E-Bay Incorporation Financial Analysis - Essay Example

E-Bay Inc. Financial Analysis A) Overview of E-Bay Incorporation History of the company Located in the suburbs of San Jose, California, eBay Inc. was first started off by Pierre Omidyar in 1995, as simple marketplace, trading in sales of goods and services, on a person to person online basis. During this time, sellers used to list items for sale, while buyers bid on goods that they are interested in. This process was automated by using the E-Bay’s listing system, which arranged items by topic and category. While starting up, the aimed market segment was collectibles and it was developed just like a traditional auction house. Through strategic business decisions, the company has been able to trade in over 186 million bids, with a sum of over $840 million items being sold with an average of around 800, 000 bids per day. (Schonfeld, 2005) History of the industry As a result of internet technology a lot of business sprung up, among them being Electronic commerce. The online business started to pick up in the early 1990s, and by around 2000 the business was fully embraced across the globe. Recently, e-commerce industry has experienced an immense development, mostly due to the growth of internet users across the world. More and more people are shifting their attention towards the new shopping model of doing online shopping. (Schonfeld, 2005) Products or services E-Bay incorporation provides an online platform for sellers and buyers to interact and trade in various categories of goods and services. There are three segments in eBay namely; payments, marketplaces and GSI Commerce. Position in the industry Since access to e-commerce is universal, and the physical assets to start up this form of business are commercially available, barriers to entry into the industry is quite lower. Now what matters here is the network externalities effect. For instance, it is extremely difficult for a competitor to acquire a bigger share of the users in market where there is relatively huge network externalities. Nonetheless, eBay has managed to secure its position among the top e-commerce websites in the world. However, just like any other industry eBay is subject to competition from companies like Yahoo and Amazon. These companies normally employ tactics such as lowering of price of their services in order to gain competitive advantage. At the moment eBay is focusing its markets abroad. It is now operating in eight of the top ten countries, by e-commerce market size outside the American nation. For example, eBay controls over 80% of e-commerce market in Asia, while it is reported to be gaining users, 45% faster in Europe continent more than in U.S.A. It is also experiencing a 135% growth of gross merchandise sales. (Mcleay, & Omar, 2000) Competition There are a number of considerable competitors eBay is experiencing in e-commerce, such as; Amazon and Yahoo. These companies seemingly offer same products and services, as eBay. However, eBay has gained its competitive advantage through offering customer satisfaction, as well as, customer value. The company is successful, despite of competing with old competitors in the market. Potential products The company has introduced a special delivery service, known as Royal Mail eBay services. Customers are offered the opportunity to do business with the e-commerce company, whereby they offer a range of delivery options. This program is set to attract more customers, while retain the existing ones, because customers love it when their goods are delivered at their disposal. (Farris, 2010) B) Types of Financing eBay uses Since the organization is a public traded company, it gets its funding from issuance of shares. However, the company also depends on sources of financing such as; debentures and collateralized bonds. (Moles, 1997) C) Ratio analysis of the publicly traded company (eBay) i) Liquidity ratios for the last three years; this computation will determine eBay’s ability to meet its short-term obligations. Year Ratio 2014 2013 2012 Current ratio (Current assets/current liabilities) = 26,531/ 17,531  =1.51 = 23,283/ 12,639 =1.84 = 21,398/ 10,924 =1.96 Quick ratio (Total quick assets/Current liabilities) = 25,040/ 17,531 =1.43 = 21,973/ 12,639  =1.74 =20,484/ 10,924 =1.88  ii) Profitability ratio analysis; it determines the ability of eBay to produce profitable sales from its resources or rather assets. Year Ratio 2014 2013 2012 Gross profit margin (Gross profit/Net revenues * 100) =12,170/17,902 =0.678 =67.8% = 11,011/16,047 =0.686 =68.6% = 9,856/14,072 =0.70 =70.0 Operating Profit Margin (Income from operations/New revenues * 100) = 3,514/ 17,902  =0.196 *100 =19.6% 3,371 / 16,0478 0.21*100 =21.0 = 2,888/14072 =0.205*100 =20.5 D) Competitor analysis of two closest competitors (Amazon and Yahoo) Amazon.com It is considered as the world’s largest e-commerce retailer, and a very powerful eBay competitor. According to the company, they offer a wide array of products and services, by allowing customers to buy, while merchants to sell their items. The revenue of this company keeps on changing over years, perhaps due to their strategic decisions. Below is a snippet of the company’s financial performance, captured through calculation of its financial ratios. Amazon financial ratio analysis (computations) Year Ratio 2014 2013 2012 Current ratio (Current assets/current liabilities) =5471/4559 =1.12 =112% =5412/5412 =1.07 107% = 6541/10901 0.6 =60% Quick ratio =6544/7998*100 =82% 7451/9934*100 =75% 7854/98175*100 =80% Operating margin N/a =0% 4541/454100 =1% 5451/545100 =1% Gross margin =6541/22555 =0.29 29% 6548/24251 0.27 27% 6555/26220 0.25 25% Yahoo Inc. Key Financial ratio analysis Different from eBay and Amazon, Yahoo is digital media firm which was created in 1994. The company has categorized its services into three groups; communications and communities; media; search and marketplaces. Yahoo is considered as a strong competitor for eBay Inc. Although, different from Amazon company, Yahoo has not been very successfully in terms of its annual revenue. Nonetheless, the table below shows an elaborate table filled with up-to-date financial ratios about the incorporation; Year Ratio 2014 2013 2012 Gross margin 5474/7709 0.7189 =71.89% 6541/9344 0.7117 =71.17% 5741/8105 0.6750 67.50% Quick ratio =4471/8279*100 =54 5174/8079*100 =64 5412/8077*100 =67% Operating margin 6541/2180 3% 6214/51783 12.30% 5142/46745 =11.365% Asset Turnover =5214/43450 =0. 