Thursday, 24 January 2013

Beware Google's drop in Margins, ROA and ROE

Google Inc (NASDAQ:GOOG) released its financials for Q4 and full year 2012 on Tuesday 22 January 2013. If you are a current shareholder or are considering buying the stock, beware the following based on yearly financial figures from 2005 to 2012:

Return on Assets (ROA) and Return on Equity (ROE):
  • Return on Assets (EBIT/Total Assets) of 13.6% for 2012 was the lowest reported for the 2005-2012 period. This compares to an average ROA since 2005 of 17.3% 
  • Excluding excess cash*, the Adjusted ROA for 2012 of 20.6% for 2012 was the lowest reported for the 2005-2012 period and twice as low as the long term average of 41.2%.
  • Return on Equity (Net Income/Total Equity) for 2012 of 15.0% was the second lowest for the 2005-2012 period (2008 was slightly lower).
  • Excluding excess cash, the Adjusted ROE for 2012 was 26.9%. This was the lowest reported for the 2005-2012 period and compares to an average of 44.7% since 2005. 




Margins:
  • Gross Margin (Gross Profit/Revenues) of 58.9% for the year was the second lowest since 2005 (2005 was lower) and was 2.8% points lower than the 61.7% average since 2005. 
  • Operating Margin (EBIT/Revenues) of 25.4% was the lowest reported for the 2005-2012 period and compares to an average of 30.8% since 2005.
  • Net Income Margin (Net Income/Revenues) of 21.4% was the lowest reported since 2008 and was 3.3% points lower than the 24.7% average since 2005.



Based on consensus earnings forecasts for the next three years (2013 to 2015 according to 4-traders.com), Google is expected to earn USD 12,859 m, USD 15,278 m and USD 17,210 m, respectively, compared to USD 10,737 m for 2012. Bottom line: the declines in returns and margins for 2012 could indicate that revenues need to grow that much quicker in the future to achieve those earnings.

* Excess cash is assumed to be current assets in excess of 2.0x current liabilities.

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