Amazon versus eBay

Introduction

            Financial analysts must examine the financial statements of firms in order to determine their financial health. There are several techniques for analyzing financial statements including the use of ratios, vertical analysis, and horizontal analysis. This paper presents an analysis of Amazon and eBay’s financial statements using ratios’ and the vertical analysis technique. The paper also examines the impact of new events on the financial performance of the firms.

Descriptions of Companies

Amazon is electronic commerce company whose core business is retail. The company retails a broad array of products including books, CDs, DVDs, video, software, video games, electronics, furniture, toys, food, and jewelry among others through its online platform (Amazon, 2014). It is a multinational company that has independent retail websites for the U.S., Canada, France, Germany, Ireland, the U.K., Spain, Australia, Italy, the Netherlands, Brazil, China, Japan, and India. It also ships it product to other international destinations. Amazon also manufacturers consumer electronics such as the Fire tablets, Amazon Kindle e-book readers, Fire Phone, and Fire TV. Amazon started in 1994 when Jeff Bezo established the online site and incorporated it as Cadabara (Amazon, 2014). The site went online in 1995 as Amazon. The original idea was to make Amazon the largest online bookstore. However, the company expanded to incorporate the sale of other products including electronic, movies and furniture. Amazon also ventured into the manufacturing sector by developing products such as the Fire tablet.

eBay is also an American electronic commerce company. However, eBay is not a retailer, but an auction and shopping website that offers business-to-consumers and consumer-to-consumer sales services through the internet (eBay, 2014). The website enables people to post their merchandise where millions of customer can view and purchase. eBay charges a commission for sales that people make through the website. It also charges service fee for people who post their where on the website. eBay Inc has other business apart from online auction including its online payment business, PayPal. The company also offers online event ticketing service through StubHub and online classified advertisements through eBay Classifieds. The firm runs local operations in over thirty countries. eBay Inc started in 1995 in California when Pierre Omidyar established the auction website that he named AuctionWeb (eBay, 2014). Initially, Pierre Omidyar had established the website as a hobby and did not charge people who posted their ware on the site. However, his internet service provider demand that he upgrades his account from personal to business because of the high traffic direct to his website. This move increased the cost of running the website compelling Omidyar to impose a fee on people who wanted to post their wear on the website. In 1998, the company made $4.7 million in revenues.

Profitability Ratios

Profitability ratios are measures that give an indication of the profitability of the firm. It is vital for creditors to understand the profitability of a given firm because profitability has an implication of the firm’s ability to meet debt obligations (Misch & Galantine, 2009). A firm that does not make sufficient profits may struggle to meet its debt obligations. Profit margin, Return on Asset (ROA), and Return on Equity (ROE) are the most common profitability ratios.

The profit margin expresses the relationship between the company’s revenues and net income. Analysts compute this ratio by dividing the value of net income with that of sales (Riedl & Srinivastan, 2008). This measure gives an indication of the firm’s ability to manage its expenses and convert most of its revenues to income. The ROA expresses the relationship between the firm’s assets and profits. It is worked out by dividing the net income by the company’s total asset value. This measure gives an indication of the company’s efficiency in terms of utilizing its assets to generate sales.

 The ROE expresses the relationship between company’s income and the amount of money that investors have channeled to the company (Riedl & Srinivastan, 2008). This measure is obtained by dividing net income with the company’s total equity value. This measure demonstrates the firm’s efficiency in terms of utilizing stockholders’ money to generate profits.   

Company	Amazon			eBay
Year	2013	2012		2013	2012
Profit Margin	0.0037	-0.0006		0.1780	0.1854
ROA	0.0068	-0.001		0.0688	0.0704
ROCE	0.0281	-0.0048		0.1208	0.1250

The analysis shows that eBay is in a better state of financial health than Amazon. eBay performed better the Amazon in all the three profitability ratios in 2012 and 2013. There is a momentous difference between the performance of eBay and Amazon in all the three ratios. For instance, in 2012, eBay profit margin was 0.1854 while that of Amazon was -0.0006. These figures imply that eBay made a profit of $0.1854 for every dollar of sales while Amazon made a loss of $0.0006 for every dollar of sales made. The figures tell that Amazon has a huge problem in managing its expenses.

There are two ways of improving the profit margin; increasing revenues and keeping costs constant or reducing expenses keeping revenues constant (Misch & Galantine, 2009). Amazon’s income statement shows that the company has no problem in terms of generating revenues. In fact, the company made over $74 billion in revenues, in 2013, as compared to eBay’s $16 billion. However, eBay profit margin was significantly greater than that of Amazon during the same year. Therefore, Amazon’s challenge is in managing its expenses. Amazon needs to find ways of reducing its operating costs in order to enhance its profitability.

