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Module Code
Module Title: Managerial Accounting and Academic Tutor: Mr Mark Fisher
Finance
Module Convener: Dr Melissa Willby

Submission Type (Delete One):

Individual

Word Count (if applicable):2999

Page Count:16

Executive Summary:
This report aims at financial analyses of Ebay Inc. for making investment decision in
company. Based on profitability analyses, liquidity determination, financial risk, etc.
report will recommend whether Ebay Inc. is good investment option or not. Financial
data of Ebay Inc. is compared two major competitors Amazon and home depot to
understand standards of industry and position of Ebay Inc. in industry. Report is year
over year analysis of financial statement of Ebay and other competitors for past five
years.

Goals and methods:

The Goal of this report is to do financial analysis of the company Ebay Inc, and
determine financial health for recommendation on investment in the organisation.
Ratio analyses, profitability, risk, leverage stock performance are part of report for
coming to conclusion on investment. Report use data for past five years from 2011 to
2015 for making all analyses.

Company Background:
Ebay Inc. is American based Multinational Corporation, which is into providing
consumer-to-consumer and business-to-consumer sales services via internet.
Company was founded on 3rd September 1995 by Pierre Omidyar. In start Ebay was
an auction website which was just part of hobby for its founder Pierre Omidyar. Ebay
Incs headquarter is based in San Jose, California.
Ebay has grown to become one of great success stories of dot com era. Ebays
mission statement is eBay's mission is to provide a global trading platform where
practically anyone can trade practically anything. Ebay is one of leading business in
ecommerce world. Its current active buyers are more than 164 million which shows
strong position in market. As stated in missing statement of Ebay, today its possible
to trade any item on its website and it has more than 1 billion live listing in either
fixed price offer or auction. Ebay as well provide Paypal for payment services for
easy and safe payment.
EBays main source of revenues are from listing, feature, advertising, as well as paid
fees on transactions which include both fees collected from the selling part and from
the usage of PayPal.

Competitors
Ebay face major competition from Amazon.com, Inc and home depot Inc.
Amazon.Com, Inc: Amazon founded in 1994 is and consumer electronics company and as well is an
American E-commerce company. Its headquarter is based at Seattle, Washington,
US. Amazon is one of leading player in E-commerce industry and from few pioneer
companies of dot com era.

The Home Depot Inc.: The Home Depot Inc., is a home improvement supplies superstore that sell tools,
construction products and services. The company is headquartered at the Atlanta
Store Support Centre in Cobb County, Georgia, in Greater Atlanta. Home Depo was
founded in 1978.

Financial Analyses
Profitability analyses:Our financial analyses will start will profitability analyses of Ebay and comparing it
with competitors Amazon and Home depot.
Net Profit Margin: - Net profit margin is one of commonly used ratio to know
profitability of organisation. Profitability ratios calculated below are based on annual
reports from 2011 to 2015 of Ebay, Amazon and Home depot.Net profit margin show
how much percentage profit company earned of each dollar of sales.
Net Profit Margin equation is as below
Net Profit Margin = 100 Net income Net revenues

Table 1:- Net Profit Margin

Company/Year
Ebay Inc.
Amazon.com Inc.
Home Depot Inc.

2015
2014
2013
2012
2011
20.08% 0.26% 17.80% 18.54% 27.72%
0.56% -0.27% 0.37% -0.06% 1.31%
7.63%

6.83%

6.07%

5.52%

4.91%

Year 2014 was not good year for Ebay, where net profit margin had deteriorated from
2013 but Ebay was able to cope up gap and as result it had improved in 2015 from
2014 exceeding 2013 level. For year 2011 was most profitable year compare to all
five years where it had almost 28% profit which show high profitability of company
and makes investment less risky.
When compared profitability of Ebay with other two companies above mentioned,
Ebay is at very strong position in terms of profitability. For year 2015 EBays NPM is
20.08% which much higher than Amazons NPM (0.56%) and Home depot (7.63%).

