Alphabet Inc. (Google) Financial Ratios and Financial Statements Analysis and Review

In "Alphabet Inc. 2018 Financial Statements and Financial Ratios: Defined, Discussed, and Analyzed for 5 Years” that was written by, Paul Borosky, MBA., doctoral candidate, and owner of Quality Business Plan and Finance Homework Help, the author summarized Alphabet Inc.'s 2019 10k, Alphabet 2018, 10k annual report, Alphabet 2017 10k annual report, and Alphabet 2016 10k annual reports as the basis for information gathering.  After all of Alphabet's 10k annual statements were collected, which included Alphabet Income Statements and Alphabet Balance Sheets, he then used proprietary financial templates to calculate different financial ratios such as Alphabet ROE, ROA, and debt ratio.

Alphabet Inc. 2015 to 2018 Income Statement Summarized

Alphabet
Income Statement 2018
2018 2017 2016 2015 2014
Revenues           136,819           110,855             90,272         74,989         66,001
COGS             59,549             45,583             35,138         28,164         25,691
Gross Profit             77,270             65,272             55,134         46,825         40,310
SG&A             24,459             19,765             17,470         15,183         13,982
Depreciation                     -                     -                     -                -                -
R & D             21,419             16,625             13,948         12,282           9,832
Other                     -                     -                     -                -                -
Operating Expenses           110,498             84,709             66,556         55,629         49,505
EBIT             26,321             26,146             23,716         19,360         16,496
Other Income               8,592               1,047                  434              291              763
Interest Expense          114                     109                     124                104                N/A
EBT             34,913             27,193             24,150         19,069         17,259
Taxes               4,177             14,531               4,672           3,303           3,639
Net Income             30,736             12,662             19,478         16,348         14,136

Alphabet Inc. 2018 Revenues Analysis:

Alphabet mainly generates their revenue from advertisement sales, Play Store sales and licensing their Android software to smartphone makers.  In 2014, the organization had sales of over $66 billion.  In 2015, their sales jump to 74.9 billion.  This was a 13.6% increase.  This trend continues for the next three years.  This has resulted in revenues of approximately $136 billion in 2018.

As for the growth trend, the organization seems to be steadily increasing their revenue growth rate.  Again, in 2015, the growth rate over the previous year was 13.6%.  In 2017 and 2016, the growth rate jumped to 22.8% and 20.4% respectively.  Still, the firm increased the growth rate again to 23.4% in 2018.  The substantial growth trend may last in the short term.  However, other technology organizations, such as Facebook and LinkedIn, may eventually start to penetrate Alphabet’s revenue sales.  This will lead to moderation in long-term growth.

Revenues  
Revenues and Growth
2018 2017 2016 2015 2014
Revenues           136,819           110,855             90,272         74,989         66,001
Revenue Growth 23.4% 22.8% 20.4% 13.6% N/A

Alphabet Inc. 2018 Cost of Goods Analysis:

The cost of goods sold, as compared to revenues, started 2014 at approximately 38.9%.  In 2015, this percentage dropped to 37.6%.  This indicated that Alphabet was able to decrease their spending for raw material or they were able to pass on additional costs to customers through price hikes.

However, starting in 2016, the company’s cost of goods has continually increased, as compared to, revenues.  In 2016, cost of goods, as a percentage of revenues, was 38.9%.  In 2017, this percentage increase to 41.1%.  Finally, in 2018, as shown below, this percentage grew to 43.5%.  This indicates that either the organization is reducing their prices to customers or raw material costs are increasing faster than the firm is able to increase prices.  Either way, this may indicate that Alphabet is facing increasing competitive pressures for advertising dollars.

COGS as % of Revenues
Income Statement 2018
2018 2017 2016 2015 2014
Revenues           136,819           110,855             90,272         74,989         66,001
COGS             59,549             45,583             35,138         28,164         25,691
COGS %
Revenues
43.5% 41.1% 38.9% 37.6% 38.9%

Alphabet Inc. 2018 SG&A Analysis:

Alphabets started 2014 with their SG&A at $13.9 billion.  This line item steadily grew to 24.4 billion in 2018.  This increase is expected when revenues are growing at double digits.  However, as compared to revenues as a percentage, the company has been steadily decreasing their SG&A, as shown below.  This shows that the company is able to increase revenue growth faster than they need to increase overhead to support the growth.  In other words, the organization is continually improving their asset utilization.

On a final note, in the last two years, as compared to revenues, the organization has been at approximately 17.9% SG&A.  This may indicate that the company has reached an optimized level of SG&A, as compared to revenues.  What this means to investors is that if this trend starts to increase, then the organization’s management cost control may be declining.

