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Google’s Financial Statement Analysis Using Ratio Measurements and Trend Analysis

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Financial statement analysis using ratio measurements and trend analysis assists the user of financial statements in making informed judgments and decisions about the entity’s financial condition and results of operations (Marshall, 2003).

Financial ratio measurements can be divided into four areas of classification that provide different types of information: liquidity, activity (or turnover), profitability and debt. Liquidity ratios, such as working capital and current ratios, provide information about a firm’s ability to meet its maturing obligations. Activity ratios use initial and closing balance sheet account reports to focus on how efficiently an organization manages resources when generating sales revenues. Profitability measures, like return on investment ratios and price/earnings ratios, for example, show resource management efficiency in the firm. Lastly, debt measurements such as debt/equity ratios indicate the extent to which a firm is financed through financial leveraging.

For the period ending June 2006, Google’s balance sheet showed a healthy current ratio of 11.3, which means that Google’s current assets during that period were 11.3 times that of their current liabilities. In other words, for every $1.00 the company incurred in the form of current liabilities, they also acquired current assets worth $11.30.  If the current ratio of Google threw up such a high figure in the second quarter, the other financial data relating to the company’s performance in the same quarter were even more staggering.

It is not surprising for a company like Google to come up with figures like that, given the type, size and volume of their business and their immense goodwill in the market. They had a quick ratio of 11 times, a leverage ratio of 1.1 times, a receivables turnover ratio of 13.5 times, an assets turnover ratio of 1 time, a revenue to assets ratio of 0.6 times, a return on equity from total operations of 18.1 per cent, a return on invested capital of 18.1 per cent and a return on assets of 16.8 per cent

Companies can learn from this example. Financial managers should use ratio measurements and trend analysis to assists the management in making informed judgments and decisions about future acquisition or investment strategy. For example analysts suggest that a current ratio of 1.5 or greater is normally sufficient to meet near-term operating needs. A current ratio that is too high can suggest that a company is hoarding assets instead of using them to grow the business -- not the worst thing in the world, but potentially something that could impact long-term returns. Financial managers should always check a company's current ratio (as well as any other ratio) against its main competitors in a given industry. Certain industries have their own norms as far as which current ratios make sense and which do not. For instance, in the auto industry a high current ratio makes a lot of sense if a company does not want to go bankrupt during the next recession.

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YouSigma. (2008). “Google’s Financial Statement Analysis Using Ratio Measurements and Trend Analysis." From http://www.yousigma.com.

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