Alphabet Inc.: Earnings, Cash Flow, and Financial Ratios Analysis

This report analyzes the financial performance of Alphabet Inc., focusing on its earnings and cash flow. It examines key financial ratios such as AROIC, ROE, and ROCE to assess profitability and investment returns. The analysis highlights the company's strong revenue generation, low debt, and economies of scale advantages. It also explores the impact of competition in the Australian internet industry and Alphabet's strategies to maintain market dominance, including investments in online customer integration and partnerships with start-ups. The report concludes with a discussion of the management's initiatives and their expected impact on future sales. The report also references various sources to support its findings and includes figures illustrating market and revenue share in Australia.

EARNINGS AND CASH FLOW
Alphabet Inc. is historically a large scale profitable business. Profitability of a
company is measured by its Accounting Return on Invested Capital (AROIC) which
is NPAT / Invested Capital. Presently, Alphabet Inc. is reporting an AROIC of
14.17%. Since this value does not take into consideration the time value of the
investment, it can overstate the cash flow results. On these basis, ratios such as
ROE (15.02%) and ROCE (14.58%) (see Appendix-1) are becoming the preferred
analysing standards of investment profitability (Deutsch et al, 2011). The actual profit
of the entity, added to the financial worth of the firm, as represented in Table-1, is
based on the actual financial performance of the entity. In this regard, the results
shown under the ratios such as ROCE, ROE and EVA (4477.89) are considered as
premium values for calculating the value of equity and capital as shown in Table-2.
Alphabet Inc. has been continuously registering consistently high ROE and this is
due to the strong revenue earned. In Appendix-1 it can be seen that this is also
because of low debt size of the company. This also creates a positive asset value as
seen in Appendix-1. The fixed operating expenses however result in a low net profit
margin. Appendix 2 also shows that Alphabet has a large economy of scale
advantage which is the factor for lowering costs and this explains why Alphabet’s
ROIC and ROE are above its competitors (Marsden, 2010).
Competition in Australian internet industry has been generally high and this has
increased the cost of entry. However, Alphabet overcame this trend because of real
incentives for start-ups to make their entry in the industry with minimal capital. This
can be seen from the results shown in Appendix-2 that these entry-level entities
have been registering higher profitability and their equity valuations (Marsden, 2010).
Their competitive advantage has helped them to capture large market share (Figure
3). This is also because on Qualitative Level, Alphabet’s management has been
practicing an overwhelming high standard of operations (Nethercott, Devos &
Richardson, 2010). Although the company has always been at risk from large
international competitors, Alphabet Inc., which holds a dominant position in major
world markets. This competitive advantage of large scale of operations and a strong
brand recognition which is recognized even in Australia is very effective in its
international markets and is creating effectiveness in the Australian domestic market
(Deutsch et al, 2011).

It is essential for the management of Alphabet Inc. to protect the company’s
dominance and competitive advantages because of its ever increasing market share.
To keep this trend intact, the management will require investing a considerable
amount in integrating its online customers and secure its revenue base in the future
(Deutsch et al, 2011). Fortunately, the management has already started taking this
approach and this recent action, as well as the company’s partnerships with the
start-ups, has seen the company’s expansion and consolidation of its online
presence to strengthen the company’s market dominance (Marsden, 2010). Under
such circumstances and in the light of these facts, the initiatives of the management
are expected to create for the company an additional increase of $1billion in sales in
the coming financial year.
LIST OF REFERENCES
Deutsch, R., Friezer, M., Fullerton, I., Gibson, M., Hanley, P. and Snape, T. (2011)
Australian tax handbook. Pyrmont, NSW: Thomson Reuters.
Marsden, S. J. (2010) Australian Master Bookkeepers Guide (3rd ed). Sydney, NSW:
CCH Australia Limited.
Nethercott, L., Devos, K. and Richardson, G. (2010) Australian taxation study
manual: questions and suggested solutions. (20th ed). Sydney, NSW: CCH
Australia Limited.

Figure showing Market Share In Australia of Internet Service Providers
Figure showing Revenue Share In Australia of Internet Service Providers