Stable company's success depends on a clear and effective planning of its activities, the regular collection and storage of information on the state of the markets and its prospects and opportunities, allowing it to develop a strategy and tactics of the financial and economic activity. In this way the role of the analysis of financial and economic activity is huge. It allows to objectively assess the performance of the enterprise as a whole and its structural divisions, to determine the effect of various external and internal factors on the basic parameters of the enterprise, as well as to form the basis of its financial policy.
Analysis of the enterprise is very essential when it comes to assessing the financial state of the organizations with which the company enters into economic relations. Analysis of the company's financial condition plays an important role in the process of business valuation. The purpose of the analysis is the identification of trends in the company's development in the past, an assessment of its current situation, the rational prediction for its future development, and the definition of the extent of its business and financial risks. Actually there are a lot of methods and techniques of financial analysis, which are differentiated by various criteria. One of them is trend analysis. What does this term mean? And how is it carried out?
Trend analysisis one of the important tools for the analysis of the company’s monetary statements for the investment purposes. Investors use this type of analysis tool a lot in order to determine the financial position of their business [1]
In the first place, a trend analysis requires a business owner to calculate ratios over several years. Comparing previous year's ratios with the current year ratios, the entrepreneur can determine which areas/fields of his/her business has improved or is going to fail. An entrepreneur, who is planning to establish a business, would use his/her three annualbalance sheets andincome statements to calculate three sets of ratios — one set of ratios for each forecasted business year. This will show to investors and the entrepreneur whether the planned business venture intends to improve in performance or decline in performance during the three year forecasted period.
So, in order to carry out the Trend Analysis it's needed to count several main ratios.
Firstly, Current ratio should be calculated, it is a market profitability ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. Then we calculate the Quick ratio, which measures whether a company has the ability to use its current assets (without selling inventory) to pay its short-term creditors. (Investors like to see a high quick ratio, since it shows the venture does not have to rely heavily on selling its inventory in order to pay its short-term debt).
Afterwards, it's necessary to find Debt-ratio and Debt-to-equity ratio. The debt ratio measures the extent to which borrowed money has been used to finance a company's operation. Investors like to see a low debt ratio, since it shows a company is relying less on creditors (such as banks, suppliers, etc) to finance its operation.The debt-to-equity ratio compares the investments made by creditors to the investments made by the company's owners or shareholders. Investors like to see a low debt-to-equity ratio, since it indicates owner's investments into the company are higher than creditor's investments into the company.
Also the Return on Total assets can be found, as it measures how well a company is using its assets to generate after tax profits (net income after taxes). Investors like to see a high return on total assets since it indicates a company is using its assets efficiently to generate after tax profits. And the last but not least is Return on equity, which measures how well a company is using its owner's investments to generate after tax profits (net income after taxes).
As a matter of fact, there are more other ratios that can be calculated in order to carry out the Trend Analysis, but undoubtedly, the mentioned ratios will also show the company's performance.
In order to understand better how it works it's necessary to carry out trend analysis, particularly trend analysis for eBay Inc. and for Amazon for 2013–2015 years and compare the performance of one company through 3 years and look at its trend. As it has already been mentioned before Trend Analysis requires the calculations of several important ratios. To fulfill this task it is important to use and analyze the data from Balance sheet and an Income statement First of all, eBay's Balance sheet and income statement are needed to be considered.
Secondly, Income statement of eBay for 2013–2015 should be taken into account.
So, now using this detailed information we can calculate the necessary ratios. To be more precise, we will calculate the following ratios: Current ratio, Quick ratio, Inventory Turnover, Debt ratio, Debt-to-Equity Ratio, Net Profit Margin, Return on Total Assets.
First of all, let’s look at the short background of eBay. What is eBay? As it is described on the official website, «eBay is the world's online marketplace; a place for buyers and sellers to come together and buy or sell almost anything!» The company had quite a history of developing.
1995 — The online auction website was founded as AuctionWeb in San Jose, California, on September 3, 1995, by French-born Iranian computer programmer Pierre Omidyar.
1996 — eBay hires its first employee. In November 1996, eBay entered into its first third-party licensing deal, with a company called Electronic Travel Auction to use SmartMarket Technology to put on the market plane tickets and other travel products.
1997 — January 1997 the site hosted 2,000,000 auctions, compared with 250,000 during the whole of the preceding year. The company officially changed the name of its service from AuctionWeb to eBay in September 1997 when it received $6.7m from venture capital firm Benchmark Capital.
1998 — March 1998 the company has 30 employees, half a million users and revenues of $4.7m in the United States. eBay went floated on the stock exchange on September 21, 1998 making its founders billionaires. eBay's target share price of $18 but the price went to $53.50 on the first day of trading.
2002 — In February 2002, the company purchased IBazar, a similar European auction web site founded in 1995 and then bought PayPal on October 14, 2002.
The company has shown a great example of successful business since then. As for the modern history, eBay and its major payment system PayPal split up in 2015. Since July 2015 the shares of the two companies are listed separately [2].
So, the necessary calculations are below, the following calculations will use the same formulas.
Current ratio=Current assets/Current Liabilities=7904000/2263000=3,49 %
Quick ratio=(Current assets — inventories) / Current liabilities=(7904000–0)/2263000=3,49 %
Debt ratio=Total debt/total assets=0,1744
Debt-to-Equity ratio=Total Liabilities / Shareholders' Equity=1,70453163
Return on Total Assets=Net income after taxes/total assets==0,10945
Return on Equity=Net income after taxes/total equity=0,29608
So, the following conclusion can be made that for example, current ratio of 2013 indicates not so good results, it shows that the company did not have enough ability to use its current assets (resources) to pay for its short-term debt (current liabilities).
