Finacial Analysis
...001-2003 EBay’s current ratio has decreased each year since 2001. However, when compared to Amazon, EBay’s ratio is still higher than Amazon’s current ratio of 1.45 for 2003. EBay’s quick ratio has decreased each year since 2001 also. This ratio for eBay, which is 3.13 for 2003, is also above Amazon’s 1.11 levels for 2003. Working capital to total assets is now approximately the same as Amazon, with EBay having levels of .42, .26, and .26 and Amazon’s .17, .28, and .26 for years 2001, 2002, and 2003 consecutively. The standard current ratio for a healthy business is two, meaning it has twice as many assets as liabilities and eBay has continued to decrease each year since 2001, but still remains well above 2. For quick ratios, the optimal level is 1 or higher, the higher the quick ratio, the higher the business' level of liquidity, which usually corresponds to financial health (http://www.mergentonline.com). Profitability Ratios Profitability Ratios show the return on sales and capital employed. Each of the various profitability measures relates the profits of a company to its sales, assets, or equity. The three widely used profitability measures are net profit margin, return on assets, and return on equity. Net Profit Margin indicates the rate of profit from sales and other revenues. Return on assets (ROA) reveals the profit generated from the assets the company has available, and it is sometimes considered the most important measure of return. As a measure of overall profitability of the firm, Return on Equity (ROE) captures the amount of success the business is having in managing its assets, operations, and capital structure (www.fool.com). Analysis eBay Profitability Ratios 2001-2003 EBay’s Return On Equity (ROE) has increased considerably since 2001. When compared to Amazon, EBay’s return on equity (ROE) is well above Amazon’s -3.41 for 2003. From 2001 to 2003, EBay’s ROE has steadily increased, while Amazon’s has decreased. ROE is the bottom line measure for shareholders. EBay’s return on assets (ROA) is also above Amazon’s ROA which was 1.63 for 2003, and has seen considerable improvement since 2001. Since ROA is a measure of how effectively the company is using its assets to generate profit, this ratio indicates that eBay is making an improvement in their use of assets. Net profit margin for eBay increased from 2001 to 2002. However, in 2003, EBay’s net profit margin came down from 44.62 to 39.75. This ratio, in comparison to their peer’s average of .67 for 2003 is extremely high. The operating margin expressed as a percentage is the operating income divided by revenues. For eBay, the operating margin has increased since 2001, with both 2002 and 2003 being almost the same. The operating margin is still well above that of Amazon’s 2003 level of 5.14. The major difference here is slightly different business models and the operating profit each company generates on the different product. EBay’s Return On Investment (ROI), which is a measure of how their output exceeds their costs, decreased to 510.16 in 2003. This was a dramatic decrease from the 2326.42 levels of 2002. In comparison to Amazon’s 8.57 ROI, this level seems extremely high. This is a measure of the return a company is earning on total assets. The acronym EBITDA stands for Earnings before Interest, Tax, Depreciation, and Amortization. For EBay, their EBITDA as a percent of revenue has increased since 2001 to 36.66. Amazon’s EBITDA as a percent of revenue for 2003 was 4.51 (http://www.mergentonline.com). This ratio gives a measure of performance prior to management’s decisions on financing through debt or equity. EBay’s Financial Condition Ebay has made a great improvement over the past few years in many of their key business ratios. Since eBay is truly a pioneer in the online auction business, it has taken some time to develop industry standards in regards to profitability of online companies. When this is taken into consideration and including the Internet stock collapse of 2000, it is easy to see how many of the potentially comparable companies no longer exist. It is for this reason that Amazon was chosen as the closest competitor with their online auction division, but even Amazon is not a very good comparison. The best method for assessing the financial condition of eBay is to compare its ratios to general norms and prior periods. Over the past few years it is evident that eBay has focused more on equity financing. In years 2001 – 2003, common stock was issued as the primary source of raising capital. As far as liquidity is concerned, their current and quick ratios both stand at a healthy 3.32 and 3.13, respectively. Since anything above 2 indicates a company capable of paying its bills and having excess cash available, these numbers indicate a strong liquidity position. When considering profitability, eBay has maintained or improved on most of the profitability ratios assessed in this report over both of the last two years and maintains a health net profit margin in comparison to other companies in this sector. As of the end of 2003 eBay was carrying a Price/Earning Ratio of 55. This is a very high P/E ratio and indicates investor acceptance of the changes being made at eBay and their high prospects for growth. Over the past 11 months of 2004 eBay’s stock price has been driven up to $94/share and the P/E has increased to 98 as profits have increased by roughly 45% since 2003. Other Factors Beyond Ratios While financial ratios are very important in the analysis of a company, it is also important to consider outside factors that are important to the assessment of a company. Specifically two issues need to be addressed that can help shed some light on the opportunities a company may have for growth. The first issue that needs to be addressed is growth prospects for the market that the company operates in. Large players in a line of business will generally control some portion of the market share for their product market. Sales growth occurs when the company is able to grow market share and/or general growth occurs in the market. EBay’s market is a worldwide market since the Internet is becoming more and more prevalent worldwide each year. EBay has localized their website to 25 different countries and languages. Because of their size and brand name they are well positioned to continue these localizations and provide their services to even more countries. Due to their business model, this can usually be done without purchasing assets in these countries. This growth potential will further be accelerated by the general growth of Internet users over the next few years. In 1995, when eBay was founded there were roughly 7.7 internet users per every 1000 people worldwide. By 2002, this number had increased to 87.7, an 1100% increase in 7 years. By 2005, this number is expected to reach 129.5 (www.etforecasts.com). Regardless of market share, eBay stands to grow rapidly simply from the fast growth of their market in general. The other issue that is not represented by the ratios is the power of a brand name. Due to its pioneer status, eBay has established one of the leading online brand names. While its competitor Amazon is most recognized for online book sales, eBay is the most recognized website for online auctions (Pastore, 1999). The value of eBay’s brand name is not carried on the accounting books and, thus is not reflected in the ratios. Management Comparison In the 2003 Annual Report, Management reports on many items but the items of particular interest are the following: § Financial Statements § Notes to the Financial Statements Financial Statements. Consolidated Statements of Income, Balance Sheet, and Cash Flow were presented in the 2003 Annual Report found on www.ebay.investor.com. EBay has seen dramatic increases in net income from 90M$ in 2001 to approximately 442M$ in 2003. In agreement with Team E’s assessment, eBay has improved on the majority of the profitability ratios previously mentioned. Members of their senior management team regularly review key operating metri...