Memo
From:
Cc:
Date:
Ratio Analysis Memo
Introduction
The purpose of this memo is to analyze the ratios of Google Inc. and provide the strategies that the organization can undertake in order to be competitive in the economy. The memo has been prepared following an increase in competition from Yahoo Inc and other companies in the industry. In this memo, I will outline the financial ratio analysis of GOOGLE Inc. over the last few months. In addition, I will demonstrate the company’s viability and performance in the economy, and strategies that can be implemented in order to realize effective operations. The ratios analyzed include liquidity ratios, profitability ratios, and solvency ratios.
Business Description
Google Inc is one of the company’s that operates in the leading internet search engine. It has been considered to be the best search engine as compared to its competitors over the past decades.
Ratio Analysis
The procedure and steps for the calculation of the ratios are provided in the appendix. The Memo focuses on liquidity ratios, Profitability ratios, and solvency ratios.
Liquidity ratios
The liquidity ratio measures the capacity of Google Inc. to repay the company’s debt when they fall due. Although the industrial levels for the liquidity ratios have been outlined, the global financial recess had an effect on the realization of these standardized ratios. The current ratio for the company is 5.8. Ideally, the current ratio shows that the company has an excess of current assets to cover the available debts. The industrial current ratio is 2.0.
However, an investor cannot use the information to analyze the company’s going concerns. Creditors use this ratio to ascertain whether the company can meet their short obligation when it falls due. Therefore, it can easily repay its current debts with the current assets. On the other hand, the industrial quick ratio is 1:1. The quick ratio of 5.6 shows how the company can pay its bills without selling inventory. As such, the company can easily meet its short-term obligations. Creditors use this ratio to determine the rate at which the company can meet its debts with the available liquid assets.
Receivables turnover determines the company’s efficiency in collecting sales that were issued on credit. During the financial year 2011, Google Inc. was able to collect its sales revenue 7 times. The ratio is used by financiers and investors to determine its going concern and efficiency of the management (Brigham & Houston, 2011).
Finally, Inventory turnover measures the rate at which each amount of inventory would generate revenue. It measures the financial stability of the company, and how it can be able to meets its financial activities. Currently, Google’s inventory turnover is at 5.4. The financiers and investors use the ratio to ascertain the liquidity and efficiency of the management’s operations.
Profitability ratios
The organizations’ profitability ratio enhances various stakeholders to determine its going concern and the overall financial performance of the organization. Some of the stakeholders that use this ratio include government (for taxation), financiers, investors, creditors, and debtors. Asset turnover measures the rate at which revenues are generated from the available assets. The asset turnover ratio for the Google is 0.6. The investors and company’s management uses the ratio to determine how efficient the company can use its assets to generate additional revenues in order to be competitive (Warren & Reeve, 2011).
Most of the companies’ strategic objective is to maximize its profitability, and this is measured using profit margin. Google Inc. has a profit margin of 69.8% implying that it maximizes its operations in generating high profits. As such, it shows that the company is financially stable, and its going concern is not at stake. Various stakeholders rely on profit margin of the company in decision making (Brigham & Houston, 2011). They include investors, debtors and creditors, suppliers, financiers, and government among others.
Return on Assets (ROA) shows the rate at which earnings can be generated from the available assets. Google ROA of 14.0% demonstrates the strong financial position, as they are able to generate earnings from the assets available. In order to ascertain the profitability and financial performance of the company, the users of this ratio—investors, financiers, government—needs to ascertain the ownership of the reported assets.
Return on Common Stockholders’ equity (RCSE) shows the rate at which earnings can be realized from the investments by common stockholders. Although there is no standard rate that has been set aside by the industry, the investors can decide on the rate in which they can use to make their decision on the investment on company’s stocks. The RCSE of 16.7% denotes a company’s financial stability.
Solvency ratios
Debt to total assets ratio shows how the total debt—both short term and long term debts—can be offset by the available assets. From the financial information, the debt to total assets of Google Inc is 0.06. It shows that the company can easily offset the total debts with the available assets. The ratio enables the investors, creditors, governments, and other stakeholders to determine whether the company can repay its debts in the case of liquidation. Times Interest Earned shows the company’s ability to effectively meet its obligations at a given time. Most of investors would want a company that would repay them dividends and interest required.
References
Brigham, E. & Houston, J. (2011). Fundamentals of Financial Management, London: Cengage Learning.
Warren, C. & Reeve, J. (2011). Financial Accounting, London: Cengage Learning.
Appendix
Liquidity ratios
Current ratio = Current Assets /Current Liabilities = 56,859,000 /8,913,000 = 5.8
Quick ratio = (Current Assets-stock) /Current Liabilities = (56,859,000 – 6,982,200) /8,913,000 =5.6
Receivables turnover = Sales revenue/average receivables = 37,905,000 /4,987,500 = 7.6times
Inventory turnover =Revenue / Average Inventory = 37,905,000 /6,982,200 = 5.4
Profitability Ratios
Asset Turnover = Revenue /Average of Total Assets = 37,905,000 /22,743,000 =0.6
Profit Margin = gross profit /Total sales = {26,568,000 /37,905,000} *100 =69.8%
Return on Assets = Earnings from total operations /Total Assets = {10,185,560 /72,574,000} *100 =14.0%
Return on Common Stockholders’ equity = Earnings from total operations /Stockholders’ equity = {10,185,560 /60,991,377} *100 =16.7%
Solvency Ratios
Debt to total assets = Total Debt /Total assets = 4,204,000 /72,574,000 =0.06
Times Interest Earned = EBIT /Interest expense =12,876,000 /58,000 = 222.0.