Earnings And Cash Flow In The Accounting Essay

Question:

Discuss About The Earnings And Cash Flow In The Accounting?

Answer:

Introducation

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 marketing 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.

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.

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