Microsoft Excel LibreOffice Calc

Alphabet Inc. (GOOG)

Analysis of Investments

Difficulty: Advanced

Investment Accounting Policy

Cash, Cash Equivalents, and Marketable Securities

Alphabet invests all excess cash primarily in debt securities including those of the U.S. government and its agencies, corporate debt securities, mortgage-backed securities, money market and other funds, municipal securities, time deposits, asset backed securities, and debt instruments issued by foreign governments.

Alphabet classifies all investments that are readily convertible to known amounts of cash and have stated maturities of three months or less from the date of purchase as cash equivalents and those with stated maturities of greater than three months as marketable securities.

Alphabet determines the appropriate classification of the investments in marketable securities at the time of purchase and reevaluate such designation at each balance sheet date. Alphabet has classified and accounted for the marketable securities as available-for-sale. After consideration of the risk versus reward objectives, as well as the liquidity requirements, Alphabet may sell these securities prior to their stated maturities. As Alphabet views these securities as available to support current operations, Alphabet classifies highly liquid securities with maturities beyond 12 months as current assets under the caption marketable securities in the Consolidated Balance Sheets. Alphabet carries these securities at fair value, and reports the unrealized gains and losses, net of taxes, as a component of stockholders' equity, except for unrealized losses determined to be other-than-temporary, which Alphabet records within other income (expense), net. Alphabet determines any realized gains or losses on the sale of marketable securities on a specific identification method, and Alphabet records such gains and losses as a component of other income (expense), net.

Non-Marketable Investments

Alphabet accounts for non-marketable equity investments either under the equity or cost method. Investments through which Alphabet exercises significant influence but do not have control over the investee are accounted for under the equity method. Investments through which Alphabet is not able to exercise significant influence over the investee are accounted for under the cost method. Alphabet classifies non-marketable investments as non-current assets on the Consolidated Balance Sheet as those investments do not have stated contractual maturity dates.

Alphabet accounts for the non-marketable investments that meet the definition of a debt security as available-for-sale securities.

Source: Alphabet Inc., Annual Report

Adjustment to Net Income (Loss): Mark to Market Available-for-sale Securities

Alphabet Inc., adjustment to Net Income

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net income (as reported) 12,662  19,478  16,348  14,444  12,920 
Add: Net change in available-for-sale investments, net of tax effect 412  (93) (507) 371  (554)
Net income (adjusted) 13,074  19,385  15,841  14,815  12,366 

Adjusted Ratios: Mark to Market Available-for-sale Securities (Summary)

Alphabet Inc., adjusted ratios

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Net Profit Margin
Reported net profit margin 11.42% 21.58% 21.80% 21.88% 21.60%
Adjusted net profit margin 11.79% 21.47% 21.12% 22.45% 20.67%
Return on Equity (ROE)
Reported ROE 8.30% 14.01% 13.59% 13.82% 14.80%
Adjusted ROE 8.57% 13.94% 13.16% 14.18% 14.16%
Return on Assets (ROA)
Reported ROA 6.42% 11.63% 11.09% 11.01% 11.65%
Adjusted ROA 6.63% 11.57% 10.74% 11.30% 11.15%
Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Alphabet Inc.'s adjusted net profit margin improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by shareholders' equity. Alphabet Inc.'s adjusted ROE improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by total assets. Alphabet Inc.'s adjusted ROA improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

Adjusted Net Profit Margin

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income (USD $ in millions) 12,662  19,478  16,348  14,444  12,920 
Revenues (USD $ in millions) 110,855  90,272  74,989  66,001  59,825 
Net profit margin1 11.42% 21.58% 21.80% 21.88% 21.60%
Adjusted: Mark to Market Available-for-sale Securities
Adjusted net income (USD $ in millions) 13,074  19,385  15,841  14,815  12,366 
Revenues (USD $ in millions) 110,855  90,272  74,989  66,001  59,825 
Adjusted net profit margin2 11.79% 21.47% 21.12% 22.45% 20.67%

2017 Calculations

1 Net profit margin = 100 × Net income ÷ Revenues
= 100 × 12,662 ÷ 110,855 = 11.42%

2 Adjusted net profit margin = 100 × Adjusted net income ÷ Revenues
= 100 × 13,074 ÷ 110,855 = 11.79%

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Alphabet Inc.'s adjusted net profit margin improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

Adjusted Return on Equity (ROE)

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income (USD $ in millions) 12,662  19,478  16,348  14,444  12,920 
Stockholders' equity (USD $ in millions) 152,502  139,036  120,331  104,500  87,309 
ROE1 8.30% 14.01% 13.59% 13.82% 14.80%
Adjusted: Mark to Market Available-for-sale Securities
Adjusted net income (USD $ in millions) 13,074  19,385  15,841  14,815  12,366 
Stockholders' equity (USD $ in millions) 152,502  139,036  120,331  104,500  87,309 
Adjusted ROE2 8.57% 13.94% 13.16% 14.18% 14.16%

2017 Calculations

1 ROE = 100 × Net income ÷ Stockholders' equity
= 100 × 12,662 ÷ 152,502 = 8.30%

2 Adjusted ROE = 100 × Adjusted net income ÷ Stockholders' equity
= 100 × 13,074 ÷ 152,502 = 8.57%

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by shareholders' equity. Alphabet Inc.'s adjusted ROE improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income (USD $ in millions) 12,662  19,478  16,348  14,444  12,920 
Total assets (USD $ in millions) 197,295  167,497  147,461  131,133  110,920 
ROA1 6.42% 11.63% 11.09% 11.01% 11.65%
Adjusted: Mark to Market Available-for-sale Securities
Adjusted net income (USD $ in millions) 13,074  19,385  15,841  14,815  12,366 
Total assets (USD $ in millions) 197,295  167,497  147,461  131,133  110,920 
Adjusted ROA2 6.63% 11.57% 10.74% 11.30% 11.15%

2017 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × 12,662 ÷ 197,295 = 6.42%

2 Adjusted ROA = 100 × Adjusted net income ÷ Total assets
= 100 × 13,074 ÷ 197,295 = 6.63%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by total assets. Alphabet Inc.'s adjusted ROA improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.