There are also two ways of increasing the ROA; reducing the cost of assets while keeping income constant or increasing income while keeping the cost of capital constant. Assets refer to company’s possessions such as cash, inventory, equipments, and machinery among others (Riedl & Srinivastan, 2008). Firms invest in assets in order to facilitate the generation of profits. Firms can increase ROA by reducing the cost of assets. For instance, Amazon can reduce the amount of inventory or lease equipment rather than opting to purchase. Firms can also increase ROA by increasing their net income. Net income is the variation between the company’s sales and expenses. Therefore, Amazon can increase its net income by increasing its revenues or by reducing its expenses.

The ROE can be increased by increasing the company’s income or changing the firm’s capital structure. Since the ROE measures the relationship between income and stockholders’ equity, firms can increase their ROE by reducing their dependence on equity financing (Misch & Galantine, 2009). However, this option may have an adverse implication as switching to debt financing will increase the bankruptcy risk of the organization. Therefore, increasing income is the better option of increasing the ROA. Again, Amazon can increase income by either increasing revenues with a greater proportion than the increase in expenses or by reducing expenses with a greater proportion that the reduction in revenues.

News Events

            A significant news event that is likely to affect Amazon and eBay is Wal-Mart investment in e-commerce. Wal-Mart is the world’s leading retail organization having recorded revenues of over $ 400 billion on 2013. Wal-Mart has always operated as a brick-and-mortar retailer. Recently, the company took note of the growing online retail market. In 2014, Wal-Mart is set to invest over $1 billion in developing online retail systems, hire talent, and increase its online fulfillment centers (Dignan, 2014). Analysts project that Wal-Mart online sales will increase to $12.5 billion at the close of 2014. The company expects to invest an additional $1.5 billion on e-commerce in 2015. Wal-Mart’s decision to venture into the e-commerce retail industry is a threat to the profitability of Amazon and eBay. The entry of Wal-Mart is bound to reduce Amazon and eBay’s control over the e-commerce retail industry. This move is also likely to drive prices downwards given that Wal-Mart relies heavily on the cost leadership strategy to compete.

             Another news event that has an effect on Amazon and eBay’s operations is the rise of fraud in ecommerce and online payment industries. In recent years, online fraud has extended beyond payments to activities such as account takeovers. According to the ReportBuyer.com (2014), the fear of fraud is pushing away prospective shoppers from online sales platforms. A survey shows that more than a third of consumers who are yet to shop online state that the fear of data breach and lack of trust on online payment as the reasons for not using online shopping platforms.  The rise of payment and other forms of online fraud are likely to affect the profitability of Amazon and eBay. External events such as industry mergers and enactment of new regulation have a significant effect on the operation of companies. Therefore, investment analysts need to pay attention to such news events.

Companies Income

            The income statement presents the analysis with information concerning the company’s revenues, expenses, profits and losses (Misch & Galantine, 2009). It gives the analysts an indication of the amount of money that they firm generated in a given period. The first think that an analyst would look at when analyzing the income statement is the company’s revenue. This item gives the analysts an indication of the firm’s ability to generate revenues. According to the analysis, Amazon outperformed eBay in the last three years when it comes to firm’s capacity to generate revenues. In 2014, Amazon generated over $75 billion in revenues as compared to eBay’s $16 billion. The larger the value of revenue suggests that the firm has a better financial health. Companies that have high revenues have greater capacity of generating income.  

            Another item that the analyst would interest the analyst is the value of all expenses. Any business has expenses. The value of company expenses erodes the company’s profitability as the firm must use it revenues to cover the expenses (Riedl & Srinivastan, 2008). Therefore, an analyst would be happier to see a company with a small value of expenses. eBay has outperformed Amazon in this regard. In 2013, eBay had a total operating expense of $ 12,676 million as compared to Amazon’s 73,707 million. These figures show that Amazon has a problem in terms of managing its costs. A high cost of operating reduces the profitability of the firm.

            The final item that would interest the analyst is the value of the company’s net income. Net income is what remains after the company’s expenditures are deducted from the company’s revenues (Misch & Galantine, 2009). When it comes to income, eBay outperformed Amazon in all the three years. In 2013, eBay has a net income of $2,856 million as compared to Amazon’s 274 million. Therefore, the analysis connotes that Amazon is the lagging company. Despite recording substantial amounts in revenues, the company’s income is significantly lower than that of eBay. Investors and creditors are more interest in the company’s income than its revenues.

            Amazon can enhance its performance by establishing mechanisms for managing its costs. Amazon need to find a business model that reduces the cost of running the company (Riedl & Srinivastan, 2008). The organization may save cost by streamlining its supply system, adopting lean administrative processes and reducing asset costs.

