Comparative Financial Analysis of Amazon.com and eBay Inc - Case Study Example

Amazon.com and eBay Inc A Comparative Financial Analysis Introduction With the boom of the cyberspace mania, came the pandemonium of radical retailing schemes -- the E-commerce phenomenon. E-commerce is the offshoot of the Internet Age. It is where business firms trade almost anything without the use of the physical currency made possible from broadband to broadband. It saves businessmen a lot of cash (Goel, 2007). From the most dashing car, to grandfather’s broken glasses; from numismatic supplies to children’s books, everything that one could see in high-street stores is also most likely available for shopping -- online. Two of the mainstream [and most popular] e-commerce businesses today are Amazon.com and eBay Inc. Both of these online sites are in major competition with each other. This paper would discuss a comparative financial analysis between both sites through their respective financial ratios and therefore, their financial conditions during the year 2007 to 2009 – when the recession was at its peak. Company Brief Amazon.com. was founded by Jeff Bezos on 1994 while followed by Pierre Omidyar who founded eBay Inc. on 1995. Amazon.com only used to be an online bookseller but now has widened its scope and now sells a variety of products online. Amazon.com is the largest non-travel e-commerce site across the globe (Keynote, 2009). Meanwhile, eBay Inc. is a significant networking company which specializes on online auctions. Almost anything can be possibly bought and sold in eBay Inc. It owns PayPal and Skype (Keynote, 2009). Comparative Financial Ratio Analysis Assessment Financial Ratios eBay Inc. Amazon.com 2007 2008 2009 2007 2008 2009 Liquidity Current Ratio 1.7 2.3 2.3 1.3 1.4 1.3 Quick Ratio 2.29 1.69 2.32 1.06 1.00 1.03 Working Capital Ratio( millions) 4,022.93 2581.5 4818.24 1450 1411 2433 Activity Inventory Turnover Ratio 0.00 0.00 0.00 12.36 13.69 11.28 Total Asset Turnover Ratio 0.49 0.54 0.47 2.28 2.30 1.77 Profitability Profit Margin Ratio 4.53 20.83 27.37 3.20 3.36 3.68 Return on Assets 2.26 11.41 12.27 7.34 7.75 6.53 Return on Equity 2.97 16.05 17.32 39.76 24.13 17.15 Financial Stability Debt/Equity Ratio 0.31 0.40 0.33 4.41 2.11 1.62 Interest Coverage Ratio 46.23 271.58 0.00 9.57 13.56 34.97 Table 1: eBay Inc. and Amazon.com Annual Financial Ratio Reports Liquidity: Liquidity, which is determined in the balance sheet, is a crucial factor in the financial condition of the business. Liquidity is the capability of the business to defray obligations with the use of its cash in times necessary and thus, sustain the business in the long run. The higher the liquidity, the more competitive it becomes (Credit Guru, 2009a). Liquidity uses the Current Ratio, Quick Ratio/ Acid Test where inventory is not included and the Net Working Capital Ratio. Liquidity Ratios are better if they are higher (Zeromillion, 2009). Current Ratio Formula: Current Ratio = Current Assets/Current Liabilities By the end of 2009, eBay Inc. had a 2.3 current ratio while Amazon.com had 1.3. This means that in meeting $1.00 of its current liability, eBay Inc. had $2.30 cents of current assets while Amazon.com had only $1.50 cents to cover up $1.00 of its current liability. In this case, eBay Inc. was more capable of outlaying cash for its obligations due within the specific year than Amazon.com. The same was true for the previous years. Quick Ratio Formula: Quick Ratio = (Quick Assets - Inventories)/ Current Liabilities eBay Inc. had 2.32 times as much as it required in meeting its current liabilities by the end of 2009. Meanwhile, Amazon.com only had 1.10 times as much. This means that eBay Inc. was more capable of covering up its short-term obligations than Amazon.com. The same fact went with the previous years. Net Working Capital Ratio: Net Working Capital Ratio = Current Assets – Current Liabilities In this case, for both Amazon.com and eBay Inc., 2008 had been a downturn for them. Meanwhile, eBay Inc. obviously had higher net working capital for the past three years than Amazon.com. eBay Inc. then, didn’t have to look with much effort for other sources to finance everyday operations. Amazon.com