Example Of Google Inc. Research Paper
Provide a rationale for the U.S. publicly traded company that you selected, indicating the significant factors driving your decision as a financial manager.
Google is a multination company mainly operating in the internet and computer software industries. It was initially incorporated in California on September 1998 and on August of 2003, was reincorporated in Delaware. It is considered to be a pioneer in technology and its widely known products and services include Google Analytics, Google Adsense, Google Search, Google Books, Gmail, Google Code, Google Search Appliance, Google+, Google Apps, Google Docs, Google Translate, Google News, Google Goggles, Google Wallet, Chromecast, Google Shopping Express, and more. Determine the profile of the investor for which this company may be a fit, relative to that potential investor’s investment strategy. Provide support for your rationale.
The profile of an investor that considers investing in Google is that of a risk-taker. Since Google is a pioneer in technology, the company is usually involved research and development of new products and services. They are proactive in fulfilling the demands of the consumers and not simply limited to meeting the forecasted demand in the market. They continually seek ways of improving how things are done because by not doing so, the whole company can go down. They market they are currently operating are highly competitive and their competitors can range from start-ups to huge, established tech companies. Since they offer a wide range of products and services, the company should be able to integrate the use of their offerings and innovate across different industries including social networking, search engine and information services, operating systems, wireless mobile devices, online advertising, and other web-based offerings.
In my understanding, If you are one of these investors, you share the same vision as with Google. You are interested in making use of technology in maximizing performance in everything you do. These investors are risk-takers because start-ups in new market usually fail the first time it is introduced. Behind every launch of its products and services, Google faces many challenges and must carefully study its supply chain, the completion, forecasted demand, government regulations, etc. However, they are the ones who would rather make use of their money for innovation even if it could take longer to realize a return from their investments. I believe that with the nature of Google’s name as an established leader in technology but a new entrant in different markets.
Although risk-takers, these investors do not just jump into these risks. They would still prefer being associated with companies that have proved its management and business strategies in winning the market. While Google is more popularly known for its technological breakthroughs, the highest share of its earnings is attributed to advertising. This accounts for more than 80% of its revenues and as such, the company’s good image must always be maintained since client contracts are based on trust. A sudden withdrawal from them can easily lead the company to bankruptcy.
Therefore, as an investor considered to be risk-takers, they are also risk-averse in essence. Although they are willing to invest money for ideas that have never been tested to work, they are only wiling to do these with companies that are established. If these ideas suddenly become innovations they will eventually earn returns that are significantly higher than those in safer investments. As it goes, the higher the risks, the higher the returns.
The liquidity ratios are used to assess the ability of the company to pay off its short-term obligations as they become due. In interpreting this ratio, the higher the result, the better it is for the firm since this means that the company has more room or margin of safety when it comes to covering current debts. In analyzing Google, we noted that its current and quick ratio has continually increased within the last two years. Although the net working capital to sales ratio declined, the change can be considered minimal. Therefore, in terms of liquidity, Google is actually moving forward.
The profitability ratios are used to assess the ability of the company to generate revenues while incurring expenses and other related costs. Similar to liquidity ratios in interpretation, the higher the computed result, the more favorable financial image it is for the firm. In many cases, these are compared to that of the company’s direct competitors and previous profitability ratios. As shown above, the profitability of Google has decreased for all three profitability ratios – gross profit margin, operating profit margin, and net profit margin. Possible reasons could be that there is increased competition in online advertising as people now have more alternative venues such as Facebook, mobile app advertising, and e-newspapers. Notwithstanding these declines, I believe that Google will still be able to improve its profitability in the future given its investments in research and development.
The activity and return ratios are used to assess the rate at which a company converts its balance sheets accounts specifically to sales and cash. It is also related to measuring the efficiency of the firm in maximizing it resources. For the last three years, Google’s total asset turnover and fixed asset turnover haven’t changed a lot. This means that management has maintained its position of utilizing assets in generating earnings.
The financial leverage ratios are used to determine the company’s income susceptibility to changes in operating costs, equity assets, and interest expenses. They are similar to liquidity ratios in that they provide clues regarding the company’s ability in meeting obligations as they mature. For the last three years, Google ratios under this type have not significantly changed. However, it is important to note that its times-interest coverage ratio has increased. This means that management has improved on meeting interest payments.
The shareholder ratios are used to determine the how much to the stockholders are benefited in the event of liquidation. Two ratios were calculated under this type – the EPS and the P/E ratios. The price used in calculating the P/E ratio is the closing price of Google on March 5, 2015. Due to the limited availability of information regarding its the closing prices, the equivalent P/E ratio for the same date in previous years were not calculated. However, it is evident in the EPS that the shareholders’ wealth experienced an upward trend for the last three years.
Based on your financial review, determine the risk level of the company from your investor’s point of view. Indicate key strategies that you may use in order to minimize these perceived risks.Provide your recommendations of this stock as an investment opportunity. Support your rationale with resources
There are several risk factors in the consideration of Google for investment. First, it faces intense competition. If they cannot continue to provide new products and services, they can no longer stay competitive in comparison to other firms. This could significantly affect their operations and decrease revenues. As mentioned before, although they are known as a technology company, they actually derive a bulk of their earnings from advertising. Since more and more companies offer avenues for online advertising, Google has provide ways to remain the preferred choice for all their clients.
Second, Google invests a lot of money in research and development. Investing in new technologies alone is inherently risky and constant failures in this area could negatively impact their ongoing operations. Furthermore there may be unexpected liabilities to be incurred which could adversely affect the company’s management and financial condition.
Third, Google is highly dependent on other companies with their adoption of updated versions of its operating systems, particularly Android, and search engines. A sudden change in preference in these areas can affect its advertising operations. For instance, consumers might prefer using apps specific to its online activity. These apps can now limit the user’s web exposure and in addition, introduce advertisements from time to time.
Fourth, Google is constantly subject to new regulations that limit its growth or increase operational expenses. In addition, it is regularly involved in suits, claims and government investigations including those related to intellectual property which are costly to defend.
Fifth, there are privacy concerns related to the use of Google’s technology creates a negative publicity which can damage its reputation leading to the loss of users that patronize its products and services. In relation to this, the company must always apply security measures over the access of private and confidential data from its users. The moment these are breached, it could subject the company to significant financial and legal exposure.
Although there are still a lot of risks associated with the company, I still believe that Google is a good investment since they are a proactive company. However, since many of these risks have significant impact on the company, one way to minimize possible losses from its failure is to diversify his portfolio. Specifically, he must invest in industries that have an inverse relationship with the company such that when losses are incurred in Google, it can be offset. Preferably, diversification would involve many companies across wider industries.
Given these risks and appropriate strategy, I would still recommend investing in Google as they are forward-looking and an established market leader in online advertising and technology.
Bragg, S. (2010.) Business Ratios and Formulas: A Comprehensive Guide. John Wiley & Sons.
Baker, K., and G. Powell. (2009). Understanding Financial Management. John Wiley & Sons.
Google Inc. (2014). Annual Report 2014 on Form 10-K. Retrieved from https://investor.google.com/earnings.html
Google Inc. (2013). Annual Report 2013 on Form 10-K. Retrieved from https://investor.google.com/earnings.html
Google Inc. (2012). Annual Report 2012 on Form 10-K. Retrieved from https://investor.google.com/earnings.html
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