Return on Asset: -Return on asset is another method to measure profitability of

company, it indicate how much company is profitable relative to its total assets. ROA
is calculated by dividing net revenue of company by its total asset value. Higher ROA
represent company using its asset more efficient. ROA give picture about how
efficient management at using its asset to generate profits. ROA level for different
industry differ depending upon amount of assets need for running company, hence
its best to compare ROA within same industry.
Return on Asset equation is as below
Return on Asset = 100 Net Income Total Assets

Table 2: - Return on Asset

Company/Year
Ebay Inc.
Amazon.com

2015
9.70%
0.91%

2014
0.10%
-0.44%

Inc.
Home Depot Inc.

15.88% 13.29%

2013
2012
6.88% 7.04%
0.68% -0.12%
11.04%

2011
11.82%
2.50%

9.58%

8.32%

For Ebay as year 2014 was not good year hence it had drop in ROA compared to
2013 figures, however ROA was improved in 2015 and beat 2013 figures as well.
Ebay have greater ROA compared to Amazon with difference of almost 8.5% in year
2015, when both company are as same scale. This indicate Ebays management is
more efficient then Amazons management in use of assets to ear profit.
When compared to Home depo, Ebays ROA is lower than Home depots ROA.
Home depot is more efficient then Ebay in case of efficient use of resources.
However ebay is having bigger scale of operation compared to home depot. As
Home Depot is smaller company then ebay, its easy of home depot to use its
resources efficient.
Return on Equity: Return on equity is another tool used to measure profitability of company. Return on
equity (ROE) is the amount of net income returned as a percentage
of shareholders equity. Return on equity measures a corporation's profitability by

revealing how much profit a company generates with the money shareholders have
invested.
Return on Equity equation is as below
Return on Equity = 100 Net Income Shareholders Equity
Table 3: - Return on Equity
Company/Year
Ebay Inc.
Amazon.com
Inc.

2015
26.23%
4.45%

2014
2013
2012
0.23% 12.08% 12.50%
-2.24%
2.81% -0.48%

2011
18.01%
8.13%

Home Depot Inc.

68.06% 43.00% 25.51% 21.70%

17.67%

Expect year 2014 Ebay has return on equity above 10 % which indicate Ebays
efficiency to use money shareholders invest to generate profit year 2015 was good
year for company where company had net income $1,725 million which had given
company 26.23% of ROE which was improved compared to pervious year where
company had not so good year.

Chart 1:- Profitability Analyse of Ebay

Liquidity:

Liquidity is measure used to check companys capacity to meet its short term
liabilities. For an entity, such as a person or a company, accounting liquidity is a
measure of their ability to pay off debts as they come due, that is, to have access to
their money when they need it.
There are many measure to know liquidity of firm, we will analyses current ratio,
quick ratio and cash ratio.
Current Ratio: - Current ratio is a liquidity ratio which is measures organisations
capability to repay its short term obligation. Current ratio use current assets of a
company to measure liquidity position. Current ratio consider all current assets and
current liabilities hence its named as current ratio. It was known as working capital
ratio.
Current ratio give an idea of companys ability to pay back its liabilities with its
assets. Liquidity and current ratio have positive relation, higher current ratio higher is
liquidity. Ratio of 1 indicates position where companys current liability are exactly
equal to its current assets. Where ratio is under 1 it show organisation owe more
liabilities compared to its assets, which shows company is very illiquidity and is at
greater risk. Ratio above 1 shows organisation owe lesser liability compared to its
assets which reflects its better position in term of liquidity.
Equation of Current Ratio
Current Ratio = Current Assets/ Current liabilities

Table 4: - Current Ratio

Company/Year
Ebay Inc
Amazon.com
Inc.
Home Depot Inc.

2015 2014 2013 2012 2011

3.49 1.51 1.84 1.96 1.88
1.08 1.12 1.07 1.12 1.17
1.36

1.42

1.34

1.55

1.33

Ebay have hike in its current ratio for year 2015 compared to past 4 years, this was
due to drop in current liabilities. EBays current ratio is greater than 1 for all 5 year.
With look at current ratio its show Ebay is having sound liquidity position. When
compared to Amazon and Home Depot, Ebay is surely at better liquidity position.

