business, finance

Google And Yahoo Financial Analysis

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Google and Yahoo financial analysis:

According to an E- business report by Larry Freed in 2009 Google has retained its position in the E businesses a market leader, the report shows that in 2009 Google internet searches amounted to 63. 9% total internet searches while yahoo amounted to 21.3% of total searches. These results show that Google internet searches are triple those of the yahoo company. (Larry Freed, 2009)

The report also indicates the customer satisfaction indices for the company; in 2002 Google customer satisfaction index was 80 while in 2009 the customer satisfaction index was 86. On the other hand yahoo customer index was 76 in 2002 and 78 in 2009. This shows that yahoo the second largest E business company customer satisfaction index has remained relatively lower than the Google company value. (Larry Freed, 2009)

This paper discusses the differences and similarities of the two companies and which company would be the best investment option, a number of financial ratios are indicated to highlight the level of activity, debt, profitability and liquidity in the two companies.

Contents:

1) Introduction:

2) Financial rations:

i) Liquidity:

(a) Net working capital

(b) Current ratio

ii) Activity:

(a) Average collection period

(b) Average payment period

(c) Fixed asset turnover

(d) Total asset turnover

iii) Debt:

(a) Debt ratio

(b) Debt equity ratio

iv) Profitability:

(a) Net profit margin

(b) Return on total assets

(c) Return on equity

(d) Earnings per share

(e) Price earning ratio

3) Conclusion:

4) References:

1) Introduction:

Major companies in the internet information technology providers industry include Yahoo, Google, MSN and ASK IT, (Larry Freed, 2009) Google is the market leader in the industry with over 50% of the market share. The industry’s market capitalization is $231 billion which comprises of 171.75 billion for Google and 22.1 billion for the Yahoo Company. In 2009 net income after tax was 0.433 billion for the yahoo company and 6.52 billion for the Google Company, this indicates the income differences between the two companies and therefore Google is the best investment option. (Yahoo Finance, 2009)

2) Financial rations:

i) Liquidity:

Google and yahoo liquidity ratio shows their ability to pay their short term debts, creditors prefer a higher current ratio and also higher net working capital (Tamari, 1998)

(a) Net working capital

Google working capital net working capital in 2009 was 26,419 million while yahoo’s working capital was 2,887 million, this indicates that Google’s working capital is 10 times higher working capital and therefore the company would easily obtain funds and expand its operations.

(b) Current ratio

The current ratio is also a good indicator of creditworthiness of a company, (Tamari, 1998). Google’s current ratio was 10.62 in 2009 while yahoo current ratio was 2.67, and this means that Google’s creditworthiness is relatively high meaning that it can easily obtain funds to finance its operations.

ii) Activity:

Ratios that indicate the level of activity in a company include average collection and payment period (Tamari, 1998), fixed assets turnover and total assets turnover, the higher the asset turnover ratio the better given that this ratio indicates how effectively a company manages its assets to generate income.

(a) Average collection period

This is a ratio that indicates how long it takes for a company to collect funds from its debtors, (Tamari, 1998), Google average collection period has declined over the years and its value was 49 days in 2009, yahoo average collection period was 56 in 2009, this indicates that yahoo collection period is relatively higher than Google and therefore may have a higher possibility of ending up with bad debts or delayed payments of services sold on credit.

(b) Average payment period

This value indicates the time taken for a company to pay up its creditors, in 2009 Google average payment period was 1.38 while yahoo average payment period was 10.4, and this means that the Google Company takes less time to pay up its funds than yahoo. (Tamari, 1998)

(c) Fixed asset turnover

Fixed asset turnover is a ratio similar to the total asset turnover, Google has a more fixed assets than yahoo, yahoo fixed asset turnover declined from 0.8 to 0.6 in the year 2008 to 2009, Google fixed asset turnover remained relatively higher and increased from 1.88 to 2.08 for the period 2008 to 2009, this indicates an increase in the efficient use of assets to generate income in the Google company and a decline in the yahoo company (Tamari, 1998)

(d) Total asset turnover

Yahoo total asset turnover remained lower than the ratio for Google, in 2009 Google total asset turnover was 0.58 and in the same year yahoo total asset turnover was 0.43, these results therefore show that Google is more efficient in using its assets to grenade income. (Tamari, 1998)

iii) Debt:

The debt level of a company is also an important indicator of the financial position of a company, and these ratios include the debt ratio and the debt equity ratio, (Tamari, 1998)

(a) Debt ratio

The debt ratio indicates the level of assets financed using debt or liabilities (Tamari, 1998), in 2009 the ratio was 0.163 for yahoo and 0.11 for Google, this indicates that yahoo is financing more of its assets using liabilities than Google, this means that the net worth of Google is relatively higher than yahoo.

(b) Debt equity ratio

This ratio indicates the proportion of debt and equity that finance a company (Tamari, 1998), in 2009 the companies did not finance using debts although in 2005 and 2006 yahoo financed using debts, this means that the two companies are equity financed, equity has a disadvantage to the company given that the company is required to pay dividends, however this form of financing is preferred given that the company is not required to pay interest on funds borrowed.

iv)    Profitability:

This is the most important factor to consider when making investment decisions, ratios that indicate profitability include the profit margin, ROE, ROA, EPS and price earning ratio. (Tamari, 1998)

(a) Net profit margin

In 2009 Google net profits amounted to 6.52 billion, yahoo net profits amounted to 0.433, this resulted into a net profit margin of 0.06 for the yahoo company and 0.275 for Google, this indicates that Google is more profitable than yahoo. (Yahoo Finance, 2009)

(b) Return on total assets

Return on assets was 0.161 for the Google Company and 0.029 for the yahoo company, and this indicates that assets in the Google Company generate more income than in the yahoo company.

(c) Return on equity

Investing in any company also requires an estimate on the returns on equity, Yahoo ROE was 0.03 in 2009 and Google ROE was 0.18, this means that Google shares generate more income than yahoo shares. (Yahoo Finance, 2009)

(d) Earnings per share

In 2009 Google shares earned 20.55 while yahoo shares in the same year earned 0.48, this indicates higher earnings for investors in the Google Company compared to the yahoo company. (Yahoo Finance, 2009)

(e) Price earning ratio

From yahoo finance (2010) Google shares cost $540.76 while yahoo shares cost $15.58, this indicates that Google shares cost is relatively high and require a large amount of investment, in 2005 Google price earning ratio was 102 and this ratio has declined to 25.93 in 2009, yahoo on the other hand in 2005 had a price earning ratio of 12 in 2005 and this ratio increased to 31 in 2009. This indicates that price earning ratio in Google has declined over the years and this can be explained by the high demand for Google shares and a decline in the demand for Yahoo shares. (Yahoo Finance, 2009)

3) Conclusion:

Google shares currently trade at $540.76 while yahoo shares currently trade at $15.58; despite the large investment required Google would be a better investment option due to its high profit margins and returns on equity. Google is also the market leader in the industry meaning that it controls a large portion of the market; implementation of appropriate strategies would greatly increase profits and investor wealth.

4) References:

Larry Freed. Foresee results 2009: E- business report, retrieved on 22nd February, from www.foreseeresults.com/downloads/ACSI_E-Business_Report_Aug09.pdf . 2009.

Meir Tamari (1998) financial ratios: analysis and prediction‎. New Jersey: prentice hall.

Yahoo finance. Google Company. Retrieved on 22nd February, from http://finance.yahoo.com/q?s=Goog . 2009

Yahoo Finance. Yahoo Company, retrieved on 22nd February, from http://finance.yahoo.com/q?s=YHOO . 2009