PowerPoint presentation

Comparing Amazon and eBay

Derius Hopkins

Purdue University Global

FI499 Bachelor’s Capstone in Finance

Dr. Ernesto Escobedo

4-28-23

The companies to analyze will be eBay and Amazon based on the leverage ratio. These ratios show how liquid a company is and how much they depend on debt to fiancé their operations. These ratios are significant for an investor to decide on which company to invest in. The higher the leverage ratios, the higher the probable risks and possible company downturns. Equally, they can also signify higher returns. The leverage rations to be analyzed include:

The debt ratio indicates how much a company depends on debt to acquire assets or the proportion of borrowing in the company’s capital. A higher debt ratio means a higher interest payment hence interest payment risks. The debt ratio for eBay was 0.82 in 2022. This is an indication that the company has more assets than debts and liabilities. Amazon's debt ratio is 0.6 hence it has more assets than its debt (Macrotrends, 2023).

The next ratio is the debt-to-equity ratio which shows the relationship between total liability and equity. It generally shows the impacts of vendors and creditors on the company compared to shareholders. A higher ratio indicates that shareholders financed the company more and it can expand from equity capital rather than debt. As of 2022, the Debt to equity ratio for eBay was 1.50 generally, eBay generates considerable capital from both sources that is equity and debt financing (Stock Analysis, 2023). However, the equity debt capital is slightly higher than the equity capital. Amazon's debt-equity ratio in 2022 is 0.49 (Macrotrends, 2023).

The third ratio is the interest coverage ratio which shows how much the company's operating income goes to debt repayment. The eBay interest coverage ratio was 4.52, this is an indication that eBay can easily cover its debts without defaulting and having much impact on company capital and operations (Stock Analysis, 2023). Amazon's interest coverage ratio is 4.9 nearly the same level as eBay hence it can easily meet all its debt obligations (Macrotrends, 2023).

EBay vs Amazon ROE analysis

ROE can be interesting and analyzed from different ratios. In this case, I will use net profit margin and asset turnover. EBay's ROE is -24.7235, ROA is -6.1103 and Net profit margin is -12.96. This ROE is high due to the negative profit margin caused by higher expenses than revenue. It is also evident that the company is spending more capital on assets that do not generate more revenues and profits for the company as expected.

Amazon's ROE is -1.86, ROA is-0.59, and Net profit margin is -0.53 (WSJ, 2022). Amazon has a high net profit margin than eBay because the revenue covers all the expenses and the company is having a high-profit level. It is also investing capital into valuable assets that have a significant impact on the returns and profitability levels.

Investment decisions

Based on the ratios discussed, it is much more profitable to invest in Amazon in the short term and long term. First, the net profit margin is higher than that of eBay meaning an investment is likely to have a higher return in the short term and the return may be guaranteed. In eBay, the return may not be guaranteed due to decisions such as investment in assets that may be profitable in the long term but not in the short term. This means that it is possible to invest in eBay in the long term and hope the ROA ratios change in the future and the assets become profitable or generate more income for the company.

In the long term, shareholder confidence in the company can be a good strategy to invest in the company. This is evident by the debt-to-equity ratio. Both companies are good for investment however Amazon presents a more favorable option due to ratios. It has limited liability and it depends more on shareholder capital to run its investment and asset acquisition operations. This means that investing in Amazon has a higher potential for returns than that of eBay. Plus, the assets they invest in have higher returns as indicated by the higher ROA ratios than eBay. This also means that Amazon is less solvent and highly unlikely to announce any bankruptcy in the future regardless of economic issues. Their debt obligations as shown by the debt ratio are low and the company has an easy time servicing the debt-related liabilities as covered by the interest coverage ratios.

For the sake of diversification investment, there is a need to consider both companies to protect against market and economic risks. However, in such circumstances, eBay may likely present a higher risk, or its investment in risky assets could have positive impacts on return hence proving profitable. In the diversification process, more capital should be towards Amazon than eBay. The investor should consider eBay for long-term rather than short-term investments and consider Amazon for both long and short-term investment decisions.

References

Macrotrends. (2023). Amazon Financial Ratios for Analysis 2005-2019 | AMZN. Macrotrends.net. https://www.macrotrends.net/stocks/charts/AMZN/amazon/financial-ratios

Stock Analysis. (2023, April 15). eBay Inc. (EBAY) Financial Ratios and Metrics. Stock Analysis. https://stockanalysis.com/stocks/ebay/financials/ratios/

WSJ. (2022). AMZN | Amazon.com Inc. Financial Statements - WSJ. Www.wsj.com. https://www.wsj.com/market-data/quotes/AMZN/financials