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: 10-K (filing date: 2018-02-06).
Adjustment to Net Income (Loss): Mark to Market Available-for-sale Securities
Alphabet Inc., adjustment to Net Income
USD $ in millions
Based on: 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-09), 10-K (filing date: 2014-02-12).
Adjusted Ratios: Mark to Market Available-for-sale Securities (Summary)
Alphabet Inc., adjusted ratios
Based on: 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-09), 10-K (filing date: 2014-02-12).
| 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. |
Alphabet Inc., Ratios: Reported vs. Adjusted
Adjusted Net Profit Margin
Based on: 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-09), 10-K (filing date: 2014-02-12).
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)
Based on: 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-09), 10-K (filing date: 2014-02-12).
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)
Based on: 10-K (filing date: 2018-02-06), 10-K (filing date: 2017-02-03), 10-K (filing date: 2016-02-11), 10-K (filing date: 2015-02-09), 10-K (filing date: 2014-02-12).
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. |