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Raheel [email protected]
A FINANCIAL ANALYSIS OF ALIBABA GROUP HOLDING LTD.
FISCAL YEAR 2014
BALANCE SHEET, INCOME STATEMENT AND CASH FLOW STATEMENT
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Raheel [email protected]
B ackground Hangzhou Ma co-founded Alibaba Group Holding Ltd in 1999 in California when he launched the
website alibaba.com. Today it has grown to become one of the 20 most visited websites in the
world. Alibaba supports business-to-business, business-to-customer and customer-to-customer
transactions through various web portals. In fact, just two of its web portals handled 1.1 trillion
yuan ($150 billion) in sales in the year 2012. The majority of Alibaba’s customers are based in
China but they are now expanding to more global markets. Alibaba launched its IPO in the New
York Stock Exchange on 19th September, 2014. At the time the company was valued at $231 billion
and the IPO itself raised $25 billion making it the largest IPO launch in history.
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An interesting story on how the co-founders decided the name. In an interview, Jack Ma was asked
how he chose that name, to which he replied,
“One day I was in San Francisco in a coffee shop, and I was thinking Alibaba is a good name. And then
a waitress came, and I said do you know about Alibaba? And she said yes. I said what do you know
about Alibaba, and she said ‘Open Sesame.’ And I said yes, this is the name! Then I went onto the
street and found 30 people and asked them, ‘Do you know Alilbaba’? People from India, people from
Germany, people from Tokyo and China… They all knew about Alibaba.”
- Jack Ma
Mission - Alibaba wants to become the biggest force in the e-commerce space. Their main
competitors are Amazon, Ebay, etc.
For the purpose of this financial analysis, we will be comparing the financial documents of Alibaba
Group Holding Ltd with those of Amazon Inc.
Alibaba Balance Sheet – Assets
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The balance sheet is a financial document that is prepared by companies to reflect its Liquidity
and Financial Health at the time the balance sheet was prepared. It is divided into three sections,
The Company’s assets, their liabilities and stockholders’ equity. The total assets of a company
must always equal the sum of the total liabilities and equities. This is the fundamental accounting
equation.
Assets = Liabilities + Equity
Analyzing the balance sheet can represent valuable information about the company to potential
investors such as:
The company’s ability to secure adequate resources to finance and maintain efficient
operations, properly support marketing operations,
Their current inventory and inventory turnover, the credit they provide their customers,
their efficiency in debt collection,
The degree of their vertical integration, which depicts management efficiency and supply
chain management,
Their competitive edge – whether they provide a better line of credit, or they are more
likely to pay dividends back to their stockholders, etc.
Mathematical formulas and ratios that are very valuable to assess the company’s standards
of performance in context to their history as well as industry benchmarks.
For the purpose of this analysis we will be comparing the balance sheet and key financial ratios of
Alibaba Group Holding Ltd. with Amazon Inc. Amazon is its global competitor and rival in the e-
commerce space.
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K ey P oints O f I nterest :
While scanning through Alibaba’s balance sheet, a few things catch the interest instantly.
Alibaba’s Accounts Receivables shot up by almost 300% from the year 2013 to 2014. This
indicates a tremendous increase in revenue on credit to its customers. However it increases
the risk of bad debts if they fail to collect these receivables. The Help Center page on
Alibaba.com explains their change in e-Credit policy. Alibaba has jointly launched its 120-day
e-Credit line with two Government Banking Agencies to take advantage of China’s maturing
international trading businesses. A 120-day credit line gives them a competitive edge as most
of the competition provides a maximum credit of 60-90 days.
Alibaba’s Working Capital Management reflects conformity with their new e-Credit policy as
well.
Working Capital
Management
Formula Alibaba Group
Holding Ltd.
Amazon Inc.
