ratio analysis of Google and Microsoft. The initial component of the paper is a rundown of some key ratios and their definitions. Then, the ratios of the companies are calculated and discussed.
Ratio analysis is a tool by which companies in the same industry can be compared. The use of ratio analysis helps to offset the differences in size between companies — for example one company may have a larger profit number, but a smaller profit margin, than a competitor. The ratio — profit margin — may be a better indicator o which company is actually more profitable. In this analysis, Microsoft and Google will be compared. Microsoft has a variety of multi-billion dollar businesses, including servers, Office and Windows, while Google makes most of its money on advertising sales. Yet, both companies are wildly profitable, and both have similar situations with regards to excess cash flow. They are also two of the major driving forces in the Internet business, and are competitors with their browsers and mobile operating systems.
Step 1. The current ratio is a liquidity ratio that tells us about the firm’s ability to meet its financial obligations for the coming year.
The quick ratio is another liquidity ratio. It is similar to the current ratio, but removes inventories from the numerator. The reason for this is that it cannot be assumed that inventories can be liquidated for book value.
Accounts receivable turnover indicates how quickly the company collects on its bills. This ratio helps tell about the company’s cash conversion cycle. This is significant because old accounts that have yet to be collected are at risk of being unpaid.
Days receivable is the same thing as accounts receivable, stated differently.
The inventory turnover tells about how fast the inventory turns over. The significance is that inventory that older inventory is harder to sell, or sell at full value, so a higher rate of inventory turnover is desirable.
Days’ inventory is a different way of stating the inventory turnover. The underlying numbers are the same.
The asset turnover is a reflection of sales/assets. This is an efficiency ratio that reflects how well the firm’s assets are being used to earn revenue.
Invested capital ratio complements the asset turnover ratio — it tells the same story but using (1- assets) as the denominator instead of assets.
Equity turnover reflects the degree to which owners’ equity is converted into revenue, so is another efficiency ratio, one that removes debt from consideration.
Capital intensity reflects sales over a specific asset class (plants, property, equipment), again reflecting the efficiency by which capital assets are converted to revenue.
The gross margin reflects the bargaining power that the firm has over buyers and suppliers. The higher this bargaining power is, the greater the gross margin will be.
Net margin is incorporates all of the firm’s costs, not just the COGS. When used with the gross margin, it can help management to tell if changes in the net profit margin were the result of changes in the gross margin, or in changes within the company’s internal and fixed cost structures.
Earnings per share reflects, roughly, what the shareholders get out of the company’s operations. This measure is not as important from an operating perspective, because # of shares (the denominator) is not an operating metric, but shareholders pay close attention to this number, which means management has to as well.
STEP 3: Print this tab & review each item’s analyses. Make notes on trends or issues to discuss in your paper.
Investment & Asset Utilization
Acid Test (Quick) Ratio
Accounts Receivable Turnover
times times times #14
(or Collection Period)
days days days #16
times times times #15
Days of Inventory
days days days #9
times times times #10
Invested Capital Turnover
times times times #11
times times times #12
Gross Margin Percentage
Profit Margin (Percentage)
Earnings Per Share
times times times
days days days
times times times
days days days
times times times
times times times
times times times
*Normally I would have hidden the MSFT columns, but the spreadsheet being locked made it impossible to do that.
Step 3 Discussion.
First a note on citations — the spreadsheet above is the source of the data. The figures used came from MSN Moneycentral. All data comes from this source unless otherwise stated. Any further notes will be cited as needed.
Both of these companies have recorded exceptional performance. Microsoft has increased its working capital significantly over the past five years. A healthy current ratio is around 1.0 in most industries, and Microsoft outperforms that metric — its acid test ratio has increased to 1.93 by 2012. With $52 billion in working capital and healthy liquidity ratios, liquidity is not an issue for Microsoft.
