Jeff Bezos, founder of Amazon, opened the store in 1995. Amazon, the earth’s biggest internet based retailer, started just selling books, but with a clear mission to one day become the place where people could buy anything they wanted. Nowadays, Amazon sells almost anything imaginable, like books, apparel, software, electronics, etc. Apart from being an e-commerce, Amazon is also a cloud computing company. Amazon’s Web Services (AWS) provides the world’s largest cloud infrastructure services. They offer platform and infrastructure as a service in which users can buy data storage and computing resources. Eventually, Amazon started producing its own products, like the Kindle, Echo, Alexa, Fire tablets, and more.(Hall) They have expanded their market from just books, and today they do not just only compete with online stores, like Ebay and Alibaba, but they also compete with online streaming companies like Spotify, Netflix and Hulu. Amazon’s prime services offers streaming for music, TV shows and movie.
eBay Inc, one of Amazon’s first competitors, was founded by Pierre Omidyar in 1995. As well as Amazon, eBay was meant to be a place where people could buy goods and services, but it ended being a platform in which users could auction or sell things from consumer to consumer. eBay themselves do not actually sell anything, meaning they do not have a warehouse. (Bjornsson) Furthermore, one can buy pretty much everything from any of the sellers on eBay. They compete with Amazon on the e-commerce aspect, but eBay falls short by not having online streaming or cloud computing services. When eBay launched, Amazon saw it as a threat and tried to copy eBay. Therefore, Amazon tried building their own auction site, but failed. (Hartmans) While eBay was a big competitor for Amazon at the beginning, today its biggest competitor is Alibaba.
Alibaba, China’s biggest e-commerce company, transactions were $248 on 2013, more than Amazon and eBay combined Jack Ma founded the company in 1999. They operate mainly to three sites: Tmall, Taobao and Alibaba. Tmall targets China’s fast-growing middle class by selling branded goods, while Taobao is China’s online store. Alibaba is more business to business site that connects exporters in China with other companies in the world. Apart from having online stores, Alibaba also has Alipay.com, which is China’s version of PayPal. (Wright) China has a population of 1.4 billion, over one billion of the US population who only has 300 million habitants. (Countries) So, while Amazon is an American based company, Alibaba was able to reach bigger market being based in China.
If one compares Amazon, Alibaba and eBay, it is clear that the giant is Amazon, No e-commerce website does as much as Amazon does. They have expanded from just selling products, and deliver groceries in within four hours. They have a platform, like UberEats, where one can order from a near restaurants, and it gets delivered straight people’s home. They offer online streaming for TV Shows and movies, like Netflix and Hulu, and they also offer on demand music streaming, like Spotify and Apple Music. Amazon has their cloud services, AWS, which competes with cloud services like Google Cloud or Alibaba Cloud. Through the years, Amazon has shown its diversity by attacking different markets. While eBay just stayed as an online store, Amazon expanded into what it is today.
Ratio Analysis
Liquidity ratios can be defined as the way companies measure their ability to pay certain debt obligations. Current ratio, quick ratio, and operating cash flow ratio are the calculations of metrics done to measure a company’s margin of safety (Investopedia). For starters, the current ratio indicates if the company has enough resources to pay its debts in the short-term; the quick ratio, on the other hand, measures the company’s ability to meet its obligations in the short-term with its liquid assets. That is why inventory is subtracted from current assets in the calculation of this ratio. According to Exhibit 1, Amazon, eBay, and Alibaba’s liquidity ratios are pretty strong. Amazon’s current ratios from 2015 and 2016 are 1.08 and 1.04, respectively; while quick ratios were 0.77 (2015) and 0.78 (2016). On the other hand, eBay’s current ratios were 3.49 in 2015 and 2.31 in 2016, and quick ratios 3.49 and 2.31, which would result higher compared to Amazon’s. In addition, Alibaba’s ratios are still higher than Amazon’s and eBay’s, with current ratios of 3.58 and 2.58, and quick ratios of 3.58 and 2.58.
In order to measure which company is performing better than the others, the liquidity ratio must be the highest. Therefore, it could be said that Alibaba is the company with the best liquidity ratio performance in both years. The reason why eBay and Alibaba’s quick and current ratios are the same is because they are companies without inventory. Since Amazon has its own inventory and warehouse, both ratios are different. In this case, Amazon is the company with the lowest ratios compared to its competitors during 2015 and 2016. Nonetheless, Amazon has strong liquidity ratios that will increase over the long-run depending on their current assets and current liabilities for the year.
