Managerial Finance

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FINANCIAL ANALYSIS AND PROPOSAL

Financial Analysis of Google and Competitor Microsoft

The purpose of this paper is to provide a financial analysis and proposal of the power technology giant Google Inc. and its competitor Microsoft. In addition this paper will delineate the Management’s Discussion and Analysis for both companies parallel to its pro-forma financial statements that capture a five year period. Of importance, the approaches that are applied by both companies and exploration of the ratio analysis of the pro-forma financial statements.

Review of Management’s Discussion and Review

Management’s Discussion and Analysis (MD&A) highlights management’s standpoint on the financial performance and business health of the company. Of note it a requisite that U.S. publicly held companies is commanded by the Securities and Exchange Commission (SEC) to supply the MD&As which comprise a discussion of the operations in detail about the company relating recent period as opposed to previous period (Investopedia, 2016).

In the previous paper the Financial Analysis of companies Google and Microsoft have been outlined. Each company has had their overall business and operating characteristics, product service, customers, goals and strategies, market position, and general risk factors all that are discussed in the MD&A.

Google documented a net revenue of 75 billion dollars which exceeded their previous year 66 billion dollars. Of note the company Google recorded a revenue progression of 14 percent over previous year, perpetual revenue progression of 20 percent year over year (SEC Google Inc., 2016). They anticipate to maintain this growth and to take on investments ventures that will be advantageous to both buyers and sellers in the long term.

Contrastingly Microsoft revenue augmented 2.7 billion or 16 percent replicating an increased product costs. Additionally, revenue increased predominantly as a result of robust sales of products and services. The generated net revenue for Microsoft in 2015 was 93 billion which increase since previous years (Statista, 2016).

Pro Forma Financial Statements

A Pro Forma financial statement is a financial statement draft on the concept of assumed events and transaction (Brigham, 2014). Please refer to attachment A for Pro Forma statement of the company Google and Microsoft over a five span.

Current Strategies to Achieve Higher ROI

The tactics and approach for Google are to expand and position their brands within diverse marketplace globally. In recent years Google have established enhanced campaigns which is profoundly changing the environment of digital advertising by combing tablets, smart phones and other mobile devices. With this introduction by Google they have seen an increase by 3 percent in the trend of digital search via mobile phones. These percentages are likely to increase as advertisers continue to use this medium to advertise their business.

At the other end of the spectrum Microsoft aims and strategies are to expand their digital marketing by reaching new customers on a large scale. In addition to continue to create and offer quality products and services. With the recent procurement of Nokia’s devices and services to form Microsoft Mobile Oy, Microsoft have repositioned their brand in the smartphone marketplace (Microsoft, 2016).

Ratio Analysis

According to Brigham (2014) ratio analysis is the quantifiable financial information from a company’s financial statements. Of paramount importance these ratios are fundamental in providing input to evaluate and relate companies with each other.

Refer to Attachment A for companies Google Inc. and Microsoft Corporation ratio analysis.

Future profitability and competitive performance

For almost a decade Google has been one the most widely used search engine in the digital marketplace globally with a market segment of 53.6 percent. The company Google Inc. recently procure phone hardware giant Motorola for an overall total of 12.5 billion dollars. Presently it foremost mission is to knock the IPhone from Apple out of the digital marketplace with the introduction of their newest cutting edge technology android smartphones.

Correlating Google with Microsoft performance in 2015, the two companies have a profit variation. Microsoft total profits is generated from engineering software, supplying quality services and products at a competitive cost. Contrastingly Google lock a gross profit from successful digital services and advertising used by billions of Google customers. The blend of Microsoft and social networking icon Facebook now stands as a significant risk for Google. In recent years Facebook and Microsoft broadcast they are now business partners. Of note this business merger generates an added competition and concern for Google. Notably Google control 72.15 percent of all digital searches in the United States in current years (Latif, Hassan, Latif, Rasheed & Yousef, 2011).

References

Brigham, E. E. (2014). Financial Management: Theory and Practice 14th ed. Mason, OH: South-Western.

