The company chosen for this analysis is Alphabet Inc. to determine if
- one can lend cash to the company, and
- buy stock in the company.
Alphabet Inc. is now the parent company of the former Google and the other so-called moonshot bets. Financial ratio analysis and professional inputs are used to arrive at the recommendation.
Current ratio is important for checking the company’s ability to pay back its short-term debts using its short-term assets. The company’s current ratio for the last five financial is presented in table 1.
Source: (GuruFocus.com LLC, 2017)1
The company’ current ratio has been rising with a negligible drop in 2014, showing that Alphabet Inc. is efficient in its undertakings and, thus, no significant challenges are anticipated. On any standards, this ratio is high and, hence, it means that the company is not likely to face bankruptcy.
Quick ratio demonstrates whether Alphabet income would be able to pay back its short-term debts using its liquid assets instead of its inventories.
Source: (GuruFocus.com LLC, 2017)2
According to the company’s financial results, for the last five fiscal years, it has noted an increasing quick ratio year-over-year, which shows that the company is highly leveraged. Therefore, the rising quick ratio is a positive performance, and Alphabet Inc. may not struggle to pay back its financial obligations.
Earnings per share ratio demonstrates the value of earnings per outstanding share of the company’s stock. The dividend needed has been withheld to avoid possible forms of manipulation through non-recurring items, depreciation, or amortization rate. The ratio is meant to indicate a reliable performance of a company.
Source: (GuruFocus.com LLC, 2017)3
For Alphabet Inc., the earnings per share is an important measure for indicating the current share price performance, and it is necessary for investors who want to review the overall profitability of the company. In these fiscal years, Alphabet Inc. has been profitable, and ratio has increased from 16.41 in 2012 to 28.32 in 2016.
At present, the current price earnings ratio of 28.44 indicates that the firm is realizing profit, which has continued to grow across the five fiscal years. It posts profits, albeit with small margins in declines between fiscal years 2012 and 2016.
Source: (GuruFocus.com LLC, 2017)4
Gross margin indicates that Alphabet Inc. has been profitable for the last five financial periods, and it is generating adequate revenues to cater for all costs of production.
Source: (GuruFocus.com LLC, 2017)5
This company presents one of the highest ratios, which reflects that it has created sustainable competitive advantage in the industry. The sustained increasing trend noted in the gross margin shows how Alphabet Inc. has been competitive for the last five financial periods.
Based on the above ratios, it is recommended that a lender should advance a loan to Alphabet Inc. and an investor should consider purchasing the company’s stock. Apart from better financial performance, industry professionals have observed some unique features in the company. For instance, the company’s CFO has inculcated discipline expenditure in Alphabet Inc. by concentrating on return on investments, a strategy that had been poorly applied in the company (Rao, 2016).6 Notably, ever since Porat was hired, the share price of Alphabet Inc. has increased from about $550 to above $800 in less than a year – showing almost $75 billion in market capitalization gain (Rao, 2016).7 Such achievements show the management team can execute strategies for financial success of the company.
Some observers, however, claim that Alphabet’s stock is buy-and-hold stock (Chandrasekhar, 2016).8 On one hand, Alphabet Inc. may face a dwindling revenue stream if competition from Facebook Inc., Amazon.com, and Netflix continues to increase, but it is expected to re-strategize for the future (Chandrasekhar, 2016).9 On the other hand, Alphabet Inc. is a buy-and-hold stock because of the potential earnings in the future from its numerous moonshot bets, which have already started to generate revenues. It is also imperative to point out that Alphabet Inc. is still being managed by its co-founders, Page and Brin, who are board members together with other senior executives, who control an aggregate of over 60% of the firm’s voting power. The management has instilled a culture that promotes innovation and employee motivation to realize strategic goals. Finally, the company has more than $88 billion in terms of cash, short-term, and long-term investment for direct investments (Stoffel, 2017).10
Conclusion
Alphabet Inc. is recommended for a potential investor and a creditor because it shows a sustained long-term growth trend, capabilities to repay debts, strong management, and investment cash among others, but it must fight competition to maintain its traditional source of revenue.
References
Chandrasekhar, S. (2016). Should you buy alphabet stock now?. Web.
GuruFocus.com LLC. (2017). Alphabet Inc. Web.
Rao, L. (2016). “One year in, Ruth Porat remains Google’s financial disciplinarian.” Fortune. Web.
Stoffel, B. (2017). 10 Reasons to buy Alphabet Inc stock and never sell. Web.