Companies’ Balance Sheet

Vertical Analysis of Amazon's Balance Sheet
Period Ending		41,639	Percent
Assets
Current Assets
	Cash And Cash Equivalents	8,658,000	22%
	Short-Term Investments	3,789,000	9%
	Net Receivables	4,767,000	12%
	Inventory	7,411,000	18%
Total Current Assets		24,625,000	61%
Property Plant and Equipment		10,949,000	27%
Goodwill		2,655,000	7%
Other Assets		1,930,000	5%
Total Assets		40,159,000	100%
Liabilities
Current Liabilities
	Accounts Payable	21,821,000	54%
	Other Current Liabilities	1,159,000	3%
Total Current Liabilities		22,980,000	57%
Long-Term Debt		3,191,000	8%
Other Liabilities		4,242,000	11%
Total Liabilities		30,413,000	76%
Stockholders' Equity
Common Stock		5,000	0%
Retained Earnings		2,190,000	5%
Treasury Stock		(1,837,000)	-5%
Capital Surplus		9,573,000	24%
Other Stockholder Equity		(185,000)	0%
Total Stockholder Equity		9,746,000	24%
Net Tangible Assets		7,091,000	18%

            The balance sheet tells an analyst how much a company owes other and how much it owns (Misch & Galantine, 2009). Vertical analysis is one of the techniques for analyzing a firm’s balance sheet. This technique entails expressing all items in the balance sheet as a percentage of one item. In this case, all items in Amazon’s balance sheet have been expressed as a percentage of the value of total asset. The analysis illustrates that a momentous portion of Amazon’s assets comprises of short-term assets; hence, the company is in a good liquidity position. The analysis also shows that Amazon’s liabilities are 76% of the company asset value. This value is also a positive indication as having a value of assets that is greater than the value of liabilities increases the firm’s capacity to meet debt obligations. Amazon’s total equity is 24% of the company’s total asset. This figure suggests that Amazon finances a huge portion of its assets using debt. This trend is likely to increase the bankruptcy risk of the company.

Vertical Analysis of eBay's Balance Sheet
Period Ending		41,639	Percent
Assets
Current Assets
	Cash And Cash Equivalents	4,494,000	11%
	Short-Term Investments	4,531,000	11%
	Net Receivables	12,948,000	31%
	Other Current Assets	1,310,000	3%
Total Current Assets		23,283,000	56%
Long-Term Investments		4,971,000	12%
Property Plant and Equipment		2,760,000	7%
Goodwill		9,267,000	22%
Intangible Assets		941,000	2%
Other Assets		266,000	1%
Total Assets		41,488,000	100%
Liabilities
Current Liabilities
	Accounts Payable	3,215,000	8%
	Short/Current Long-Term Debt	9,266,000	22%
	Other Current Liabilities	158,000	0%
Total Current Liabilities		12,639,000	30%
Long-Term Debt		4,117,000	10%
Other Liabilities		244,000	1%
Deferred Long-Term Liability Charges		841,000	2%
Total Liabilities		17,841,000	43%
Stockholders' Equity
Common Stock		2,000	0%
Retained Earnings		18,854,000	45%
Treasury Stock		(9,396,000)	-23%
Capital Surplus		13,031,000	31%
Other Stockholder Equity		1,156,000	3%
Total Stockholder Equity		23,647,000	57%
Net Tangible Assets		13,439,000	32%

            eBay’s total current assets 53% of the total asset values, which is an indication that the majority of eBay’s assets are also short-term assets. Therefore, the firm is in a good position to settle short-term debt obligations. eBay liabilities are 43% of the company’s total asset value. The figure shows that eBay is in a better position to meet it liabilities than Amazon. The company stockholder’s equity amounts to 57% of the firm’s total asset value. This figure connotes that eBay finances most of its assets through equity; hence, the firm has low bankruptcy risk.

            The vertical analysis shows that Amazon is the lagging company. The company lags behind eBay in terms of liquidity and financial leverage. Amazon can enhance it liquidity position by reducing it account payable. The analysis shows that Amazon obtains a significant portion of its current assets on credit terms. The company should reduce the amount of items taken on credit terms or enhance it credit settlement policies (Riedl & Srinivastan, 2008). Amazon should also reduce its bankruptcy risk by changing its capital structure. The company should consider financing its investments using equity rather than debt sources.

Conclusion

The financial statement analysis shows that both eBay and Amazon are in good financial positions. However, eBay offers a better investment options as the firm had a superior financial performance in the past three years. Amazon can improve its financial performance by managing it business costs, reducing its reliance on debts, and improving its credit management policies.

References

Amazon (2014). Annual Report 2013. 

Dignan, L. (2014). Wal-Mart’s e-commerce sales revenues to hits $ 12.5 billion as investment continues. 

eBay Inc (2014). Annual Report 2013.

ReportBuyer.com (2014). Fraud in Global e-commerce and online payment. 

Riedl, E., & Srinivastan, S., (2008). Signaling firm performance through financial statement presentation. 

Sherry Roberts is the author of this paper. A senior editor at MeldaResearch.Com in urgent custom research papers. If you need a similar paper you can place your order from nursing school papers services.