financial ratio analysis of alibaba

FOREIGN TRADE UNIVERSITY CORPORATE FINANCE FINANCIAL RATIO ANALYSIS OF ALIBABA CLASS: TCHE321(1-1819).1 MEMBER LIST HA THUY TRANG 1613340095 NGUYEN THU TRANG 1617340097 DINH DIEU VY 1617340101 November, 2018 TABLE OF CONTENT I Introduction to the study 1 Introduction .1 Objectives Methods of study .2 II Findings .2 Financial Statements of Alibaba (2016-2018) 2 Financial ratio analysis .4 2.1 Liquidity 2.2 Asset management/Turnover Ratios 2.3 Leverage 13 2.4 Profitability 18 2.5 Market value measure 22 Ratio analysis 26 III Conclusion .27 IV References .28 I Introduction to the study Introduction 1.1 ALIBABA GROUP HOLDING: Alibaba Group is an e-commerce firm that provides consumer-to-consumer and business-tobusiness sales services via web portals Alibaba Group's headquarters is in Yu Hang District, Hangzhou, Zhejiang Province Alibaba Group has a revenue of $44.7B, and 66.421 employees Alibaba Group has raised a total of $24.8B in funding Alibaba Group's main competitors are Amazon, Ebay and Walmart As of February 2018, Alibaba Group has 6.0M fans on Facebook and 58.7K followers on Twitter In recent years, modern technology has become one of the markedly fastest growing sectors in the 21st century As technology becomes more advanced and sophisticated over time, its role reaches critical levels of importance in the e-commerce value chain With backbone of technology, ecommerce called electronic commerce or e-business is a system for the buying and selling of goods and services using the Internet as the main means of exchange One of the most leading e-commerce companies in the world, Alibaba has operated nearly 20 years and gained noticable successes in Asia with more than a billion users worldwide 1.2 Financial Ratio analysis and interpretation This financial statement analysis mainly focuses on examining the financial ratio of Alibaba Group Holding over the years Each calculation and section will encompass graphs and assessments This data will illustrate the perception and rationale beyond the numbers Besides, many of companies in the e-commerce industry are competing against one another to win the crown for the leader of the global ecommerce market Therefore, two companies, Amazon and Ebay are selected to compare their ratios to Alibaba’s with a view to gaining a better insight into Alibaba’s stock The ecommerce world is dominated by marketplaces such as Alibaba, Amazon or eBay that achieved and maintain huge success through bringing countless third-party sellers into their ecosystems Three of the most prominent ecommerce players in the market today, Alibaba (BABA), eBay and Amazon operate in a homogenous, complementary way, but provide distinctive user experiences After assessing all data points, graphs and calculations based on financial ratios, the final decision needs to be made whether to buy or sell Alibaba’s stock It is recognized that the value of BABA’s brand, its high-growth engine and the massive end market that Alibaba caters to in the incredibly large Chinese e-commerce market boost the potential of company in the long run The financial statement analysis indicates that it is worth investing BABA’s stock or not 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Objectives  To understand and interpret the basic concepts of financial statement and financial ratio of a company  Interpretation of financial ratios and their significance  To make an investment decision on a company Methods of study In this report, we will use the financial ratio analysis to evaluate the performance of Alibaba, Amazon, and eBay Ratio analysis is a powerful tool for financial analysis This method is used as a benchmark for evaluating the financial position and performance of a firm because the absolute accounting figures reported in the financial statements not provide a meaningful understanding of the performance and financial positions of a firm Therefore, in our report, we used “ratio analysis” method to review and analyze Alibaba’s financial statement to make better economic decisions Different ratios across various categories like liquidity ratios, leverage ratios, profitability ratios, and efficiency ratios help in analyzing the overall health of the company II Findings Financial Statements of Alibaba (2016-2018) 1.1 Income statement (Millions) Period Ending: 3/31/2018 3/31/2017 3/31/2016 Total Revenue $39,777,000 $22,965,000 $15,638,000 Cost of Revenue $17,014,000 $8,631,000 $5,312,000 Gross Profit $22,764,000 $14,334,000 $10,327,000 Operating Expenses Research and Development $3,617,000 $2,475,000 $2,132,000 Sales, General and Admin $6,920,000 $4,143,000 $3,172,000 Non-Recurring Items $79,000 $0 $70,000 Other Operating Items $1,132,000 $743,000 $453,000 Operating Income $11,017,000 $6,973,000 $4,500,000 Add'l income/expense items $5,508,000 $2,125,000 $8,397,000 Earnings Before Interest and Tax $16,525,000 $9,098,000 $12,897,000 Interest Expense $567,000 $388,000 $301,000 Earnings Before Tax $15,958,000 $8,710,000 $12,596,000 Income Tax $2,893,000 $1,999,000 $1,306,000 Minority Interest $426,000 $355,000 $26,000 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Equity Earnings/Loss Unconsolidated Subsidiary Net Income-Cont Operations ($3,305,000) ($729,000) ($267,000) $10,187,000 $6,337,000 $11,049,000 Net Income $10,187,000 $6,337,000 $11,049,000 Net Income Applicable to Common Shareholders $10,170,000 $6,337,000 $11,049,000 1.2 Balance sheet (Millions) Period Ending: 3/31/2018 3/31/2017 3/31/2016 Cash and Cash Equivalents $32,221,000 $21,241,000 $16,724,000 Short-Term Investments $1,733,000 $1,025,000 $1,373,000 Current Assets Net Receivables $0 $0 $0 Inventory $0 $0 $0 Other Current Assets $6,871,000 $4,122,000 $2,627,000 Total Current Assets $40,824,000 $26,388,000 $20,724,000 $28,274,000 $22,029,000 $18,686,000 Long-Term Assets Long-Term Investments Fixed Assets $10,568,000 $2,932,000 $2,107,000 Goodwill $25,772,000 $18,198,000 $12,624,000 Intangible Assets Other Assets $5,856,000 $2,686,000 $2,728,000 $1,263,000 $1,275,000 $902,000 Deferred Asset Charges $0 $113,979,00 $0 $0 $73,538,000 $56,318,000 Total Assets Current Liabilities Accounts Payable $15,076,000 $7,706,000 $4,657,000 Short-Term Debt / Current Portion of Long-Term Debt $1,443,000 $2,498,000 $665,000 Other Current Liabilities $5,066,000 $3,372,000 $2,723,000 Total Current Liabilities $21,586,000 $13,576,000 $8,046,000 Long-Term Debt $18,997,000 $11,149,000 $8,235,000 Other Liabilities $325,000 $187,000 $335,000 Deferred Liability Charges $3,227,000 $1,596,000 $1,066,000 Misc Stocks $477,000 $434,000 $54,000 Minority Interest $11,224,000 $6,142,000 $5,033,000 Total Liabilities $55,836,000 $33,084,000 $22,768,000 Stock Holders Equity Common Stocks $0 $0 $0 Capital Surplus $29,684,000 $23,881,000 $20,441,000 Retained Earnings $27,394,000 $15,752,000 $12,176,000 Treasury Stock ($355,000) ($410,000) $0 Other Equity $1,421,000 $1,230,000 $932,000 Total Equity $58,144,000 $40,454,000 $33,550,000 Total Liabilities & Equity $113,980,00 $73,538,000 $56,318,000 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1.3 Cash Flow (Millions) Period Ending: 3/31/2018 3/31/2017 3/31/2016 Net Income $10,187,000 $6,337,000 $11,049,000 Depreciation $3,542,000 $2,112,000 $1,131,000 Net Income Adjustments $3,082,000 $2,508,000 ($4,441,000) Accounts Receivable ($102,000) ($367,000) $0 Changes in Inventories Other Operating Activities $0 ($2,126,000) $0 ($1,068,000) $0 ($679,000) Liabilities $5,738,000 $2,488,000 $1,754,000 Net Cash Flow-Operating $19,895,000 $11,655,000 $8,788,000 Capital Expenditures Investments ($4,102,000) ($8,490,000) ($1,773,000) ($4,037,000) ($841,000) ($4,831,000) Other Investing Activities ($742,000) ($5,561,000) ($952,000) Net Cash Flows-Investing ($13,333,000) ($11,371,000) ($6,622,000) Sale and Purchase of Stock Net Borrowings $242,000 $5,300,000 $443,000 $4,256,000 ($2,945,000) $383,000 Other Financing Activities ($2,288,000) $0 $0 Net Cash Flows-Financing $3,236,000 $4,776,000 ($2,450,000) Effect of Exchange Rate ($964,000) $296,000 $72,000 Net Cash Flow $8,833,000 $5,357,000 ($213,000) Financial ratio analysis 2.1 Liquidity 2.1.1 Current ratio The current ratio measures a company’s ability to pay both short and long-term debts If the ratio is below one, this would indicate a company’s inability to pay off its liabilities after depleting cash and cash equivalents and liquidating its assets Acceptable current ratios vary from industry to industry and are generally between and for healthy businesses However, a ratio that is abnormally high would indicate that the company is not managing their working capital successfully Formula: Current ratio= Current assets Current liabilities In 2017, Alibaba = $26,388,000/$13,576,000 = 1.94 times Amazon = $60,197,000/$57,883,000 = 1.04 times Ebay = $7,743,000/$3,539,000 = 2.19 times 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ROE is more than a measure of profit; it's a measure of efficiency A rising ROE suggests that a company is