SG&A as % of Revenues
Income Statement 2018
2018 2017 2016 2015 2014
Revenues           136,819           110,855             90,272         74,989         66,001
SG&A             24,459             19,765             17,470         15,183         13,982
SG&A %
Revenues
17.9% 17.8% 19.4% 20.2% 21.2%

Alphabet Inc. 2015 to 2018 Balance Sheet Summarized

Balance Sheet
2018 2017 2016 2015 2014
Cash             16,701          10,715          12,918          16,549          18,347
Short Term Investment             92,439          91,156          73,415          56,517          46,048
Account Receivable             20,838          18,336          14,137          11,556            9,383
Inventory               1,107               749               268               491                  -
Other               4,236            2,983                  -                  -                  -
Current Assets           135,676        124,308        105,408          90,114          80,685
Net PPE             59,719          42,383          34,234          29,016          23,883
Goodwill             17,888          16,747          16,468          15,869          15,599
Other               2,693            2,672                  -                  -                  -
Total Assets           232,792        197,295        167,497        147,461        131,133
Accounts Payable               4,378            3,137            2,041            1,931            1,715
Accrued Expense             26,142          18,733          13,062          10,636            9,455
Accrued Taxes                    69               881               554               302                 96
Notes Payable                     -                  -                  -            3,225            2,009
LT Debt - Current                     -                  -                  -                  -                  -
Other                     -                  -                  -                  -                  -
Total Current Liabilities             34,620          24,183          16,756          19,310          16,805
LT Debt               4,012            3,969            3,935            1,995            3,228
Other               3,545            3,059            2,665            1,822            1,118
Total Liabilities             55,164          44,793          28,461          27,130          26,633
Common Stock             45,049          40,247          36,307          32,982          28,767
Treasury                     -                  -                  -                  -                  -
Retained Earnings           134,885        113,247        105,131          89,223          75,706
Other                     -                  -                  -                  -                  -
Total Equity           177,628        152,502        139,036        120,331        104,500
Total Equity & Liability           232,792        197,295        167,497        147,461        131,133

Alphabet Inc. 2018 Cash Analysis:

The company started 2015 with approximately $18.3 billion in cash.  Over the next four years, their cash position would fluctuate between 10.7 and 16.7 billion dollars.  This cash holding strategy seems to be in line with the organization’s total assets.  In other words, the company seems to keep their cash at approximately 7% of their total assets.  Hopefully, this strategy implements the absolute minimal amount of funds needed to ensure sufficient liquidity for operation.  The best judge if this is the case, an analysis of the current ratio is needed.  This is done later in the book.

Cash as a % of Sales
Balance Sheet
2018 2017 2016 2015 2014
Cash             16,701          10,715          12,918          16,549          18,347
% of Sales 12.2% 9.7% 14.3% 22.1% 27.8%
% of Total Assets 7.2% 5.4% 7.7% 11.2% 14.0%

Alphabet Inc. 2018 Accounts Receivable Analysis:

Alphabet’s Accounts Receivable looks to be approximately 15% of sales, on average.  This significant historical trend tells investors that any variance, in the future, may be an indication of changes in the company’s Accounts Receivable department.

For the most part, investors should not expect any significant decline in accounts receivable (AR), as compared to sales, in the future.  However, in the event that account receivable’s percent of sales increases, then this may indicate there are changes afoot in the Accounts Receivable department.  Specifically, the company may be either loosening credit terms to customers or taking longer to collect funds from the customers.  Either way, further examination in the company’s 10k is needed.

Accounts Receivable as a % of Sales
Balance Sheet
2018 2017 2016 2015 2014
Accounts Receivables             20,838          18,336          14,137          11,556            9,383
% of Sales 15.2% 16.5% 15.7% 15.4% 14.2%

Alphabet Inc. 2018 Inventory Analysis:

Per Alphabet’s 10k, the company uses a first-in first-out inventory methodology.  Inventory holdings, for the most part, by Alphabet, is related to the company’s hardware (Google Smart Home Speaker) that they offer for sale.

Surprisingly, the company does hold substantial inventory, at least for a technology company.  As of 2018, the company has approximately $1.1 billion in inventory.  This figure may increase as the organization further competes with Amazon for smart home market share.

A possible risk related to carrying inventory for Alphabet is inventory obsolescence.  As the company introduces more technological-advanced smart home items, older models will inevitably become obsolete.  Without specific strategic liquidation strategies, the firm may face ever-increasing losses in the segment of their business from obsolence.

