The Financial Picture of E-bay and Amazon - Case Study Example

E-bay and Amazon Investors are normally interested on the financial picture of companies wherein they want to put their investments. Understanding its financial statements helps investors in their decisions for investment. The companies that will be the subject of comparison are E-Bay and Amazon. These are two companies that derive their business in on-line market presence and are publicly listed in the stock exchange. 1. Due to the economy decline in 2008, profitability of both companies are somewhat affected. Items that investors are interested in reviewing financial statements are its revenues and operating expenses. Based on the data of both companies from 2011 to 2013, revenues are improving. E-Bay’s shows an overall improvement of revenues and upward trend for the three-year period. At the end of 2013, its revenue was able to rebound by 14% from previous years’ revenue of USD$14,072B to USD $ 16,047B. The relationship of revenues to income is described by its operating margin. Operating margin gives a view at the quality of the corporation, but changes should be observed and compare it yearly or to competitors. E-Bay has 0.20% operating margin while Amazon has 0 % (Yahoo Finance). Operating margin is the percentage of revenue that the company can use to pay investors. Accounting rule suggests that all things being equal, a higher operating margin is healthier. Judging from both operating margins, E-Bay has enough room to pay investor while Amazon would most likely run a deficit. One thing that has improved operating margin of E-bay is that there is no significant increase in its Operating expenses. E-bay has only added 10% on its expenses on SGA in 2013 that means company has controlled its expenses to maintain profitability since percentage increase on SGA between 2011 and 2012 is 21 %. Operating expenses can behave in many ways. One is fixed anytime in its operations, while the other is variable whose costs depend on the level of operations that increases as revenues increase. For the three years in review, both companies demonstrated an increasing operating expenses that indicates growing of revenues. Another focus of attention in the Financial Statement is its Earnings per share (EPS) as investors are always interested on income from its investments. E-Bay shows a decreasing trend on EPS. There is a13.6% percent decrease in its $2.50 earnings per share in 2011 to $2.20 EPS in 2013. This should unease investors as EPS is the amount of income attributable to a common stock over the year. Through the EPS, investors can examine the amount of earnings that they own that is in addition to the earnings of the company. Going to Amazon, revenue shows 21.86% increase from $61B in 2012 to $74B in 2013. However, this revenue is thinned down by operating expenses such as Sales, General and administrative expenses that increased by 42.84% in 2013, and additional expense items shown in its FS (Nasdaq. 2014). A slow growth of income should worry investors as company’s income reflects the EPS. 2. Balance sheets of companies show liquidity of company, and its ability to pay maturing obligations and components of capital. Balance sheet of Amazon shows a 16% of increase of its current assets in 2013 from previous year (Nasdaq). It has no liquidity problem as its current assets are more than its current liabilities. Current ratio obtained from its FS is 1.747%. Current ratio is a measure that determines if a company has enough resources