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Yahoo! Inc. (sign yhoo) and Google Inc. (goog) were selected. Industry is „ Internet information providers“ and sector „technology“, by yahoo terminology (finance.yahoo.com January 5 2014). Google.finance uses sector: „techology“ and industry: “search engines“. (www.google.com/finance, January 5 2014) In literature it is advised to compare firms of „roughly the same size“ and „similar products and services“ (Moles, Parrino and Kidwell 2011:116), which is modestly achieved, as size ratio between companies changes substantialy during 5 years.
For bouth companies, balance sheets and income statements were downloaded from www.marketwatch.com (The Wall street Journal, January 8 2014). In that source, data on 5 years (instead of required 4) were provided, which would enable calculations of some average ratios where values in the beginning end the end of a year are necesarry. This was not used, and all calculated ratios were done with end year data.
It is noticable that the numbers provided by www.marketwatch.com are given with different precision, but generally with no more that 2 significant digits. This is though neglected in further calculations, and no statistical interpretation of significant digit is given. Clearly, this implies that rounding mistakes are unavoidable.
As not all data from Balance Sheet (BS) and Income satement (IS) is necesarry for required ratio calculations, for the purpouse of easier display some rows are hidden.
Picture 1 shows income statement and picture 2 balance sheet in their simplified form, with some rows hidden. Rows that are not shown are mostly the ones with no dana (zeroes), the ones that are allready included in other numbers and some rows less relevant for calculating given ratios. Rows used for direct calculations are designated with colours, to be more easyly visible.
Picture 1, Balance sheet, Yahoo! Inc. (YHOO) and Google Inc. (GOOG), Y:2008-2012
Picture 2: Income statement Yahoo! Inc. (YHOO) and Google Inc. (GOOG), Y:2008-2012
Profitability ratios measure „management´s ability to make efficient use of firm´s assets to generate sales and manager firm´s costs“ (Moles et al 2011:132).
Operating margin (OM)
There are some variations regarding the use of Operating Margin. So „operating profit is tipically measured with EBIT“. (Moles et al 2011:132). Also,: „ Often non-recuring cash flows are excluded as they don´t represent company´s true performance“ (Valueclick, 5 January 2014). Mathematically looking, when computing a ratio, in the denominator of formula 1, net sales are present. Number in the numerator should thuse also be a number coneccted to sales in some way.
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But, if one strictly adhers to the definition of EBIT (earnings before interest and taxes), then non-recuring cash flows are not excluded. This is also in accordance with (Moles et al 2011:132): „an indication…independent of its financing policies or tax management strategies“ (but not of non-recurring events). Again, denominator in formula (1) contains net sales,
So, here, OM is calculated as:
OM = EBIT / Net sales (1)
EBIT is calculated from the IS for each year as: Gross Income – SG&A Expense – Other Operating Expense – Unusual Expense + Non Operating Income/Expense;
Gross Income = Net Sales – COGS incl. D&A; (2)
Net Profit Margin (NPM)
NPM is by (Moles et al 1011:132): „Percentage of sales remaining after all of firms expenses (including taxes and interests) have been paid“. Here, a similar discussion as for Operating Margin can take place. (on non-recurring events.). Non recuring cash flows are not excluded, and NPM is calculated as:
NPM = Net Income / Net Sales; (3)
Bouth numbers are taken from IS.
Return on Equity (ROE)
ROE is determined by dividing net income for the past 12 months by common stockholder equity (Nasdaq Stock Market, January 8 2014 - glossary). ROE is calculated as:
ROE = Net Income / Total Equity (4)
Net Income is taken form IS, while Total equity is taken form BS.
There is an alternative method of defining Total Equity in (4). As net income is a measure of performance of 12 months, and Total Equity in a point in time, a corection can be made by calculating average value of Equity in a year. Here, total equity is not averadged.
All profitability ratios are calculated according to formulas 1-4 and given in table 3:
Table 3, Profitability ratios
While profitability ratios are „of interest to shareholders, creditors and managers“, (Moles et al, 2011:132), and are calculated using historical data from financial statements, investment ratios that are listed require also usage of share prices. In table 4, share prices for the last working day of every year, for Google and Yahoo are given.
Table 4: Share prices on last working day
Also important for Investment ratio calculations is a number of issued shares. It changes through the year, and with it all indicators that use number of shares in their computations. Number of shares is taken from income statement. For comparison, number of shares for Yahoo „shares used in per share calcuations“ is taken for 5 years, from Yahoo´s anual financial report, seen in table 5.
Table 5, Number of shares,
Nr. of shares outstanding
Year yahoo! Inc. (yhoo) Google Inc. (goog) Yahoo! Inc. "Shares used in per share calcualtions"
2008 1,37B 313,96M 1.369476B
2009 1,4B 316,22M 1.397652B
2010 1,35B 318,7M 1.345118B
2011 1,27B 222,78M 1,274240B
2012 1,19B 327,21M 1,192775B
Earnings per share (EPS)
Earnings per share divides net income by the number of shares outstanding. By definition it is „a company's profit divided by its number of common outstanding shares“ (Nasdaq, January 6 2014). In calculating EPS company „often uses weighted average of shares outstanding over the reporting term“ (Nasdaq, January 6 2014).