Investopedia. (2016). Management Discussion and Analysis & Financial Statement. Retrieved July 31, 2016 from http://www.investopedia.com/exam-guide/cfa-level-1/financial-statements/management-analysis-footnotes.asp#ixzz4G2wVjLA5

Latif, M, Hassan, M., Latif, A., Rasheed, I., & Yousaf, U. (2011). The Financial Performance Analysis of Google Inc. V/S Industry Technology. Research Journal of Finance and Accounting. Vol. 5. No.17. Retrieved July 31, 2015 from http://www.researchgate.net/publication/266739629_The_Financial_Performance_Analysis_of_Google_Inc._VS_Industry_Technology.

Microsoft. (2016). Retrieved July 31, 2016 from https://www.microsoft.com/en-us/

Statista. (2016). Microsoft Corporation. Retrieved July 31, 2016 http://www.statista.com/statistics/272747/net-profit-by-quarter-of-the-microsoft-corporation/

United States Securities and Exchange Commission. (SEC). (2016). Google Inc. Retrieved July 31, 2016 from https://www.sec.gov/Archives/edgar/data/1288776/000165204416000012/goog10-k2015.htm

Thank you for your submission. However, I will suggest you derive a better way of presenting your ratio analysis that it will not take this much space. And you want to discuss the ratios in one or two paragraphs aside from showing the numbers. You have a few grammatical errors to correct against your next submission. You have included the elements required by the assignment instruction.

ATTACHMENT A.

Google Inc.

Fiscal year	2013	2014	2015	2016	2017	2018	2019	2020
Assets
Cash and cash equivalents	1,604	2,201	1,393	1,665	1,998	2,357	2,781	3,199
Receivables	12,428	14,957	16,582	20,177	24,213	28,571	33,714	38,771
Investments	196	31	2,348	2,348	2,348	2,348	2,348	2,348
Property and equipment	858	922	1,344	1,585	1,902	2,245	2,649	3,046
Goodwill	3,187	3,189	4,069	4,069	4,069	4,069	4,069	4,069
Other intangible assets	258	156	358	444	533	629	742	853
Other assets	629	461	2,787	1,110	1,332	1,571	1,854	2,132
Total assets	19,160	21,917	28,881	31,398	36,394	41,790	48,157	54,419
Liabilities and stockholders' equity
Liabilities
Short-term borrowing	1,103	1,093	-	-	-	-	-	-
Payables and accrued expenses	10,158	12,190	13,617	14,427	17,312	20,167	23,642	27,011
Taxes payable	37	29	32	55
Deferred taxes			1,505	1,505	1,505	1,505	1,505	1,505
Other liabilities	472	357	(32)	444	533	629	742	853
Total liabilities	11,770	13,669	15,122	16,431	19,350	22,300	25,889	29,369

Stockholders' equity (balancing figure)	7,390	8,248	13,759	14,967	17,044	19,490	22,269	25,050

Total liabilities and stockholders' equity	19,160	21,917	28,881	31,398	36,394	41,790	48,157	54,419

Cash and cash equivalents (% of Sales)	23.8%	27.4%	15.1%	15%	15%	15%	15%	15%

Receivables turnover	0.54	0.54	0.56	0.55	0.55	0.55	0.55	0.55

Investments (remain constant)

Property and equipment (asset turnover)	7.84	8.70	6.88	7.00	7.00	7.00	7.00	7.00

Goodwill (remain constant)

Other intangible assets (% of sales)	3.8%	1.9%	3.9%	4.0%	4.0%	4.0%	4.0%	4.0%

Other assets (% of sales)	9.4%	5.7%	30.1%	10.0%	10.0%	10.0%	10.0%	10.0%
Short-term borrowing (remains constant)

Payables turnover	0.43	0.43	0.46	0.60	0.60	0.60	0.60	0.60

Taxes payable (% of sales)	0.6%	0.4%	0.3%	0.5%	0.5%	0.5%	0.5%	0.5%

Deferred taxes (remains constant)

Other liabilities (% of sales)	7.0%	4.4%	-0.3%	4%	4%	4%	4%	4%

It is anticipated that the gap in balance sheet will be meet by equity financing and company will raise additional equity either through follow-up offer or through strategic sale.