Days Sales
Outstanding
AR Balance/(Annual
Revenue/365)109.57 23.01
Accounts Receivable
Turnover
Sales/Avg. AR4.94 17.1
As seen in the table above, the days sales outstanding for Alibaba seem critical when compared
to Amazon’s 23 days outstanding receivables, but it falls inside their 120 day policy. Due to
such customer friendly credit terms, the Accounts receivables saw a sharp increase in the year
2014.
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Short-term investments in current assets as well as total investments and advances sharply
increased last year. This is the balance sheet’s representation of Alibaba’s recent business
strategy of buying patents related to search results and data centers. Figure 1 below shows the
break up of all the patents bought by Alibaba in the last year. It is clear that they are investing
heavily on search engine results and big data to improve their business.
Figure 1: Graphic Representation of Alibaba's Patent buying activity
Long-term investments represent the string of investments and buyouts made by the company
to learn more about the US market. For example, Alibaba recently bought 9% of shares, valued
at $150 million; of a US based e-commerce site Zulily.com. They also invested $15 million in a
New York based luxury e-commerce site called 1stdibs. These investments are part strategic in
helping them understand the US market better and part long term revenue generators as they
are new e-commerce sites that focus on a niche market and aim at serving it well. The fact that
Alibaba’s balance sheet shows goodwill tells us that not only did Alibaba buy out certain
companies but also paid above their valuation to generate trust and goodwill. This further
establishes that these investments are strategic alliances and not just revenue sources.
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L iquidity R atios :
Liquidity Formula Alibaba Group Holding
Ltd.
Amazon Inc.
Cash Flow To
Debt
Cash Flow/Total Debt0.38 0.0983
Working Capital Current Assets (CA) –
Current Liabilities (CA)$4,767 million $3.238 million
Current Ratio CA/CL 1.79 1.11
Quick Ratio
(Acid Test)
(CA – Inventory)/CL1.79 0.50
Cash Flow To Debt: This ratio is an indication of how well the company is able to cover its total
debts from the operating cash flow generated each year. I higher number means the company has
better chances of meeting its financial obligations in the long term. Alibaba’s Cash flow to debt
reads 0.38, which is not particularly high and indicates they will most likely not be able to meet
their long-term obligations simply through the cash flow generated by their operations. They will
need to take on more debt or issue more common stock (thereby raising equity) to meet those
obligations. However in comparison to Amazon’s ratio, they are doing much better. Amazon
generates a lot more revenue but has very high fixed costs and therefore has little or no incoming
cash flow.
Working Capital: Due to the IPO launch Alibaba has not been required to leverage itself by taking
on more loans. Amazon, even though they have significantly higher current assets, is a heavily
leveraged company. They can still pay off their current liabilities but it leaves much less working
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capital for them to invest in new technologies or business opportunities. Alibaba on the other
hand is in a much stronger position with almost $4.8 billion dollars in working capital, when you
consider that their business model does not even require significant investments in fixed assets
like Amazon’s model.
Current and Quick Ratio: Alibaba’s current ratio (1.79) seems to be much better than Amazon’s
(1.11) and this ties in with what was already mentioned about Amazon being a highly leveraged
company. Nonetheless, the ratio reiterates that both companies are capable of meeting their
obligations in the coming year. But more interestingly, Alibaba’s quick ratio is identical to its
current ratio. This is because Alibaba has zero inventory, while Amazon’s quick ratio takes a
plunge due to it’s high inventory. This may look good as a ratio but there are talks about whether
Alibaba can compete with Amazon’s customer delivery services such as two day and the more
recent same day deliveries. Alibaba operates solely as a virtual trader of goods and the
manufacturer then ships the said goods. This results in long delivery times. Going head to head
with Amazon in the United States will require investment in warehouses and inventory. This will
require significant investment in warehouses, supply chain, and inventory but as seen earlier,
Alibaba has the working capital ($4.7 billion) to do it.
