Financial Management in Business
Calculate or distinguish from Google and Microsoft, each organization’s most recent annual report, the six (6) specific financial ratios listed and support as an appendix to the paper.
Category stream MICROSOFT GOOGLE
Liquidity measurement ratio: The Current ratio
2.9 5.9
Profitability indicator ratios: Return on assets
20.9% 13.9%
Return on equity
42.% 17.9%
Debt ratio: Debt ratio
0.1 0.09
Operating performance ratio: Fixed asset turnover ratio 2.07 1.91
Cash flow indicator ratio Dividend payout ratio
19% 23%
Investment valuation ratio: Price / Earnings ratio 11.1 20.4
2. Compare and contrast each company’s business model: (1) Core business, (2) leading products and/or services, (3) management/leadership style, and (4) innovation record of accomplishment.
Core Business
Both companies are dealing with the core business in information technology. Google mainly deals with searching the web using their Google search engine. On the other hand, Microsoft deals with a large variety of products and services like software for business, entertainment, developer tools, mobile devices, servers, hardware, etc.
Leading products and/or services
The core products of Google are web searching tools, news stories, internet image search. Other includes home and office functions like creating and sharing online documents, presentations and spreadsheets. The company is also into Instant translation of text, web pages, and files between over 50 languages, social grouping services and discussion groups, innovation in Developer tools, APIs and resources. The company is also diversifying into Specialized Search in Blog, Scholarly and email alerts on various topics. Microsoft’s core products include Bing, Internet Explorer, Microsoft Advertising, All office products, windows products, Microsoft Security Essentials, Windows Live, and Skype. (WWW.microsoft.com)
Management/Leadership Style
Microsoft used monopolistic business practices and anti competitive strategies such as putting unreasonable restrictions in the use of its software, and misrepresentative marketing strategies. The CEO Steve Ballmer’s job entails convincing customers that Microsoft’s latest products are ground breaking enough to purchase. He transformed a $44 billion company in sales into an agile innovator, competing against new business models that challenge their traditional approach to software development, and recruiting enough talent to keep the software giant relevant 25 years from now.
With a management style requires a heavy degree of personalization coupled with the ability to adapt to new conditions. Microsoft’s style is to focus on the long term; his people target market and work until their products are competitive. Ballmer’s approach to management is patience. If they do not succeed at first, they keep trying, until they get what the customer wants. They join leadership and passion, strengthen accounting practices, and insist that a successful career is made up of people, passion, and performance. Leaders set the tone about the real purpose of the organisation by inspiring the people and their passions.
According to google.com, Google’s mission is to organise the world’s information and make it universally accessible and useful. They have a management team that represents some of the most experienced technology professionals in the industry. Their team is committed to innovation by making every team member be comfortable sharing ideas and opinions. Every employee is a hands-on contributor, and each Google is an equally valuable part of Google’s success. In hiring, they favour ability over experience, and their team reflects the global audience that they serve.
Innovation Track Record
Microsoft has a history of entering markets where it was not top dog and yet eventually becomes a strong competitor, which takes patience and long term innovation to win. Microsoft’s CEO says that if you are not the first with an innovation, you do not shy away. Microsoft believes that search area is ripe for innovation, and they will be battling there for years to come as they have some brilliant ideas coming. The CEO acknowledges that innovating is one thing; being agile enough to advantage of innovation is another. Since it is not easy to change culture, the company say that what they working on hardest is agility. They invent things that require scale, discipline, and execution. They are trying to cultivate pockets of agile groups, and enabling people to get the best of all the cultural aspects of the organisation. Windows for instance need to be more things to more people and encompassing than any other product in the world. Zune is creating a niche for itself. They want to break from the past by building a new ecosystem, and have seen a new opportunity in music sharing.
Google has invested in several programs which are not directly related to their core business. This is designed to encourage innovation in areas they care about. For example, Google Ventures is a diverse team of investors, entrepreneurs, and specialists who believe in the power of positive companies to change the world. Google Green will invest hundreds of millions of dollars in renewable energy. They insist that progress depends on radical innovation right now by baking passion, audaciousness, and a little unconventional thinking into everything they do.