had much more effort. With the figures above, eBay Inc. had been apparently and consistently more liquid than Amazon.com for the past three years. Therefore, eBay Inc. had fewer efforts in covering up its short-term obligations with its current assets as compared to Amazon.com. Activity: This is the operational efficacy of the business in utilizing its assets. If the firm can easily generate resources into revenues, then the business is competent enough in the industry (Credit Guru, 2009b). Operational efficacy is arrived at the balance sheet and the income statement. Activity Ratios are the Inventory Turnover Ratio and the Total Asset Turnover Ratio. Inventory Turnover Ratio Formula: Inventory Turnover Ratio = Net Sales / Inventory eBay Inc. had no inventory for the past three years. Hence, by the end of 2009, there was no inventory turnover ratio for eBay Inc. Amazon.com had an 11.28 ratio. eBay Inc., then was not able to use inventory in sales in a fiscal year while Amazon.com was able to utilize its inventory 13.2 times in one fiscal year. Total Asset Turnover Ratio Formula: Total Asset Turnover Ratio = Sales Revenues/ Assets With the figures under the year 2009, eBay Inc. generated sales by $ 0.50 cents for every $1.00 of assets while Amazon.com made $2.80 cents for every $ 1.00 of assets. As shown in the table above, Amazon.com clearly used its resources more effectively than eBay Inc. since the former used lesser assets to function at a specific stage of operation. For the past three years, Amazon.com had been more operational than eBay Inc. Profitability: Profitability Ratios assess the firm’s current standing in terms of gaining profit with respect to its investment. The investment is profitable if the ratio is above one; below one makes the business not profitable (Credit Guru, 2009c). Profitability Ratios include Profit Margin Ratio and Return on Assets Ratio. Profit Margin (Return on Sales) Ratio Formula: Profit Margin Ratio = (Net Profit / Sales) x 100 eBay Inc. generated $27.37 cents profit with every $1.00 of sale while Amazon.com earned $3.68 cents with every $1.00 of sale towards the end of 2009. For the past three years, eBay Inc. had been more profitable than Amazon.com with almost 8 times less generated profit than the former. Return on Assets Ratio Formula: Return on Assets Ratio = (Net Profit / Total Assets) x 100 By the end of 2009, eBay Inc. gained a 12.27% return on assets relative to its investment while Amazon.com only made a 6.53% return. This goes to show that eBay Inc. is more able to change its investment into profit. Return on Equity Ratio Formula: Return on Equity Ratio = (Net Profit / Net Worth or Owners Equity) x 100 By the end of 2009, eBay Inc. generated a 17.32% return on the investment to imburse share dividends while Amazon.com makes almost the same with 17.15%. However, considering previous years especially in 2007 where there was approximately 36 ratio difference between both companies, Amazon.com had been more competent in giving value to its stockholders. In conclusion to all the terms for profitability as shown above, eBay Inc. is apparently more profitable than Amazon.com. Leverage: Leverage Ratios measure the financial risks of the business therefore assessing the effectivity of the firm’s debt servicing schemes. A higher leverage means a greater financial risk. In great financial risks come fewer investments and more liabilities. Leverage ratios indicate the proportion of equity and credit in a business (Investopedia, 2010a). It usually has Debt/Equity Ratio and the Interest Coverage Ratio or the Time Interest Earned. Debt/Equity Ratio Formula: Debt/Equity Ratio = Total Liabilities / Owner’s Equity or Net Worth From the table above, it can be said that Amazon.com had a higher financial risk than eBay Inc. which had $ 0.00 of debt and only $1.00 in equity to meet its obligation. Amazon.com had $ 0.47 cents of debt and only $1.00 in equity to cover up an obligation. eBay Inc. used its equity to finance its debt. Interest Coverage Ratio Formula: Interest Coverage Ratio = (Earnings Before Interest and Tax) / Interest Expense eBay Inc. had no interest expense at the end of the fourth quarter of 2009 where it plunged