Googl vs. Yahoo Ratio Analysis, Essay Example

When we think of leading technology companies in the Silicon Valley, Google and Yahoo are one of the first names that come to mind. Yahoo was once synonymous with the term ‘search engine’ but the crown has been stolen by Google since then. While Google may be the leading search engine now with a share of approximately 67 percent of the U.S. search engine market(Zeckman), financial analysis may be beneficial in objectively determining whether Google has really been performing economically better than Yahoo or not. The data for financial ratios in this paper comes from the two companies’ respective financial statements(Google)(Yahoo) for the fiscal year 2013. It is important to note Google lists data in millions except per share figures while Yahoo lists data in thousands except per share figures on their financial statements.

Book value per share ratio determines the per share amount that the common stockholders will receive after debtors and preferred shareholders have gotten their share should the company be forced into liquidation. Thus, higher book values per share are preferable to lower book values per share figures. As far as Google and Yahoo are concerned, Google’s book value per share was 3.37 during the fiscal year 2013 as opposed to Yahoo which had a book value per share figure of 12.89.

In this scenario, Yahoo’s common stock shareholders would have fared better than Google’s common stock shareholders were the companies liquidated at the end of 2013. A closer look at the balance sheets for both companies reveal that Google takes more liberal approach towards raising funds through debt financing as opposed to Yahoo which may also help partially explain why Yahoo ended up with such high book value per share figure as opposed to Google. While equity financing does enable the company to avoid high financial leverage, equity financing may also turn out to be more expensive form of raising funds as opposed to debt financing.

Current ratio helps us determine the short term liquidity position of the company and the higher figure is preferable to a lower figure. At the minimum, a ratio of 1 is desirable since it indicates the company can meet its short term obligations with the help of current assets.

As far as Google and Yahoo are concerned, Google’s current ratio stood at 4.58 in the fiscal year as opposed to Yahoo’s 3.75 during the same period. In other words, both companies have adequate liquidity to meet their short term obligations but Google fares better than Yahoo in this regard.

Debt to total assets ratio (DTA) helps us determine the financial leverage of a company and even though it may vary from one industry to another, lower figures are generally preferable since they indicate lower default risk. As far as Google and Yahoo are concerned, Google’s DTA ratio was 0.21 as compared to Yahoo’s 0.22 during the fiscal year 2013.

Even though Google had slightly lower financial leverage, the difference was too small to be considered material, thus, a better conclusion may be that Google and Yahoo had almost the same level of financial leverage. This also shows companies in same industries may have quite similar capital structures.

Return on Assets (ROA) measures the income generated by each dollar worth of asset. In other words, it tells us how efficiently an organization uses its assets and, thus, higher figures are preferable. Google’s ROA was 11.65 percent as opposed to Yahoo’s 8.13 percent, thus, it is clear Google is more efficient when it comes to utilizing its assets in day-to-day operations.

Like current ratio, working capital also measures an organization’s ability to cover its short term obligations and higher figures point to healthy liquidity position. Both Google and Yahoo had positive working capitals though not surprisingly Google demonstrated better liquidity position. It is important to convert Yahoo’s figures in balance sheet from thousands to millions before comparing them to Google’s which reported its figures in millions.

Return on Equity (ROE) measures the income attributable to each dollar worth of shareholders’ equity. Higher figures are preferable because it means higher returns for shareholders though it is important to be aware of ratio’s shortcomings. For example, a highly leveraged firm may show high ROE if it has a very small shareholder base. In this case, this is not a worry since both Google and Yahoo have low financial leverage. As far as Google and Yahoo are concerned, Google’s ROE at 14.80 percent was significantly higher than Yahoo’s ROE of 10.45 percent. While Yahoo’s figure was impressive, it is clear Google’s shareholders fared better than Yahoo’s shareholders during the fiscal year 2013. It may not come as a surprise to many since Google has been performing economically better than Yahoo for quite a time.

Yahoo fared ok in all ratios but Google emerged as the clear winner overall. Google specifically has an edge when it comes to asset utilization and profitability. This is to be expected given Google’s significantly higher market share of search engine as compared to Yahoo.

Works Cited

Google. 10-K. Annual Report. Mountain View, CA: Google Inc., 2013.

Yahoo. 10-K. Annual Report. Sunnyvale, CA: Yahoo! Inc., 2013.

Zeckman, Ashley. Google Search Engine Market Share Nears 68%. 20 May 2014. 31 January 2015 <http://searchenginewatch.com/sew/study/2345837/google-search-engine-market-share-nears-68>.