Running Head: FINANCIAL RESEARCH REPORT 1

Financial Research Report

GOOGLE INC

Name

Year

Affiliation
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Rationale for choosing the company for which to invest

With reference to the Modern portfolio theory, there is a provision of fundamental

concepts whose application is very crucial in environments of multiple portfolio management.

Putting into context the fact that Portfolio management entails the aggregation of a set of user

needs, it creates a relationship relating to the portfolio as well as particular elements which

determine the mix of resource investments which are expected to result in an improvement of the

end user capabilities, (Dow, 2007). The choice of GOOGLE INC as an appropriate company for

investment is based on several crucial factors including; the fact that it has almost retired and

the need to focus the portfolio investment to the preservation of capital is paramount,

(Hamilton, 2013). Owing to that fact, therefore, the need for other investments to be designed to

provide a safer return profile is very necessary. This helps to provide support in relation to

retirement expenses. The other factor is related to the financial performance of the company. The

company’s Equity ratio on a book value basis is positive and much higher than the industry

average. The company debt/Equity ratio on a market value basis is almost, double the industry

average. The company has not only increased its leverage but it has also increased its leverage in

a manner that much higher than the industry average leverage ratio, (Dow, 2007). When an

asset or item is purchased with the hope that it will generate income or appreciate in the future, it

creates a scenario that in an economic sense amounts to an investment. In an economic sense, an

investment entails the purchase of goods whose consumption is meant for the future as a matter

with a view of creating wealth out of it, (Dow, 2007).

The corporate headship and management of the company is also another factor put into

consideration. The company corporate leadership can be credited with defining the objective of

the organization clearly. The move played has played a significant role in ensuring that there
FINANCIAL RESEARCH REPORT 3

would be no wastage of time, money and effort. In so doing, management converted

disorganized resources of men, machines, money, etc. into the useful enterprise, (Dow, 2007). .

These resources have been coordinated, directed and controlled in such a manner that enterprises

work towards the attainment of goals. From the corporate angle the company has also been

observed to maintain optimum Utilization of Resources. This has been ascertained in the manner

that management utilizes all the physical & human resources productively. This leads to

efficiency in management. Management provides maximum utilization of scarce resources by

selecting its best possible alternate use in the industry out of various uses. It makes use of

experts, professional and these services leads to use of their skills, knowledge, and proper

utilization and avoids wastage.

Lastly the company’s financial investment have been made in such a manner that they

underline the crucial need for diversification of assets. Such a move ensures that the unnecessary

and unproductive risks are well dealt with. In that regard, therefore, it would be practical and

wises assume that an investment of finance in such a company would be a wise move with the

potential to yield positive financial returns, (Hamilton, 2013).

Ratio analysis

Financial analysis of the company in relation to its performance is limited in financial

resources within the organization. It’s always up to the organization to use the financial

performance and management tools to its utmost advantage. Relating to the analysis of the

company performance as per the financial statements, it’s relevantly ideal to indicate that the

group’s business and financial operations were comprehensively invested in vital systems,

(Hamilton, 2013).The business success factors which provided a comprehensive approach in a

FINANCIAL RESEARCH REPORT 4

styled process showed from the study the relevance of various financial ratios and the input of

the business which equally showed the advanced profitability margin. Initiatives that have been

embarked upon in the course of the financial years have seen the firm making progress that is

significant in productivity as embedded in the entire group. It should also be noted that the

strength has also been influential in the firm’s performance in previous years with the continued

uncertainty within the international performance of the previous year as well as the cautious

perception of the growth prospects within most domestic markets,( Hamilton, 2013).

Net profit margin:

This ratio relates to the net profit of the business in relation to the sales made by the

business over a given period of time. To determine the net profits, the cost of sales is subtracted

from the net sales made by the business over the same period of time.

Net profit margin: Net Profit/sales revenue x 100

For 2008

$373/ $462,982*100=0.080564687%

For 2009

$15,846/$421,314*100=3.761090303%

The forecast in 2008 indicates that the company net profit increased from 0.080564687% to

3.761090303% in 2008. The indication is that there was use of better quality raw materials as

well as a bigger stock and therefore the money could be tied up in stock, (Hamilton, 2013).
FINANCIAL RESEARCH REPORT 5

Liquidation rations

In terms of the strength of the company’ financial performance based on the revenue

statement, the firm is reflected as realizing healthy financial progress. After thorough

examination of the Google’s overall net incomes and, it could be argued that there is an

indication of a positive trend. Using the interest coverage ratio of the company the conformation

is that the Google easily covered its debt obligations. This is a major ratio for it helps the

company to fully leverage their financial performance, (Hamilton, 2013).