M easures O f P rofitability :
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MOP Formula Alibaba
2013
Alibaba
2014
Amazon
2014
Gross Margin % Gross Margin/Revenue 71.46% 73.93% 28.21%
Return On
Assets
Net Income/Assets0.18 0.24 0.07
Return On
Equity
Net Income/Stockholders’
Equity1.06 0.66 0.417
Return On Sales Net Income/Revenue 0.34 0.51 0.05
The gross margin percent for Alibaba has been growing each year as they are almost completely
an online presence and have minimal cost of goods sold. Amazon on the other hand has high direct
costs associated with warehousing and supply-chain maintenance and operation costs. This high
gross margin percent translates to a high net income. We can say they have a high net income
because looking at their return on sales for 2014 (0.51), we can see that more than half of the
revenue they generated was profits. Compared to Amazon that has abysmal return on sales (0.05)
meaning they are making little or no money.
The Return on Equity went down drastically for Alibaba from the year 2013 to 2014. This is
because Alibaba was a leveraged company, and still is as most of their financing comes from loans,
but after launching their IPO in September of 2014, they raised considerable amounts of equity
causing their return on equity to drop sharply. However, even after the drop in ROE they are still
better off than Amazon whose bottom line, i.e. net income is not enough to give a good return on
equity.
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With Alibaba making more than 50% profits (0.51 return on sales) on their revenue in 2014, it is
hardly surprising that even after heavy short and long term investments, they have still managed
to increase their Return on Assets from 0.18 in 2013 to 0.24 in 2014. Amazon on the other hand
cannot be expected to have a high number in this ratio as they have comparatively much less net
income and a lot more total assets.
F inancial L everage :
Financial
Leverage
Formula Alibaba
2013
Alibaba
2014
Amazon
2014
Debt to Equity (ST + LT debt)/Equity 4.77 1.73 4.24
Interest Coverage Cash Flow/Interest
Expense7.55 12.11 21.36
From the table above, it is clear that Alibaba in 2013 and Amazon in 214 are highly leveraged
companies. This makes them risky for investors, as the companies need to generate enough cash
flow through operations to meet their obligations. However taking on debt is not always a bad
thing because financing the business through debt means that any revenue earned will directly
improve the return on equity ratio. If the ROE is high enough it may be a sign that the company is
ready to pay dividends.
The big drop in Debt to equity for Alibaba from 2013 to 2014 is due to the fact that they launched
their IPO on the New York Stock Exchange (NYSE) in September of 2014. They still have a debt to
equity of 1.73 after the money raised through equity in the IPO, which means they are still a
leveraged company but not as much as before.
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Interest Coverage is the ability of the company to pay the interest on the loans taken using their
profits from operations. A ratio above 1 indicates that the company can meet its interest
payments, though a ratio above 1.5 is generally desired. Both companies have values way over 1.5
which means they are in no danger of being unable to pay their interests.
This ratio could help both companies negotiate with banks to take bigger loans in the future for a
smaller interest percent as they have appealing interest coverage.
I ncome S tatement A nd C ash F low S tatement A nalysis
The income statement, also known as the profit and loss statement, describes the financial
performance of the company over the period for which it was calculated. The fundamental
equation for calculating profit from the income statement is
Revenue – Expense = Profit
From the income statement of Alibaba Group Holding Ltd, we can see that the gross profit margin
percent (GPMP) has increased from 66% in 2012 to 71% in 2013 to 73% in 2014. Amazon’s
GPMP also increased from 23% in 2012 to 26% in 2013 to 28% in 2014. Alibaba and Amazon
have been competing in markets with minimal overlap and therefore haven’t really eaten into
each other’s market share yet. That will change with Alibaba’s presence growing in the United
States. The general reason for the increase of both their gross profit margin is that the e-
commerce industry itself is expanding. Both companies have been in existence long enough and
have well established profit margins for products that have not increased dramatically, while the
decrease in cost of technology is too insignificant to affect the gross margin percent this greatly
when the revenue earned is in billions of dollars. The only reason is an increase in sales due to an
expanding and maturing industry.