EPS = Net Income / Shares outstanding (5)
Price to earnings ratio (P/E)
P/E ratio is ratio of market price for share to earnings per share. It is calculated as:
P/E = Price per share / Earnings per share (6)
Price to book value (P/B)
Also called price-book, or price equity ratio. It compares stock market´s value to a company´s book value. It is calculated as:
P/B = (Market value of company´s shares) / (assets – liabilities- intangibles) (7)
This is a definition where intangibles are substracted (Nasdaq, January 6 2014), although sometimes they are not.
Dividend per share
DPS is total dividend paid/year, devided by the number of shares issued.
DPS = D – DS / Number of shares, (8)
Where D is dividend and DS – special dividend
The two selected companies did not pay any cash dividends ever.
Table 6, Investment ratios for Yahoo! Inc (yhoo) and Google Inc.
EPS EPS, y* year P/E P/B year DPS
Yhoo Goog Yhoo Yhoo Goog Yhoo Goog Yhoo Goog
0,31 13,47 0,3098 2008 39,39 22,83 2,28 4,31 2008 0 0
0,43 20,62 0,4279 2009 39,28 30,07 2,76 6,46 2009 0 0
0,91 26,70 0,9083 2010 18,25 22,24 2,59 4,86 2010 0 0
0,83 30,18 0,824 2011 19,51 21,40 2,43 4,24 2011 0 0
3,32 32,98 3,3116 2012 6,00 21,45 2,23 4,31 2012 0 0
EPS, Y* is EPS calculated for Yahoo! (for comparison purpouses). When using numbers from IS (marketwatch), a small difference in table 6 occurs, to figures in IS. If using „shares used in per share calculations“ no such difference would exist, (data from table 5).
Table 7. Comparison of yahoo! Inc. and Google Inc. to industry averages
Ratio Yahoo! Inc. Industry Sector Google Inc.
Operating Margin(TTM) (%) 12,72 15,83 14,68 23,42
Operating Margin 5y avg. (%) 8,47 24,16 13,07 29,86
Net profit margin (%) 14,68 9,14 10,91 20,46
NPM, 5y avg. (%) 16,32 17,82 10,35 24,43
ROE (%) 9,20 19,71 18,51 15,55
ROE, 5y avg. (%) 11,89 25,24 15,88 18,43
P/E (TTM) 34,22 33,41 21,35 32,10
EPS, 5 year growth rate (%) 47,64 15,77 18,14 19,55
P/B 3,24 6,87 2,82 4,50
DPS 0 0
TTM – trailing twelwe months
It can be seen that Yahoo´s Operating Margin is almost 2x as little as Google´s. But the last 12 months were actually good for Yahoo, with magin substantially above its 5 year average.
Quite the contrary is obvious for google, where margin is still above Industry (or sector), but under its 5 years average. Google´s 2012th year was in all 3 profitability ratios under its 5 year average, indicating a negative trend.
Bouth companies outperform vs. Ind/sector on net profit margin.
Yahoo achieved considerable growth in EPS, but this is a consequence of seling Alibaba shares in 2012.
Yahoo´s ROE is weak comparing to competitors, which can typically be a sign of slow growth (as here the growth really is slow).
Maybe the most distinctive characteristic of the two is the oposite trend in total sales. From $7,21B in 2008, Yahoo fell to $4.88B in a continuous fall, barely managing to achiev last years result in 2012, ($4.61B income from sale of Alibaba shares is here not taken into account). For google, it is visible that from $21.8 B in 2008 it unrelentlessly grew to 49.4 B in 2012. In just 5 years, google managed to achieve 10 x the sales of Yahoo, starting from sales aproximatly 3 x as big.
Yahoo! Inc., Yahoo! Inc., 701 First Avenue, Sunnyvale, CA 94089 USA, http://finance.yahoo.com/q?s=yhoo, viewed on January 8 2014
Google Inc., Google inc, 1600 Amphitheatre Parkway, Mountain View, California 94043, https://www.google.com/finance?tab=8e, viewed on January 10 2014
Moles P, Parrino R & Kidwell D, 2011, Corporate Finance, European Edition, John Wiley & Sons, Chichester, United Kingdom (1)
The NASDAQ Stock Market, One Liberty Plaza, 165 Broadway, New York, NY 10006F, viewed January 8 2014, USA
Valueclick, Vestlake Village, 30699 Russell Ranch Road 2014, Investopedia, http://www.investopedia.com/
Yahoo! Inc. annual financial report – income statement The Wall street Journal, 1211 Avenue of the Americas, New York, NY 10036 http://www.marketwatch.com/ vieved on January 5 2014