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Alphabet Inc. (GOOG)

Analysis of Investments

Advanced level

Accounting Policy on Investments

Alphabet invests all excess cash primarily in government bonds, corporate debt securities, mortgage-backed and asset-backed securities, time deposits, and money market funds.

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 reevaluates such designation at each balance sheet date. Alphabet has classified and accounted for the marketable debt securities as available-for-sale. After consideration of the risk versus reward objectives, as well as the liquidity requirements, Alphabet may sell these debt 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 on 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 debt securities on a specific identification method, and Alphabet records such gains and losses as a component of other income (expense), net.

Source: 10-K (filing date: 2019-02-05).

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

Alphabet Inc., adjustment to net income

US$ in millions

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12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net income (as reported) 30,736  12,662  19,478  16,348  14,444 
Add: Net change in available-for-sale investments, net of tax effect (823) 412  (93) (507) 371 
Net income (adjusted) 29,913  13,074  19,385  15,841  14,815 

Based on: 10-K (filing date: 2019-02-05), 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).

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

Alphabet Inc., adjusted profitability ratios

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net Profit Margin
Reported net profit margin 22.46% 11.42% 21.58% 21.80% 21.88%
Adjusted net profit margin 21.86% 11.79% 21.47% 21.12% 22.45%
Return on Equity (ROE)
Reported ROE 17.30% 8.30% 14.01% 13.59% 13.82%
Adjusted ROE 16.84% 8.57% 13.94% 13.16% 14.18%
Return on Assets (ROA)
Reported ROA 13.20% 6.42% 11.63% 11.09% 11.01%
Adjusted ROA 12.85% 6.63% 11.57% 10.74% 11.30%

Based on: 10-K (filing date: 2019-02-05), 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).

Profitability 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 ratio deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by shareholders’ equity. Alphabet Inc.’s adjusted ROE deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by total assets. Alphabet Inc.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Alphabet Inc., Profitability Ratios: Reported vs. Adjusted

Adjusted Net Profit Margin

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income 30,736  12,662  19,478  16,348  14,444 
Revenues 136,819  110,855  90,272  74,989  66,001 
Profitability Ratio
Net profit margin1 22.46% 11.42% 21.58% 21.80% 21.88%
Adjusted: Mark to Market Available-for-sale Securities
Selected Financial Data (US$ in millions)
Adjusted net income 29,913  13,074  19,385  15,841  14,815 
Revenues 136,819  110,855  90,272  74,989  66,001 
Profitability Ratio
Adjusted net profit margin2 21.86% 11.79% 21.47% 21.12% 22.45%

Based on: 10-K (filing date: 2019-02-05), 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).

2018 Calculations

1 Net profit margin = 100 × Net income ÷ Revenues
= 100 × 30,736 ÷ 136,819 = 22.46%

2 Adjusted net profit margin = 100 × Adjusted net income ÷ Revenues
= 100 × 29,913 ÷ 136,819 = 21.86%

Profitability 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 ratio deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Adjusted Return on Equity (ROE)

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income 30,736  12,662  19,478  16,348  14,444 
Stockholders’ equity 177,628  152,502  139,036  120,331  104,500 
Profitability Ratio
ROE1 17.30% 8.30% 14.01% 13.59% 13.82%
Adjusted: Mark to Market Available-for-sale Securities
Selected Financial Data (US$ in millions)
Adjusted net income 29,913  13,074  19,385  15,841  14,815 
Stockholders’ equity 177,628  152,502  139,036  120,331  104,500 
Profitability Ratio
Adjusted ROE2 16.84% 8.57% 13.94% 13.16% 14.18%

Based on: 10-K (filing date: 2019-02-05), 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).

2018 Calculations

1 ROE = 100 × Net income ÷ Stockholders’ equity
= 100 × 30,736 ÷ 177,628 = 17.30%

2 Adjusted ROE = 100 × Adjusted net income ÷ Stockholders’ equity
= 100 × 29,913 ÷ 177,628 = 16.84%

Profitability ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by shareholders’ equity. Alphabet Inc.’s adjusted ROE deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.

Adjusted Return on Assets (ROA)

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Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
As Reported
Selected Financial Data (US$ in millions)
Net income 30,736  12,662  19,478  16,348  14,444 
Total assets 232,792  197,295  167,497  147,461  131,133 
Profitability Ratio
ROA1 13.20% 6.42% 11.63% 11.09% 11.01%
Adjusted: Mark to Market Available-for-sale Securities
Selected Financial Data (US$ in millions)
Adjusted net income 29,913  13,074  19,385  15,841  14,815 
Total assets 232,792  197,295  167,497  147,461  131,133 
Profitability Ratio
Adjusted ROA2 12.85% 6.63% 11.57% 10.74% 11.30%

Based on: 10-K (filing date: 2019-02-05), 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).

2018 Calculations

1 ROA = 100 × Net income ÷ Total assets
= 100 × 30,736 ÷ 232,792 = 13.20%

2 Adjusted ROA = 100 × Adjusted net income ÷ Total assets
= 100 × 29,913 ÷ 232,792 = 12.85%

Profitability ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by total assets. Alphabet Inc.’s adjusted ROA deteriorated from 2016 to 2017 but then improved from 2017 to 2018 exceeding 2016 level.