Google’s Business Model and Strategy

1. Have Google’s business model and strategy proven to be successful? Should investors be impressed with the company’s financial performance? How does the company’s financial performance compare to that of Microsoft and Yahoo? Please conduct a financial analysis to support your position—you may wish to use the financial ratios presented in the Table 4.1 of the text as a guide in doing your financial analysis of the company.

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Google’s business model and strategy had proven to be successful, and investors should be impressed with the company’s financial performance.

Google’s revenue during 2001 to 2009 grew rapidly. From 2001 to 2009, Google’s revenue increased steadily, from 86 millions in 2001 to 23.65 billions in 2009, increasing about 275 times. And compared with other corporations, Google also had a high average net income growth between 2007 and 2009. Google’s growth ratio is 30.47%, while Microsoft’s is 6.58% and Yahoo’s is -1.45%, which means Google is more potential than the other two corporations. Especially in terms of online service, Google shows unparalleled competitive power.

Profitability Ratios

Operating profit margin（or return on sales)

Definition: A ratio widely used to evaluate a company's operational efficiency. This measure is helpful to management, providing insight into how much profit is being produced per dollar of sales.

Operating profit margin is expressed as a percentage and calculated as:

Net return on sales = Net income / Revenue

The operating profit margins indicate that all the companies are growing less efficient than 2006. Although both Google and Microsoft are growing more efficient than Yahoo, Microsoft’s operating income of online services business is negative, which means Microsoft is not competitive on this part of business also.

One the other hand, the trend of Operating profit margin should be upward, however all of them didn’t show a stable upward trend. There are many reasons for this phenomenon. The most important reason is the financial crisis from 2007 to 2009.

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ROE (return on stockholders’ equity)

Definition: The amount of net income returned as a percentage of shareholders equity. This ratio measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

The ROE indicate that Google’s profitability is much better than Yahoo. On the other hand, although Microsoft’s ROE is higher than Google, Windows 7 and Microsoft Office accounted for most of the company’s revenues and operating profit, and the operating incomes of Microsoft’s online services business unit are negative. We can conclude from that: Microsoft’s online services business is not profitable. So in terms of online services business, Google is the most profitable corporation among them.

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Liquidity Ratio

Current ratio

Definition: The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).

The Current Ratio is calculated as: Current Ratio = Current assets/Current Liabilities

The higher the current ratio, the more capable the company is of paying its obligations. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash.

The current ratio of Google is too high, which means the company was capable enough to pay its obligations, but not efficiently used its current assets or its short-term financing facilities. Huge amount of idle current assets led to the increase of opportunity cost, and weakened Google’s profitability. This maybe also indicated problems in working capital management.

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Leverage Ratio

Debt ratio

Definition: The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a company’s assets that are financed by debt.

The Debt Ratio is expressed as a percentage and calculated as:

Debt ratio=Total debt/ Total assets

This ratio measures the extent to which borrowed funds (both short-term loans and long-term debt) have been used to finance the firm’s operations. We can infer from the graph, Google is with lowest risk and highest financial flexibility among three corporations. Microsoft with a high fraction indicates that it overuse of debt and greater risk.

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2.What are the company’s key resources and competitive capabilities? What competitive liabilities and resource weaknesses does it have? What opportunities exist? What threats to its continued success are present?