Managerial Finance

Financial Analysis of Google and Microsoft

INTRODUCTION

The objective of this paper is to outline the analysis of fundamentals for the technology power icon Google and their competitor Microsoft. The mission statement of Google is to bring together a world’s information and make it globally accessible and useful (Google, 2016). On the other hand, Microsoft mission is to facilitate every individuals and businesses universally to apprehend their fullest potential (Microsoft, 2015). Google known as a Delaware Corporation is predominantly a search engine provider, situated in Mountain View California. In 1998 the company was constructed by Larry Page and Sergey Brin.

Microsoft instituted in 1975, is a global leader in software, services, devices and solutions. The primary interest is to analyze the financial health by focusing on the most current Securities and Exchange Commission 10-K reports.

Analysis of the Fundamentals

Business Overall and Operating Characteristics

Google Inc. and Microsoft even though they are competitors in the business world of technology have dominated the connection of technology and customer access since their advent. They compete a wide range of sub industries, namely operating systems, computing software, mobile devices, web browsing, applications and advertising, both company utilized a dissimilar approach from a philosophical and structural standpoint.

Notably, in 2015 both companies supply tablets, phone, desktop operating systems and TV based operating systems. In addition, all two companies depend on exclusive product to generate the greater portion of earnings, and tried to tap into the each other marketplace with alternative products and services. Google still performs best in the area of business and data revenues, since Microsoft’s Bing advertisement sells less. Google flourished on cost effective services and its exclusive internet position, while Microsoft’s platform is focused on generating a license for software and providing service for businesses (Investopedia, 2016).

Product and Services

Google make available a wide range of products and services for individuals, communities, businesses and the wider society. The core product of Google Inc. is Google search engine. Of note, Google receives over 3 billion searches on a daily basis. Additionally, Google affords regional search by it 189 regional domain. Google not only provide an internet search engine, but offer other products and services to boost their overall revenues. The most common products and services are Gmail, Drive, Google+, Image Search, Docs and Chrome.

Contrastingly, Windows Microsoft’s is the center core of Windows business. Of paramount importance Microsoft publicized it have generated sales of 400 million copies of its latest version. In addition, Microsoft Corporation is in the business of developing, licensing and supporting a wide range of services and software products. The company also fabricate and market hardware, and offers digital advertising, servers, phones, computing devices, video games and business solution applications.

Customers

Microsoft have dominated the corporate software market, but Google driven by its digital search advertising and customer acceptance, have surpassed the competitor over the years with cost effective services such as productivity apps, calendars, emails and video conferencing. To date, Google is position among a diverse group of customers ranging from the corporate world, manufacturing industries, universities and health care industries.

Like Google, Microsoft Corporation offer a contained technology services to a wide customer base globally. Moreover, the support team at Microsoft comprises of highly skilled professional teams to afford the support and help their customers need to use Microsoft products, software, services and comprehend the prospective of their business. They create a platform to satisfy both their internal and external customer population. Regardless of the geographical location they offer service and support to their vast areas of technology solutions.

Goals and Strategies

In recent years Google have recorded a growth in its overall assets and equity. Google growth and the promptness of its innovation have permitted the company equity and appreciation of 405.43 percent within the past year.

Microsoft displays a solid operating margin, longevity and a good financial health. Historically, Microsoft have depended on a few main areas, licensing fees generated from Windows operating systems, but have evolved and now generating revenues from other successful products and services. Respectively, both companies intend to continue to spread their wings and develop new products and services in the ever changing technological marketplace to maintain their position.

Market Positions

Google is number 2 on Forbes Lists as the World's Most Valuable Brands. Subsequently, Google is one of the most widespread search engine in the digital marketplace for almost a decade propelling a market share of 53.6 percent.

Correlating Google and Microsoft performance in 2015, the two companies are generating a vast profit differences. Microsoft earn their net mass profits by providing products and services at a cost effective price. On the side of the fence, Google secured an inconsequential profit from billions of digital services and advertising. Importantly, Google control the digital search engine marketplace in the United States in current years.

General Risk Factors

Google noted their operations and financial outcome are subject to diverse uncertainties and risks, which can impact the financial health, cash flows, and results of operations of their business adversely.

For both companies having documents leaked and person’s accounts being hacked is a major risk. In recent months some internal documents were leaked from Yelp to TechCrunch which now push Google to make changes to their algorithms and how result are display.

Quantitative and Qualitative Mark Risk Factors

Similarly, Google Inc. and Microsoft Corporation faces the challenges of market uncertainties or possibilities associated with the deviations in fixed and variable interest and debt rates. Both Google and Microsoft transact business across diverse geographical locations. The international earnings are simple impacted by foreign currencies fluctuation. Interests and the value of the dollar change over time which affect both companies.

At the other end of the spectrum, Microsoft projected a growth rate of 11 percent and continues to increasingly struggle with competition and market overload problems.

