The Net Income was derived from the income statement, while stockholders equity was retrieved from
the balance sheet. The ratio was calculated by dividing Net Income and Equity, yielding favorable results
for both companies. Both companies have significant amounts of Treasury Stock, which reduced the
amount of Stockholder equity and increased this ratio. MSFT has the higher ratios.
Both companies are in the technology sector which is currently one of the most lucrative industries. The
companies have emerged as some of the most profitable entities in their industry. They both have
positive financial outlooks with share prices rising rapidly and market capitalizations of half a trillion,
respectively.
Microsoft has averaged higher Net Income than Google in recent years. However, Google has
maintained a steady profile by not being as volatile as Microsoft with Return on Equity. Google kept to
an average of 13% while Microsoft tumbled from 24.6% in 2014 to 15.2% in the next year.
The profit margin was determined by dividing the Net Income and Revenue. Although the results for
both companies are comparable, they operate under similar parameters causing their results to vary
slightly. Google yielded an average of 21.5% for 2014 and 2015, with the difference in margin under 1%
for both years. On the other hand, Microsoft averaged an 18% margin for both years, with a 25.4%
margin in 2014 and a decrease to 13% in 2015.
Determination of ROE by DuPont analysis was achieved the formula
ROE = Profit Margin X Asset Turnover Ratio X Equity Multiplier (Staff, 2017).
TATO is Sales / Assets: As far as TATO, we discovered that Google has a higher operational efficiency
with a profit margin of 21%, which is compared to Microsoft’s average of 18%. A theme of consistency in
Google is also recurring.
An equity multiplier calculates a company's financial independence by utilizing a ratio of the company's
total assets to its stockholder's equity. The higher the number, the more the company is "leveraged."
Usually, a lower equity multiplier implies that a company has lower financial leverage. It is better to
have a low equity multiplier because a company uses less debt to finance its assets and operations.
The financial leverage aspect of DuPont Analysis is understood using Equity multiplier that shows that
Microsoft is a higher leverage than Google, at an average of 2 versus and an average of 1.2
Asset utilization is measured using TATO ratio. Both companies have a high utility of assets, with nearly
identical asset utilization rates at around 50%. The determination of ROE assesses how many assets the
company uses to generate revenue.
On average, the ratio for Microsoft is higher than that of Google indicating greater efficiency in
processes, hence the additional revenue.
This has the same amount as the ROE described from DuPont analysis. This shows that Microsoft has a
higher return for capital equity compared to Google (When we are referring to This, what are we
referring to?) location I 38-40
The utilization of the assets by Google and Microsoft is on average the same. Google however, appears
to have a much more seamless transition than Microsoft in YoY change
Raw earning power shows the ability of the companies to earn profits regardless of how they are
financed. Both companies are evenly paired with their earning power standing at a ratio of around 15%
in 2015.
Alphabet Inc., which is the parent company of Google for which the analysis is being carried out, has a
higher profit margin in both gross and net. The focus, however, is net, for which Google averaged about
21% compared to 17 % for Microsoft.
The EBIT to sales ratio is used in comparing the company’s profitability, as well as the revenue to the
earnings. It is meant to compare efficiencies and maintain the low costs. In this case, both Companies
have the same average of around 25% in margins. Google's consistent and stable growth is again a clear
factor, unlike Microsoft’s more volatile progress.
Liquidity is the idiom used to ascertain the level of difficulty or ease at which a company can convert
assets to cash. Liquidity is essentially a company's ability to have sufficient cash to meet its day to day
operations. The ratios discussed below detail this and provide an overview of the company’s ability to
remain afloat. The money is generated from services and investments
Quick ratio assesses how efficiently a company can meet its short-term financial liabilities by leveraging
some current assets to cover the current liabilities. Both companies remain very healthy in this regard,
although Google has a slight edge since it can cover its current liabilities up to 4.7 times, as opposed to
2.4 times for Microsoft.
The current ratio is a liquidity ratio, which calculates a company’s ability to pay back short and long term
obligations or liabilities. The data acquired from the current ratio calculations shows that both Google
and Microsoft can cover an adequate amount of liabilities. Current ratios of around 4.7 times coverage
for Google and 2.5 times coverage for Microsoft are good for the sector in which they operate.
The companies efficacy in cash conversions through their receivable and payable turnover periods show
that they both have good product turnaround time, as well as receipt of payments, although Google has
a shorter turnover period than Microsoft.