Fiscal Year	2012	2013	2014	2015	2016	2017	2018	2019	2020
Revenue	5,662	6,727	8,025	9,248	11,098	13,317	15,714	18,543	21,324
% Growth		18.8%	19.3%	15.2%	20%	20%	18%	18%	15%

Technology and occupancy	677	727	890	947	1,221	1,465	1,886	2,596	3,412
% of Sales	12.0%	10.8%	11.1%	10.2%	11%	11%	12%	14%	16%
Advertising and promotion	662	791	998	985	1,332	1,598	1,571	1,854	2,132
% of Sales	11.7%	11.8%	12.4%	10.7%	12%	12%	10%	10%	10%
Nonrecurring expense	19			48	-	-	-	-	-
% of Sales	0.3%	0.0%	0.0%	0.5%	0%	0%	0%	0%	0%
Other expenses	3042	3665	4353	5199	6,104	7,324	8,643	9,735	10,662
% of Sales	53.7%	54.5%	54.2%	56.2%	55%	55%	55%	53%	50%
Total operating expenses	4,400	5,183	6,241	7,179	8,656	10,387	12,100	14,185	16,206
% of Sales	77.7%	77.0%	77.8%	77.6%	78.0%	78.0%	77.0%	76.5%	76.0%
EBIDTA	1,262	1,544	1,784	2,069	2,441	2,930	3,614	4,358	5,118
% of Sales	22.3%	23.0%	22.2%	22.4%	22.0%	22.0%	23.0%	23.5%	24.0%
Depreciation and amortization	382	453	516	608	721	866	1,021	1,205	1,386
% of Sales	6.7%	6.7%	6.4%	6.6%	6.5%	6.5%	6.5%	6.5%	6.5%
Operating income	880	1091	1268	1461	2,441	2,930	3,614	4,358	5,118
% of Sales	15.5%	16.2%	15.8%	15.8%	22.0%	22.0%	23.0%	23.5%	24.0%
Total nonoperating income, net	11	-7	-7	27	-	-	-	-	-
% of Sales	0.2%	-0.1%	-0.1%	0.3%	0%	0%	0%	0%	0%
Income before taxes	891	1084	1261	1488	2,441	2,930	3,614	4,358	5,118
% of Sales	15.7%	16.1%	15.7%	16.1%	22.0%	22.0%	23.0%	23.5%	24.0%

Provision for income taxes	113	129	842	260	488	586	723	872	1,024
% of PBT	12.7%	11.9%	66.8%	17.5%	20%	20%	20%	20%	20%
Net income	778	955	419	1228	1,953	2,344	2,891	3,486	4,094
% of Sales	13.7%	14.2%	5.2%	13.3%	17.6%	17.6%	18.4%	18.8%	19.2%
Diluted EPS			0.31	1.00	1.59	1.91	2.35	2.84	3.33
Diluted outstanding shares			1,262	1,229	1,229	1,229	1,229	1,229	1,229