Google Earth Engine is an innovative platform that turns an archive of satellite photos taken from space into an online tool. Its main use is in the analysis and visualization of the planet for possible changes and transformations. It also allows scientists and environmentalists to study deforestation, desertification, and global warming on a global scale. Google believes that they can power their operations from 100% renewable energy, and are approaching a clean environment revolution.
Use the financial ratio analysis and explain which company is better able to withstand a major recession.
The two companies may not be fully comparable though they operate in the same industry; however, comparing the two company’s profitability rations, we find that the gross profit margin of Google is higher than that of Microsoft. This means that Google control its cost of inventory better than Microsoft by passing the on the cost of operation to the customers. The main customers of Google include corporate advertisers and ad space sales. All these information can be read from the two company’s income statements.
.Operating Profit Margin
The operating profits margin of Google is also larger than that of Microsoft. Google’s earning before profit and tax is higher than that of Microsoft considering that the amount that amount that Google pays as tax is much higher. This shows that the general operational efficiency of Google is better than that of Microsoft. The expenses incurred by Google are lower and within the limits (Weston, 1990).
Net Profit Margin
The two companies’ net profit margin ratios show that they are almost operating at the same level of profitability. The amount of money that the two companies earn as profit from each dollar is equal. This are derived from the two company’s income statement
Cash Flow Margin
The Cash Flow Margin ratio of the two companies shows an extremely large disparity. The cash flow margin ratio, of Microsoft is larger than that of the Google showing that the cash flow margin ratio of Microsoft shows a remarkably strong correlation in terms of cash generation and sales. The company pays dividends and discharges its debt obligations in time. This makes cash a tremendously significant factor to both Microsoft and Google. From the cash flow margin ratios, it shows that Microsoft easily translates its sales into cash. Google has a higher liquidity measurement ratio; thus, it has a higher ability to pay off its short term debt obligations than Microsoft.
4. Explain what the profitability ratios can tell about Google and Microsoft’s performance and how that information would influence investing decisions.
All companies must assess their bottom lines at the end of each fiscal period. In this way, companies can make their investment decision on which products are not profitable. Companies may decide to increase their investment into the profitable products and drop the less profitable products. The two company’s profitability ratios show the efficiency and the performance of the company. The main ratios that the two companies can use are the margin and the returns. While the two companies use the margins to prove the firm’s ability to convert the sales dollars into profits, the returns are an necessary measure of the two company’s efficiency in the generation of returns to shareholders (Houston, & Eugene, 2009)..
Microsoft has higher profitability ratios as compared to Google. Microsoft has a return on assets at 20.9% while Google has 13.9% when considering a return on assets. While considering a return on equity Microsoft has 42%, and Google has a mere 17.9%. When it comes to investing, analysing the profitability ratios is crucial in influencing investor decisions.
The return on assets ratio indicates how profitable a company is, relative to its total assets. It is calculated by comparing the net income to average total assets, which is expressed as a percentage. This shows that Microsoft management is employing the company’s total assets to make a profit. Microsoft’s management is more efficient in utilizing its asset base as compared to Google. For technology and service companies like Microsoft and Google, who have a small investment in fixed assets? Return on Assets (ROA) is highly favoured information to use in analysing which company to invest in because of a low denominator number.
Microsoft is a better company to invest in compared to Google. As a rule of thumb, investment professionals would advise people to invest in a company with Return on Assets that come at no less than 5%. Looking at Return on Equity ratio (ROE), it indicates how a company is more profitable by comparing its net income to its average shareholders’ equity. Therefore, it measures how much the shareholders earned for their investments in the company. Return on Equity ratio is calculated by comparing net income and average shareholders’ equity which is expressed as a percentage (Weygandt, & Kell, 1996).