Further looking at the Google’s earnings per share, results from the Google’s’ revenue

statements indicate that there is enough money available to shareholders of Google even after

calculating the profits on per share basis. This reflects a major strength in the Google’s financial

performance. Google’s revenue statements including Google’s ability to achieve a much more

improved efficient operating expense ratio is sufficiently desirable to indicate high level

increased efficiency.

Google’s financial prospects appear promising. This is illustrated by the positive growth

of Google’s assets, overall profits as well as healthy financial management. This could partly be

due to significant business environments. Basing on the current trend, the Google’s is likely to

double their overall profit margin and also achieve significant asset bases in the following

financial years. To be able to realize such figures, the firm can employ prudent measures to

establish and substantially analyze the risks associated with every source of revenue. This will

help to determine whether the source risk or whether the company’s market share is growing,

among many other associated risks.

FINANCIAL RESEARCH REPORT 6

The contribution margin ratio of Google’s indicates that Google’s contribution margin

ratio of 20%, in 2009 repented an increase in sales, which led to a more than double increase in

profit. The profitability of the company has grown in every aspect in the last three years. The

growth can be assessed by an increase in the percentages and different ratios in 2012 and 2013.

The gross profit margin in 2012 was 21.1%, but there was a slight increase in 2013 to a

percentage of 21.53%, thus making an increase of 0.43% at the end of 2013. Though the increase

in the gross profit is the very minimum increase percent it indicates growth in 2013 as compared

to 2012.

Likewise, there is an increase in the net profit margin in the company over the years. This

is from computing the difference between the net profit margin of 2012 and 2013. Having had a

net profit 3.35% and 3.53% in the respective years will make a profit difference of 0.18%, which

also shows the growth of net profit margin.

The return on net assets (ROA) of the company over the years was a healthy. This is

attributed to the growth that is realized from the difference in the ratios of the company years.

Having started off at 0.28 in 2012 and getting to 0.3 in 2013 indicates that there was a growth of

0.02 during this period. Therefore, there was a growth and a significant improvement in the

company over the years, (Austin, 2010). In relation to the company’s Return on equity Google

outperformed most of its competitors at a return on equity of 55.34% compared to the industrial

average of 26.78%

Stock price analysis

It is a fact that in the world of business firms are most likely to employ a number of

sources to aid the financing of their business operations. This is both for the long and short term
FINANCIAL RESEARCH REPORT 7

financing purposes. This is particularly because of the need to finance a number of business

requirements that require raising hundreds of millions of money. Because of that need especially

with the financing of long-term business operations, it’s logical to employee as many sources as

possible in spite of the potential presence of a dominant source of finance, (Austin, 2010). To

fully contextualize this aspect of long-term financing the following aspects as well as their

tradeoffs are rendered the following explanation. On average GOOGLE INC has been in position

raise to, 589 billion dollars by the firm in equity. The book value of the firm’s equity is $529.82

billion and as for the market value the company is at $569.50 billion. The firms’ current cost of

equity is $529.82 billion. More emphasis will be placed on the company search site as well as

revamp its technology capabilities and others, in bid to expand its equity offerings in the future.

The company’s Equity ratio on a book value basis is positive and much higher though the fact

that the company’ debt/Equity ratio on a market value basis is quite respectable, it could be

argued the company has the required resources to maneuver their debts. Google as not only

increased its leverage but it has also increased its leverage in a manner that much higher than the

industry average leverage ratio. In that sense, therefore, Austin, (2010) contends that the

relevance of risk factors within a changing platform in the financial sector provide a critical basis

for examining the impact of financial transactions within a wider environment. In this case, the

consideration establishes itself within a more dynamic point of reference where there are core

objectives examined in vital business establishments. The analysis above provide the necessary

mechanisms which enlists the support framework for the business and this is especially in a more

concentrated level, argued by the amount of financial management witnessed in the general

operations of the company, (Austin, 2010).

