Financial Managment of Google and Microsoft - Essay Example

? Google Inc. was founded in 1998 and is headquartered in Mountain View, California. Google Inc. is in the business of providing online solutions to its customers by maintaining various websites such as google.com, gmail.com, youtube.com etc. Moreover, Google also publishes advertisements on various websites and blogs. Google is the leader in internet search and earns most of its revenue through advertising. Google also provides Android which serves as an operating system for cellular phones. Furthermore, Google Chrome is regarded as one of the most easy to use web browser.  Microsoft was founded in 1975 and is headquartered in Redmond, Washington. Microsoft is a leader in operating systems and Microsoft windows is its star product. Furthermore, office application such as Microsoft Office is also one of the key products of Microsoft. Microsoft develops licenses and supports various software products and services for computing devices all over the world. Leading products include PC operating systems that primarily include Windows 7. Microsoft also provides online solutions to its customers through Bing and MSN portals. Microsoft recently acquired ‘Skype’ and serves as one of its major product. Microsoft is also present in the entertainment industry through its product named Xbox 360. Organizational Culture Google Inc has a normal hierarchical structure and important decisions are taken by the upper management. Dissent and difference of opinion is encouraged and decisions are made in front of everybody. Google encourages its workers to follow their instincts so that they can come up with creative ideas that help in innovation and product development. Although, Google is not lead by a charismatic leader such as Bill Gates, the vision of the company is well defined and the employees strive towards accomplishing the goals that are given to them. Microsoft strives to make the workplace as comfortable for the employees as they can. Microsoft has a clearly defined vision and the employees stick to the vision and mission of the overall organization. Microsoft is lead by a charismatic leader in the form of Bill Gates. Bill Gates knows that in order to move forward, he can leave no man behind. In order to ensure this, he has a clear vision not only in his mind but he also makes certain to pass it on to his employees. He sets clear standards about his expectation from the employees which is pursued passionately by the employees. By saying inspiring expressions like, every house and business must run on Microsoft software, or a computer on every desktop, he provides an unambiguous picture to his employees of exactly what is expected of them. This helps clear misconceptions and misunderstandings and provides refreshing clarity to employees. He has set a standard for them, they can easily envision it and therefore achieving it becomes easier (Grist, 2007) Google has always introduced new and innovative products. Employees are encouraged to provide Creative and innovative ideas. The concept of search engine, videos sharing, advertisements on blogs etc. are all examples of the innovations Google has introduced over the years. Ratio Analysis: Microsoft also has an impeccable track record in introducing innovative products and services. Microsoft Windows and Office are examples of introducing innovative products in the market that match the customer’s needs and demands. Google Inc. has a better current ratio of 4.2 times as compared to the current ratio of Microsoft. Hence, Google’s ability to repay its short term obligations is better than Microsoft’s (Brigham & Houston, 2012). However, Microsoft earns a far better return on its assets and equity than Google. The higher current ratio indicates that Google has excess short term assets available and hence is better positioned to withstand a recession. Microsoft has been more profitable than Google as indicated by the higher return on assets and return on equity figure of Microsoft. Microsoft earned 41% return on the total equity as compared to the 18% return earned by Google. An investor would want to invest in Microsoft as it provides a better return on equity than Google and is more profitable than Google. Microsoft utilizes its assets and equity efficiently to earn a high return for its investors. Chance to withstand recession: Looking at the innovation track record, Microsoft has an upper hand in this regard. Moreover, it is also utilizing its assets in an efficient and effective manner thereby, increasing their revenue and decreasing cost simultaneously. This in return increases the spread or income of the company. Moreover, the product produced by Microsoft has become a necessity for people therefore, demand is predictable and stable as well. On the other hand, Google’s revenue depends on the advertisement revenue. We need to keep in mind that advertisement is one of the expenditure that companies cut when recession strikes (FRANKENBERGER & GRAHAM, 2009). Ultimately, this would impact Google’s revenue and result in decreased returns. In my view, Microsoft has a better chance of withstanding recession due to above mentioned reasons. The company is highly capable of producing brilliance in tough scenarios as it is has delivered in the past. Financial Guidelines The 3 financial guidelines would be to assess the profitability of each of the companies, measure the liquidity of the companies and evaluate the future prospects of the companies. The ratios calculated in table 1 explain the first two guidelines for an investor. Profitability of Microsoft in comparison to Google is extremely high for an investor’s perspective. An investor puts in his equity and would want a higher return for his investment which is provided by Microsoft over Google. Microsoft’s return on equity is more than double the return provided by Google’s stock. Moreover, an investor would also be interested in return on asset as it is a measure of the efficacy of the investment made in the company. In the above given case, Microsoft beats Google in providing higher return on asset. It is clear that Microsoft beats Google in the first financial guideline which is profitability. The second financial guideline is to compare the liquidity condition of each company. The risk of default is the one of the prime risk that an investor should notice before hand. It is imperative for any investor to identify hidden default risk (if any) of the company. The company’s situation in the stock market can debilitate rapidly if a hint of default prevails in the stock market. In our case, the companies have a fairly good liquidity condition but in comparison to each other, Google takes the upper hand with highly liquid current and quick assets. Google has an upper hand as it is a service industry with no inventory holdings. On the other hand, Microsoft is a manufacturing company which needs to hold huge bulk of inventory to meet the variance in demand. This automatically reduces the current and quick ratio. The third financial guideline is to assess the future prospects of the company. This will help an investor analyze the future movements of the stock. For example, if Google is an innovator and has an aggressive policy of hostile takeover or acquisition is the upcoming future then the stock will grow. However, risks are attached to it and the stock movement can be both ways. On the other hand, Microsoft is a mature company and is in their maturity stage of life cycle. The stock movement would be relatively slow in comparison to Google. Therefore, it is imperative for an investor to carefully asses company’s mindsets, popularly known as policy, to adjust his required rate of return accordingly. Table 1 Microsoft (june 2011) Google (dec 2010) Current Ratio 2.6 4.16 Return on Assets 21% 15% Return on equity 41% 18% Debt ratio 0.47 0.20 Fixed asset turnover 8.57 3.78 Dividend Payout Ratio 23% - P/E ratio 9.44 23.8 Current ratio 2.9 4.15 Quick Ratio 2.6 4.15 Works Cited Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage Learning. FRANKENBERGER, K. D., & GRAHAM, R. C. (2009). The Value of Advertising : Should Firms Increase Advertising Expenditures During Recession? American Association of Advertising Agencies . Grist, R. E. (2007). The changing paradigm of emergency management: improving professional development for the emergency manager. Portland State University. Read More