Business Finance - Accounting assignment

Nova Southeastern University

H. Wayne Huizenga College of Business and Entrepreneurship

Assignment for Course: MGT-5170: Applying Strategy for Managers

Submitted to: Dr. Jason Cavich

Submitted by:

Date of Submission: April 23, 2023

Title of Assignment: Uber Case

CERTIFICATION OF AUTHORSHIP: I certify that I am the author of this paper and that any assistance I received in its preparation is fully acknowledged and disclosed in the paper. I have also cited any sources from which I used data, ideas of words, whether quoted directly or paraphrased. I also certify that this paper was prepared by me specifically for this course.

Student’s Signatures:

******************************************************************************

Instructor’s Grade on Assignment:

Instructor’s Comments:

Executive Summary

Problem Statement

Uber’s main problem is the ongoing debate and legal issues around how its drivers are classed and whether they should be treated as workers or independent contractors, especially in California with the passage of AB5.

Analysis

· With negative net profit margins and a negative return on assets in 2017 and 2019 and positive net profit margins and return on assets in 2018, Uber's profitability has fluctuated over the past three years.

· Although Uber has high liquidity ratios, it has become more dependent on debt financing and has not produced enough operating revenue to meet its interest costs.

· Uber's advantages include a substantial market share in the US, good liquidity ratios, and efficient receivables management. Weaknesses are negative net profit margins, large debt-to-equity ratios, and a low return on assets.

· Threats to Uber include ongoing legal challenges over driver classification and cyberattacks, while opportunities include reentering the Southeast Asian market and expanding its food delivery services to include restaurants.

Alternatives

· Enter new markets to increase worldwide reach.

· By starting a food delivery business or providing logistics and courier services, Uber can go beyond only providing ride-hailing services.

· Spend money on R&D to create new technology, such as driverless vehicles or sustainable transportation solutions, and focus on innovation.

Recommendation

The recommended strategy for Uber is to diversify its offerings beyond ride-hailing by branching into new industries like food delivery, logistics, and courier services, to reduce its reliance on the ride-hailing sector and discover new revenue streams.

Implementation

Implementation of the recommended strategy will require investment in research and development, marketing, and customer support for the additional services.

Problem Statement

Uber’s main problem is the ongoing debate and legal issues around how its drivers are classed and whether they should be treated as workers or independent contractors, especially in California with the passage of AB5.

Financial Analysis

According to the examined financial ratios, Uber’s profitability has changed during the last three years. In 2019 and 2017, the company’s net income margin, which measures the profit it makes for every dollar of revenue, was negative, but in 2018, it was positive. The return on assets (ROA) was likewise negative in 2019 and 2017, demonstrating that the business was not using its resources to produce profits. However, the company had a positive return on assets in 2018. These variances in profitability are probably brought on by the company’s significant expenditure on growing operations and advancing technologies.

Uber is in a good situation in terms of liquidity. The company has regularly had a current ratio above 1, indicating that it has adequate current assets to cover its current obligations and its capacity to satisfy its short-term liabilities. Furthermore, the business has increased its working capital, or the sum of money accessible for regular business activities. This demonstrates how well the company is handling its current assets and liabilities. Uber’s leverage ratios, on the other hand, have been inconsistent. Over the previous three years, the company’s reliance on debt financing has increased, as indicated by the debt-to-equity ratio. This suggests that the business depends more on debt financing to fund its operations, which raises the possibility of financial difficulty if it cannot produce enough cash flow to pay off its debts.

The company’s ability to pay interest on its debt has been measured by the times’ interest earned ratio, which has been negative for the last three years. This shows the company is not producing enough operational revenue to cover its interest costs. Uber has maintained a high accounts receivable turnover ratio, showing that the company successfully obtains client payments. The average collection time has constantly been 30 days, which indicates effective receivables management.

Analyzing the Internal Environment

Strengths

· Large market share: Uber has a market share of 74% in the US, while Lyft, its primary competitor, holds 26% of the market (Thorbecke, 2023). Uber’s market share has been increasing while Lyft has been losing them. In 2020, Uber held 62% of the market share, with the remaining 38% held by Lyft (Thorbecke, 2023).