to pay maturing obligations. As compared with E-Bay, its current assets are lower although it is making progress. Balance sheet of E-Bay shows an 8.78% increase of current assets in 2013 from previous year. (Market Watch 2014). It has no liquidity problem as current assets are more than its current liabilities. Current ratio obtained is 1.75% that is almost the same with Amazon. Accounting rules suggest that a higher ratio is preferred as it shows company has more ready assets to meet its maturing obligations. A ratio under 1 shows company is not in good health but not necessarily going bankrupt. The current ratio puts importance on the efficiency of company in turning its assets into cash. This tells creditors and investors that company has the ability to pay its obligations if there is unforeseen events.(Investopedia) Another important item in the balance sheet is the total shareholders’ equity . This tells us how company is financed through common shares and retained earnings. Retained earnings of E-Bay has increased by 18% in 2013 while its total shareholders’ equity is better by 13% in 2013, from $20.87B in 2012 to $23,65B in 2013. This means it has enough capital to be used for investing purposes for growth of company. Balance sheet of Amazon shows a raise in retained earnings of 18.9% in 2013, while total shareholders’ equity is greater than before by 18.96% in 2013. 3. Cash flow statements show the cash generated from company’s operation and how it is used during a specified period. As shown, both E-Bay and Amazon use its retained earnings to support its operations, fund its financing and investment activities. Investments are expenses that are intended to strengthen operations while financing expenses are needed to pay cost of capital. Use of company’s funds to finance its continued growth must be weighed against the importance of paying dividends. Company must consider its effects and the significance of dividends to company stockholders. I agree with the use of the financing strategy of both companies as I believe there are more advantages in using retained earnings than debt or equity. Debt financing requires repayment plus interest that is an added expense while equity dissipates ownership and equity ownership sometimes interfere with management decision. Failure to pay means property is exposed to repossession by the bank that endangers stability of company. 4. Items that I would like to be incorporated in the financial statements are explanatory notes of auditors on ratios comparing yearly trend of growth of revenues, expenses and income so that investors can see at a glance the trend and figures will have more meaning. Ratios of profitability , asset use, liquidity and use of debt can also be used as a gauge and comparison among companies in the same line of business. For instance, comparative sales and profit comparison on year end would give the investors an idea of how well funds are managed, and comparing it further to other companies in the same industry gives an idea of how E-Bay and Amazon stands in competition. For instance, Yahoo Finance’ comparison shows Amazon ‘s net income in 2013 trailing behind E-Bay. This would require investor to dig deeper on reasons behind. Other ratios such as asset use that indicates relationship of inventories, and accounts receivables to the efficiency of operations would help clarify matters. 