Want to invest? See what Cup O’ Joe is pouring today. In pursuit of my Master’s
Degree in Business Management and being in the corporate sector of business for
several years I have learned to benchmark the financial data of many competitive
companies. So the company as I will be mentioning is Google Inc. Take a look at the
financial key ratios and absorb! “A reader is a leader”.
Financial Ratio Comparisons
The following section will present useful ratios for Google, Inc. in graph format and
analyze them against the ratios of their leading competitors, Yahoo and Baidu.
Financial ratios are used to analyze a company‘s position in relevant areas of
business. They also help identify strengths and weaknesses so that companies can
adjust their practices to improve efficiencies and the quality of their products. These
ratios fall in one of four groups: liquidity, leverage, activity or profitability.
Revenue
Total revenue is the total amount of money brought in by a company for all of their
products combined, prior to deducting any production costs or overhead.
Google brought in 29.32B of revenue in 2010, over 99% of that revenue came from
internet advertising solutions. The remaining 1% came from various subscription
applications, along with some expansion in mobile phone technology, and other
forms of traditional advertising. Google’s revenue is three times larger than its
closest competitors – Baidu and Yahoo.
Operational Margin Ratio
Operating margin is a measure of profitability. It indicates how much of each dollar of
revenues is left over after both costs of goods sold and operating expenses are
considered.
The formula is for calculating operating margin is:
Operating Margin = Operating Earnings
Revenue
From 2008 to 2010, Google‘s operating margin increased 4.97 percentage points
compared to Baidu‘s increase of 15.73 and Yahoo‘s increase of 12.03.
A good operating margin is needed for a company to be able to pay for its fixed
costs, such as interest on debt. A higher operating margin means that the company
has less financial risk. From this comparison, Google appears to be at a higher risk
than its competitors in regards to operating margin performance.
Net Profit
Net profit represents the number of sales dollars remaining after all operating
expenses, interest, taxes and preferred stock dividends (but not common stock
dividends) have been deducted from a company's total revenue.
Total Revenue -Total Expenses = Net Profit
In 2009 Google’s net profits amounted to 6.520 billion, yahoo net profits amounted to
597,992, Baidu net profit 217,534 which resulted into a net profit margin of lowest to
highest of 5.922. This indicates that Google is more profitable than yahoo and Baidu.
(Yahoo Finance, 2009). Google doubled net profit from 2008 to 2010. Yahoo also
doubled profits over the past three years, while Baidu’s net profit decreased by half.
Net Profit Margin Ratio
This ratio tells you how much profit a company makes for every $1 it generates in
revenue or sales. Profit margins vary by industry, but all else being equal, the higher
a company‘s profit margin compared to its competitors, the better.
(www.beginnersinvest.com) It is an indicator of a company‘s pricing policies and its
ability to control its assets. This ratio is what is normally considered to be profit. It is
the percentage of each sales dollar that is available for normal uses such as
reinvestment, savings, and payments of dividends. (Strategic Management
Pinterest)
Net Profit Margin Ratio = Sales
Net Profit
Google has continued to increase its Net Profit Margin over the past three years,
with significant gains for both Google and Baidu from 2008 to 2009, and modest
gains from 2009 – 2010. Yahoo Net Profit Margin has steadily increased over the
past three years. What we can summarize from this graph is that while Google is a
strong company, its competitor, Baidu, still returns a better profit for every dollar it
makes in sales revenue. Increasing this margin should definitely be a goal for
Google to focus on in the coming years.
Display advertising was the margin killer, as brand advertising's revenue finds the
smaller Baidu generating far better net profit margins than Google and Yahoo. Baidu
is also growing its profitability at more than half Google's rate at 54.07%, but this is
due to Baidu making logical moves to expand into online travel and even legal music
downloads, but it has done so either through partners that bear the brunt of margin
damage or by stepping in only if the venture will be lucrative on the bottom line.
Return on Assets Ratio
This ratio indicates how profitable a company is relative to its total assets. It provides
the amount of profit earned for every dollar of assets. ROA provides management
with an idea of how efficient they are in using assets to generate earnings.
Return on Assets Ratio = Net Profit After Taxes
Total Assets
The ROA indicates how well total assets are being managed to product profits. The
difference between the ROA and the Net Profit Margin is that Net Profit Margin is
use as a measure of effectiveness in terms of sales, where ROA is a measure of
management’s effectiveness in terms of its resources. The goal here, as it is with
NPM, is to have the largest possible ROA. The larger these numbers, the more
money you are returning in profit for every asset you hold.
In the graph you can see that Google, as well as its competitors, have had
fluctuating ROA over the past few years. In 2010, Google was returning $.174 for
every $1.00 in assets it held. Compared to Baidu, which had the highest ROA of the
three companies at .183, Google would need to increase its ROA by 24% to catch
up with Baidu. Increasing this number should be another focus for Google over the
next few years.
Return on Equity Ratio
This ratio indicates how much profit a company generates with the money invested
by shareholders. The higher this ratio is, the greater the share price of the equity.
This makes the company more attractive to other investors. The ROE is the best
determinant of the value of a company. When analyzed along with the return on total
assets, these two ratios give a good idea of the potential of the company. This ratio
should be compared to other companies in the same industry.
Return on Equity Ratio = Net Profit After Taxes
Total Equity
ROE reveals the rate of return on the funds that have been invested by the owners.
A healthy company, large in scale, has an ROE between 10 and 15 percent. A ROA
above 20 percent is considered superior, and to maintain an ROE at that level
over period of years is a mark of corporate excellence. As you can see from the
graph, Google and Baidu are sitting between 10 and 20% in recent years. Baidu has
far exceeded the 20% threshold, showing it’s excellence in returns on equity
reinvested in the company. As a company Google has performed well in this
analysis, but should continue to strive to increase this ratio above and beyond 20%
range.
Sources:
http://financials.morningstar.com/ratios/r.html?t=YHOO
http://finance.yahoo.com/q/is?s=YHOO+Income+Statement&annual
http://finance.google.com/q/is?s=YHOO+Income+Statement&annual
http://finance.bidu.com/q/is?s=YHOO+Income+Statement&annual