nowhere but south from its peak in 2008. This means that eBay Inc. no longer had a long-term debt. It can also be said that eBay Inc. answered all its obligations by that quarter or year. The figures above show that eBay Inc. can be more capable of compensating its liabilities than Amazon.com can. This makes eBay Inc. more attractive to creditors. It can also be inferred that although in the same industry, both had different debt-financing techniques. Market Value: Market Value Ratios evaluate a firm’s ability to gain profit for its stockholders with the use of its resources. It indicates the price of a security so that it helps determine whether a security (stocks, bonds) is either overvalued or undervalued (Investopedia, 2010b). The most significant and simplest Market Value Ratio is the Price/Earnings Ratio. Price/Earnings Ratio Formula: P/E Ratio = (Market price per share) / (Earnings per share) Amazon.com. eBay Inc. Current P/E Ratio 51.2 11.0 P/E Ratio 1 Month Ago 51.5 11.8 P/E Ratio 26 Weeks Ago 78.5 21.6 Table 2: Price/Earnings Ratio, July 12, 2010 (Bloomberg) As of July 12, 2010, an investor in Amazon.com is willing to pay $51.20 cents for $1.00 of its current earnings while an investor in eBay Inc. is only eager at an $11.00 price for every $1.00 of its earnings. For the past 26 weeks, Amazon.com is highly more valued than eBay Inc. In inference, stockholders are expecting higher returns in the future if they invest in Amazon.com since it may have faster expected growth rate of earnings. So they would likely invest in Amazon.com than in eBay Inc. For the past three years, eBay Inc. had been more liquid, a more profitable, and more financially stable than Amazon.com. However, the current market value seems to have not favored eBay Inc. which is somehow ironic. Earnings Growth Rate: As of July 13, 2010, the growth rate for Amazon.com is 45.3% while for eBay Inc. is 8.5%. This percentage rate is ostensibly favorable to Amazon.com. Likewise, this may explain the high market value for Amazon.com. Conclusion For the past three annual financial reports of both companies, eBay Inc. and Amazon.com went to opposite directions in terms of generated net income. For the same period, eBay Inc. was at a loss for $821, 590 as a difference in profit gained from 2007 to 2008 and 2008 to 2009. Amazon.com, on the other hand, produced a considerable but positive profit. It generated an income difference of $88, 000 of the same time intervals. These data imply that the recession was more manageable for Amazon.com than for eBay Inc. eBay Inc. may have been more profitable than Amazon.com as the ratios in Table 1 indicate, but its profitability growth rate slumped during the recession. Amazon.com had been more operationally efficient than eBay Inc. This should have probably made the former more resilient than the latter during the recession which signaled around 2007. Besides other significant factors, Amazon.com will continue to grow since it rotates its resources effectively. As the profit margin ratio shown in the Table 1, the end of 2007 had been hard for eBay Inc. but it speeded up by the end of 2008. Hence, the slow profitability rate doesn’t mean that eBay Inc. was out of the game. Since it had also been more liquid and financially stable for the past three years than Amazon.com, eBay Inc. will still be able to continue growing because it also generates revenues from PayPal and Skype. eBay Inc. also no longer had to spend for the interest expense so that it can utilize its other resources for generating revenues. With the figures that both Amazon.com and eBay Inc. are contributing, the E-commerce phenomenon is still an on-going and growing industry despite the on-going recession. Other internal or external factors can affect the industry but with its promising and accessible features, its trend says that it is still far from having the same fate the dotcom bubble suffered. Reference List Credit Guru, 2009a. Financial statement analysis - liquidity ratios. [Online] Available at: http://www.creditguru.com/ratios/ratiopg1.htm [Accessed 8 July 2010]. Credit Guru, 2009b. Financial statement analysis - efficiency ratios. 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