Quick Ratio: - Quick Ratio is better indicator compared to current ratio for
measuring liquidity. The quick ratio measures the dollar amount of liquid
assets available for each dollar of current liabilities. Its indicates
Quick Ratio is used to measure short term obligation with its most liquid ratio. Quick ratio
exclude inventory from current assets.
Equation from Quick Ratio

Quick ratio = (current assets inventories) / current liabilities, or

= (cash and equivalents + marketable securities + accounts receivable) /
current liabilities

Table 5: - Quick Ratio

Company/Year
Ebay Inc.
Amazon.com
Inc.
Home Depot Inc.

2015 2014 2013 2012 2011

2.98 1.43 1.74 1.88 1.79
0.71 0.74 0.67 0.74 0.79
0.28

0.31

0.34

0.34

0.16

Ebay Inc. is very liquid company compared to its both competitors when analyse
quick ratio. When looking at quick and current ratio together other two companies
have big drop in their

quick ratio then compared to their current ratio , this show

both companies where too much dependent upon their inventory for liquidity.
Whereas for Ebay there is no much difference in quick ratio and current ratio this
shows Ebay hold less inventory and is at better liquidity position then Amazon and
Home depot.
Cash Ratio: - Cash ratio is another important ratio used for measuring firms short
term liquidity or its ability to pay its short term obligation. It consider current value of
marketable securities and cash for knowing liquidity of company. Also known as
the cash assets ratio. Cash asset ratio compares the dollar amount of highly liquid
assets (such as cash and marketable securities) for every one dollar of short-term
liabilities. Ideal ratios will be different for different industries and for different sizes of

corporations, and for many other reasons.

Equation for Cash Ratio

Cash Ratio = cash and cash equivalents / current liabilities

Table 6: - Cash Ratio

Company/Year
Ebay Inc
Amazon.com
Inc.
Home Depot Inc.

2015 2014 2013 2012 2011

2.71 0.58 0.71 0.86 0.88
0.58 0.62 0.54 0.60 0.64
0.15

0.18

0.22

0.21

0.05

Cash flow statement: Cash flow statement is financial statement presenting cash and cash equivalents
coming in and going out from organisation. It help to understand how operations of
an organisation are carried on, from where its money come in and where does
money spent. Cash flow has been divided into three parts i.e. cash from operation
activities, cash from financing activities and cash from investing activities.
The below table shows cash flow statement of EBay on quarterly basis:

Categories

6/30/2016

3/31/2016

12/31/2015

9/30/2015

Net Cash Provided by Operating Activities ($

million)

763

641

1,040.00

686

Net Cash Provided by Investing Activities ($

million)

-898

-1,075.00

-323

-867

Net Cash Provided by Financing Activities ($

million)

-537

1,222.00

-1,222.00

-2,354.00

Leverage: Financial leverage is degree to which company uses debt capital over equity capital
to finance capital. Higher the use of debt capital higher will be investment in
organisation risky.
Debt to Equity Ratio: Debt to equity ratio is a financial ratio which indicates relative amount of debt capital
and equity capital used to finance a companys assets. Its is most widely used to
calculate financial leverage of organisation.
Debt to equity ratio is calculated by dividing companys total liability by its
shareholders equity. Higher the value of ratio higher will be amount of debt capital
used to finance companies assets. Higher debt to equity ratio makes investment
more risky.
Equation for Debit to Equity Ratio

Debt - Equity Ratio = Total Liabilities / Shareholders'

Table 7: - Debt to equity Ratio
Year / Company Ebay Amazon Home
Depot
Dec 31, 2011
0.12
0.03
0.52
Dec 31, 2012
0.22
0.38
0.60
Dec 31, 2013
0.17
0.33
0.61
Dec 31, 2014
0.38
0.77
1.18
Dec 31, 2015
1.03
0.62
1.84

Ebay had increase in Debt-to-equity ratio in year 2015 compared to previous years,
this hike was due to reduction in other equity from $ 1,171,000 in 2014 to $526,000
in 2015. For rest of years Ebay mostly use to finance its assets from equity capital.
For year 2011 to 2014 Ebay had low debt to equity ratio compared to amazon and
Home Depot which make Ebay less risker their both other two companies.