increasing its ability to generate profit without needing as much capital It also indicates how well a company's management is deploying the shareholders' capital In other words, the higher the ROE the better Falling ROE is usually a problem ROE= Net Income Total Equity As of March 2018, Alibaba ¿ 10,187,000 =17.53 % 58,144,000 For every dollar in equity, Alibaba generated less than 18 cents in profit Obj ect100 In 2016-2017 period, there was a sharp decrease from 33% to 16% From 2017 to 2018, ROE slightly went up to 18% The sharp decrease in 2017 once again because of the decline in net income 21 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Obj ect103 Compare with other companies like Amazon and Ebay ROE of Alibaba is higher than ROE of Amazon nearly 6% From an investor’s perspective, as he/she uses ROE to judge how efficiently the firm will be able to use his/her investment to generate additional revenues, he/she may choose Alibaba 2.5 Market value measure Market value ratios are used to evaluate the current share price of a publicly-held company's stock These ratios are employed by current and potential investors to determine whether a company's shares are over-priced or underpriced The most common market value ratios are as follows: 2.5.1 Price Earnings ratio Price Earnings ratio (P/E) is a market prospect ratio that calculates the market value of a stock relative to its earnings by comparing the market price per share by the earnings per share In other words, the price earnings ratio shows what the market is willing to pay for a stock based on its current earnings P/ E= Market price per share Earnings per share Earnings per share (EPS)= Net Income Shares Outstanding As of March 2018, Alibaba with net EPS = $3.72, stock price = 183.54 P/E = 183.54 / 3.72 = 49.34 22 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Obj ect109 As we can see from the data table, Amazon has the highest PE ratio with 182.28 on 31st March, 2018 The PE ratio of Alibaba and Ebay shared the same number in March 2016 However, while Alibaba ratio has increased steadily to nearly 50 over the years, Ebay ratio has felt to because of its negative net income We can conclude that investors anticipate higher performance and growth in the future of Amazon and Alibaba On the other hand, Ebay may have poor current and future performance This could prove to be a poor investment 2.5.2 Price-sales Ratio The price-to-sales ratio helps determine a stock’s relative valuation It is a financial metric that measures the value investors put on a company for each dollar of revenue generated by the firm by comparing the stock price with total revenue This ratio is widely used because it states the valuation of a company in context of one the easiest to understand financial metric (i.e revenue) from investor point of view Generally, the lower the ratio the better it is as it might indicate undervaluation of a company P/S ratios between and are generally considered good, and ratios less than are considered excellent Formula: Price−sales Ratio= Price per Share Sales per share As of March 2018, Alibaba with stock price = 183.54, Sales per share = $15.29 Price – sales ratio = 183.54 / 15.29 = 12.00 23 financial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibaba financial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibaba Obj ect113 Amazon has the safest P/s ratio with just around Though Ebay has a net loss, its Price-to-sale ratio could still can be considered safe Alibaba ratio is the highest when it was always around 12 or higher Luckily, the ratio has slightly decrease to below as of September 2018 In conclusion, P/S ratio of Alibaba is not as good as the others two companies 2.5.3 Market –to-book ratio (P/B) The market to book financial ratio, also called the price to book ratio, measures the market value of a company relative to its book or accounting value Book value is calculated by looking at the firm's historical cost, or accounting value Market value is determined in the stock market through its market capitalization In basic terms, if the ratio is above then the stock is undervalued; if it is less than 1, the stock is overvalued A ratio above indicates that the stock price of a company is trading for less than the worth of its assets A high ratio is preferred by value managers who interpret it to mean that the company is a value stock, that is, it is trading cheaply in the market compared to its book value A book-to-market ratio below implies that investors are