12 4848/17314 =0.28 5874/18948 =0.31 . A chart showing the results of key financial ratios of the 3 organizations for the year 2014 Discussion and Interpretation The above chart was produced after calculating and evaluating the ratios, with an assistance of accurate data. Nonetheless, the above chart shows that the most performing organization is eBay. However, the top position is tightly contested with Amazon while Yahoo is seen performing poorly. There is no doubt that E-Bay has a good financial performance, while Yahoo is experiencing serious financial challenges. Judging from the graph, eBay Inc. has a very high current ratio, which implies that the organization has enough short term assets to meet its obligations such as; short-term liabilities. However, the high current ratio shows that the organization might not be investing well its excess assets, which is risky for an organization. The gross profit margin shows that the incorporation is producing a very high percentage of net income, from every dime of sales. (Mcleay, & Omar, 2000) It should be understood that the above ability to earn a high profit per dollar is due to its low cost generation of income, which consequentially contributes to a strong financial growth of eBay. The company’s operating profit margin was reported to have improved from 2012 to 2013, however the figure dropped significantly from 2013-2014. This shows that the operating income against the revenue received by the organization went down, due to some financial market reasons. The gross profit margin for eBay decreased in the previous years; however from 2013 to 2014 it improved. This clearly indicates that the revenue available to cover any expenditure and operating costs increased, hence a good sign of financial improvement. (Fabozzi, & Peterson, 2003) E) An analysis of the P/E ratio for the three companies from 2012-2014 Price per earnings ratio is a well-known too used to carry out stock evaluation calculations. The P/E ratio is given by doing the following; Dividing the last sale price by the average earnings per share (EPS) for a certain fiscal period. Year Company 2014 2013 2012 eBay Inc. 54/2.3 = 23.86 56/2.3 =24.51 74/3.7 = 20.35 Amazon Inc 152/-0.2 = -749.62 65/2.3 = 30.52 74/-0.4 = -1752 Yahoo 47/1.2 = 38.24 64/2.09 = 30.58 45/1.4 = 30.12 From the above computations, Yahoo is seemingly on the higher side in terms of the stock received in the organization. For instance, Yahoo maintains a higher profit per earnings, which would imply that the organization is very much profitable, against all its competitors. However, this might not be the case for the above three companies. (Bunnell, 2001) Well, earnings are always a true financial position of an organization, and there are chances that this could just be an “inflated figure” to fit the organization executives’ desire. Earnings can be influenced by unusual losses or gains, which can sometimes bring a wrong picture about the company’s earning metric. Moreover, there are high possibilities for reported earnings to be tampered or manipulated by management just to meet the earnings goals. This implies that the P/E ratios might be what it is reported in the financial books of accounts, hence misleading the investors. There are cases where investors rely on the reported profit per earnings, and end up investing for all the wrong reasons. Yahoo incorporation seems to reflect positive P/E ratios because of its newly developed strategy, as well as its long experience in the industry. However, Yahoo is slowly losing market share, due to the growing shift from the company to new forms of e-commerce. This is more likely due to the preconceived perceptions that the site is obsolete and no more reliable. Amazon enjoys a good market share, due to its quality marketing strategy, as compared to that of eBay. This is what makes the organization attain its competitive benefit against its rival competitors (Lewellen, J. (2000). Lastly, eBay enjoys positive P/E ratios due its mind-captivating strategies. The organization has been able to compete with long-established companies such as; Amazon and Yahoo, and still maintain its top position. E-Bay is well-positioned due to its customer-oriented products and services that keeps customers coming back to do business with the organization. However, the organization is faced with the technological challenge of keeping abreast with latest developments, while ensuring it does not compromise its organizational value and missions References Bunnell, D. (2001). The Ebay Phenomenon: Business Secrets Behind the Worlds Hottest Internet Company. John Wiley & Sons. Fabozzi, F. J., & Peterson, P. P. (2003). Financial management and analysis(Vol. 132). John Wiley & Sons. Farris, P. W., Bendle, N. T., Pfeifer, P. E., & Reibstein, D. J. (2010). Marketing metrics: The definitive guide to measuring marketing performance. Pearson Education. Lewellen, J. (2004). Predicting returns with financial ratios. Journal of Financial Economics, 74(2), 209-235. Mcleay, S., & Omar, A. (2000). The sensitivity of prediction models to the non-normality of bounded and unbounded financial ratios. The British Accounting Review, 32(2), 213-230. Moles, P. (1997). Handbook of International Financial Terms. Oxford University Press. Schonfeld, E. (2005). The world according to eBay. Business, 2(6), 1. Read More