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.