Introduction
Google Inc. is an American multinational company that offers internet-related products and services. The company offers services such as cloud computing and search engine advertisements. Google obtains most of its profit from AdWords which refers to online advertisement services that allow adverts to be listed on the search engine (Brumley, 2015, para. 4). The value of the stock has increased over the past five years due to the nature of its business. Investors can make better decisions by conducting ratio analysis. It helps them to identify the profitability of the firm over a given period. Investors should be able to analysis financial statements using ratios in order to maximize their returns.
Moreover, this knowledge helps them to make better investment decisions. This paper critically analyzes Google’s financial ratios in order to advise investors whether they should invest in the company or not. These ratios include the current ratios, debt ratios and profitability ratios. The profitability ratios have declined significantly over the past three years.
Profitability ratios
Profitability ratios refer to financial analysis metrics that measures the ability of a company to generate revenues compared to its expenses. A higher ratio is preferred because it shows that the company is performing better than other in the same industry. There are different types of profitability ratios including return on equity, asset turnover ratio and return on assets (Singh & Kaur, 2016, p. 54). They measure the ability of a company to utilize its assets efficiently to generate profits.
An investor should also consider other factors that affect the profitability of the company before basing their decisions on ratios. This will enable investors to make decisions that are more relevant.
From the ratios above, the company’s profitability ratios have decreased over the last three years. This is an indicator that the company is not utilizing its assets effectively to generate sales. A similar trend is also recorded on the return on capital invested and asset turnover ratio. Therefore, the company’s profitability has declined over the past three years.
Liquidity ratios
Liquidity ratios measure the ability of a company to meet is short-term obligations when they fall due. As a rule, a higher ratio is ideal because it indicates better performance (Hwanyong, Haksoon & Simpson, 2015, p. 251). From the ratios below, the profitability ratios have remained stable over the past three years. However, the debt to equity ratios has improved from 0.3 in 2014 to 0.2 in 2015. This is an indicator that the company is not highly geared.
Conclusion
Ratio analysis is an effective financial statement analysis tool that can be used by investors to make investment decisions. After conducting a ratio analysis on Google’s financial statements, the result shows that profitability ratios have declined over the past three years. However, the liquidity ratios have remained stable over the last three years.
References
Brumley, J. (2015). What Google (GOOG) investors should know before Thursday’s close. Web.
Hwanyong, K., Haksoon, K., & Simpson, J. (2015). Financial Analysis for Profitability Improvement : A Case Study of a HMMA Supplier. International Journal Of Business Management & Economic Research, 6(5), 249-255.
Singh, R. I., & Kaur, S. (2016). Efficiency and Profitability of Public and Private Sector Banks in India: Data Envelopment Analysis Approach. IUP Journal Of Bank Management, 15(1), 50-68.