· High liquidity ratios: Uber’s high liquidity ratios is a prominent strength for the company. The company has regularly maintained a current ratio above 1, indicating that it has adequate current assets to cover its current liabilities. Uber’s working capital has increased over the years, demonstrating that it has sufficient current assets to meet its immediate obligations.

Weaknesses

· Negative Net Profit Margin: Uber has repeatedly reported negative net profit margins, with 2019’s lowest performance at –60.13%. This suggests that the business’s expenses exceed its revenue. The business has made significant investments in growth and expansion, which has affected its profitability.

· High Debt-to-Equity Ratio: High Debt-to-Equity Ratio: Over the past three years, Uber’s debt-to-equity ratio has risen, reaching 1.19 in 2019. A high debt-to-equity ratio shows that a business significantly relies on borrowing money to fund its operations, which raises financial risk.

· Negative Return on Assets (ROA): Uber has reported negative ROA in two of the three years examined, with the worst performance coming in 2019 at -26.78%. This suggests that the business is not making enough money from its assets.

Analyzing the External Environment

Opportunities

· Reentering the South East Asian market: In 2018, Uber ceased its operations in several South East Asian countries and sold much of its business to competitors there (Goel, 2018). With less competition and a monopoly in the ride-hailing business due to Uber’s leaving, customers are experiencing subpar service and higher costs (Goel, 2018). Due to its enormous population, expanding middle class, rising use of smartphones, and adoption of electronic payment systems, the Southeast Asian market represents a significant opportunity for Uber.

· Uber Eats had a market share of 23% in March 2023 (Perri, 2023). Expanding their meal delivery services to include their restaurants may present a chance for forward integration. Uber might connect their delivery services with the restaurant’s ordering system and provide clients with a seamless dining experience by acquiring or collaborating with well-known restaurant chains.

Threats

· The ongoing legal disputes with authorities and drivers in several locations, which contest the company’s designation of its drivers as independent contractors instead of employees, pose one of the most significant risks to the business. The UK Supreme Court decision that Uber drivers should be treated as “workers” with the right to benefits like minimum wage and holiday pay is a significant setback for the corporation (Reuters, 2021). The California appeals court recently voted in favor of ride-hailing companies (Rana, 2023), but Uber remains vulnerable to lawsuits and frequent protests.

· Uber is susceptible to cyberattacks affecting its users’ privacy and data. In 2022, the company suffered a major cyber attack, a breach on its computer network that might have exposed many of its internal systems (Conger & Roose, 2022). A perpetrator shared screenshots of email, cloud storage, and code repositories. Uber may have given the hacker complete access throughout the attack. As a result, several internal communications and engineering systems were taken offline as the firm looked into the scope of the incident (Conger & Roose, 2022).

Strategy Alternatives

1. International competition: Uber’s strategy is to expand globally by entering new markets. Although the business is currently well-established in many nations, there are still a lot of undiscovered places where Uber may extend its offerings. Uber may improve its market share and revenue sources by going global, which will lessen its reliance on a small number of markets.

2. Strategy for diversification: Uber may want to expand beyond providing ride-hailing services. The business could, for instance, enter the food delivery industry or offer logistics and courier services. Uber will be able to investigate new revenue streams thanks to this diversification approach and lessen its reliance on the ride-hailing industry, which is dealing with escalating competition and regulatory issues.

3. Concentrate on innovation: Uber may keep spending money on R&D to develop new technology to enhance its offerings and give customers a better experience. This can involve creating autonomous vehicles or collaborating with other businesses to offer sustainable, eco-friendly transportation options.

Recommended Strategy

I recommend that Uber concentrates on diversification to lessen its reliance on the ride-hailing sector, which deals with escalating competition and regulatory difficulties. Uber may develop new revenue streams and discover new markets by branching into new industries like food delivery, logistics, and courier services. Additionally, this will allow the business to stand out from its rivals and lessen its exposure to legal and regulatory problems in the ride-hailing sector. Additionally, this plan is consistent with Uber’s earlier initiatives to expand its clientele, such as purchasing Postmates and creating Uber Eats.

