Ratio Analysis and Statement of Cash Flows Paper

Essay by rvr410University, Bachelor'sA, April 2007

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The business world uses risk analysis to aid in determining the health and viability of a given company. While risk ratio analysis alone does not provide concrete answers about the health and viability of a company, it can raise important questions that will help determine where the company stands in its industry. There are four types of financial ratios used in financial ratio analysis.

"Leverage ratios show how heavily the company is in debt; liquidity ratios measure how easily the firm can lay its hands on cash; efficiency or turnover ratios measure how productively the firm is using its assets; and profitability ratios are used to measure the firm's return on its investment" (Brealey, Myers, Marcus, 2004).

The two companies reviewed by this learning team are Google and Yahoo. Thesecompanies are found in the technology sector of the business world under the industry category of Internet Information Providers. Comparing the two most recent fiscal years 2004 and 2005, both companies had a high return on its investment.

In the years 2004/2005, Yahoo's operating profit margin was 33% and 48% respectively, while Google's was 20% and 35% respectively. The return on equity for Yahoo was 12% and 22% respectively, and Google was 14% and 16% percent respectively. It is not entirely clear what these numbers tell us but companies sell "information," meaning their product does not require a great deal of capital for product inventory in order to generate revenue. Although both companies realized profit margin gains in 2004 and 2005, Yahoo's profit margin was larger and their return on equity was higher than that of Google.

The total asset turnover shows that for every dollar of asset produced in 2004 and 2005, only .39 and .49 of sales were generated for Yahoo, and .96 and .60 for Google. This could...