Google or Yahoo: Which Is a Better Investment and, or a Candidate for Merger or Acquisition?

Topics: Financial ratios, Generally Accepted Accounting Principles, Financial ratio Pages: 5 (1387 words) Published: June 12, 2008
Concluding our question of which is a better investment, and, or merger or acquisition candidate we will recap our findings from the financial performance characteristics of both Google and Yahoo. And, proving we have found Google to be the better purchase. We will mention the impending hostile takeover/acquisition of Yahoo by Microsoft. In review of the current ratio, measuring the short term debt paying ability, Yahoo has been in decline while Google’s had increased from inception. Yahoo’s current ratio of 1.41 times versus Google’s 8.49 times characterizes the point, and indicates a debt problem for Yahoo. The acid test or quick ratio, indicating how the two firms can meet immediate liabilities: Yahoo at 1.33 times and Google of 8.12 times. Current assets for Yahoo of $3,237,720,000.: versus $15,464,930,000 proves the sheer size of Google compared to Yahoo and all other competitors currently in the industry. In review of Yahoo’s debt we noticed they have changed Long Term Debt to convertible debt and listed it as a current liability, increasing Yahoo’s short term obligations. Google does not have Debt, giving the advantage to Google.

Liquidity for Yahoo shows erratic since 2001, and more so in direct competition over the past couple years in direct competition with Google. We would endear to continue to check liquidity for Yahoo, but with an acquisition on the near horizon we may not have to.

How are the assets provided by creditors in the Debt/Total Assets ratio: Google; 2007 10.44%, 2006 7.76%, 2005 8.3%, 2004 11.6% and 2003 (before going public) 30.85%. Yahoo: 2007 21.95%, 2006 20.37%, 2005 20.92%, 2004 22.15%, and 2003 25.81%. Google is showing a much lower leverage issue than Yahoo. While Yahoo isn’t faced with a catastrophe, it’s debt to total assets ratio is of some concern in relation to Google’s.

Their book value per share since 2004, amount each share of stock would receive if the company were to liquidate at the amounts reported on the balance sheet? Google: 2007 $70.82, 2006 $53.88, 2005 $32.14, and 2004 $10.97. Yahoo’s book value: 2007 $7.01, 2006 $6.61, 2005 $5.78, and 2004 $5.23. As we can see from our analysis of liquidity, there is virtually no bankruptcy risk to associate with either company.

Looking at Earnings per share, a measure of net income earned on each share of common stock outstanding (Net Income/Weighted Shares Outstanding). Google had an actual EPS of 13.29, while Yahoo had a poultry 0.47 EPS; demonstrating stronger earnings for Google than Yahoo. Their peer mean was at 6.11, which is lower than Google’s by far and higher than Yahoo’s. To make a more meaningful comparison we evaluated Price to Earnings ratio, measuring the market price per share to earnings per share to observe how much investors are willing to pay per $ of profits for the stock, the lower the better. Current PE mean for the peer group was 32.15:1, Google had a PE of 30.22:1, and Yahoo had 60.34:1. Assessment of operating profit margin shows us a good picture of how much Google and Yahoo make before interest and taxes on each $ of sales, the higher the better. The peer group is at 16.96%, while Google shows 30.64% and a much lower 9.98% for Yahoo. Their gross profit margins were both much higher than that of their peer group: Google at 59.93%: Yahoo at 57.73% and peer group at 50.66%. But, we require utilization of the operating profit margin, because of its improved usefulness. To compare how effective, two companies in the same industry subject to the similar business conditions, Google and Yahoo are at converting revenue into actual profit one of the best measures is Net Margin: net profit/net revenues. Google is currently at a 25.33% net margin, while Yahoo is at a 9.47% net margin.

Two primary calculations used to compare how effective management is utilizing the firm’s resources are return on assets and return on equity. Return on assets, ROA, will show us just how...
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