Interest Coverage Ratio: The interest coverage ratio measures the ability of a company to pay the interest on
its outstanding debt. This ratio is used by investor to analyse how risky an
investment will be in a particular organisation. Higher interest coverage ratio
indicates organisations is in better position to pay its interest expenses, whereas low
ratio will indicate chances of organisation to default on its loan payment. EBIT is
used to calculate interest coverage ratio as interest expenses are to be paid before
payment of tax. Its also known as debt service ratio or debit service coverage ratio.
Equation for Interest coverage Ratio
Interest coverage ratio = Earnings before interest and Tax / Interest
expenses
Table 8: - Interest Coverage ratio
Company/Year
Ebay Inc
Amazon.com
Inc.
Home Depot Inc.

2015 2014 2013 2012

17.71 29.71 35.66 49.95
4.37
0.65
4.09
5.23
13.02 12.91 12.43

11.01

2011
157.21
15.18
10.95

Ebay have very strong interest coverage ratio, as high as 157.21 in year 2011. This
indicate Ebays strong capability to pay its interest expenses. When compared with
Amazon and home depot Ebay have much higher interest coverage ratio which
indicates ebays strong financial position in term of pay its obligations.

Share Price Analyses

At Initial public offer on 1998 ebays shares were traded at $ 1.97, which have gone
up to 31.39 as of August 2016. It show high growth witnessed by Ebay. However as
year 2014 was not good year for Ebay Inc, where company recorded lowest net
profit margin over past 5 year had resulted in drop of share prices. Organisation
have too much of up and down in share prices. As of 29 th August 2016 companys
share price 31.27.
Share price trend for Ebay

Table 9: - Market Price for Ebay shares

Year
Dec, 2011
Dec, 2012
Dec, 2013
Dec, 2014
Dec, 2015
August
2016

Share price
31.60
57.21
53.20
54.50
23.94
31.39

Price Earnings Ratio (PE ratio):The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that measures
its current share price relative to its per-share earnings. Its shows how much
investors are willing to pay for stock relative to its earnings. Its calculated by taking
current price of stock dividing by Earning per share.

A low P/E ratio is favourable for investor as he have to pay less to buy stock. For
example company A have P/E ratio of 6 and Company B have P/E ratio of 9, this
means an investor have to pay $6 for every $1 of company A whereas have to pay
$9 for every $1 of company B. So one have to invest less in company A then
company B for same amount of earnings.

Table 10: - P/E Ratio

Year/Company
Dec 31, 2011
Dec 31, 2012
Dec 31, 2013
Dec 31, 2014
Dec 31, 2015

eBay Inc.

Amazon.com
Inc.

12.59
28.43
24.12
1,433.64
16.36

129.42

601.22

463.73

Home Depot
Inc.
18.15
19.49
22.86
20.18
23.15

For year 2014 Ebay have high P/E ratio due to low net profit due to high tax amount
paid. When compared with Amazon and Home Depot, Ebay have lower P/E ratio,
which make Ebay better investment option.

Conclusion: Depending upon analyses of finical statement of Ebay and comparing with two
competitors I would recommend to buy shares of Ebay based on below points.
1) High profitability:- Ebay have net profit margin of almost 21% which indicates
high profitability of company
2) Sound liquidity position: - Ebays is at sound liquidity position
3) Balanced debt equity ratio

Bibliography
Available from http://www.investopedia.com/ accessed on 20th August 2016
Available

from

https://www.stock-analysis-on.net/NASDAQ/Company/eBay-Inc

accessed on 21st August 2016

Available from http://www.ebay.co.uk/gds/History-of-Ebay-/10000000008868464/g.html
accessed on 29th August 2016
Available from https://www.ebayinc.com accessed on 25t August 2016
Available from http://www.cs.brandeis.edu/~magnus/ief248a/eBay/history.html accessed
on 25th August2016
Available from http://www.nasdaq.com/symbol/ebay/financials?query=cashflow&data=quarterly accessed on 29th August 2016