Question

Refer to the ratio analysis example (listed below) and update these ratios for Amazon, Sears, and eBay based on their 2015, 2016, and 2017 annual reports. Review other applicable areas of the annual report, such as the footnotes and MD&A and tell us what the results mean in your own words. What do you think could explain the changes?

Defining Ratio Analysis (Continued) You will use ratio analysis throughout the rest of the course. For now, consider the following basic analysis to see how it can provide valuable information. You will be looking at the net profit margin (also known as the return on sales), the asset turnover, and the gross profit margin for Amazon, Sears, and eBay Net Profit Margin Net profit margin tells us how much of every sales dollar the company can keep after the expenses have been subtracted. The higher the number, the better This number varies considerably for different industries. Net margin is typically pretty low for retail but can be high for a manufacturer net profit marginnet income + sales What does Figure 3.1 tell you? Return on Sales Amazon.com 2009 Sears Holdings 2009 eBay 2009 ($ in millions) Net income Sales revenue Return on sales 2010 2008 2010 2008 2010 2008 1,152 34,204 3.4% 902 24,509 3.7% 645 19,166 3.4% 150 43,326 0.3% 297 44,043 0.7% 46,770 0.2% 1,801 9,156 19.7% 2389 8,727 27.4% 1779 8,541 20.8%) A/B Figure 3.1. Return on Sales Amazon's net profit margin, ranging from 3.4% to 3.7%, remained consistent over the three years. Investors like consistency and slight growth. Sears had a very low net profit margin of less than 1% in this time frame, and eBay shows the highest net profit margin numbers, but they jumped considerably over the three years You would want to investigate eBay's numbers to see if there is a logical reason for the jump. For example, the company could have sold a building at a huge gain, which would have increased net income in 2009, You wouldn't expect to see this type of gain on a regular basis, so the 27% would be more of the outlier. Industry benchmarks for these years would add another dimension of depth to this analysis.

Answer 1

If we look at figure 3.1,Amazon has created a constant return on sales which is good in a financial aspect

Sears Holdings eventhough they are having very high sales their return on sales is very low which could be due to several reason like this may be it's 1st year after incorporation or they may have relied more on debt financing which increases the liability

eBay on the other side eventhough having less sales compared to other two but has high return on sales especially in the year 2009 it may be because of sale of capital asset at a huge profit or investments etc overall eBay is performing better in return on sales compared to all the other 2

If we consider the figure 3.2

For Amazon the asset turnover has decreased from 2.3 to 1.8 mainly because they invested more in the assets in the year 2009 and 2010 with only slight increase in sales.They could have bought new offices or patent rights or investments for the same,which will only give the benifit after a few years

Sears is maintaining constant asset turnover with slight increase in sales which is good as of now

eBay on the other hand has less turnover than all the other 2 companies mainly because they are not able to convert investment in assets to sales.

In the figure 3.3

Amazon and Sears are showing good gross profit ratio with a upper hand to sears mainly due to higher sales for sears.ebay cannot be compared with them as it does not have any inventory

Flipkart and Myntra can be in the same situation like Amazon and sears.This might be the case for these two as well