MICROSOFT CORPORATION

Fiscal Year	2012	2013	2014	2015	2016	2017	2018	2019	2020
Revenue	203	552	850	1267	1,901	2,851	3,849	5,003	6,254
% Growth		171.9%	54.0%	49.1%	50%	50%	35%	30%	25%
Cost of Revenue	139	424	624	897	1,283	1,853	2,502	3,002	3,440
% of Sales	68.5%	76.8%	73.4%	70.8%	68%	65%	65%	60%	55%
Gross Profit	64	128	226	370	618	998	1347	2001	2814
% of Sales	31.5%	23.2%	26.6%	29.2%	32.5%	35.0%	35.0%	40.0%	45.0%
Research and development	47	74	145	145	209	314	423	550	688
% of Sales	23.2%	13.4%	17.1%	11.4%	11%	11%	11%	11%	11%
Sales, General and administrative	100	149	213	371	523	784	962	1,251	1,563
% of Sales	49.3%	27.0%	25.1%	29.3%	28%	28%	25%	25%	25%
Other expenses		2	1	2	2	3	4	5	6
% of Sales	0.0%	0.4%	0.1%	0.2%	0.1%	0.1%	0.1%	0.1%	0.1%
Total operating expenses	147	225	359	518	734	1,100	1,389	1,806	2,258
% of Sales	72.4%	40.8%	42.2%	40.9%	38.6%	38.6%	36.1%	36.1%	36.1%
EBIDTA	(83)	(97)	(133)	(148)	(116)	(103)	(42)	195	557
% of Sales	-40.9%	-17.6%	-15.6%	-11.7%	-6.1%	-3.6%	-1.1%	3.9%	8.9%
Depreciation and amortization	3	8	18	27	38	57	77	100	125
% of Sales	1.5%	1.4%	2.1%	2.1%	2.0%	2.0%	2.0%	2.0%	2.0%
Operating income	(86)	(105)	(151)	(175)	(154)	(160)	(119)	95	432
% of Sales	-42.4%	-19.0%	-17.8%	-13.8%	-8.1%	-5.6%	-3.1%	1.9%	6.9%
Other income (expense)	0	1	-2	-2	-	-	-	-	-
% of Sales	0.0%	0.2%	-0.2%	-0.2%	0%	0%	0%	0%	0%
Income before taxes	(86)	(104)	(153)	(177)	(154)	(160)	(119)	95	432
% of Sales	-42.4%	-18.8%	-18.0%	-14.0%	-8.1%	-5.6%	-3.1%	1.9%	6.9%
Provision for income taxes		1	1	4	-	-	-	-	-
% of PBT	0.0%	-1.0%	-0.7%	-2.3%	0%	0%	0%	0%	0%
Net income	(86)	(105)	(154)	(181)	(154)	(160)	(119)	95	432
% of Sales	-42.4%	-19.0%	-18.1%	-14.3%	-8.1%	-5.6%	-3.1%	1.9%	6.9%
Preferred dividend				32	32	32	32	32	32
Net income available to common shareholders	(86)	(105)	(154)	(213)	(186)	(192)	(151)	63	400

Fiscal year	2013	2014	2015	2016	2017	2018	2019	2020
Assets
Cash and cash equivalents	166	225	471	665	713	770	750	938
Receivables	2	2	5	11	16	21	28	35
Inventories	1	3	12	38	57	77	100	125
Prepaid expenses	3	5	7	11	14	12	5	6
Other current assets	81	175	211	475	713	962	1,251	1,563
Net property, plant and equipment	52	64	87	127	168	192	200	250
Goodwill	1	40	57	57	57	57	57	57
Intangible assets	1	10	27	27	27	27	27	27
Other assets	12	17	18	38	57	77	100	125
Total assets	319	541	895	1,449	1,821	2,195	2,518	3,127
Liabilities and stockholders' equity
Liabilities
Payables and accrued expenses	33	39	70	134	197	259	321	380
Deferred revenues	-	-	33	33	33	33	33	33
Other liabilities	97	152	257	475	713	962	1,251	1,563
Long-term debt	-	30	-	-	-	-	-	-
Other long-term liabilities	27	46	27	48	71	96	125	156
Total liabilities	157	267	387	690	1,014	1,351	1,729	2,133
Stockholders' equity (balancing figure)	162	274	508	759	807	844	789	994
Total liabilities and stockholders' equity	319	541	895	1,449	1,821	2,195	2,518	3,127
Cash and cash equivalents (as % of sales)	81.8%	40.8%	55.4%	35%	25%	20%	15%	15%
Receivables turnover	102	276	170	180	180	180	180	180
Inventories turnover	139	141	52	50	50	50	50	50
Prepaid expenses (as % of sales)	1.5%	0.9%	0.8%	0.60%	0.50%	0.30%	0.10%	0.10%
Other current assets (as % of sales)	39.9%	31.7%	24.8%	25%	25%	25%	25%	25%
Assets turnover	3.90	8.63	9.77	15.00	17.00	20.00	25.00	25.00
Goodwill (Remain constant)
Intangible assets (remain constant)
Other assets (as % of sales)	5.9%	3.1%	2.1%	2.0%	2.0%	2.0%	2.0%	2.0%
Payable Turnover	8.67	16.64	14.04	15.00	15.00	15.00	15.00	15.00
Deferred revenues (Remain Constant)
Other liabilities (as % of Sales)	47.8%	27.5%	30.2%	25%	25%	25%	25%	25%
Long-term debt (remain constant)
Other long-term liabilities (as % of sales)	13.3%	8.3%	3.2%	3%	3%	3%	3%	3%

It is anticipated that the gap in balance sheet will be met by equity financing and company will raise additional equity either through follow-up offer or through strategic sale.