5.One competitor that is worth considering along the line of business is Overstock Company. This company is also an on-line retailer that has a notable growth of revenues from 2011 to 2013. Although it has a low operating margin of 0.1%, OSTK has an impressive ability of reducing its income tax expense from 0.04% to -5.53%. This becomes the reason of growth of its income from US$14.7M to US$88.5M in just a matter of two years. (Bloomberg Businessweek, 2014). OSTK used very little debt in its capital structure. All of its retained earnings are reinvested and ploughed back to the business that explains its very little debt. Comparing the 2013 net income of E-bay with that of OSTK, we find net income of OSTK to be $88.5B and a net income of E-Bay to be $2.86B. OSTK income jumped to a 502% and a reported gain of $73.8B in 2013 that shows a well managed company, and a good indication for investors. If I were an investor, I would park my investment with OSTK based on its efficiency on operations, price earning growth, and revenue and net income development. Going to market capitalization, it should not be interpreted as company’s capitalization that is the sum of shareholders equity and long term debts. Market cap is the total dollar value of all of company’s share. E-Bay and Amazon’s market cap are smaller than OSTK, but it should not be construed that they are bigger companies. It is only a representation that OSTK has more investors. ANNEXES: FINANCIAL STATEMENTS Source: NASDAQ www.annualreports.com › NASDAQ › Services annual Financials for eBay Inc. View Ratios Fiscal year is January-December. All values USD millions. 2009 2010 2011 2012 2013 5-year trend Sales/Revenue 8.71B 9.15B 11.68B 14.03B 16.05B Cost of Goods Sold (COGS) incl. D&A 2.74B 2.75B 3.73B 4.55B 5.35B COGS excluding D&A 1.93B 1.99B 2.79B 3.35B 3.95B Depreciation & Amortization Expense 810.95M 762.47M 939.95M 1.2B 1.4B Depreciation 473.45M 508.37M 602.75M 767M 976M Amortization of Intangibles 337.5M 254.1M 337.2M 433M 424M Gross Income 5.97B 6.39B 7.95B 9.48B 10.7B 2009 2010 2011 2012 2013 5-year trend SG&A Expense 4.12B 4.33B 5.46B 6.62B 7.31B Research & Development 803.07M 908.43M 1.24B 1.57B 1.77B Other SG&A 3.31B 3.42B 4.23B 5.05B 5.55B Other Operating Expense 0 0 0 0 0 Unusual Expense 396.16M 19.65M 40.89M (32M) (1M) EBIT after Unusual Expense (396.16M) (19.65M) (40.89M) 32M 1M Non Operating Income/Expense 1.42B 54.22M 1.38B 122M 70M Non-Operating Interest Income 0 0 110.75M 134M 111M Equity in Affiliates (Pretax) - - - - 0 Interest Expense 0 0 25.03M 63M 100M Gross Interest Expense 0 0 25.03M 63M 100M Interest Capitalized 0 0 0 0 0 Pretax Income 2.88B 2.1B 3.91B 3.08B 3.47B Income Tax 490.05M 297.49M 680.66M 475M 610M Income Tax - Current Domestic 603.91M (144.32M) 542.15M 390M 451M Income Tax - Current Foreign 64.96M 92.21M 121.56M 120M 190M Income Tax - Deferred Domestic (180.99M) 406.79M 61.13M 10M (4M) Income Tax - Deferred Foreign 2.18M (57.2M) (44.17M) (45M) (27M) Income Tax Credits 0 0 0 0 0 Equity in Affiliates 0 0 0 0 0 Other After Tax Income (Expense) 0 0 0 0 0 Consolidated Net Income 2.39B 1.8B 3.23B 2.61B 2.86B Minority Interest Expense 0 0 0 0 0 Net Income 2.39B 1.8B 3.23B 2.61B 2.86B Extraordinaries & Discontinued Operations 0 0 0 0 0 Extra Items & Gain/Loss Sale Of Assets 0 0 0 0 0 Cumulative Effect - Accounting Chg 0 0 0 0 0 Discontinued Operations 0 0 0 0 0 Net Income After Extraordinaries 2.39B 1.8B 3.23B 2.61B 2.86B Preferred Dividends 0 0 0 0 0 Net Income Available to Common 2.39B 1.8B 3.23B 2.61B 2.86B EPS (Basic) 1.85 1.38 2.50 2.02 2.20 Basic Shares Outstanding 1.29B 1.31B 1.29B 1.29B 1.3B EPS (Diluted) 1.83 1.36 2.46 1.99 2.18 Diluted Shares Outstanding 1.3B 1.33B 1.31B 1.31B 1.31B EBITDA 2.66B 2.83B 3.43B 4.06B 4.78 e-bay Balance Sheet assets Fiscal year is January-December. All values USD millions. 