Working Capitol Mangment
... of the Company’s increased short-term debt, or a decrease in their current assets. In order to improve the current ratio, eBay should consider paying off some of their current liabilities. If eBay does not have the cash to reduce its liabilities, another consideration would be to utilize long-term borrowing to repay the short-term debt and therefore improve the current ratio. eBay cold also improve their current ratio by attempting to increase the total current assets and/or decrease total current liabilities as of the balance sheet date. This would mean that eBay would invoice pending orders and place them on the books sooner to increase accounts receivable. Another alternative would be to delay some purchases to reduce accounts payable (www.toolkit.cch). Cash is extremely important for any company. Without the lifeline of cash, eBay could not fund their operations, reinvest, or meet their capital requirements and payments. By understanding eBay’s cash flow health, it will be easier to make positive investment decisions. eBay’s expansions require more cash that for working capital and investment. The cheapest and best source of cash exists as working capital right within business. Good management of their working capital will generate cash, improve profits and reduce risks. Inventory, receivables and payables are all components of working capital management that has two dimensions: time and money. If the money can be collected from their debtors more quickly, or the amount of money tied up in inventory levels relative to sales can be reduced, eBay will generate more cash or it will need to borrow less money to fund working capital. As a consequence, the cost of bank interest will be reduced or additional free money will be available to support additional sales growth or investment. Similarly, if eBay can negotiate improved terms with suppliers, such as getting longer credit or an increased credit limit, they can effectively create free finance to help fund future sales (www.planware.com). eBay should also carefully manage their receivables. The company’s cash flow could be enhanced if the amounts owed to them are collected faster. Slow payment can have negative effect on eBay’s business. If the Company does not manage debtors, it could be possible to lose control due to reduced cash flow and, of course, face the increased incidence of bad debt. eBay should manage their debt by establishing clear credit practices in their company policy. These practices should be clear to all of the staff, including suppliers. eBay should also check out all new customers who are applying for credit, and put distinct limits for each of them. These practices should be re-evaluated especially in the event of an economic down time. eBay should also establish set penalties on overdue accounts and they should also monitor the debtor balances to ensure that they do not get too large or remain for too long (www.planware.com). Valuation and Investment Price/Earnings Ratio EBay’s price-to-earnings (P/E) ratio over the past five years has made an impressive improvement. During their first full year as a public company (1999) they ended the year with a P/E ratio of 1564. This was primarily due to the Internet stock speculation in the market at that time and the unproven business models that many Internet companies employed. The year 1999 closed with a split adjusted share price of $31.29 and earnings of $.02 per share. Over the next few years, while many other Internet based companies went out of business, eBay refined their strategy and stuck to their core auction services. This strategy allowed them to gradually increase their earnings while at the same time the stock market adjusted downward to reflect new valuations on Internet based stocks. Their P/E ratio dropped to 183 in the year 2000. In the year 2001 it became apparent to the stock market that this new business of Internet auctions could actually become profitable unlike many other Internet companies. This drove eBay P/E ratio up to 209 in 2002. Since 2002 eBay’s P/E ratio has remained fairly stable as the company has continuously increased earnings from year to year. The result has been a rise in the share price and general stabilization of the P/E ratio in a small range from 90-100 from 2003 to the current quarter. The following chart illustrates eBay’s P/E ratio over the last five years. Earnings Per Share Ebay has continually been able to grow earnings per share (EPS) from $0.02 in 1999 to an estimated $1.22 in 2004. Even though the following trend chart shows a continual growth in earnings, it should be noted that in it’s annual report eBay acknowledges that as their business models is slowly developed earning may fluctuate greatly from quarter to quarter (eBay, 2003, pg 41). EBay feels that core to their sustaining EPS growth is 1) attracting new users and keeping existing users active, 2) increasing the awareness of their brand, and 3) managing the costs of developing their technology (eBay, 2003, pg 41). Analysts are forecasting that eBay will end 2004 with $1.22 in earnings per share and are forecasting $1.59 for fiscal year 2005. If these estimates are accurate then that would price eBay stock at a P/E ratio of 65 on next years earnings, well below the 90 range that eBay currently sells at. Between the years 1999 and 2000 eBay increased EPS by an impressive 350%. Then from 2000 to 2001 they increased it again by another 77%. From that point on, eBay has made impressive EPS gains of 169%, 56%, and 82% in the years 2002, 2003, and 2004, respectively. The following chart illustrates eBay’s EPS growth over the last five years. Dividend Yield Ebay, being a relatively young company, does not pay dividends on their common stock and instead chooses to retain all earnings to finance growth of their business. The 2003 annual report makes it very clear that eBay has no plans to pay dividends any time soon (eBay, 2003, pg 18), thus the dividend yield on eBay stock is 0.0. Common Stock Share Price EBay’s common stock share price ended 1999 at roughly $31 per share (split adjusted) with a P/E ratio of 1564. Since this time, Internet stocks went through a cooling off period in 2000 when many Internet business models did not work out and many businesses ceased to exist. Ebay closed 2000 at a share price of $16.50 and a P/E ratio of 183 due to an increase in earning to $0.09 per share. From 2001 forward eBay’s share price has grow considerably as their earnings have grown by a whopping 663% over this period. EBay currently sells for around $100 per share with a P/E multiple of 81 on this years forecasted earnings of $1.22. EBay’s stock was split on March 2, 1999 - 3 for 1, May 25, 2000 - 2 for 1, and August 29, 2003 - 2 for 1. The following chart illustrates eBay’s common stock share price over the last five years. Recommendation We recommend eBay as a ‘Buy’ at the current price of $99.25 per share and project the price to reach $130-$140 in 2005. This recommendation is based on the following factors and past trend analysis as presented above. P/E Ratio Valuation For the past three years eBay has maintained a P/E ratio of between 75 and 95 with the last two years being closer to the 95 level. As eBay has continued to work their business model and increase earnings their stock price has reflected these increased earning and the investing community seems willing to pay approximately 95 times current years earning for a share of eBay stock. Based on recently released third quarter earnings, it is estimated that eBay will earn $1.22 per share this year. If investors are still willing to pay 85-95 times earnings for this stock then that would value the company at $104-$116 per share in the near term. When eBay released their 3rd quarter results on October 20, 2004 they also increased their earnings outlook for 2005 and expect anywhere earnings as high as $1.59 per share. If eBay is able to deliver this level of earnings then it is safe to assume the stock could be valued next year still at a 85-95 P/E ratio. This would place a value on the stock of $1.35 to $1.51 per share. Strong Ratios Another factor supporting eBay’s share price and earnings growth for the next 12 months is their strong financial ratios. EBay currently maintains a Current Ratio of 3.00 and a Quick Ratio of 2.60. Both of these ratios indicate a high level of liquidity. This liquidity gives them a strong position for an online business where quick acquisitions can obtain necessary technologies that may otherwise develop into competitive threats. Since eBay carries a Beta of 1.76 this indicates a stock which is more volatile then the general market. This indicates that eBay may outperform is the market increases, but may severely under perform is a bear market. This is one risk that eBay faces, but if earning increase to $1.59 per share as suggested then the P/E for eBay could drop to a...