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Financial Statement Analysis

Introduction

This paper analyses the financial statements of Google, Inc. The stock symbol for this company is GOOG (Google.com, 2015). The analysis covers the fiscal years 2012, 2013 and 2014. This financial statement analysis involves calculations of DuPont decomposition and liquidity ratios of the company and analyzing the results of the calculations. The annual income statements and balance sheets of the company provide information necessary to make these calculations. Finally, the paper makes a conclusion based on financial statement analysis.

Calculation of the DuPont decomposition

DuPont identity is basically an equation that breaks down Return On Equity (ROE) into three parts (Berk, 2010). Usually, ROE is calculated using the short formula:

ROE= Net Income/ Equity

However, the above equation can further be broken down into three parts to give an equation known as DuPont identity shown below:

ROE = Net Income/Sales *Sales/Assets * Assets/Equity

The table below shows the calculation of DuPont Decomposition of Google Company for the fiscal years 2012, 2013 and 2014.

DuPont Analysis for Google, Inc

From the above table, ROE for Google Company has been declining over the three years. ROE is a profitability ratio which assesses the effective use of the company’s resources so as to generate more profits (Berk, 2010). The decline in this ratio may imply that stockholder’s equity was not effectively used over the three years (Berk, 2010). However, by further analyzing the components of ROE, it can be seen that the ratios Net Income/ Sales and Assets/Equity also declined over the three years while the ratio Sales/Assets improved over the three years.

The decline in the ratio Net Income/Sales imply that the company generated more sales over the three years but this was not translated into improved net income. A decline in assets/equity ratio implies that the contributions of stockholders increased at a faster rate than total assets over the three years. Finally, the increase in the Sales/Assets ratio implies that the company generated more sales over the three years. In overall, the changes in these three components of ROE led to a decline in ROE over the three years. Since ROE assesses the effective use of resources provided by the stockholders, the decline in this ratio means that the stockholder’s equity was not effectively used to generate more profits over the three years (Berk, 2010). In other words, the sales increased but this did not significantly improve the profits of the company. This may indicate inefficiency in the use of company’s resources (Berk, 2010).

Determination of Google’s liquidity

Google’s liquidity is determined using the liquidity ratios. These ratios include the current ratio, quick ratio and cash ratio (Ross, Westerfield & Jaffe, 2005). The liquidity ratios measure the ability of a company to meet its short-term financial obligations (Berk, 2010). An increase in these ratios implies that the liquidity position of the company is improving over time. Current ratio equals current assets divided by current liabilities whereas the quick ratio equals cash plus cash equivalents plus accounts receivables divided by current liabilities. The cash ratio equals plus short-term marketable investments divided by current liabilities (Berk, 2010).

The table below shows the liquidity ratios of Google Company for the fiscal years 2012, 2013 and 2014.

From the above table, all the three liquidity ratios for Google Company improved over the three years. This suggests that the company became more financially stable and improved its liquidity position over the years. Thus the company is in a good position to meet its short-term financial obligations without experiencing a financial distress due to presence of a strong cash base and other assets which can be easily converted into cash (Berk, 2010).

The improvement in liquidity ratios over the three years also suggests that the company’s debt has been decreasing drastically over the three years (Ross, Westerfield & Jaffe, 2005).

Conclusion

In summary, the results of the financial statement analysis of Google Company are mixed. The ROE which is a profitability ratio declined over the three years suggesting inefficiency in the use of company’s resources. However, the three liquidity ratios increased steadily over the three years suggesting an improvement in liquidity position of the company over time. Thus in future, the company may achieve a strong liquidity position but it needs to take into consideration the effective use of its resources so as to generate more profits

References

Berk, J. (2010). Fundamentals of corporate finance. Frenchs Forest, N.S.W.: Pearson

Australia.

Google.com,. (2015). About Google. Retrieved 15 September 2015, from http://www.

google.com/about/

Ross, S., Westerfield, R., & Jaffe, J. (2005). Corporate finance. Boston: McGraw-

Hill/Irwin.

Yahoo! Finance,. (2015). Google Inc.. Retrieved 15 September 2015, from http://finance.

yahoo.com/q?s=GOOG