2009 2010 2011 2012 2013 5-year trend Cash & Short Term Investments 4.94B 6.66B 6.04B 9.46B 9.03B Cash Only 4.03B 5.6B 4.71B 6.83B 4.51B Short-Term Investments 915.23M 1.06B 1.33B 2.63B 4.51B Total Accounts Receivable 3.19B 4.13B 6.2B 11.44B 12.95B Accounts Receivables, Net 3.19B 3.96B 6.15B 11.08B 12.95B Accounts Receivables, Gross 3.44B 4.18B 6.43B 11.17B 12.95B Bad Debt/Doubtful Accounts (250.76M) (223.52M) (280.03M) (89M) - Other Receivables 0 172.87M 44.66M 362M 0 Inventories 0 0 0 0 0 Finished Goods 0 0 0 0 0 Work in Progress 0 0 0 0 0 Raw Materials 0 0 0 0 0 Progress Payments & Other 0 0 0 0 0 Other Current Assets 327.74M 271.17M 425.14M 497M 1.31B Miscellaneous Current Assets 225.03M 155.7M 255.65M 316M 1.31B Total Current Assets 8.46B 11.07B 12.66B 21.4B 23.28B 2009 2010 2011 2012 2013 5-year trend Net Property, Plant & Equipment 1.31B 1.52B 1.99B 2.49B 2.76B Property, Plant & Equipment - Gross 3.32B 3.96B 4.88B 5.96B 7.12B Buildings 431.46M 688.28M 783.89M 807M 931M Land & Improvements - - - - - Computer Software and Equipment 2.19B 2.73B 3.37B 4.17B 5.18B Other Property, Plant & Equipment 368.16M 404.5M 488.13M 633M 802M Accumulated Depreciation 2B 2.44B 2.89B 3.47B 4.36B Total Investments and Advances 1.38B 2.49B 2.45B 3.04B 4.97B Other Long-Term Investments 709.11M 1.76B 2.26B 2.71B 4.7B Long-Term Note Receivable 0 0 286.8M 0 0 Intangible Assets 6.91B 6.73B 9.77B 9.67B 10.21B Net Goodwill 6.14B 6.19B 8.36B 8.54B 9.27B Net Other Intangibles 767.81M 540.71M 1.41B 1.13B 941M Other Assets 341.12M 189.21M 161.62M 476M 266M Tangible Other Assets 341.12M 189.21M 161.62M 476M 266M Total Assets 18.41B 22B 27.32B 37.07B 41.49B Liabilities & Shareholders Equity 2009 2010 2011 2012 2013 5-year trend ST Debt & Current Portion LT Debt 0 300M 564.6M 413M 6M Short Term Debt 0 300M 550M 400M 0 Current Portion of Long Term Debt 0 0 14.6M 13M 6M Accounts Payable 2.35B 2.74B 4.25B 8.4B 9.57B Income Tax Payable 210.52M 40.47M 297.69M 98M 107M Other Current Liabilities 1.08B 1.44B 1.62B 2.02B 2.96B Dividends Payable - - - - - Accrued Payroll 280.45M 348.5M 489.09M 649M - Miscellaneous Current Liabilities 800.64M 1.09B 1.13B 1.37B 2.96B Total Current Liabilities 3.64B 4.52B 6.73B 10.92B 12.64B Long-Term Debt 0 1.49B 1.53B 4.11B 4.12B Long-Term Debt excl. Capitalized Leases 0 1.49B 1.51B 4.1B 4.12B Non-Convertible Debt 0 1.49B 1.51B 4.1B 4.12B Convertible Debt 0 0 0 0 0 Capitalized Lease Obligations 0 0 14.92M 6M - Provision for Risks & Charges 838.62M 428.34M 285.72M 340M 0 Deferred Taxes 90.53M 217.11M 787.23M 632M 841M Deferred Taxes - Credit 90.53M 217.11M 787.23M 632M 841M Deferred Taxes - Debit 0 0 0 0 0 Other Liabilities 49.56M 45.39M 58.14M 207M 244M Other Liabilities (excl. Deferred Income) 49.56M 45.39M 58.14M 207M 244M Deferred Income - - - - - Total Liabilities 4.62B 6.7B 9.39B 16.21B 17.84B Non-Equity Reserves 0 0 0 0 0 Preferred Stock (Carrying Value) 0 0 0 0 0 Redeemable Preferred Stock 0 0 0 0 0 Non-Redeemable Preferred Stock 0 0 0 0 0 Common Equity (Total) 13.79B 15.3B 17.93B 20.87B 23.65B Common Stock Par/Carry Value 1.49M 1.51M 1.54M 2M 2M Retained Earnings 8.36B 10.16B 13.39B 16B 18.85B ESOP Debt Guarantee 0 0 0 0 0 Cumulative Translation Adjustment/Unrealized For. Exch. Gain 565.62M 408.4M 185.75M 394M 551M Unrealized Gain/Loss Marketable Securities 413.75M 531.18M 587.99M 687M 921M Revaluation Reserves 0 0 0 0 0 Treasury Stock (5.38B) (6.09B) (7.16B) (8.05B) (9.4B) Total Shareholders Equity 13.79B 15.3B 17.93B 20.87B 23.65B Accumulated Minority Interest 0 0 0 0 0 Total Equity 13.79B 15.3B 17.93B 20.87B 23.65B Liabilities & Shareholders Equity 18.41B 22B 27.32B 37.07B 41.49B CASH FLOW Operating Activities Fiscal year is January-December. All values USD millions. 