This report provides an in-depth understanding of financial operations and analysis of eBay Inc. The financial analysis includes horizontal and vertical analyses and analyzing the outcome of financial ratios. The required figures for the horizontal and vertical ratio analyses are based upon the financial statement of the company of years 1999 and 2000. The financial performance of eBay has been noted to be successful as the company is providing online trading opportunities to a wider and diverse natured customer’s throughout the world. By following the financial statements of the company, it can be stated that eBay Inc. has shown better performance in the year of 2000 comparatively with the previous.
Horizontal Analysis
Income Statement
The analysis of the figures from 1999 and 2000 financial statements shows that the measure of sales revenue was significantly improved as the company has posted 91.98% growth. Also, the company has achieved a rise of 101.02% in its gross profit margin. The comparison of figures from the financial statements also help in understanding that the company has spent a great deal of amount for product development that has increased the measure of expenses by 124.83%. One of the interesting measures to note is the interests that company has after the acquisition of a company. The noted figure of minor interest is noted to be 1296% comparatively with the previous year. Overall company performance can be considered as highly profitable as the net profit of the company in a year has increased by 404.80%. However, some of the expenses of the company also showed considerable hike of 65.75%.
Balance Sheet
eBay Inc. short term investments have considerably increased 95.98%. Through the financial analysis, it comes to understand that there has been a 9% decline in the company’s cash. When compared with the overall figures of company’s assets it has been observed that the current assets of the company have increased by 45.1%. The analysis of the balance sheet of eBay Inc. shows that the company’s long term investment ratio in terms of assets has significantly declined by 42%. Overall, balance sheet analysis shows growth in the assets of the company by a significant 21.29%. It must be noted that the company’s accrued expenses have been raised by 89.23% leading to increase in the current liabilities by 47.72%. Talking about the liabilities, overall measure noted is 45.76% which is higher than the growth in the company’s which shows a comparative figure concerning company’s assets. Also, eBay Inc. has greatly deferred tax by 146% as analyzed by the balance sheet of the company.
Vertical Analysis
Income Statement
This analysis is based upon presenting all elements of the income statement as a proportion of sales revenue. With the help of the vertical analysis, it can be noted that the cost of sales has lowered from 25.6% in 1999 to 22.1% in 2000. The comparative measure of overall revenue has lowered to 22.1% in 2000 as compared to 25.6% in the year 1999. However, the gross profit of eBay Inc. has increased to 77.9% in 2000 as compared to 74.4% in 1999. As per analysis, it was also evaluated that major expense as proportion of sales by the company was for sales and marketing purpose i.e. 38.7% in 2000 as compared to 42.7% in 1999. Despite of the increase in the company’s business the company has been able to cut back on its expenses as suggested by the decline in overall operating expenses by 6.1% in 2000 in comparison with the level in 1999. The proportion of earnings before interest and taxes to revenues has increased significantly from just being 8.1% in 1999 to 18.1% in 2000. Finally, the company’s net profit margin is improved from just a mere 4.3% in 1999 to a healthy 11.2% in the year 2000.
Balance Sheet
For this analysis, each element of the balance sheet is calculated as a proportion of either total assets or total shareholders’ equity depending on the nature of the line item. The company’s current assets have increased from 48% in 1999 to 57.1% in 2000 as a proportion of total assets. These current assets are in the form of short term investments which are made in government and municipal securities and corporate bonds. Moreover, the company’s accounts receivables are also considerable proportion of total assets i.e. 83.82% in 2000. These credit sales are majorly made to credit card holders and therefore, such sales carry a lower default risk (eBay, 2000). Additionally, the company’s long term assets appear to have declined in value as they are only 42.9% in 2000 as compared to 52% in 1999. On the other side of the accounting equation, current liabilities are significant proportion of total shareholders’ equity and liabilities i.e. 81.5% in 2000 as compared to 80.4% in 1999. Also, retained earnings have improved from 2.7% in 1999 to 6.3% in 2000 which is a good sign for the company’s prospect for expansion and improvement in the business.
Financial Ratio Analysis
Based on the values obtained for key financial ratios the following discussion could be made regarding different aspects of evaluation.
Liquidity
Derived values of key performance indicators related to the liquidity position of the company it can be suggested that the company’s working capital has risen by an amount of $165,756.00 in one year’s period from 1999 to 2000. Another important measure is the current ratio for which the calculations show that its value has declined from 5 in 1999 to 4.91 in 2000. Ignoring the value of other assets from the ratio then the value of quick ratio (acid test) can be obtained which in the case of eBay has declined from 4.72 in 1999 to 4.53 in 2000. Finally, it can be suggested that accounts receivable turnover has remained low at a value of 8.32 in 2000 which has resulted in higher number of day sales in receivables which are 43.8 days.
Profitability
Three ratios have been used for assessing eBay’s profitability position. Therefore, the results show that the company’s profitability has not only improved in the year 2000 as a measure of net profit to total sales indicating a rise in the value of net profit margin from 4.26% in 1999 to 11.9% in 2000. Moreover, Return on Assets (ROA) and Return on Equity (ROE) have been recorded at 4.49% and 5.17% respectively in the year 2000.
Solvency
The debt ratio which is the proportion of total liabilities to total assets (Bernstein & Wild, 2000) has resulted in a percentage value of 14.26% in 2000 which is up from 11.93% in 1999. This is mainly due to the significant increase in the company’s borrowing. The company is also generating sufficient EBIT that is 10.37 times the interest payments required by the obligators (Chandra, 2006).
Recommendations
The overall financial position of eBay has remained promising. Although the company is operating in the technology sector and its future is susceptible due to the nature of the business yet the company appears to be performing very well. Its book value has improved with sharp increase in its revenues and earnings generating capabilities. The company has strong liquidity and profitability position however it needs to keep a watchful eye upon its borrowing and capability to pay its interest obligations.
References
Bernstein, L. A., & Wild, J. J. (2000). Analysis of financial statements. New York: McGraw-Hill Professional.
Chandra, D. B. (2006). Fundamentals of Financial Management. New Delhi: PHI Learning Pvt. Ltd.
eBay. (2000). eBay Annual Report. San Jose, California: eBay.