Google vs Yahoo Financial Analysis Essay Example

gauges the amount of gross profit earned from sales. It is crucial to note that the (gross) profit margin solely considers the firm's cost of goods sold while excluding other expenditures.

The previous chart shows that Google has significantly higher profitability ratios compared to Yahoo and the industry average. This means that in 2006, Google was more effective at managing its return on assets and equity, resulting in a much higher level of profitability than its competitors.
For Activity Ratios, the asset turnover ratio calculates the total sales (revenue) for every dollar of assets a company owns. A receivables turnover ratio can be used to measure how well a company extends credit and collects debts. A high ratio suggests that a company operates on a cash basis or efficiently manages credit and accounts receivable. Conversely, a low ratio indicates the need for a company to review its credit policies to ensure timely collection of accounts that don't earn interest. Comparing the two activity ratios on the previous page, Google's higher asset turnover ratio indicates that it generates twice as much revenue per dollar spent compared to Yahoo. Additionally, Google's higher accounts receivables turnover ratio suggests that it has better management of extended credit accounts compared to both Yahoo and its industry peers.

Capital Structure Ratios, such as the debt ratio, are utilized to evaluate a company's long-term solvency. In contrast to liquidity ratios which concentrate on short-term assets and liabilities, financial leverage ratios like the debt ratio gauge how a company utilizes long-term debt. Companies fund their operations through either debt or equity. The debt-to-capital ratio provides significant understanding into a company's financial structure and strength

by indicating its method of financing.

A company's debt-to-equity ratio is a measure of its debt compared to equity. A high debt-to-equity ratio, especially when compared to the industry average, may indicate weak financial strength. This is because the cost of these debts can become burdensome and increase the risk of default for the company. Typically, a capital structure ratio above 50% suggests that a company may be approaching its borrowing limit, often around 65%. Google's debt-to-ratio of 10% demonstrates effective management of its debt and significantly stronger financial standing compared to Yahoo and similar companies. Borrowing money is an effective strategy for companies to promote business growth.

However, borrowing comes with a cost: the interest that must be paid on a monthly and yearly basis. These interest payments directly impact the company's profitability and its ability to meet its interest obligations, which is crucial for its financial solvency. It can be argued that this ability is one of the most important factors in generating returns for shareholders. The interest coverage ratio offers valuable insight into how well a company can handle the interest charges on its debt. The term 'coverage' in this ratio indicates the number of times the interest could be covered by available earnings, providing an indication of the safety margin a company has for meeting its interest obligations during any given period.

A company that maintains earnings significantly higher than its interest obligations is well prepared to endure potential financial challenges. On the other hand, a company that barely meets its interest expenses may easily encounter financial troubles, including the risk of bankruptcy, if its earnings decline even for a short period. Clearly, an

interest-coverage ratio below 1 promptly reveals that the company, regardless of its sector, is not generating enough cash to cover its interest payments. With that being said, an interest coverage ratio of 1.

Regardless of industry, it is generally believed that every company should have a minimum comfort level of 5. In 2006, Google had an interest coverage ratio of 3.4, which was lower than Yahoo's 5.3 but considerably higher than the industry average of 1.

The rise in Google's stock price is attributed to the interest charged on the company's debt from its acquisitions in 2005 and 2006. This report examines financial ratios that provide a standardized evaluation of Google's performance and financial well-being. Analysis of these ratios reveals that Google has effectively managed its cash, assets, capital structure, and debt, resulting in significant growth. The current stock price is $503.0 per share, confirming this success.

References

1. Google, (2007). Google 2006 Annual Report. Retrieved August 5, 2007 from Google, Incorporated
2. Web site: http://investor.google.com/releases/2006Q4.html MSN Money, (2007).
3. Google Key Financial Ratios.

Retrieved August 5, 2007, from MSN Money

Retrieved August 5, 2007, from Yahoo Financial Filings. Web site: http://yhoo. client. shareholder. com/annuals.

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