Implementation of the Recommended Strategy

If Uber chooses a diversification approach, it may begin by locating potential markets or products to enhance its ride-hailing operation. For instance, the food delivery sector makes sense, given that Uber already runs Uber Eats. It may need to work with additional restaurants, create a more effective delivery system, and enhance the ordering functionality of the app to expand its capabilities in this area. Offering logistics and courier services is another way to diversify, and this could involve forming alliances with small and medium-sized firms that need dependable and effective delivery services. This might increase the company’s revenue streams and lessen its reliance on the ride-hailing sector. Uber would need to devote enough resources to research and development, marketing, and customer support for the additional services to adopt a diversification plan successfully.

References

Conger, K. & Roose, K. (2022). Uber Investigating Breach of Its Computer Systems. NY Times. Retrieved from https://www.nytimes.com/2022/09/15/technology/uber-hacking-breach.html

Goel, V. (2018, October 28). Uber’s Exit From Southeast Asia Upsets Regulators and Drivers. NY Times. Retrieved from https://www.nytimes.com/2018/05/28/technology/uber-grab-southeast-asia.html

Perri, J. (2023, April 14). Which company is winning the restaurant food delivery war? Bloomberg Second Measure. Retrieved from https://secondmeasure.com/datapoints/food-delivery-services-grubhub-uber-eats-doordash-postmates/

Rana, P. (2023). Uber, Lyft Score Victory as California Court Affirms Right to Treat Drivers as Contractors. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/uber-lyft-score-victory-as-california-court-affirms-right-to-treat-drivers-as-contractors-642bdd67

Reuters. (2021, February 19). Factbox: Uber’s legal challenges around the world. https://www.reuters.com/business/legal/ubers-legal-challenges-around-world-2021-02-19/

Thorbecke, C. (2023, March 29). How Uber left Lyft in the dust. CNN. Retrieved from https://www.cnn.com/2023/03/29/tech/lyft-leadership-change/index.html

Appendix: Financial Ratio Calculations

Profitability Ratios

Return of Asset = Net Income / Total Assets

2019: –8,506,000/31,761,000 = –26.78%

2018: 997,000/23,988,000 = 4.16%

2017: –4,033,000/15,426,000 = –26.14%

Net Profit Margin = Net Income / Total Revenue

2019: –8,506,000/14,147,000 = –60.13%

2018: 997,000/11,720,000 = 8.51%

2017: –4,033,000/7,932,000 = –50.84%

Liquidity Ratios

Current Ratio = Current Assets / Current Liabilities

2019: 13,925,000/5,639,000 = 2.47

2018: 8,658,000/5,313,000 = 1.63

2017: 6,837,000/3,847,000 = 1.78

Working Capital = Current Assets – Current Liabilities

2019: 13,925,000 – 5,639,000 = 8,286,000

2018: 8,658,000 – 5,313,000 = 3,345,000

2017: 6,837,000 – 3,847,000 = 2,990,000

Leverage Ratios:

Debt to Equity Ratio = Total Debt / Total Equity

2019: 16,889,000/14,190,000 = 1.19

2018: 13,655,000/10,333,000 = 1.32

2017: 23,983,000/–8,557,000 = –2.80

Times Interest Earned = Operating Income / Interest Expense

2019: –8,596,000/559,000 = –15.38

2018: –3,033,000/648,000 = –4.68

2017: –4,080,000/479,000 = –8.52

Activity Ratios:

Accounts Receivable Turnover Ratio = Total Revenue / Net Receivables

2019: 14,147,000/1,214,000 = 11.65

2018: 11,270,000/919,000 = 12.26

2017: 7,932,000/739,000 = 10.73

Average Collection Period = 365 / Accounts Receivable Turnover Ratio

2019: 365/11.65 = 31.33 days

2018: 365/12.26 = 29.77 days

2017: 365/10.73 = 34.02 days