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F ixed C ost A nd E fficiency
As a percent of sales Alibaba’s fixed costs, i.e. SG&A costs have been declining steadily each year
for the last three years.
Alibaba Amazon
33% in 2012 22% in 2012
29% in 2013 25% in 2013
26% in 2014 28% in 2014
This shows that Alibaba has been becoming more efficient over the years with regards to
managing their fixed costs. They have a scalable system in place and are therefore enjoying
efficiencies of scale.
K ey P oints O f I nterest I n C ash F low
The cash flow statement discusses the sources and uses of funds by the company in the period for
which it was prepared. To better understand to sources and uses of these funds the cash flow is
broken up into three categories, namely Operating Activities, Investing Activities and Financing
Activities.
Looking at Alibaba’s cash flow statement there are two areas of interest, one in the Investing
activities and one in the financing activities.
Purchase of Investments in the Investing activities shows a massive increase of almost
5,500% from 2013 to 2014. This cements the view that Alibaba is investing in patents and tie-
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ups with other e-commerce companies to increase their business. The total cash flow from
Investing Activities changed from a positive $87 million in 2013 to ($5.3 billion) in 2014.
The second point of interest is Issuance and Reduction of Debt line items in the Financing
Activities section of the cash flow statement.
Alibaba took on $3.9 billion in long-term debt in 2013 and then a further $4.9 billion in 2014.
However it also paid back $4 billion in 2014. This could be because they got a very favorable
interest rate in 2014 due to their appealing interest coverage discussed earlier. They took on
debt with high interest rates in 2013, generated substantial revenue from it, improved their
interest coverage and received another loan for $4.9 billion dollars at a lower interest rate
enabling them to pay off the previous year’s loan with a higher interest rate saving them future
interest expenses.
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S ummary
Alibaba is a new entity in the US market but is a well-oiled revenue machine. It has a very high
gross profit margin compared with the rest of the industry, it is enjoying efficiencies of scale. They
have favorable return on assets and return on sales ratios. Their return on equity only went down
due to their initial public offering. Alibaba has been focused on a very different business model
than most of its competitors. They prefer giving their customers direct access to the low cost
manufacturers in China. This gives them a competitive edge but they cannot delivery services like
the ones provided by Amazon, however they countered this by facilitating 120-day credit terms to
their customers. Their working capital is significant enough to allow them to take advantage of
new technologies and business opportunities. Alibaba is also securing its future as they know that
the success of their e-commerce business will depend on better search results and big data
management and are therefore on a buying spree to secure related patents and business that can
help them with it.
Considering all of this information Alibaba Group Holding Ltd seems to be primed to churn out
greater revenue in the coming years, which will again improve their return on equity. I would
strongly recommend investing in this company right now and would do so myself.
R eferences :
http://www.wordlab.com/blog/2007/10/where-did-alibaba-the-brand-name-come-from/
http://www.wsj.com/articles/alibaba-buys-stake-in-u-s-e-commerce-site-zulily-1431169781
http://www.bloomberg.com/news/videos/b/c1398a1e-c6ae-4207-b679-de248f9f22a5
http://www.industryweek.com/customer-relationships/alibabas-supply-chain-ready-take-amazon
http://www.alibaba.com/help/safety_security/products/credit/what.html
http://quotes.wsj.com/BABA/financials/annual/balance-sheet
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http://quotes.wsj.com/BABA/financials/annual/income-statement
http://quotes.wsj.com/BABA/financials/annual/cash-flow
http://quotes.wsj.com/AMZN/financials/annual/balance-sheet
http://quotes.wsj.com/AMZN/financials/annual/income-statement
http://quotes.wsj.com/AMZN/financials/annual/cash-flow
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Alibaba Cash Flow Statement – Operating And Investing Activities
Alibaba Cash Flow Statement – Financing Activities
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