ratio is the current ratio, which measures a firm's capacity to meet its financial obligations over the next year by comparing those obligations to assets that can be readily liquidated. The formula is current assets divided by current liabilities. Both of these firms are exceptionally wealthy, so both should have fairly high current ratios. Google's current ratio at the end of FY 2011 was 5.91, while Microsoft's was 2.6. Both firms are highly liquid, but Google is exceptionally so.
The return on assets (ROA) and return on equity (ROE) measure the ability of a company to convert its assets and equity into profits; higher figures are better. For Google, the ROA was 14.9% and the ROE was 18.66%. For Microsoft, the ROA was 22.9% and the ROE was 41.68%. These figures indicate that Microsoft achieves better investment returns in both categories. The company's exceptional profits are very high relative to both its asset base and shareholders' equity. The latter could be partly explained by higher debt levels in its capital structure.
The debt ratio is one indicator of a firm's capital structure. A high debt ratio signifies that the firm is heavily leveraged, which reflects a higher degree of financial risk, as more of the firm's operating cash flows must be diverted to debt service. However, high leverage can also deliver superior shareholder returns, and debt financing typically costs less than equity financing. For these reasons, some firms deliberately maintain high debt levels. The key to interpreting the debt ratio is therefore to determine whether a company is in financial difficulty or whether its debt level is a deliberate strategic choice. Google's debt ratio is 0.2, while Microsoft's is 0.47. Google carries very little long-term debt and is clearly in a strong financial position. Microsoft's higher debt level appears to be a strategic choice for two reasons. First, the company holds enough cash ($52.7 billion) to retire its entire long-term debt ($11.9 billion) at any time. Second, the debt ratio has changed little over the past five years, indicating that the company is deliberately maintaining its current capital structure—likely to lower its overall cost of capital.
Works Cited
Investopedia. (2012). Reading the balance sheet. Investopedia. Retrieved March 5, 2012, from http://www.investopedia.com/articles/04/031004.asp
Loth, R. (2012). Understanding the income statement. Investopedia. Retrieved March 5, 2012, from http://www.investopedia.com/articles/04/022504.asp
MSN Moneycentral. (2012). Google. MSN Moneycentral. Retrieved March 5, 2012, from http://investing.money.msn.com/investments/stock-balance-sheet/?symbol=us%3AGOOG&stmtView=Ann
MSN Moneycentral. (2012). Microsoft. MSN Moneycentral. Retrieved March 5, 2012, from http://investing.money.msn.com/investments/stock-balance-sheet/?symbol=us%3AMSFT&stmtView=Ann
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