FINANCIAL RESEARCH REPORT 8

Debt funding report (on the core stock)

The mortgage option can be an option specifically to address the purchase of property.

This has been observed to operate as many businesses have adopted the use of mortgage

financing to acquire property as well as expand their business entities. The cases with mortgage

financing involve the use of mortgages as a security for loans acquired. The firm was in a

position to earn $396.80 million in debt. The value of the long term debt of the company stands

at -1.32 % and the current cost of debt of the firm is valued at historical cost, (Austin, 2010).

Portfolio performance analysis

The overall capital of the firms stands at $99,997.02million. The profit margin is given

by how much the income is generated as per the level of sales. It’s computed by the formula, Net

Income / Net Sales. For this particular figure the level of performance needs to be compared to

the industrial average to determine internal performance as a high or lower profit margin will

indicate a higher a higher margin or low margin of safety respectively. In the case above,

comparisons between Google and the other company indicate a healthy financial performance

compared to industrial average. This is reflected in the profit margin levels which put the

company at some kind of risk.

Recommendations:

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 company has an asset allocation of more than 85% equities, 5% fixed income as well

as 10% commodities. Relating to the amount of the company’s portfolio (95%) that is weighted
FINANCIAL RESEARCH REPORT 9

to equities as well as commodities, it is fair to regard it as aggressive. The investor harboring

intentions of making investments in this kind of portfolio must take more vigorous management

as opposed to the unadventurous “buy- as well as -hold” strategy,( Thorp, 2010). The portfolio is

quite volatile and thereby requires numerous alterations to modify it to fluctuating market

circumstances. The investor must aim at pursuing an aggressive investment strategy for this

particular investment. The strategy must be aimed at the maximization of returns. To achieve this

strategy the investor must be able to take a comparatively higher degree of risk. This will involve

an emphasis on the appreciation of capital as the most fundamental objective of the company. An

aggressive investment strategy is prerequisite given the amount of the company’s portfolio

(95%) that is weighted to equities as well as commodities, (Thorp, 2010).

Based on your financial review, determine the risk level of the company from your

investor’s point of view.

The Return on Total Assets ratio is a reflection of the level of the company’s profitability

in relation to how much the company assets and how generates revenue. Relating to how the

company generates revenue from its assets, there is a potential for a bit of risk. The implication

could be that the company is in a position to realize a much higher growth of revenue earned

from the use or sell of its assets as reflected by a percentage growth though at a significantly

higher operational cost. However, Hamilton, (2013) argues that such a scenario puts the

company in a position where it is able to realize an increase in revenue for every dollar of assets

that it has control over. The company derives a positive growth internally with a realization of

more revenue from the assets compared to the previous years. To fully contextualize how the

company is performing in relation to how it earns from its assets, a comparison with the industry

is made, (Thorp, 2010). This helps to determine whether it has a high or low average. A better
FINANCIAL RESEARCH REPORT 10

understanding and improved company performance are the yardstick for overall enhanced

business performance and the subsequent healthy financial performance. The company is

generally quite risky given the volatility of the portfolio. The level of the risk is manageable

when compared to the industrial risk. The major risk from an investor’s point of view is the

opportunity Risk. This is specifically because buying, investing in Google (GOOG), amount to

giving up on the investment in another investment. It is therefore essential that the company

makes the best possible investments to ensure that it does not end up sacrificing another wise

better opportunity, (Thorp, 2010).

Key strategies to minimize perceived risks

To mitigate the risk, the company can invest in diversifications though this can be

conducted with very careful research regarding the investments.

The company’s financial prospects could be enhanced by deviating on bigger investments

in the growth of the company assets. The company can attain a positive growth in its asset base

by employing highly specialized financial management techniques. This would enhance the

operation strategies and ultimately create significant business environments. If such a strategy is

implemented and well monitored, it will more than likely double their overall profit margin and

also achieve significant asset bases in the preceding financial years. It would therefore be

recommended that the company employs prudent measures to establish and analyze the risks

associated with every source of revenue will help to determine whether the revenue source risky

or not. The significance of such a move is that it would help determine whether the companies’

market share is growing, among many other associated risks. With such information, the

company would be in position to continue to embrace flexible financial and business decisions as
FINANCIAL RESEARCH REPORT 11

well maintain fundamental business settings, particularly with respect to liquidity and capital,

(Hassett, 2008).
FINANCIAL RESEARCH REPORT 12

References

 Hassett, Kevin A. (2008). "Investment". In David R. Henderson (ed.). Concise Encyclopedia of

Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-

0865976658. OCLC 237794267.

Thorp, Edward (2010). Kelly Capital Growth Investment Criterion. World

Scientific. ISBN 9789814293495. Retrieved 2010.