willing to pay more for a company than its net assets are worth This could indicate that the company has healthy future profit projections and the investors are willing to pay a premium for that possibility Technology companies, and other companies in industries which not have a lot of physical assets, tend to have a low book-to-market ratio Formula: Market−¿ −book ratio= Market value per share Book value per share 24 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financial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibabafinancial.ratio.analysis.of.alibaba Obj ect117 In 2015 period, we can see from the chart that Amazon far exceeds its competitors which is the ratio may be overvalued The market-to-book ratio of Alibaba overall can be seen that it has increase slightly over the 2015-2018 period (from 6.78 to 8.18) This ratio is much higher than which means the investor are willing to pay more for a company than its net assets are worth In conclusion, the market-to-book of Alibaba is satisfactory enough 25 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Ratio analysis Key ratio Liquidity Asset Management / Turnover ratio Leverage Profitability Market Value Current Ratio Quick Ratio Cash Ratio Inventory turnover NWC turnover Fixed asset turnover Total Asset turnover Total Debt ratio Debt - Equity ratio Equity multiplier Long-term debt ratio Profit margin ROA ROE Aftertaxed P/E Ratio Price-sales ratio Market-tobook ratio (P/B) Alibaba Amazon 3/2018 3/2017 3/2016 12/2017 189% 189% 149% 194% 195% 156% 258% 258% 208% 104% 76% 35% - - - 6.98x Ebay 12/2017 Analysis 219% 219% Highly liquid 60% - 2.06 1.79x 1.23x 76.87x 2.2756x 3.76x 7.83x 7.42x 4.6x 5.9906x 0.35x 0.31x 0.28x 1.35x 0.3682x 0.49x 0.45x 0.4x 0.79x 0.6896x 0.96x 0.82x 0.68x 3.74x 2.22x 1.96x 1.82x 1.68x 4.74x 3.2222x 0.25x 0.22x 0.2x 0.47x 0.5338x 26% 9% 28% 9% 71% 20% 2% 2.31% -10.62% -3.91% 18% 16% 33% 11% -12.60% 49.34x 43.31x 17.92x 190.16x - 12x 12.05x 12.9x 3.24x 4.27x It is better than its peer It carries least risk It is profitable enough It is good 6.78x 5.85x 26 5.05x 20.43x 4.82x 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III Conclusion Alibaba’s ability to cover its debt and short-term liabilities is safe comparing with Amazon and Ebay The company has enough cash and cash equivalents to pay off all short-term debts and still has cash remaining Asset management is not as efficient as industry, but considerably satisfactory management in using working capital to support sales Debt ratio is considered to be low-risk Alibaba is the safest of the three companies while Amazon and Ebay might be high-risk and unpredictable Alibaba has a good and satisfactory profitablity ratio in comparison with the industry The market value of the company is satisfactory enough in the industry Overall, Alibaba’s performance is less risky and quite profitable as the industry Based on the risk tolerant, risk lover investors may choose Amazon for higher profit and riskier probability whereas other investors may invest their funds in Alibaba’s stock for safer asset We draw a conlusion that we make decision on buying Alibaba’s stock for some reasons as followed: - - - Alibaba is big giant of the e-commerce industry and have established a strong leading brand presence in their home territories - China over 20 years It is worth investing in a highly reputable company that has profitability with safety Alibaba is still a growing company and its potential of development in the industry is improving significantly Alibaba serves about 80% of the Chinese e-Commerce market where population density is extremely high Not developed markets, developing markets hold the most potential for online growth, also China is now leading the race in terms of maximizing the potential of the Internet compared with the Western countries The lowcost, widely available telecommunication infrastructure in China has increased the popularity of online shopping Therefore, Alibaba that dominates the world’s largest eCommerce market has an edge over its competitors Alibaba tends to constantly expand their presence around the globe as there are still many parts of the world where online retail markets remain undeveloped and untapped It is expanding its logistic net around the world and wants to connect its global ecommerce markets Overall, the Chinese e-commerce giant now looks like a very compelling investing opportunity BABA’s stock is regarded as a Strong Buy 27 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