Evaluation of the two companies from the perspective of a potential equity investor - Essay Example

Supervisor’s 31 March Evaluating Google and Yahoo from the Perspective of a Potential Equity Investor Introduction Financial statements summarize information on an organization’s financial condition and meet the needs of different stakeholders. Equity shareholders have such needs as immediate return on investments and sustainable improvement of an organization’s worth through retained earnings. This establishes their interest in the management’s ability to utilize available resources.

Activity ratios, also known as turnover ratios, measure this efficiency by determining the number of times that an entity’s assets yield revenue (Periasamy 4.39). This section analyzes activity ratios of Google and Yahoo and focuses on inventory turnover, accounts receivable turnover, and total assets turnover ratios. Google Analysis The following table summarizes the three ratios for Google for the economic periods ended 2012, 2013, and 2014. Ratio Formula 2012 2013 2014 Accounts receivable turnover Net credit sales/ Average inventory 6.

78 times 6.81 times 6.86 times Total assets turnover Net revenues/Total assets 0.6 times 0.58 times 0.55 times Inventory turnover Cost of sales/average inventory - 55.55 times - Accounts receivable turnover is high and has an improving trend that indicates the management’s efficiency in collecting its debts. Total assets turnover measures the rate at which an entity can convert its total assets into revenues, and the higher the ratio, the more efficient the entity is said to be in asset management.

Total asset turnover for Google was 0.6 times in the economic period that ended in the year 2011 that means low-level efficiency in asset management. The ratio decreased in the subsequent two years and even though the decreased efficiency was marginal, it indicates risk of long-term inefficiency (Google 1; Debarshi 70-72). Inventory turnover measures the number of times that an entity uses its inventory to generate sales, and a higher ratio is recommended. However, very high ratios could indicate poor management that stocks low volume of inventory and could lead to scarcity.

Google’s inventory turnover was 55.55 times for the period ended 2013. The ratio was too high but not available for the years 2012 and 2014 the fact that the company was just diversifying into scopes (Motorola hardware) could explain the inconsistency (Google 1; Debarshi 70-72). Yahoo Analysis The following table summarizes the activity ratios for Yahoo for the periods ended 2012, 2013, and 2014. Ratio Formula 2012 2013 2014 Accounts receivable turnover Net credit sales/ Average inventory 4.

75 times 4.53 times 4.33 times Total assets turnover Net revenues/Total assets 0.31 times 0.28 times 0.12 times Inventory turnover Cost of sales/average inventory - - - The accounts receivable turnover ratio was 4.75, an indicator of efficiency in debt collection. The ratio however decreased in the years 2013 and 2014, indicating decline in the efficiency but it remained high. Lack of inventory in the company’s operations, based on its financial statements, also means that inventory turnover does not exist for the company.

Total asset turnover was very low in the year ended 2012, 0.31 times, an indicator that the company was only able convert 34 percent of its total assets into revenues. The ratio further declined in the years ended 2013 and 2014 reporting 0.28 times and 0.07 times respectively. The consistent trend further suggests that the company is likely to continue losing its asset management efficiency and the drastic decline in the year 2014 makes the worry more significant. Poor total asset management is, therefore, predicted in the long run (Yahoo 1; Debarshi 70).

Comparative Conclusion Google only reported inventory turnover ratio in a single year and this is not sufficient for reliable inference. Expansion into hardware devices, that suggests trial in the year ended 2013, also explains absence of the inventory turnover ratio in the years 2012 and 2014. The company reported high efficiency in debt management and consistent improvement in the efficiency suggests better future efficiency. The expansion and efficiency suggest asset management efficiency and mean strong future prospects for equity shareholder through improved value in the company’s assets.

Total assets turnover was however low and decreased over the three year period. Accounts receivable ratio for yahoo was however lower than that of Google and had a decreasing trend, and indicator of relatively lower efficiency in debt management. Even though both of the companies realized decreasing efficiency in management of total assets, Google’s efficiency remained better than Yahoo’s efficiency. Unlike Google that reported inventory management, Yahoo did not, and this means its inefficiency in expanding to other ventures despite the low efficiency that it realized from its existing assets.

The analysis therefore identifies better efficiency with Google than with Yahoo. Consequently, Google is a better option for equity shareholders because of its higher-level efficiency in managing assets that could also contribute to profitability from higher return on investments and improved value in shares. Works Cited Debarshi, Bhattacharyya. Management Accounting. New Delhi: Pearson Education India, 2011. Print. Google. “Financial Information.” Google. N.d. Web. 31 Mar. 2015. .

Periasamy, P. Financial Management. 2nd ed. New Delhi: Tata McGraw-Hill Education, 2009. Print. Yahoo. “Investor Relations.” Yahoo. N.d. Web. 31 Mar. 2015. .