 Austin, Scott (2010). ""Law Firms Offer Discounts, Play Matchmaker," The Wall Street Journal,

Sept. 9, 2010". Online.wsj.com. Retrieved 2012-05-18.

 Hamilton, Walter (2013). "Venture-capital funding drops sharply in Southern California".

latimes.com. Retrieved 2013-06-14.

Dow, J. ( 2007). Private Equity Analyst as referenced in Taub, Stephen. [7] Record Year for

Private Equity Fundraising. CFO.com,

FINANCIAL RESEARCH REPORT 13

APPENDICES

  Full Year 2014

      (unaudited)(unaudited (unaudited) (unaudited (unaudited)

) )

Revenues 2012 2013 2014 Q1 Q2 Q3 Q4

Google Websites $31,221 $37,422 $45,085 $10,469 $10,935 $11,252 $12,429

Y/Y Growth Rate 19% 20% 20% 21% 23% 20% 18%

Q/Q Growth Rate NA NA NA -1% 4% 3% 10%

Google Network $12,465 $13,125 $13,971 $3,397 $3,424 $3,430 $3,720

Members'

Websites

Y/Y Growth Rate 20% 5% 6% 4% 7% 9% 6%

Q/Q Growth Rate NA NA NA -4% 1% 0% 8%

Total $43,686 $50,547 $59,056 $13,866 $14,359 $14,682 $16,149

Advertising

Revenues

Y/Y Growth Rate 20% 16% 17% 17% 19% 17% 15%

Q/Q Growth Rate NA NA NA -1% 4% 2% 10%

Other Revenues $2,354 $4,972 $6,945 $1,554 $1,596 $1,841 $1,954

Y/Y Growth Rate 71% 111% 40% 48% 53% 50% 19%

Q/Q Growth Rate NA NA NA -6% 3% 15% 6%

 FINANCIAL RESEARCH REPORT 14

Total Revenues $46,039 $55,519 $66,001 $15,420 $15,955 $16,523 $18,103

Y/Y Growth Rate 21% 21% 19% 19% 22% 20% 15%

Q/Q Growth Rate NA NA NA -2% 3% 4% 10%

As % of              

Revenues

Google Websites 68% 67% 68% 68% 69% 68% 69%

Google Network 27% 24% 21% 22% 21% 21% 20%

Members’

Websites

Other Revenues 5% 9% 11% 10% 10% 11% 11%

  Full Year 2014

      (unaudited)(unaudited (unaudited) (unaudited (unaudited)

) )

Costs 2012 2013 2014 Q1 Q2 Q3 Q4

Cost of $17,176 $21,993 $25,691 $5,961 $6,114 $6,695 $6,921

Revenues

As a % of 37% 40% 39% 39% 38% 40% 38%

Revenues

Traffic $10,956 $12,258 $13,496 $3,232 $3,293 $3,348 $3,623

Acquisition

Cost
 FINANCIAL RESEARCH REPORT 15

As % of 24% 22% 20% 21% 20% 20% 20%

Revenues

Other Cost of $6,220 $9,735 $12,195 $2,729 $2,821 $3,347 $3,298

Revenues*

As % of 14% 18% 18% 18% 18% 20% 18%

Revenues

Research & $6,083 $7,137 $9,832 $2,126 $2,238 $2,655 $2,813

Development*

As % of 13% 13% 15% 14% 14% 16% 16%

Revenues

Sales & $5,465 $6,554 $8,131 $1,729 $1,941 $2,084 $2,377

Marketing*

As % of 12% 12% 12% 11% 12% 13% 13%

Revenues

General & $3,481 $4,432 $5,851 $1,489 $1,404 $1,365 $1,593

Administrative*

As % of 8% 8% 9% 9% 9% 8% 9%

Revenues

Total Costs & $32,205 $40,116 $49,505 $11,305 $11,697 $12,799 $13,704

Expenses*

Y/Y Growth Rate 23% 25% 23% 23% 21% 28% 22%

Q/Q Growth NA NA NA 0% 3% 9% 7%
 FINANCIAL RESEARCH REPORT 16

Rate

* Includes stock-based compensation expense.

