A Horizontal Analysis For 2000 and A Vertical Analysis for the Years 1999 and 2000 for eBay, Inc
From the trading profit and loss account, it is clear that the firm was able to record a sharp increase in its profitability from just 9000 to over 48000 within the 2000 financial year. Although the revenues increased significantly, the costs also remained very high with a more than 176% increment, and this was quite high for a company that was seeking to strengthen its competitiveness. The balance sheet clearly shows a sharp increase in the current assets from 465000 to 675000, which was quite massive, and this can be attributed to improvement in the working levels of the firm. The company, however, managed to record a low increase in fixed assets. The high levels of increase in current assets show that the business has greatly improved its liquidity and the ability to meet its short-term financial obligations. The low levels of fixed assets led to a low increase in total assets, and this shows that the company is maintaining large sums of fixed assets that are idle.
On a negative, note the firm’s liabilities during the period increased with both long term and short-term liabilities increasing significantly. The management must therefore look for ways of containing the liabilities, as they will weaken the liquidity and solvency of the business.
Balance sheet analysis shows that the current assets are higher than the fixed assets, and this is a clear indication that the firm is operating with high levels of working capital, which will definitely strengthen the firm’s liquidity. The current assets stood at 57.2% compared to fixed assets at 48.2% in 2000, but in the year 1999, the current assets stood at 47.9% against the fixed assets at 52.1%. The general trend, therefore, is that the firm has strengthened its current asset position within the two years. On the other side of the balance sheet, the short-term and long-term liabilities both increased by a smaller margin, and this led to an overall increase in total liabilities from 11.9% to 14.3% from 1999 to 2000. The increasing trend in the liabilities led to a decrease in the owner’s equity from 88% to 85.7% in 1999 and 2000, respectively. The business, however, has a strong position of owners equity at more than 80% against the liabilities, which stands at an average of 14%. This is quite impressive for the firm as the strong equity base will protect the firm’s liquidity and solvency. The business is therefore operating with high levels of equity compared to top debt.
From the income statement, it is quite evident that the firm operating expenses take the largest share of the sales revenues at 102% and 89% from 1999 to 2000 respectively and hence the firm is not able to generate enough revenues to cover the costs. It’s also possible that the firm operates at high costs. Hence, there is a need for cost control measures to protect the firm’s revenues. The interest income greatly improved to about 23% in 2000 from 10% in 1999. The net income accounts for only 14% of sales in 2000, which is an improvement from 5% recorded in 1999.
A Ratio Analysis for the Years 1999 and 2000 for eBay, Inc
The selected ratios above demonstrate the mixed fortunes that the company has had over the period and as such it has been able to achieve better performance in 2000 compared to 1999. Return on net sales was higher in 2000 at 14% compared to 6% in 1999. Both current ratio and acid test ratios were quite high at 4 in 2000 and 5 in 1999, showing that the firm is financially sound and able to meet its short-term obligations. The quick ratio is at 1.4 for 2000 and 2 for 1999, which is very favorable for the company. It’s, however, worth noting that the firm’s liquidity is weakening due to a large number of liabilities, and this must be addressed. The figures for working capital improved greatly from 372000 to 538000 from 1999 to 2000, and hence the firm’s liquidity position has strengthened.
The debt ratio is quite low owing to the large proportion of the firm’s finances being in the form of equity. At a debt ratio of 0.023 and 0.026, the company is very strong and cannot be subjected to any solvency risks from creditors. It’s, however, worth noting that the strong equity position means that the shareholders will have a lot of expectations from the firm, and this must be translated into its ability to pay dividends. It must therefore maintain a high level of growth.
The Financial Health of eBay Inc
The information from the ratio and the vertical and horizontal analysis clearly shows that the company is very sound, especially in the short term as the firm has a very strong current assets position, and this means that it can meet its short-term obligations. The strong current asset base is, however, backed by a high level of short-term and long-term liabilities, which could affect the future growth of the company necessary to address the increasing levels of liabilities. The horizontal analysis has shown a sharp increase in current assets, profitability and owners equity within the two years, but this has also been followed by sharp increases in liabilities and operating expenses. This means that the firm’s current assets will still remain to be under pressure from the increased operating expenses and liabilities.
The company is, however, strong given its high level of equity financing, which leads to enough working capital for short-term operations. The firm also has a strong debt ratio which protects it’s from any long-term financial risk, and hence it will be able to remain viable in both the short term and long term.
From the vertical analysis, the assets side of the balance sheet has shown a strong current asset position compared to fixed assets, and this is quite healthy for the firm as it is able to meet its short-term revenue expenditure using the current assets. The low percentage of fixed assets is a major booster, and the company will not have too many idle resources in the form of fixed assets. It will therefore be able to operate efficiently.
The firm, however, needs to efficiently utilize the enormous equity provided by the shareholders as well as the current assets as the returns are still low at only 4% and 5%, respectively. The returns on sales are quite impressive at 14%, and hence revenues will be the major driver of growth in the future.
Due to the strong liquidity and solvency position of the firm, it’s quite clear that it can continue to be competitive in the short run and also in the long run. But there is a need for efficiency in the management of working capital to achieve maximum benefits. The returns on equity also remain low, and hence there is a need for better strategies to manage the owner’s equity. The firm is, however strong financially.
References
Bradshaw, M. T. (2004). eBay, Inc.: Stock option plans (A), Harvard Business School Accounting Cases. Boston: Harvard Business School Publishing.
Financial Accounting Standards Board. (2011) “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123”. Web.
Horngren, C. T., & Harrison, W. T. (2007), Accounting (7th edition), Upper Saddle River, NJ: Pearson Prentice Hall.
Wright, S. and Wright A (1997), “The Effect of Industry Experience on Hypothesis Generation and Audit Planning Decisions.” Behavioral Research in Accounting 9: 273-294