Question

i) Use the attached stock-market charts for Google for the period January 1, 2013, through February 14, 2014, to answer the following questions.

i. Compare Google’s fiscal 2013 earnings performance with the movement in Google’s stock price over 2013.

ii. Compare Google’s 2013 stock price performance with the performance of the broader set of firms trading on the NASDAQ exchange (that is, the NASDAQ index). Google Inc.—Earnings Announcements and Information Environment 2 This document is authorized for use by Melinda Mucka, from 1/13/2020 to 5/19/2020, in the course: ACC 498 - Case Studies in Financial Accounting - Skiba (Spring 2020), West Connecticut State University. Any unauthorized use or reproduction of this document is strictly prohibited.

iii. Based on the stock market chart, did the market perceive the earnings news in Google’s press release dated January 30, 2014, as “good news” or “bad news”? Note: the press release was made available after the close of trading for the day.

Answer 1

Operating Margin

A company's operating margin measures how profitable it is from its actual operations. The operating margin is a valuable metric when analyzing a company's core business since it disregards money the company made outside its normal operations, such as selling off a business segment or cashing in a profitable investment. The operating margin expresses operating income as a percentage of net sales. What constitutes a strong operating margin varies by industry, but across the board, a value above 10% is considered good, and a value above 25% is considered excellent. Google's operating margin is just about there with 24.12%.

Revenue Growth

Revenue growth compares the company's revenue from the most recent quarter to its revenue from the same quarter in the previous fiscal year. A positive value, particularly growth over 10%, signifies the core business is doing well, and the company's products and services are in demand and priced right. Google's second-quarter revenue for 2018 was 24% higher than its same-quarter revenue for 2017. This is an encouraging sign; it shows merchants are paying for ad placement in Google's search results at an expanding rate. In fact, between 2005 and 2018, Alphabet saw a median rate of annual revenue growth of 23.2%.

Price-To-Sales Ratio (P/S)

The P/S divides a company's market capitalization by its last 12 months of revenue. Market capitalization is the total value of all outstanding common stock, determined by multiplying the share price by the number of shares outstanding. The P/S indicates how much value investors place on each dollar of revenue. It is a good measure of whether you are paying too much for the stock based on what a company is actually earning from its business operations. A low P/S often reveals a good value play. Google's P/S is currently 6.32, which is moderately higher than average.

Price-To-Earnings (P/E) Ratio

The P/E ratio is the gold standard of valuation metrics. It compares a company's share price to earnings per share. The ratio indicates whether the stock is priced high, low, or in between based on the company's earnings.

This ratio is good for analyzing the core business because the market tends to be highly efficient. When the core business is doing well, this information is priced into the stock. A high P/E ratio can indicate investors are optimistic about a stock, or it could simply mean the stock is overpriced. A low P/E ratio sometimes suggests a good value buy, perhaps because other investors have failed to discover the company's earnings potential. Google's P/E ratio is 48.23 x. While 15 x is considered average across the board, Google's P/E ratio falls into the average range for technology companies, which tend to have higher valuations relative to earnings.

Debt-To-Equity (D/E) Ratio

Google has big plans to expand its core business in the coming years. Bringing these big ideas to fruition requires capital to finance research and development. Often, companies raise this capital, at least in part, by taking on debt. This tactic can put a company in a precarious financial position, particularly if the economy turns bad. The D/E ratio compares a company's total debt to its equity. A value under 100% is good. As of Q2 2018, Google's D/E ratio is just 2%, indicating an extremely low debt load compared to its equity. In fact, over the 13-year period 2005-2018, Google's D/E ratio never rose above 10%.