From the financial data, it is evident that Google’s management is more efficient in utilizing its equity base. It also gives a better return to investors compared to Microsoft. This information should influence those who want to invest as shareholders to invest in Microsoft. Return on Equity is an indispensable measure of a company’s earnings performance, because it tells common shareholders how effectively their money is being employed. Financial analysts consider return on equity ratios between 15-20% ranges as representing attractive levels of investment qualities. So, Both Google and Microsoft are suitable for shareholders, but Microsoft is better. Though, investors need to interpret Return on Equity in the context of a company’s debt-equity ratio, and not in isolation.
According to Groppelli, & Ehsan, (2000), using the DuPont model, we realise that the ROI of Microsoft comes from the asset turnover. While the ROI of the Google come from the company’s net profit. This puts Microsoft at a higher financial advantage that Google. On the other hand, Google is much more stable considering that their ROI is asked on the net profit and not the asset turnover, the company’s stability and financial base puts it at a better financial advantage as it can leverage its assets base to gain a competitive advantage.5. Identify and explain three (3) primary financial-based guidelines that should be used when selecting which of these two companies to invest in.
Financial stability
The stability of the companies is the most influential factors that should be ocnisde4red when evaluating the company. The feasibility study of the company should be geared towards determining if the company is financial table and liquid enough to discharge all its debt obligation both accruals and incremental.
The financial health of the company is the most influential factor to consider. This is because both the current shareholder and potential shareholder would be interested in knowing the strengths of the company balance sheets. The financial reports of the company can provide a number of ways to derive the finial ratios instrumental for evaluating the company’s financial position. Potential shareholder is interested in evaluating if the company will be able to maintain its profitability and increase their shareholders value. Additionally the government and creditors look at the company
Efficiency
Before making a decision on which company is best investing in, it is advisable to look at the efficiency of the company management. Any investor would be interested in how the company is utilising its resources to manage the liabilities it incurs. If the efficiency ratio of the company is high, it is highly likely that the company assets are well utilised and that the management of the company business model is optimal. Investors look at the inventory turnover, accounts receivable turnover as well as the total asset turnover (Bodie, Alex, & Alan, 2004).
Leverage
While most companies operate on debt, it is necessary to ensure that the debt that the company has in the balance sheet is manageable. All investors are interested in knowing the leverage level of a company or the amount of debt the company has in its balance sheet. The financial health of the company is particularly valuable. Most inventors prefer those companies with exceptionally low debt/equity ratios. Thus, is because if the company is experiencing financial problems, the numbers of debt holder who can make claims to the company assets are few. On the other hand, lower debt/equity ratio makes an investment attractive.
References
Bodie, Z., Alex K,& Alan J., (2004). Essentials of Investments, 5th ed. McGraw-Hill Irwin. pp. 459
Groppelli, A. & Ehsan N., (2000). Finance, 4th ed. Barron’s Educational Series, Inc.. pp. 433