Microsoft has a somewhat sluggish accounts receivable turnover. There are two factors of concern. The first is that the receivables turn trend is downward, from 70 days in 2009 to 78 days in 2012. This means that the company is taking longer to collect from its customers, especially the enterprise customers that make up the majority of its base. That the company, with $63 billion in cash and equivalents, does not need the money should not encourage it to be cavalier about receiving payment, especially in businesses where competition in minimal (i.e. Windows, Office).
Inventory turnover is more rapid. Though Microsoft has experienced a generally negative trend towards slower inventory turnover, inventory (at $1.137 billion in 2012) comprises a minimal amount of the company’s current assets. Whether the company’s inventory turn is fast or slow is not going to affect the company’s financial outcomes in any material way.
The asset turnover has been on a downward trend as well. This indicates that the company has added assets faster than it has added sales. Thus, it is not the increase in cash that is causing this number, but the increase in assets that do not have the same ROA as the company’s older assets. Invested capital turnover and equity turnover are also slowing on a four-year trend, highlighting that whatever Microsoft is plugging money into lately is not returning the same as it’s prior activities. There are a few possible explanations for this, but the rapid increase in working capital is one. If Microsoft has a lot of cash on the sidelines — and it does — then that money will not earn as much return as its actual businesses. The more money piles up for Microsoft, the less efficient the company becomes, which is why all three of its efficiency ratios are declining.
It is also possible that a decline in gross margin is contributing to the lower returns. Microsoft’s gross margin has declined in each of the past four years, indicating either that its pricing power in existing businesses is being reduced, or that it is entering new businesses are not as profitable as its traditional businesses. The profit margin has not behaved in the same way as the gross margin, which indicates that Microsoft is taking steps to adapt to lower gross margins, cutting costs elsewhere in order to maintain net margins. The net margin, however, has recorded higher volatility than the gross margin as a result.
Microsoft’s earnings per share has not increased in a linear fashion, something that must discourage the shareholders. It increased for three years, but in 2012, Microsoft’s net income dropped, as did its EPS. The drop in net income and EPS was not the result of operating decline, but was the result of a $6.2 billion writedown on an online advertising company called aQuantive (Goldman, 2012).
Google has seen its working capital increase significantly over the four-year time period, from $26 billion to $46 billion. While this increase is not as large as the one Microsoft experienced, it is still substantial. The company has an exception liquidity situation. In 2009, the current ratio was over 10, and even though this has dropped, it is still at a very healthy 4.22. Most of that is in cash and receivables, which means that the quick ratio is also very healthy, at 3.35. As with the current ratio, the quick ratio has seen a decline from rates that were absurd, and the current figure represents a number that is a lot more sustainable.
Google is mostly an advertising vendor, and like Microsoft is takes a long time to collect its bills. Over the past four years, Google’s days’ receivable has deteriorated from 49 days to 62 days. As with Microsoft, Google does not need the money, so it may be developing bad habits with respect to collections. An alternative possibility is that Google is using slow collections as a means of competing with Yahoo, Facebook and Microsoft in the online advertising business. If Google takes longer to collect, its clients have better working capital situations. Because Google can afford this, the increased days’ receivable may be part of a broader competitive strategy, rather than sloppiness borne of success.
It is difficult to get a read on Google’s inventory turnover. Until 2011, it did not have inventory, so 2012 was the first full year of Google actually having inventory. Thus, there is no trend to analyze. 41 times seems like a lot, but inventory accounts for such a small portion of the company’s total sales that this figure is heavily distorted.
Unlike Microsoft, Google has held its asset, capital and equity turnover rates more or less steady over the four-year period. Asset turnover has dipped slightly and equity turnover increased slightly, but for the most part, Google has demonstrated stability, where its revenue performance has matched the increases in these balance sheet items.
As with Microsoft, Google enjoys healthy margins. Its gross margin is high, at 58.9%, but this is the lowest mark in four years. Increased competition is likely responsible for this, as Facebook has increased its advertising revenues significantly. Google has probably been forced to become more price-competitive in response to a growing number of upstarts chipping away at its core advertising business.