Besides liquidity ratios, companies also use profitability ratios to measure the “ability to generate earnings compared to its expenses and other relevant costs incurred during a specific period of time” (Investopedia). That being said, just as liquidity ratios, profitability ratios are measured as the higher the value, the better the company is performing compared to its competitor’s ratios. For profitability ratios, we used Return on Assets (ROA), and Return on Equity (ROE). ROA indicates how profitable a company is in relation to its total assets. This ratio can also “give an idea of how efficient management is at using its assets to generate earnings” (Investopedia). It is calculated by dividing net income by total assets. ROE indicates how much profit a company has made with the money invested by its shareholders. It is calculated by dividing net income by shareholder’s equity.
According to Exhibit 2, Amazon’s profitability ratios are very different from its competitors. Amazon’s ROA’s ratios were 0.02 (2015) and 0.04 (2016), and its ROE’s ratios were 0.04 (2015) and 0.12 (2016). eBay’s ROA’s ratios were 0.11 (2015) and 0.31 (2016), and ROE’S 0.26 and 0.69 for 2015 and 2016, respectively. Lastly, Alibaba’s ratios were 0.11 and 0.2 for ROA, and 0.17 and 0.33 for ROE. As mentioned before, the higher the ratio, the better. Therefore, the company with the highest ROA and ROE was eBay. Amazon, on the other hand, is the company with the lowest profitability ratios compared to its competitors.
To measure if a company’s flow of cash is enough to meet its short and long-term liabilities, solvency ratios are used. The two solvency ratios calculated in this case were debt-to-equity and interest coverage. The first one is used to measure a company’s financial leverage. This is calculated by dividing the company’s total liabilities by its stockholder’s equity. In other words, this ratio “indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity” (Investopedia). On the other hand, the interest coverage ratio is used to determine how an interest outstanding debt can be easily paid by a company. One of the ways it can be calculated is by dividing earnings before interest and taxes by interest expense.
According to Exhibit 3, Amazon’s debt-to-equity ratio between 2016 and 2015 decreased by 0.22, and interest coverage ratio increased by 7.71. For eBay, debt-to-equity ratio decreased by 0.18, and its interest coverage ratio by 2.22. Lastly, Alibaba’s debt-to-equity ratio was 0.09 lower from 2015 to 2016, and 31.95 higher on its interest coverage ratio. Therefore, the lower the company's ratio, the greater the chance that it will default on its debt obligations (Investopedia). In other words, if the ratio is low or weak, future financial struggles may come. In this case, the company that got the greatest interest coverage ratio was Alibaba, since it potentially increased from one year to the other. Even though Amazon was not the greatest among its competitors, it is still doing a good job in this ratio. Also, all the companies decreased their debt-to-equity ratio from 2015 to 2016; however, the one that performed the better was eBay, since it was the one with the lowest change compared to the others.
Lastly, when it comes to market value ratios, they can be described as the ratios “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 under-priced” (Accounting Tools). For this particular project we calculated the earning per share and book value per share ratio. The first one is used to derive the price the investors think the shares cost, and the second one is used by “owners of common shares in a firm to determine the level of safety associated with each individual share after all debts are paid accordingly” (Investopedia).
Earnings per share ratio is calculated by dividing the reported earnings of the business by the total number of shares outstanding, while the book value per share is calculated by dividing the total market value of the business by the total number of shares outstanding. That being said, the results for Amazon’s earnings per share ratios for 2015 and 2016 were 1.01 and 1.54, respectively. Also, the book value per share ratios were 28.43 and 40.42 respectively, which means an increase of 11.99 from one year to the other. For eBay, the earnings per share ratio increase by 4.8, and the book value by 4.12, as well. Alibaba’s ratios were 1.12 (2015) and 4.42 (2016) for the earnings per share, and 8.85 and 13.44 for the book value per share. In other words, the three companies performed well since all their ratios increased from 2015 to 2016 in both calculations. However, the company that did a better performance over its competitors was Amazon. In other words, Amazon was the company with the most accurate share price compared to Alibaba and eBay. Even though they also increased their ratios from 2015 to 2016, it is still important for these companies to keep working on these sections since the share price of any company is what determines its reputation, as well as its culture and quality. The higher the share price, the better the reputation and performance.