Question

Questions:

1. Compute the following ratios for PAYPAL HOLDINGS INC:

CURRENT RATIO

QUICK RATIO

CASH RATIO

TOTAL DEBT RATIO

DEBT EQUITY RATIO

TIMES INTEREST EARNED RATIO

CASH COVERAGE RATIO

INVENTORY TURNOVER

DAYS SALES IN INVENTORY

RECEIVABLES TURNOVER

DAYS SALES IN RECEIVABLES

TOTAL ASSET TURNOVER

CAPITAL INTENSITY

PROFIT MARGIN

RETURN ON ASSETS

RETURN ON EQUITY

PRICE EARNINGS RATIO

MARKET TO BOOK RATIO

2. Decompose the ROE using the extended Du-Pont Analysis.

Answer 1

1.

As of December 31,
	2017				2016
	(In millions, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	2,883			$	1,590
Short-term investments	2,812				3,385
Accounts receivable, net	283				214
Loans and interest receivable, net of allowances of $129 in 2017 and $339 in 2016	1,314				5,348
Loans and interest receivable, held for sale	6,398				—
Funds receivable and customer accounts	18,242				14,363
Prepaid expenses and other current assets	713				833
Total current assets	32,645				25,733
Long-term investments	1,961				1,539
Property and equipment, net	1,528				1,482
Goodwill	4,339				4,059
Intangible assets, net	168				211
Other assets	133				79
Total assets	$	40,774			$	33,103
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	257			$	192
Notes payable	1,000				—
Funds payable and amounts due to customers	19,742				15,163
Accrued expenses and other current liabilities	1,781				1,459
Income taxes payable	83				64
Total current liabilities	22,863				16,878
Deferred tax liability and other long-term liabilities	1,917				1,513
Total liabilities	24,780				18,391
Commitments and contingencies (Note 13)
Equity:
Common stock, $0.0001 par value; 4,000 shares authorized; 1,200 and 1,207 shares outstanding as of December 31, 2017 and 2016, respectively	—				—
Treasury stock at cost, 47 and 27 shares as of December 31, 2017 and 2016, respectively	(2,001		)		(995		)
Additional paid-in-capital	14,314				13,579
Retained earnings	3,823				2,069
Accumulated other comprehensive income (loss)	(142		)		59
Total equity	15,994				14,712
Total liabilities and equity	$	40,774			$	33,103

CONSOLIDATED STATEMENTS OF INCOME

												Year Ended December 31,
												2017					2016				2015
												(In millions, except for per share amounts)
Net revenues												$	13,094				$	10,842			$	9,248
Operating expenses:
Transaction expense												4,419					3,346				2,610
Transaction and loan losses												1,011					1,088				809
Customer support and operations												1,364					1,267				1,110
Sales and marketing												1,128					969				937
Product development												953					834				792
General and administrative												1,155					1,028				873
Depreciation and amortization												805					724				608
Restructuring and other charges												132					—				48
Total operating expenses												10,967					9,256				7,787
Operating income												2,127					1,586				1,461
Other income (expense), net												73					45				27
Income before income taxes												2,200					1,631				1,488
Income tax expense												405					230				260
Net income												$	1,795				$	1,401			$	1,228
Net income per share:
Basic												$	1.49				$	1.16			$	1.00
Diluted												$	1.47				$	1.15			$	1.00
Weighted average shares:
Basic												1,203					1,210				1,222
Diluted												1,221					1,218				1,229
	Shares Repurchased			Average Price Paid per Share (1)				Value of Shares Repurchased				Remaining Amount Authorized for Repurchases
	(In millions, except per share amounts)
Period ended October 31, 2017	—			—				—				$		5,299
Period ended November 30, 2017	—			—				—				$		5,299
Period ended December 31, 2017	4.0			$	74.30			$	300			$		4,999
	4.0							$	300

Current Ratio = Current Assets / Current Liabilities = 32645 / 22863 = 1.428

Quick Ratio = (Current Assets – Inventory) / Current Liabilities = (32645- 0) / 22863 = 1.428

Cash Ratio = Cash / Current Liabilities = 2883 / 22863 = 0.126

Total Debt Ratio = Total Debt / Total Assets = 24780 / 40774 = 0.607

Debt Equity Ratio = Total Debt / Total Equity = 24780 / 15994 = 1.549

Times Interest Earned Ratio = Earnings Before Interest & Tax / Interest Payments   = 2127 / 0 = Not Applicable

Cash Coverage Ratio = (Earnings Before Interest & Tax + Depreciation) / Interest Payments = (2127+805) / 0 = Not Applicable

Inventory Turnover = Cost of Goods Sold / Average Inventory   = 0    [As, COGS is 0]

Days Sales In Inventory = 365 / Inventory Turnover = Not Applicable

Receivables Turnover = Sales / Average Receivables = 13094 / {(283+214)/2} = 52.69

[Average Receivables = (Ending Receivables + Opening Receivables) / 2]

Days Sales In Receivables = 365 / Receivables Turnover = 365 / 52.69 = 6.927

Total Asset Turnover = Sales / Total Assets = 13094 / 40774 = 0.321

Capital Intensity = Total Assets / Sales = 40774 / 13094 = 3.114

Profit Margin = Net income / Sales = 1795 / 13094 = 0.137

Return On Assets = Net income / Total Assets = 1795 / 40774 = 0.044

Return On Equity = Net income/ Total Equity = 1795 / 15994 = 0.112

Price Earnings Ratio = Price per Share / Earning per share = 74.30 / 1.49 = 49.86

Market To Book Ratio = Market value per share / Book value per share = 74.30/ (15994/1203)   = 5.589

[Book value per share = Total Equity / No. of shares outstanding]

2. Du-Pont Analysis:

Return On Equity (ROE) = Net income/ Total Equity = (Net income / Sales) x (Sales / Total Assets) x (Total Assets / Total Equity)

= (1795 / 13094) x (13094 / 40774) x (40774 /15994) = 0.112