Google vs. Yahoo Financial Analysis
FINC 350 Business Finance
Instructor: Darryl Sanborn
February 11, 2011
Liquidity ratios, like the current ratio, provide information about a firm's ability to meet its short time financial obligations. Short-term creditors seek a high current ratio from prospective clients since it reduces their risk. For investors in a company, such as shareholders, a lower ratio is sought, so that more of a firm's assets are working to grow the business. When computing financial relationships, a good indication of the company's financial strengths and weaknesses becomes clear. Examining these ratios over time provides …show more content…
For Capital Structure Ratios, the debt ratio, a financial leverage ratio, is an indication of the long-term solvency of an entity. Unlike a liquidity ratio which focuses on a firm's short-term assets and liabilities, a financial leverage ratio like the debt ratio, measures the extent to which a firm is using its long-term debt.
Companies finance their operations through either debt or equity. The debt-to-capital ratio provides an interested party with an idea of a company's financial structure, or how it is financing its operations, along with some insight into its financial strength. The higher the debt-to-equity ratio, the more debt the company has compared to its equity. A company with high debt-to-equity ratios, compared to a general or industry average, may show weak financial strength because the cost of these debts may weigh on the company and increase its default risk. Customarily, a capital structure ratio over 50% indicates that a company may be near their borrowing limit (often 65%). Google’s 10% debt-to-ratio is an indication that the company is effectively managing its debt load, and is considerably stronger than Yahoo and its peers in terms of it financial strength. Borrowing money is one of the most effective things a company can do to build its business. However, borrowing comes with a cost: the interest that is payable month after