Financial ratios are used by companies, investors, and by students. The purpose of financial ratios is to determine the whether a company is able to pay off debts, use its assets to regenerate cash, or determine how much profit a company is making from every dollar they make. A study of two internet giants, Google and Yahoo!, will show that although one company is not generating as much as the other is, there are ways that it can improve future cash flows.
Current RatioThe current ratio of an organization shows its ability to meet its short-term financial obligations (Investor Words, 2009), by taking the current assets divided by current liabilities. At the end of 2008, Google's ratio was $8.77 million and $8.49 million at the end of 2007 (Google Finance, 2009). At the end of 2008, Yahoo's ratio was $1,705.02 million and $1.41 million in 2007 (MSN Money, 2009), showing a growth.
When comparing the financial statements of Google and Yahoo!, neither of the two had current liabilities greater than current assets, so both companies do not face the risk of not being able to meet short-term financial needs. However, the current ratio of Yahoo! is significantly higher than Google, therefore Yahoo! is considered more liquid or possesses greater assets that can be easily converted into cash if need be.
Quick RatioThe quick ratio, or acid-test ratio, is an alternative form of the current ratio. It also measures the short-term liquidity of an organization; however, it is a slight more accurate, because it accounts for inventories. To find the quick ratio, take current assets minus inventories and divide by current liabilities (Investopedia, 2009). The financial statements of both Google and Yahoo! show zero inventories for 2008 and 2007. Therefore, since the only difference in the current ratio and quick ratio...