The cash flow from operations/net income rate encompasses the earnings quality analysis. A rise in this
ratio means that the company has a stronger ability to fund activities through the generation of
operating cash flow (Profile, 2017). It also matches a company's operating cash flow to its net sales or
revenues, which gives investors an idea of the company's ability to turn sales into cash. Ideally, the
growth of sales must parallel operating cash flow.
Google rate has an average of 1.5, implying that it has the adequate capacity for longer term solvency,
however, for Microsoft that stands at around 2, meaning they have more ability compared to their
counterparts.
Debt is money that an individual or a company owes. Debt is acquired when a borrower seeks a loan,
and in return, the borrower will pay the lender interest. Leverage, on the other hand, is when debt is
used to purchase incredibly large and expensive assets that can appreciate in value, and there is a lack of
necessary funds at the time of purchase.
It is imperative that Shareholders comprehend debt obligations and payment strategies of companies. In
this instance, both Google and Microsoft have very high market capitalization. Google, however,
maintains a high leverage of ownership and a low debt profile, especially when compared to Microsoft
that has a much higher debt/Equity ratio.
The equity multiplier measures some assets financed by shareholders as a comparison of total
shareholder equity. It is a secondary component in the DuPont Analysis above. In this instance, Google
has a lower multiple of 1.2, while Microsoft stands at an average of 2.
The capital structure of Google is primarily equity, as depicted in both Debts to Total Assets ratio and
Debt/Equity Ratio, while Microsoft has a much more even spread between leverage and investment.
The debt to equity ratio is a liquidity ratio that matches a company's total debt to total equity. The debt
to equity ratio will yield the percentage of a company's financing that comes from creditors and
investors.
Google can adequately cover its debt obligations to a much greater degree than Microsoft, with it's 4%
Debt to Equity ratio in both 2014 and 2015, whereas Microsoft was 83% in 2014 and 44% in 2015.
Both companies operate within the same parameters and have profitable operations. They can both pay
off their debt obligations easily with Google maintaining a higher level of liquidity and solvency.
The 0.7 EBITDA/Interest is significantly lower for the measurement in Microsoft, implying volatility in its
earnings, which can adversely affect the amount payable.
Data Retrieved From Yahoo Finance (06.06.2017), for the stocks as at 31.12.2015
P/E ratio is calculated from the stock price and EPS. Both have consistency and indicate a high
expectation that the prices will rise even further, however, increasing risks.
Market to Book ratio measures the market value of a company relative to its book or accounting value.
The calculations show that both companies are currently undervalued when a comparison of actual
costs is made over market capitalization. Google has a market/book ratio of 7.27 and a Yahoo book
price of 4.242, while Microsoft has a market/book ratio of 6.99 and a Yahoo book Price of 5.219. Google
has a market to book value of 0.58. Microsoft has a market to book value of 1.33, and they are
undervalued.
The book-to-market ratio is a ratio used to find the value of a company by comparing the book value of
a firm to its market value.
This shows negative YoY change for the growth in Microsoft, while Google maintains a healthy growth
rate of about 15% on average. (When we use this, what are we referring to?) location I 207- 210
The growth of the companies is hinged on increasing cash flows. Google has maintained a positive
outlook with higher growth rates, while Microsoft's growth fluctuates in and out of growth and
regression regions.
GOOGLE Beta on June 3, 2017, from http://financials.morningstar.com/ratios/r.html?t=GOOG
MICROSOFT Beta on June 3, 2017, from http://financials.morningstar.com/ratios/r.html?t=MSFT
Microsoft, has a low beta of 0.58 while Google stands at 1.28
Both companies work in the same industry, but each has carved out a niche for each of themselves in
operations. In this way, they can pursue their objectives adequately. In this context, both are almost
equally profitable, with Google being more operationally efficient. The capital structure of the
companies is significantly different with Microsoft depending more on debt than Google. On leverage,
they can both adequately pay off their debt. Microsoft has wide fluctuating income streams, hence
volatile in many aspects of the business. The companies are undervalued, which will continue increasing
their market capitalization despite their large sizes. Growth is desperate for big companies, but they
have managed to increase their presence and increase the return to the owners for their accentuated
risk profiles.
A recommendation would be for Google, which seems to have much more consistency, lower debt in its
structure and continued growth.