Inventory as a % of Sales and Total Assets
Balance Sheet
2018 2017 2016 2015 2014
Inventory               1,107               749               268               491                  -
% of Sales 0.8% 0.7% 0.3% 0.7% 0.0%
% of Total Assets 0.5% 0.4% 0.2% 0.3% 0.0%

Alphabet Inc. 2018 Financial Ratios

2018 Liquidity Ratios
Ratios 2018 2017 2016 2015 2014
Current Ratio                  3.92             5.14             6.29             4.67             4.80
Cash Ratio                  0.48             0.44             0.77             0.86             1.09
Quick Ratio                  3.89             5.11             6.27             4.64             4.80
2018 Asset Utilization
Ratios 2018 2017 2016 2015 2014
Total Asset Turnover                  0.59             0.56             0.54             0.51             0.50
Fixed Asset Turnover                  2.29             2.62             2.64             2.58             2.76
Days Sales Outstanding                55.59           60.37           57.16           56.25           51.89
2018 - Profitablility Ratios
Ratios 2018 2017 2016 2015 2014
Return on Assets 13.20% 6.42% 11.63% 11.09% 10.78%
Return on Equity 17.30% 8.30% 14.01% 13.59% 13.53%
Net Profit Margin 22.46% 11.42% 21.58% 21.80% 21.42%

Alphabet Inc. Current Ratio Analysis:

For the last five years, Alphabet’s current ratio has well exceeded the 1.0 rule.  This indicates that the company has more than enough liquid assets to cover their current liabilities.  An interesting note is that in the last three years, the current ratio has fallen from 6.2 in 2016 to 3.92 in 2018.  This may indicate that the firm is transferring some of their cash to short-term securities.  If this is the case, kudos to Alphabet.  At least the organization will be able to make some interest on their cash hoard.

Alphabet Inc. 2018 Cash Ratio Analysis:

In 2014, Alphabet’s cash ratio was 1.09.  This means that the organization had enough cash, without all other current assets, to cover their current liabilities for a 12-month time span.  From an investor’s perspective, this shows that management neglected in their duties to optimally use our assets.  This is because cash sitting in a checking account does the company no good.  A better strategy would have been to invest the cash and short-term securities.  This would have insurer at least a small return on investment.  Fortunately, in the last four years, Alphabet’s executive team has continued to steadily decrease the cash ratio.  This shows that the firm is steadily improving their cash asset utilization.

Alphabet Inc. 2018 Fixed Asset Turnover Analysis:

The company’s fixed asset turnover started 2015 at 2.76.  In 2018, this ratio slightly declined to 2.29.  This indicates that the firm slightly underutilized its fixed assets as compared to four years ago.

Another interesting point to note is that the company is doing well with their fixed asset turnover.  However, as discussed above, the total asset turnover was less than pristine.  This shows that the firm has cash management problems.  Again, the company has too much cash.  Either acquire some more companies, start new projects, or give the cash back to investors in dividends.

Alphabet Inc. 2018 Days Sales Outstanding Analysis:

Alphabets days sales outstanding is actually quite poor.  In 2014, their days sales outstanding was 51.89.  This means that it took the company almost 52 days to collect on their accounts receivable.  Further, this ratio further deteriorated to 60.37 in 2017.  In other words, the company waited almost 2 months to receive their accounts receivable.  Fortunately, in 2018, this ratio slightly improved.  The reason for the lengthy accounts receivable collection could be twofold.  First, Alphabet may offer a lenient payment structure for their customers.  A second reason for the elevated Accounts Receivable could be that the company has significant bad debt.

Alphabet Inc. 2018 Return of Assets Analysis:

Alphabet started 2015 with a return on assets of 10.78%.  This increased to 11.63% in 2016.  In 2017, the ratio substantially declined to 6.4% only to rebound to 13.2% in 2018.  This shows that the company is significantly fluctuating with net income as compared to assets.  The reason for the decline in 2017 was their slump in net income.  However, their growth in assets has been steady.

Alphabet Inc. 2018 Return of Equity Analysis:

Alphabet’s return on equity started 2015 at 13.53%.  This increase steadily to 17.3% in 2018.  This shows that the firm is continually earning their investors more profits on an annual basis.  There was a bump in 2017.  However, as noted a few other times before, the company rebounded again in 2018.

Alphabet Inc. 2018 Profit Margin Analysis:

The all-important profit margin.  For Alphabet, the profit margin started 2015 at 21.42%.  The profit margin has slightly increased over the last several years to 22.46% in 2018.  The lack of growth in net profit margin may indicate that the firm is entering a more mature business cycle.  This could indicate that sales growth may be tapering off in the near term.