The net margin has similarly declined. In this case, the net margin declined from 27.6% to 21.4% over the course of the four years. That both margins have declined indicates that Google’s main business is not as profitable as it once was. It is also possible that Google’s excess working capital is not earning much for the company, and new business investments are not returning in margin what the advertising business does. Google makes almost nothing on Android or Chrome, despite these being significant expenditures.
While margins are down, Google shareholders do not have much reason to worry. The earnings per share for the company has gone from $16.61 in 2009 to $27.36 in 2012. Share prices have also increased significantly in response, but these figures have gone upward every year, as Google’s profits have continued to increase with the size of its industry, and its dominant share within the industry.
Overall, both Google and Microsoft are very healthy companies financially. If there is a question mark for both, it lies in the accounts receivable, as both have ratios that seem high. But for liquidity and investor returns, Microsoft and Google have both performed very well, that one writedown for Microsoft excepted.
Goldman, D. (2012). Microsoft’s $6 billion whoopsie. CNN Money. Retrieved November 18, 2014 from http://money.cnn.com/2012/07/02/technology/microsoft-aquantive/index.htm
Google 2012 Annual Report. Retrieved November 18, 2014 from http://www.sec.gov/Archives/edgar/data/1288776/000119312513028362/d452134d10k.htm
Microsoft 2012 Annual Report. Retrieved November 18, 2014 from http://www.microsoft.com/investor/reports/ar12/download-center/index.html
MSN Moneycentral (2014). Microsoft. Retrieved November 18, 2014 from http://www.msn.com/en-us/money/stockdetails/financials/fi-MSFT?ocid=qbeb
MSN Moneycentral (2014). Google. Retrieved November 18, 2014 from http://www.msn.com/en-us/money/stockdetails/financials/fi-GOOG?ocid=qbeb
Get Professional Assignment Help Cheaply
Are you busy and do not have time to handle your assignment? Are you scared that your paper will not make the grade? Do you have responsibilities that may hinder you from turning in your assignment on time? Are you tired and can barely handle your assignment? Are your grades inconsistent?
Whichever your reason is, it is valid! You can get professional academic help from our service at affordable rates. We have a team of professional academic writers who can handle all your assignments.
Why Choose Our Academic Writing Service?
- Plagiarism free papers
- Timely delivery
- Any deadline
- Skilled, Experienced Native English Writers
- Subject-relevant academic writer
- Adherence to paper instructions
- Ability to tackle bulk assignments
- Reasonable prices
- 24/7 Customer Support
- Get superb grades consistently
Online Academic Help With Different Subjects
Students barely have time to read. We got you! Have your literature essay or book review written without having the hassle of reading the book. You can get your literature paper custom-written for you by our literature specialists.
Do you struggle with finance? No need to torture yourself if finance is not your cup of tea. You can order your finance paper from our academic writing service and get 100% original work from competent finance experts.
While psychology may be an interesting subject, you may lack sufficient time to handle your assignments. Don’t despair; by using our academic writing service, you can be assured of perfect grades. Moreover, your grades will be consistent.
Engineering is quite a demanding subject. Students face a lot of pressure and barely have enough time to do what they love to do. Our academic writing service got you covered! Our engineering specialists follow the paper instructions and ensure timely delivery of the paper.
In the nursing course, you may have difficulties with literature reviews, annotated bibliographies, critical essays, and other assignments. Our nursing assignment writers will offer you professional nursing paper help at low prices.
Truth be told, sociology papers can be quite exhausting. Our academic writing service relieves you of fatigue, pressure, and stress. You can relax and have peace of mind as our academic writers handle your sociology assignment.
We take pride in having some of the best business writers in the industry. Our business writers have a lot of experience in the field. They are reliable, and you can be assured of a high-grade paper. They are able to handle business papers of any subject, length, deadline, and difficulty!
We boast of having some of the most experienced statistics experts in the industry. Our statistics experts have diverse skills, expertise, and knowledge to handle any kind of assignment. They have access to all kinds of software to get your assignment done.
Writing a law essay may prove to be an insurmountable obstacle, especially when you need to know the peculiarities of the legislative framework. Take advantage of our top-notch law specialists and get superb grades and 100% satisfaction.