Weygandt, J. & Kell, G. (1996). Accounting Principles (4th ed.). New York, Chichester, Brisbane, Toronto, Singapore: John Wiley & Sons, Inc. p. 800.
Houston, J,& Eugene F. (2009). Fundamentals of Financial Management. [Cincinnati, Ohio]: South-Western College Pub. p. 90
Weston, J. (1990). Essentials of Managerial Finance. Hinsdale: Dryden Press. p. 295
WWW.google.org
www.microsoft.com
Appendix
GOOGLE FINANCIALS
Latest Full Context Quarter Ending Date 2011/12
Gross Profit Margin 70.1%
EBIT Margin 32.7%
EBITDA Margin 37.2%
Pre-Tax Profit Margin 32.5%
Interest Coverage 213.5
Current Ratio 5.9
Quick Ratio 5.7
Leverage Ratio 1.2
Receivables Turnover 6.8
Asset Turnover 0.6
Revenue to Assets 0.5
ROE from Total Operations 16.7%
Return on Invested Capital 15.9%
Return on Assets 13.4%
Debt/Common Equity Ratio 0.05
Price/Book Ratio (Price/Equity) 3.39
Book Value per Share $178.83
Total Debt/ Equity 0.07
Long-Term Debt to Total Capital 0.05
SG&A as % of Revenue 19.3%
R&D as % of Revenue 13.6%
Receivables per Day Sales $58.62
Days CGS in Inventory 0
Working Capital per Share $134.85
Cash per Share $30.70
Cash Flow per Share $35.64
Free Cash Flow per Share $28.38
Tangible Book Value per Share $151.39
Price/Cash Flow Ratio 17.0
Price/Free Cash Flow Ratio 21.4
Price/Tangible Book Ratio 4.01
Most recent data
Latest 12 Months Data Items
5-Year Averages
Return on Equity 17.3%
Return on Assets 14.6%
Return on Invested Capital 17.1%
Gross Profit Margin 68.7%
Pre-Tax Profit Margin 33.3%
Post-Tax Profit Margin 25.7%
Net Profit Margin (Total Operations) 25.7%
R&D as a % of Sales 12.9%
SG&A as a % of Sales 17.2%
Debt/Equity Ratio 0.02
Total Debt/Equity Ratio 0.04
Most recent data
Current P/E Ratio 20.4
P/E Ratio 1 Month Ago 21.8
P/E Ratio 26 Weeks Ago 20.3
P/E Ratio 52 Weeks Ago 23.7
5-Year High P/E Ratio 56.2
5-Year Avg. High P/E Ratio 37.0
5-Year Low P/E Ratio 13.9
5-Year Avg. Low P/E Ratio 19.5
5-Year Avg. P/E Ratio 30.0
Current P/E as % of 5-Year Avg. P/E 68%
P/E as % of 2 Digit MG Group P/E 63%
P/E as % of 3 Digit MG Group P/E 76%
12 Month Normalized P/E Ratio 20.4
MICROSOFT FINANCIALS
Latest 12 Months Data Items
Latest Full Context Quarter Ending Date 2011/12
Gross Profit Margin 80.3%
EBIT Margin 39.2%
EBITDA Margin 41.5%
Pre-Tax Profit Margin 38.7%
Interest Coverage 77.0
Current Ratio 2.9
Quick Ratio 2.6
Leverage Ratio 1.8
Receivables Turnover 5.4
Inventory Turnover 12.8
Asset Turnover 0.7
Revenue to Assets 0.6
ROE from Total Operations 36.6%
Return on Invested Capital 30.9%
Return on Assets 20.9%
Debt/Common Equity Ratio 0.19
Price/Book Ratio (Price/Equity) 3.97
Book Value per Share $7.64
Total Debt/ Equity 0.19
Long-Term Debt to Total Capital 0.16
SG&A as % of Revenue 25.8%
R&D as % of Revenue 13.0%
Receivables per Day Sales $68.17
Days CGS in Inventory 28
Working Capital per Share $5.62
Cash per Share $1.26
Cash Flow per Share $3.13
Free Cash Flow per Share $1.37
Tangible Book Value per Share $4.99
Price/Cash Flow Ratio 9.7
Price/Free Cash Flow Ratio 22.1
Price/Tangible Book Ratio 6.08
5-Year Averages
Return on Equity 42.0%
Return on Assets 21.6%
Return on Invested Capital 38.2%
Gross Profit Margin 83.2%
Pre-Tax Profit Margin 38.6%
Post-Tax Profit Margin 29.2%
Net Profit Margin (Total Operations) 29.2%
R&D as a % of Sales 13.9%
SG&A as a % of Sales 28.2%
Debt/Equity Ratio 0.10
Total Debt/Equity Ratio 0.11
Most recent data
HHH
Price Earnings Ratios
Current P/E Ratio 11.0
P/E Ratio 1 Month Ago 10.2
P/E Ratio 26 Weeks Ago 9.3
P/E Ratio 52 Weeks Ago 11.6
5-Year High P/E Ratio 22.2
5-Year Avg. High P/E Ratio 17.2
5-Year Low P/E Ratio 8.4
5-Year Avg. Low P/E Ratio 11.6
5-Year Avg. P/E Ratio 14.2
Current P/E as % of 5-Year Avg. P/E 78%
P/E as % of 2 Digit MG Group P/E 51%
P/E as % of 3 Digit MG Group P/E 65%
12 Month Normalized P/E Ratio 11.0
Most recent data