2009 2010 2011 2012 2013 5-year trend Net Income before Extraordinaries 2.39B 1.8B 3.23B 2.61B 2.86B Depreciation, Depletion & Amortization 810.95M 762.47M 939.95M 1.2B 1.4B Depreciation and Depletion 473.45M 508.37M 602.75M 767M 976M Amortization of Intangible Assets 337.5M 254.1M 337.2M 433M 424M Deferred Taxes & Investment Tax Credit (178.81M) 349.6M 16.96M (35M) (31M) Deferred Taxes (178.81M) 349.6M 16.96M (35M) (31M) Investment Tax Credit - - - - - Other Funds (333.72M) 731.84M (592.49M) 820M 1.12B Funds from Operations 2.69B 3.64B 3.59B 4.59B 5.35B Extraordinaries - - - - 0 Changes in Working Capital 220.58M (899.1M) (320.13M) (756M) (354M) Receivables (97.49M) (111.61M) (291.82M) (207M) (123M) Accounts Payable (27.24M) (9.26M) 29.42M (16M) 7M Other Assets/Liabilities 151.83M (181.19M) 12.87M (378M) (466M) Net Operating Cash Flow 2.91B 2.75B 3.27B 3.84B 5B Investing Activities 2009 2010 2011 2012 2013 5-year trend Capital Expenditures (567.09M) (723.91M) (963.5M) (1.26B) (1.25B) Capital Expenditures (Fixed Assets) (567.09M) (723.91M) (963.5M) (1.26B) (1.25B) Capital Expenditures (Other Assets) 0 0 0 0 0 Net Assets from Acquisitions (1.21B) (90.57M) (3.22B) (143M) (869M) Sale of Fixed Assets & Businesses 1.78B 0 2.27B 144M 0 Purchase/Sale of Investments (1.04B) (1.21B) (694.12M) (1.71B) (3.56B) Purchase of Investments (1.14B) (2.64B) (2.29B) (3.13B) (7.51B) Sale/Maturity of Investments 103.57M 1.44B 1.6B 1.42B 3.94B Other Uses (121.14M) (385.68M) (695.34M) (800M) (816M) Other Sources 6.49M 125M 0 0 485M Net Investing Cash Flow (1.15B) (2.28B) (3.31B) (3.76B) (6.01B) Financing Activities 2009 2010 2011 2012 2013 5-year trend Cash Dividends Paid - Total 0 0 0 0 0 Common Dividends 0 0 0 0 0 Preferred Dividends 0 0 0 0 0 Change in Capital Stock 102.53M (475.54M) (821.78M) (415M) (906M) Repurchase of Common & Preferred Stk. 0 (711.07M) (1.06B) (898M) (1.34B) Sale of Common & Preferred Stock 102.53M 235.53M 242.21M 483M 437M Proceeds from Stock Options 102.53M 235.53M 242.21M 483M 437M Other Proceeds from Sale of Stock - - - - - Issuance/Reduction of Debt, Net (1B) 1.79B 50.73M 2.43B (400M) Change in Current Debt (1B) 300M 250M 0 0 Change in Long-Term Debt 0 1.49B (199.27M) 2.43B (400M) Issuance of Long-Term Debt 0 1.49B 0 2.98B 0 Reduction in Long-Term Debt 0 0 (199.27M) (550M) (400M) Other Funds (48.18M) (78.76M) (67.45M) (60M) (48M) Other Uses (614.64M) (513.43M) (1.52B) (4.32B) (1.42B) Other Sources 566.46M 434.68M 1.45B 4.26B 1.37B Net Financing Cash Flow (945.66M) 1.23B (838.5M) 1.95B (1.35B) Exchange Rate Effect (2.16M) (120.1M) (14.63M) 100M 48M Miscellaneous Funds 0 0 0 0 0 Net Change in Cash 810.89M 1.58B (886.31M) 2.13B (2.32B) Free Cash Flow 2.34B 2.02B 2.31B 2.58B 3.75B REFERENCES Amazon Annual Report at NASDAQ, Services, pdf. Web. 14 Nov, 2014 Annual Financials for E-Bay. Market Watch. 2014, web. 14 Nov. 2014 Bloomberg Business Week. Overstock Com. Inc. (OSTK:Consolidated Issue listed on NASDAQ Global Marke), 2014. Web. 16 Nov.), 2014. Web. 16 Nov.014 E-Bay Competitors at Yahoo Finance . 2013. Web. (http://finance.yahoo.com/q/co?s=EBAY+Competitors) 14 Nov. 2014 Investopedia. Market cap definition. Web. 14 Nov. Read More