What discipline/subjects do you deal in?
We have highlighted some of the most popular subjects we handle above. Those are just a tip of the iceberg. We deal in all academic disciplines since our writers are as diverse. They have been drawn from across all disciplines, and orders are assigned to those writers believed to be the best in the field. In a nutshell, there is no task we cannot handle; all you need to do is place your order with us. As long as your instructions are clear, just trust we shall deliver irrespective of the discipline.
Are your writers competent enough to handle my paper?
Our essay writers are graduates with bachelor's, masters, Ph.D., and doctorate degrees in various subjects. The minimum requirement to be an essay writer with our essay writing service is to have a college degree. All our academic writers have a minimum of two years of academic writing. We have a stringent recruitment process to ensure that we get only the most competent essay writers in the industry. We also ensure that the writers are handsomely compensated for their value. The majority of our writers are native English speakers. As such, the fluency of language and grammar is impeccable.
What if I don’t like the paper?
There is a very low likelihood that you won’t like the paper.
- When assigning your order, we match the paper’s discipline with the writer’s field/specialization. Since all our writers are graduates, we match the paper’s subject with the field the writer studied. For instance, if it’s a nursing paper, only a nursing graduate and writer will handle it. Furthermore, all our writers have academic writing experience and top-notch research skills.
- We have a quality assurance that reviews the paper before it gets to you. As such, we ensure that you get a paper that meets the required standard and will most definitely make the grade.
In the event that you don’t like your paper:
- The writer will revise the paper up to your pleasing. You have unlimited revisions. You simply need to highlight what specifically you don’t like about the paper, and the writer will make the amendments. The paper will be revised until you are satisfied. Revisions are free of charge
- We will have a different writer write the paper from scratch.
- Last resort, if the above does not work, we will refund your money.
Will the professor find out I didn’t write the paper myself?
Not at all. All papers are written from scratch. There is no way your tutor or instructor will realize that you did not write the paper yourself. In fact, we recommend using our assignment help services for consistent results.
What if the paper is plagiarized?
We check all papers for plagiarism before we submit them. We use powerful plagiarism checking software such as SafeAssign, LopesWrite, and Turnitin. We also upload the plagiarism report so that you can review it. We understand that plagiarism is academic suicide. We would not take the risk of submitting plagiarized work and jeopardize your academic journey. Furthermore, we do not sell or use prewritten papers, and each paper is written from scratch.
When will I get my paper?
You determine when you get the paper by setting the deadline when placing the order. All papers are delivered within the deadline. We are well aware that we operate in a time-sensitive industry. As such, we have laid out strategies to ensure that the client receives the paper on time and they never miss the deadline. We understand that papers that are submitted late have some points deducted. We do not want you to miss any points due to late submission. We work on beating deadlines by huge margins in order to ensure that you have ample time to review the paper before you submit it.
Will anyone find out that I used your services?
We have a privacy and confidentiality policy that guides our work. We NEVER share any customer information with third parties. Noone will ever know that you used our assignment help services. It’s only between you and us. We are bound by our policies to protect the customer’s identity and information. All your information, such as your names, phone number, email, order information, and so on, are protected. We have robust security systems that ensure that your data is protected. Hacking our systems is close to impossible, and it has never happened.
How our Assignment Help Service Works
1. Place an order
You fill all the paper instructions in the order form. Make sure you include all the helpful materials so that our academic writers can deliver the perfect paper. It will also help to eliminate unnecessary revisions.
2. Pay for the order
Proceed to pay for the paper so that it can be assigned to one of our expert academic writers. The paper subject is matched with the writer’s area of specialization.
3. Track the progress
You communicate with the writer and know about the progress of the paper. The client can ask the writer for drafts of the paper. The client can upload extra material and include additional instructions from the lecturer. Receive a paper.
4. Download the paper
The paper is sent to your email and uploaded to your personal account. You also get a plagiarism report attached to your paper.
PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET A PERFECT SCORE!!!