  Full Year 2014

      (unaudited) (unaudited) (unaudited) (unaudited) (unaudited

Profitability 2012 2013 2014 Q1 Q2 Q3 Q4

Income from Operations $13,834 $15,403 $16,496 $4,115 $4,258 $3,724 $4,399

As % of Revenues 30% 28% 25% 27% 27% 23% 24%

Net income from continuing $11,553 $13,347 $13,928 $3,650 $3,490 $2,998 $3,790

operations

As % of Revenues 25% 24% 21% 24% 22% 18% 21%

Net (loss) income from -$816 -$427 $516 -$198 -$68 -$185 $967

discontinued operations

Net Income $10,737 $12,920 $14,444 $3,452 $3,422 $2,813 $4,757

EPS - Basic $16.41 $19.41 $21.37 $5.13 $5.07 $4.15 $7.01

EPS - Basic - Continuing $17.65 $20.05 $20.61 $5.42 $5.17 $4.42 $5.58

operations

EPS - Basic - Discontinued -$1.25 -$0.64 $0.76 -$0.29 -$0.10 -$0.27 $1.43

operations

EPS - Diluted $16.16 $19.07 $21.02 $5.04 $4.99 $4.09 $6.91

EPS - Diluted - Continuing $17.38 $19.70 $20.27 $5.33 $5.09 $4.36 $5.50

operations

EPS - Diluted - Discontinued -$1.23 -$0.63 $0.75 -$0.29 -$0.10 -$0.27 $1.41

operations

Number of Shares              
FINANCIAL RESEARCH REPORT 17

Basic 654,426 665,692 675,935 672,587 675,115 677,097 678,943

Diluted 664,610 677,618 687,070 685,212 686,363 688,215 688,491

Balance Sheet & Cash Flow Statement Information

(In millions, except DSO)

  Full Year 2014

      (unaudited) (unaudited) (unaudited) (unaudited) (unaudited

2012 2013 2014 Q1 Q2 Q3 Q4

Cash, Cash Equivalents & $48,088 $58,717 $64,395 $59,379 $61,204 $62,157 $64,395

Marketable Securities

Accounts Receivable, net of $6,769 $8,089 $9,383 $7,827 $8,321 $8,237 $9,383

allowance (Google stand-

alone)

DSO for Google stand-alone 54 53 52 46 47 46 48

(in days, using ending AR)

Property and Equipment, $11,854 $16,524 $23,883 $17,877 $19,486 $20,981 $23,883

Net

Total Assets $93,798 $110,920 $131,133 $116,526 $121,608 $125,781 $131,133

Cash Flow from Operations $16,619 $18,659 $22,376 $4,391 $5,627 $5,994 $6,364

Capital Expenditures $3,273 $7,358 $10,959 $2,345 $2,646 $2,417 $3,551

FINANCIAL RESEARCH REPORT 18

Supplemental Information

(In millions, except headcount data)

  Full Year 2014

      (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)

2012 2013 2014 Q1 Q2 Q3 Q4

Amortization Expense $893 $1,158 $1,063 $270 $266 $285 $242

of Intangible Assets

Google Amortization $792 $1,010 $1,051 $258 $266 $285 $242

Expense of Intangible

Assets

Motorola Mobile $101 $148 $12 $12 $0 $0 $0

Amortization Expense of

Intangible Assets

Stock-Based $2,473 $3,127 $4,175 $839 $880 $1,255 $1,201

Compensation Expense

(excluding Motorola

Home & Mobile)

International Revenues 54% 55% 57% 57% 58% 58% 56%

as % of Revenues

Ending Permanent 53,861 47,756 53,600 49,829 52,069 55,030 53,600

Headcount

Google Stand-Alone 37,544 43,862 53,600 46,170 48,584 51,564 53,600

Headcount

Sequential Headcount NA NA 22% 5% 5% 6% 4%

FINANCIAL RESEARCH REPORT 19

Growth Rate for Google

stand-alone

Motorola Stand-Alone 16,317 3,894 0 3,659 3,485 3,466 0

Headcount