Financial Statement Analysis Case: eBay Inc. (EBAY) & Oracle Corporation (ORCL)

Part I

When comparing eBay Inc. (EBAY) & Oracle Corporation (ORCL) in terms of profitability the most important profitability ratios to analyze are the companies’ Net Margin ratios, Asset Turnover ratios, the Return on Assets ratios, the companies’ Financial Leverage ratios, their Return on Equity, Return on Invested Capital & the companies’ Interest Coverage ratios. These ratios, when compared side by side, help determine which one of these companies is deemed most profitable without considering any of the other ratios and simply taken for their face value. According to the ratios in Appendix A, ORCL appears to be much more efficiently profitable when comparing their respective ROE, ROA & Profit Margin. Although both companies have declining ratios year over year, EBAY’s respective profitability ratios are declining slightly more than those of ORCL, i.e. EBAY’s ROE declined by 4.83% year-to-year versus that of ORCL’s 4.71% year-to-year. In regards to the company’s actual dollar amounts of net income, ORCL is again outperforming EBAY with a 2013 fiscal year end amount of $10,955 million versus EBAY’s $2,856 million. Also, ORCL has a slightly higher basic EPS of $2.42 versus EBAY’s $2.20. Again, ORCL is experiencing greater net income by looking just at the companies’ Profit Margin, which is Net Income divided by sales. This measure helps determine how much of a company’s revenues has been kept when all expenses have been considered. Also, the companies Profit Margin, coupled with their ROE, helps determine how effective management is at returning on investments to their shareholders, thus a better measure on earnings per share given the ratio analysis. Considering the types of business these companies are in, it is easy to determine why EBAY has a smaller profit margin than ORCL. EBAY’s cash flow scheme is transactional based based off of them acting as intermediaries in their exchanges, skimming a very small percentages from the transactional values that passes through their platforms, and also, as of late, the company’s PayPal subsidiary had a business model also taking a small percentage of the amounts being transferred between accounts. ORCL, on the other hand, is a computer technology company generating its revenues by its extensive research and development budgets which allows it to capture large profit margins when their products are brought to market. The companies’ liquidity ratios help determine whether or not EBAY and/or ORCL can pay off its short term debt obligation in a timely manner, if warranted, due to management’s miscalculations, external events, or otherwise. The most common liquidity ratios to look at are the; Current ratios, Quick ratios and Operating Cash Flow ratios, however the cash conversion ratios of A/R Turnover and Fixed Asset Turnover are also important metrics to consider because it helps show how effectively the companies are in turning their inventory into cash. In respect to EBAY and ORCL, ORCL again appears to be better positioned in regards to their liquidity. ORCL has a better Current Ratio & Cash Flow from Operations to Current Liabilities ratio which means that the company can better cover unexpected operational shortfalls and cover its short term obligations. However, EBAY is better positioned in regards to their credit policies of their collection practices which is shown by the lower A/R turnover ratios. Both EBAY and ORCL do not have a liquidity issue only because both companies do have sufficient amounts to liquidate in short term assets to meet their short terms obligations, however in terms of operational efficiencies, EBAY cannot cover its short term obligation by its operations alone. Also, ORCL holds more in both cash and in marketable securities as a proportion to total assets than EBAY, which translates in liquidity. In regards to the solvency metrics, EBAY has a better Debt to Equity