RATIOS

Fiscal Year	2012	2013	2014	2015	2016	2017	2018	2019	2020
Revenue Growth - Google		18.8%	19.3%	15.2%	20.0%	20.0%	18.0%	18.0%	15.0%
Revenue Growth - Microsoft		171.9%	54.0%	49.1%	50.0%	50.0%	35.0%	30.0%	25.0%
3-Yr CAGR trend - Google				17.8%
3-Yr CAGR trend - Microsoft				84.1%
5-Yr CAGR Forecast - Google									18.2%
5-Yr CAGR Forecast - Microsoft									37.6%

Operating Profit Growth - Google		24.0%	16.2%	15.2%	17.7%	20.0%	25.6%	21.6%	18.4%
Operating Profit Growth - Microsoft		NA	NA	NA	NA	NA	NA	NA	NA
Net Profit Growth - Google		22.8%	-56.1%	193.1%	12.1%	20.0%	25.6%	21.6%	18.4%
Net Profit Growth - Microsoft		NA	NA	NA	NA	NA	NA	NA	NA
EBITDA margin - Google	22.3%	23.0%	22.2%	22.4%	22.0%	22.0%	23.0%	23.5%	24.0%
EBITDA margin - Microsoft	-40.9%	-17.6%	-15.6%	-11.7%	-6.1%	-3.6%	-1.1%	3.9%	8.9%

Operating Margin - Google	15.5%	16.2%	15.8%	15.8%	15.5%	15.5%	16.5%	17.0%	17.5%
Operating Margin - Microsoft	-42.4%	-19.0%	-17.8%	-13.8%	-8.1%	-5.6%	-3.1%	1.9%	6.9%
Net Margin - Google	13.7%	14.2%	5.2%	13.3%	12.4%	12.4%	13.2%	13.6%	14.0%
Net Margin - Microsoft	-42.4%	-19.0%	-18.1%	-16.8%	-9.8%	-6.7%	-3.9%	1.3%	6.4%
Receivable Turnover -Google		0.54	0.54	0.56	0.55	0.55	0.55	0.55	0.55
Receivable Turnover - Microsoft		101.50	276.00	170.00	180.00	180.00	180.00	180.00	180.00

Inventory Turnover - Google	-	-	-	-	-	-	-	-	-
Inventory Turnover - Microsoft		139.00	141.33	52.00	50.00	50.00	50.00	50.00	50.00

Payable Turnover - Google		0.43	0.43	0.46	0.60	0.60	0.60	0.60	0.60
Payable Turnover - Microsoft		8.67	16.64	14.04	15.00	15.00	15.00	15.00	15.00

Asset Turnover - Google		7.84	8.70	6.88	7.00	7.00	7.00	7.00	7.00
Asset Turnover - Microsoft		3.90	8.63	9.77	15.00	17.00	20.00	25.00	25.00

Return on Assets - Google		5.0%	1.9%	4.3%	4.4%	4.5%	5.0%	5.2%	5.5%
Return on Assets - Microsoft		-32.9%	-28.5%	-23.8%	-12.8%	-10.5%	-6.9%	2.5%	12.8%

Return on Investments - Google		12.8%	13.6%	10.6%	11.5%	12.2%	13.4%	14.2%	15.0%
Return on Investments - Microsoft		-64.8%	-49.7%	-34.4%	-20.3%	-19.8%	-14.1%	12.0%	43.4%

Return on Equity - Google		12.9%	5.1%	8.9%	9.2%	9.7%	10.7%	11.4%	12.0%
Return on Equity - Microsoft		-64.8%	-56.2%	-41.9%	-24.5%	-23.7%	-17.9%	8.0%	40.2%