Competitors

Google face substantial competition in practically each component of their business, comprising of companies like Microsoft Bing, Yahoo, Yandex, Navers, Baiden, WebCrawler and MyWebSearch. These companies also offer a wide range of services, internet supplies and digital advertising, as well as mobile companies and smaller internet companies. In addition, Google face competition from online media businesses. Still, Google has a large cash reserves and continues to dominate the technology marketplace.

Competitive Technology

Google is an exceptional company that seems to have concrete fundamentals of the most imperative foundations of competitive advantage known, customer captivity, cost and economies. Remarkably, Google exhibits several indices of each of the categories of advantage. Equally important for Microsoft is to stay competitive in today’s dynamic world of technology. Therefore, they are more focus on fostering a culture of innovation. They aim at constantly developing and innovating new product and services to support innovation across the globe.

Regulatory Considerations

Both Google and Microsoft as they continue to grow their companies are subject to operate based on regulatory guidelines both locally and internationally. Even though, these technology icon provides a medium for many topics, there are certain topics that are not allowed such as the sale of regulated services and products. Due to the fact some contents are often regulated and may not be appropriates for all age group or in all geographical location rules and regulations are implemented by policy makers.

Choice of Equity Valuation Model

I chose to use the ratio analysis to outline the equity of Google. In addition, I will provide a comparative analysis with Microsoft applying the same ratio analysis.

Ratio Analysis

Ratio analysis is used to calculate the relationships between financial statements. The ratios are used ascertain trends over period of time for one company or two or more companies at one point in time (Cliffnotes, 2016).

Performance

Of paramount importance, performance ratio is the most vital variables for weighing the efficiency of a company. These ratios indicate how well a company generates its assets into earnings (Brigham, 2014). In addition, how the company transfigures its sales into money and translates its resources to produce sales and grow shareholders value. Of note, Google gross profit margin is 62.44%.

Gross profit margin = 100 x Gross profit /Revenues

=100 x 46,825 /74, 989 = 62.44%

Notably, earnings for Microsoft Corporation increased $3.1 billion or 14 percent, software, hardware and licensing earnings. Operating revenue augmented $198 million or 3 percent, replicating higher earnings. Microsoft gross profit margin is 64.70%

Gross profit margin = 100 x Gross margin /Revenue

= 100 x 60,542 / 93,580 = 64.70%

Activity Ratio:

Activity ratios are financial analysis methods applied to measure the ability of a company to convert asset, liability and capital into cash and sales (Avenir, 2016). The receivable turnover ratio is determined is determined by dividing net revenue by average receivable. For Google the Net receivable turnover ratio is 7.21 (CSIMarket, 2016). Receivables turnover = Revenues /Accounts receivable, net allowance

= 74, 989 / 11, 556 = 6.49

Microsoft receivables is 5.23. Microsoft receivables turnover = Revenue /Accounts receivable, net of allowance for doubtful accounts

= 93,580 / 17, 908 = 5.23

Financing:

The level that a company uses debt financing is referred to as financial leverage. Applying a debt to equity ratio a company is able to tell the sum of all short term and long term debt (Brigham, 2014). Debt to equity ratio is calculated by total debt divided by total assets. Google debt to equity ratio is 0.04. The industry average is 2.19 (Stock Analysis, 2016).

Debt to equity = Total debt/Stockholders’ equity

= 5,220 / 120,331 = 0.04

On the other hand competitor Microsoft debt to equity is 1.43. Of note, Microsoft debt to equity ratio depreciated from 2013 to 2014 and from 2014 to 2015.

Liquid:

Liquid ratio is the most often used ratios. This imperative to companies due to the fact this ratio measures a company’s ability to meet short term duties (Lan, 2012). Google current ratio is 4.67.

Current ratio = Current assets /Current liabilities

= 90,114 / 19, 310 = 4.67

Google Inc. current ratio enhanced from 2013 to 2014 but depreciated slightly from 2014 to 2015 (Stock Analysis, 2016).

Contrastingly, Microsoft current ratio weakened from 2013 to 2014 and from 2014 to 2015. Microsoft current average ratio 2.766.

References

Avenir, R. (2016). What Are Activity Ratios? Retrieved July 20, 2016 from http://smallbusiness.chron.com/activity-ratios-57298.html

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

Cliffnotes. (2016). Ratio Analysis. Retrieved July, 2016 from https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/financial-statement-analysis/ratio-analysis

CSI Market. (2016). Google Inc. Retrieved July 20, 2016 from http://csimarket.com/stocks/singleEfficiencyrt.php?code=GOOG

Google Inc. (2016). Over 5 million businesses have gone Google. Retrieved July 18, 2016 from https://www.google.com/work/customers.html.

Lan, J. (2012). Financial Ratios for Analyzing a Company's Strength and Weakness. AAII Journal. nasdaq. Retrieved July 18, 2016 from http://www.nasdaq.com/symbol/sq/financials?query=ratios

Stock Analysis. (2016). Long-term Debt and Solvency Analysis. Retrieved July 20, from https://www.stock-analysis-on.net/NASDAQ/Company/Alphabet-Inc/Ratios/Long-term-Debt-and-Solvency

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