Financial statement analysis of Amazon and Ebay
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Electronic commerce is an emerging industry born with the wide spread of internet. Goods and services can be supplied and traded through electronic ways. The Electronic commerce enables consumers to shop in 24 hours a day from any location, as long as he can access internet. The industry has grown rapidly in the United States, as well as many developing countries, such as, China, India, and so on. According to a calculation by the U.S. Department of Commerce, the total amount of e-commerce sales in the US during 2008 were around $133.6 billion, an increase of 4.6% on 2007, which is very huge. For China, the market value of electronic commerce has grown to about 38 million dollars by 2008 and is keeping a fast growth rate. The company of Electrical commerce industry makes profits through business models, for instance, B2B, C2C and B2C. Typical companies in this industry are eBay, Amazon, Exostar, Ariba and so on. In this report, we will focus on analyzing eBay and Amazon, which are the two largest companies in the Electronic commerce industry.
Both Amazon and eBay are listed in the NASDAQ, as leaders online business. Amazon opens a website to sell a lot of products to consumers; also, potential sellers are also allowed to make advertisement and sell their products to consumers through Amazon website. There are variety of products can be found on Amazon, like, CDs, coffee machines, books, as well as camera. The Amazon provides comments and ranks, which help potential buyers to sort and choose between products of the same category.
EBay is a little bit different from Amazon in that, eBay was founded by Pierre Omidyar's in his San Jose home in September of 1995, under the name Auction Web. From its early beginnings it was meant to be a marketplace for the sale of goods and services for a variety of interested individuals. It was incorporated in 1996, and has since grown to become the world's largest most financially successful online auction company. Both individuals and small business can make order online through eBay to sell millions of kinds of products. It is a world-wide platform, where everybody can make trade on it. On EBay, people can easier to sell any product they want and people can also look to purchase any products they are looking for. it is free for buyers to submit bids on eBay. EBay is different from its competitors, mainly, Amazon, through its online auction business model, where people can enjoy the excitement and competition in the process of shopping. Buyers don't know the cost of a product until he or she wins the bid and the bid has been posted. It has quick search engine and make a product receives world-wide media coverage and provide advertisements through website, TV, as well as email. eBay makes money by charging transaction fees from sellers. They also make income by online bill payment service and selling online advertisement spaces.
Amazon, as an online retailer, is different from eBay in that, it tries to create a easier shopping environment for people, for example, one-click online shopping. People are easier to get information about their interested products here. In addition, people can compare benefits, prices, as well as many other things in Amazon and help users to save money online. For example, for a buyer of books, Amazon offer free chapters or contents from the books for one to compare. So, Amazon differs itself from its competitors, mainly, ebay, through providing the same products with as lower price as possible and sells products that are more daily related. It is more like a fixed-price platform, which is different from eBay, where more auctions take place. Amazon makes profits through trough transaction fees charged from sellers, providing advertisement places, as well as its online payment system.
In this paper, I will use three kind of ratio to compare the two similar companies. They are liquidity ratio, leverage ratio and profitability ratio.
Based on the income statement, sales revenue in last year growed around 30%, at the same period, eBay increased only 2%, these data show that both Amazon and eBay has continued to grow in total revenue in 2009, from data, we can know generatly that both Amazon and eBay sucessful make money in last fiscal year.
I use current ratio to compare two companies liquidity, it shows eBay and Amazon are 2.5 and 1.5, from current ratio, both of them are able to pay off their liabilities. The ratio of eBay is much higher than Amazon in the last fiscal year, means it has more cash and cash equivalents to cover its short-term liability than Amazon has. On the other hand, it also shows that eBay might not invest enough to enlarge its assets such as labor and merge and acquisition. In eBay, there is no inventory, we can not use Quick ratio to compare between the two companies.
In leverage ratio, I choose debt ratio, eBay is 24.6% while Amazon is 54.8%. In this ratio, eBay is lower than Amazon which means eBay has less debt should to pay than Amazon. EBay's assets are financed more through equity than debt compare to Amazon, illustrated that eBay has a lower risk in operation. In addition, eBay may have more borrowing capacity and financial flexible to enlarge its business than Amazon.
Let's see some profitability ratio to have some in-depth discussion.
On ROA, eBay and Amazon are 7.63% and 8.61%, separately, Amazon earned net income more effectively than eBay, from the data. On ROE, eBay is 18.69% and Amazon is 22.44%, it shows management in Amazon is more effective in using investors' money than in eBay. Compare eBay and Amazon gross profit margin and net profit margin, which is 71.96%, 22.71% and27.37% , 3.7%, separately, they have significant different between two firms ,eBay is much higher than Amazon. it demonstrated that eBay earned a higher profit in each dollar from sales than Amazon. It may because of the selling format different, in eBay, sellers are very involved with eBay buyers due to sellers sell their commodities directly to potential buyers, they must be very interactive during the transaction. When they make a deal, sellers send their products directly to buyers, the website do not need to inventory any of goods in transaction, that's can save a lot of operating expenses. Moreover, eBay charge money to both sellers and buyers, two major revenue come from listing fees and final value fees. For eBay,they can earn money if any transaction or show products on eBay's website, they do not need to invest much to get this revenue and less maintains expenses.Compare to negotiate between sellers and buyers in eBay, Amazon buyers is easier to have an online shopping, everything on the website have fixed price,the same shipment and payment methods. More important, consumers do not need to pay any extra fee for shopping from Amazon. For Amazon, they are direct online sale while eBay is a online auction system, the different between the shopping style may be an reason why eBay has high profit margin.
Cash flow of eBay: the statement illustrated that operations (2908.1M) can generate enough cash to fund the company's investing activities(1149.4M), the difference was financed in borrowed money under credit agreement (100M)and other cash financing activities(945.6M) and cash and cash equibalents(810M) during the period.
Cash flow of Amazon: the cash flow statement demonstrated that operations(3292M)can paid to investing activities(2337M), and the rest of cash can pay for the long term debt and capital lease obligations (472M)and net cash used in financing activities (280M). Both eBay and Amazon are use their Operating cash flow and borrowed money to expand their firm.
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