Google, Inc. Google Inc., the Most Dominant

Google, Inc.

Google Inc., the most dominant search tool on the Web, was founded in 1998 by Stanford University graduate students Larry Page and Sergey Brin. The two had been working since early 1996 on a search engine they called BackRub, named for its ability to analyze the "back links" that point to a given Web site. With the encouragement of Yahoo! co-founder David Filo, they decided to start the company in 1998 and went in search of backers. They started the business, which was officially established on September 7, 1998 in a friend's garage. The company employs 28,768 and is now headquartered in Mountain View, California (Baskan, 2008).

Google now has more than 50% share of the total search market. It currently handles 150 million searches a day, with the typical query lasting less than half a second. Google claims one of the widest audiences among Web sites, with 3 billion searchable documents and more than 21 million users per month (Funding Universe, 2011).

Google Inc. provides an index of Web sites along with other content for users, advertisers, Google network users, and other content providers. Google offers AdWords, an auction-based advertising program; AdSense program, which enables Web sites that are part of the Google Network to deliver ads from its AdWords advertisers; Google Display, a display advertising network that comprises the videos, text, images, and other interactive ads; and YouTube that provides video, interactive, and other ad formats for advertisers. The company also provides Google Mobile that optimizes Google's applications for mobile devices in browser and downloadable form and enables advertisers to run search ad campaigns on mobile devices. In addition, the company offers Android, an open source mobile software platform; Google Apps, a cloud computing suite of message and collaboration tools including Gmail, Google Docs, Google calendar, and Google Sites; and Google Books platform to discover, search, and consume content from printed books online (Yahoo!, 2011).

Financial Analysis

RATIOS

GOOGLE

INDUSTRY

S&P 500

P/E Ratio

18.6

23.4

16.9

Gross Margin

65.2

66.3

39.7

Net Profit Margin

27.0

26.9

13.3

Debt/Equity Ratio

0.08

0.06

1.00

Current Ratio

6.0

5.4

1.5

Return on Equity

19.5

24.2

27.6

Return on Assets

16.0

18.4

9.0

Source: http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=GrowthRates&symbol=GOOG

Price / Earnings (PE) Ratio = Market Value per Share / Earnings per Share

The P/E ratio is used for valuation and is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. Generally speaking, a high P/E indicates that investors expect higher earnings growth in the future compared to companies with a lower P/E. Google's P/E is lower than the industry ratio which does not necessarily indicate that lower earnings growth is expected; 35 analysts recently rated Google stock as Buy or Strong Buy while only 4 rated it as Hold (Yahoo! Finance, 2011).

Gross Margin = [Revenue -- COGS] / Revenue

The Gross Margin is used to assess a firm's financial health by showing the proportion of money left over from revenues after accounting for the Cost of Goods Sold. This calculation represents the proportion of each dollar of revenue that the company retains as gross profit. Google's gross margin is only slightly higher than the industry average.

Net Profit Margin = Net Profit / Net Revenue

The Net Profit Margin is a measure of profitability of a company after the taxes have been paid. It shows how much of each dollar earned by the company is translated into profits. Google's net profit margin is in keeping with industry averages.

Debt to Equity = Total Liability / Total Equity

The Debt Ratio indicates what proportion of debt a company has relative to its assets. It measures what proportion of equity and debt the company is using to finance its assets. Google's debt ratio is higher than the industry average.

Current Ratio = Total Current Assets / Total Current Liabilities

This ratio is primarily used to indicate the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). Google's current ratio is higher than the industry average, indicating a good liquidity position.

Return on Equity = Net Income / Total Equity

Return on Equity (ROE) measures the rate of return on the ownership interest. ROE measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Google's ROE is lower than the industry average, possibly because Google stock has matured from its earlier phase as a growth stock

Return on Assets = Net income / Total Assets

Return on Assets (ROA) indicates how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Google's ROA is lower than the industry average, which could indicate that Google management is not investing as effectively as some of their competitors.

Net Change in Cash (in millions)

Period

2011 Q2

2011 Q1

2010 Q4

2010 Q3

2010 Q2