Now, to put it in a nutshell, calculated in Excel numbers are in a table and comparable for three years.
Table 1
|
2015 |
2014 |
2013 |
|
|
Current Ratio |
3,492709 |
1,513376305 |
1,842155 |
|
Quick Ratio |
3,492709 |
1,513376305 |
1,842155 |
|
Debt Ratio |
0,1744 |
0,383 |
0,031 |
|
Debt-to-Equity Ratio |
1,704532 |
1,2672561 |
0,754472 |
|
Net Profit Margin |
|||
|
Return on Total Assets |
0,10945 |
-0,00001917 |
0,04982 |
|
Return on Equity |
0,29608 |
-0,000043 |
0,08741 |
As it is seen from the table some indicators increased through the years, for example, the Current ratios and Quick ratios increased from 2013 to 2015. It shows that the ability of the company to pay short–term debts to creditors increased and situation in 2015 became better, moreover, also it is seen that they are going to increase in 2016. Probably, it is happening because the sphere of information technologies, and specifically mobile apps are becoming more and more popular, therefore, eBay Inc. is likely going to earn more profit.
Speaking about Debt ratios and debt–to-equity ratio, which measure if borrowed money has been used to finance a company's operation or not, they fluctuate through the years, nevertheless, they were increased from 2013 to 2015.
The Return on Total Assets ratio measures how well a company is using its assets to generate after tax profits. As you can see, the company's 2015 return on total assets is 0,10945 or 10,945 %. This means, for every one dollar ($1.00) spent on purchasing assets, the company generated approximately 11 cents in after tax profits. But in 2014 some indicators (Current, Quick ratios) fell down, probably it’s connected with the scandal of massive theft by hackers of user data, which luckily was solved and the situation was stabilized [3].
The next company that is being assessed is Amazon. It is an American company, the world's largest in terms of turnover among selling goods and services via the Internet and one of the first online services focused on sale of real goods of mass demand Amazon.com company was founded in 1994 by American entrepreneur Jeff Bezos, and in 1995, the site was launched. The company was named after the Amazon River, the deepest in the world. Initially, the site sold only books. In June 1998, the store began selling music CDs, and in November of the same year — a video production. Later in the range appeared MP3-recording, software, video games, electronics, clothing, furniture, food and toys [4].
Now that the purpose of the company is clear it is possible to carry out the calculations for Amazon for the period of 2013–2015.
The results of calculated ratios are below:
Table 2
|
2013 |
2014 |
2015 |
|
|
Current Ratio |
1,07596 |
1,11527644 |
1,07158399 |
|
Quick Ratio |
-0,19457 |
0,8198228 |
0,749 |
|
Inventory Turnover |
|||
|
Debt Ratio |
1,2583277 |
1,6899318 |
0,7945915 |
|
Debt-to-Equity Ratio |
0,388972 |
0,407448096 |
0,312 |
|
Return on Total Assets |
0,944319 |
-0,3066 |
859 |
So, through the years most ratios fluctuate, it shows the unstable situation in the company in this period of time. The indicator of debt ratio increased in 2015 in comparison with 2013, it became less, that means that less company's assets are financed by creditors. However, Financial Director of the company Brian Olsavsky said that the company will continue investing in areas that is more interested in the consumers, while not reducing its focus from the problems associated with the cost reduction within the company [5]. Quick ratio dramatically increased in 2015, probably it happened thanks to the sales increase of this year.
So, now it’s interesting to compare these companies, which both operate in the field of internet trade. Through the years the indicators of Current ratio of eBay initially decreased but then increased dramatically and of Amazon there is the opposite situation, it firstly increased in 2014, but then decreased to 1,08 in 2015. Unlike eBay, Amazon improved much its measures for 3 years, for example Debt Ratios became less, therefore, the company is paying off its creditors and thus, owes less money to them. This is an indication that the company is becoming stronger, and closer to «self sufficiency». And in eBay this ratio increased from 2014 to 2015, so it means that the company depends much on its creditors. Speaking about Return on Total assets, it also better performed in Amazon than in eBay, so according to calculated indicators, we can conclude that the situation in Amazon is better that in eBay and it is better cope with unstable economic situation in the world. Likely, eBay suffered much from the scandal in 2014 and it coursed the worse performance, at the same time Amazon increased its sales during this year, which made its financial indicators raise.
So, going back to trend analysis in general, it can be concluded, that this type of analysis is rather complex, but nevertheless it shows company’s economic performance, which, in turn, will be interesting for potential investors.
References:
- Financial Portal «Accounting Couch», article «What is Trend Analysis?» URL:http://www.accountingcoach.com/blog/trend-analysis
- Official website of eBay URL: https://www.ebayinc.com/our-company/
- Article «A comparative look at the valuation of Amazon, eBay and Alibaba» Forbes journal // URL: http://www.forbes.com/sites/greatspeculations/2015/10/09/a-comparative-look-at-the-valuation-of-amazon-alibaba-and-ebay/2/#4fc3b1b4892b
- Official website of Amazon URL: http://www.amazon.com/
- Analytical Portal- «Utmagazine», article «Amazon улучшилпоказатели» URL:http://utmagazine.ru/posts/14446-amazon-uluchshil-finansovye-pokazateli
