Question

A short 500-600 word synopsis that: discusses whether Amazon is an appropriate aspirational peer for Etsy in that it provides a positive financial role model, evaluate trends in both Etsy and Amazon’s financial performance, using peer group analysis and ratio analysis to evaluate these firms’ relative performance in the following three areas: asset management profitability, and use of leverage

Instructions

For purposes of this assignment, assume that you have been hired as an operational risk manager by Etsy, an online retailer of craft goods. You are meeting with a management team to discuss operational strategy, and you are invited to present an analysis of the recent management and operations at both Etsy, and Amazon (Motley Fool, n.d.) as a competitor, comparing the two firms’ relative financial strategies. (Bensinger, 2015). For purposes of this comparison, you will refer back to the financial statements of Etsy, which were included in the previous (Module One) discussion. Amazon’s financial statements are supplied here. Assume that the group that you are speaking to includes design specialists that are not trained in financial principles.

Tasks

When preparing for this assignment, consider your assigned role in the situation, and let that guide your perspective. Look deeper at the details: facts, problems, organizational goals, objectives, policies, strategies. Next, consider the concepts, theories, tools and research you need to use to address the issues presented. Then, complete any research, analysis, calculations, or graphing to support your decisions and make recommendations.

Background Information

In this discussion, you are asked to analyze basic financial statements and other key financial metrics of Etsy (ETSY), and Amazon, a massive online retailer. You may wish to begin by reviewing the Management Discussion and Analysis (MD&A) which is found in Amazon’s recent SEC filing (Amazon, 2016). Differences in managerial decisions that are evidenced within these firms’ financial statements, including the use of leverage, will be the subject of this discussion. To summarize some difference between the firms, Etsy maintains an online platform which allows artisans from around the globe to distribute their goods. Etsy’s revenue consists of the 3.5% fee that an Etsy seller pays for each completed transaction on its platform. Etsy’s cost of revenue consists primarily of expenses associated with the operation and maintenance of our platform and data centers. Operating expenses additionally consist of marketing, product development and general and administrative expenses. Toward the end of 2014, Etsy began increasing its brand and digital marketing efforts, which involved business changes and reorganizations that moved certain teams previously focused on product-related projects into marketing. Gross merchandise sales, or GMS, is the dollar value of items sold in Etsy’s marketplace within the applicable period. Etsy’s GMS were $2.4 billion in 2015, up 23.6% over 2014, and $1.9 billion in 2014, up 43.3% over 2013. Etsy is not as diversified as Amazon, however, nor does it hold physical inventories, as Amazon does. Etsy operates a marketplace which connects sellers and buyers of unique goods. As of December 31, 2015, it connected a community of 1.6 million active Etsy sellers and 24.0 million active Etsy buyers, in nearly every country in the world. Nevertheless, Etsy incurred net losses of $54.1 million, $15.2 million, and $0.8 million for the years ended December 31, 2015, 2014 and 2013, respectively. While it has incurred losses, these decreased over time. Etsy has never declared or paid cash dividends on its capital stock. It states that it intends to retain all available funds and any future earnings and does not anticipate paying any cash dividends in the foreseeable future. In 2015, Etsy generated revenue of $273.5 million, up 39.8% over 2014, and in 2014, it generated revenue of $195.6 million, up 56.4% over 2013 (Etsy, 2016). In contrast, the products offered on Amazon’s consumer-facing websites primarily include merchandise and content it purchased for resale from vendors and those offered by third-party sellers; it also manufactures and sells electronic devices. It also offers other services such as computing, storage, and database offerings, fulfillment, publishing, digital content subscriptions, advertising, and co-branded credit cards. Amazon's sales increased 20%, 20%, and 22% in 2015, 2014, and 2013, compared to the comparable prior year periods (Amazon, 2016). Amazon has recently announced intentions to expand into the area of handmade-goods, such as those sold by Etsy.

Use Tables 1 through 3.

Amazon Balance Sheet

All numbers are quoted in thousands

Period Ending		12/31/2015	12/31/2014	12/31/2013
Current Assets
	Cash And Cash Equivalents	15,890,000	14,557,000	8,658,000
	Short Term Investments	3,918,000	2,859,000	3,789,000
	Net Receivables	6,423,000	5,612,000	4,767,000
	Inventory	10,243,000	8,299,000	7,411,000
Total Current Assets		36,474,000	31,327,000	24,625,000
	Long Term Investments	-	-	-
	Property Plant and Equipment	21,838,000	16,967,000	10,949,000
	Goodwill	3,759,000	3,319,000	2,655,000
	Other Assets	3,373,000	2,892,000	1,930,000
Total Assets		65,444,000	54,505,000	40,159,000
Current Liabilities
	Accounts Payable	30,781,000	26,266,000	21,821,000
	Other Current Liabilities	3,118,000	1,823,000	1,159,000
Total Current Liabilities		33,899,000	28,089,000	22,980,000
	Long Term Debt	8,235,000	8,265,000	3,191,000
	Other Liabilities	9,926,000	7,410,000	4,242,000
Total Liabilities		52,060,000	43,764,000	30,413,000
Stockholders' Equity
	Common Stock	5,000	5,000	5,000
	Retained Earnings	2,545,000	1,949,000	2,190,000
	Treasury Stock	-1,837,000	-1,837,000	-1,837,000
	Capital Surplus	13,394,000	11,135,000	9,573,000
	Other Stockholder Equity	-723,000	-511,000	-185,000
	Total Stockholder Equity	13,384,000	10,741,000	9,746,000
Net Tangible Assets		9,625,000	7,422,000	7,091,000

Table1. Amazon Balance Sheet

Amazon Income Statement

All numbers are quoted in thousands

Revenue		12/31/2015	12/31/2014	12/31/2013
	Total Revenue	107,006,000	88,988,000	74,452,000
	Cost of Revenue	71,651,000	62,752,000	54,181,000
Gross Profit		35,355,000	26,236,000	20,271,000
Operating Expenses
	Research Development	-	-	-
	Selling General and Administrative	33,122,000	26,058,000	19,526,000
Operating Income or Loss		2,233,000	178,000	745,000
Income from Continuing Operations
	Total Other Income/Expenses Net	-206,000	-79,000	-98,000
	Earnings Before Interest and Taxes	2,027,000	99,000	647,000
	Interest Expense	459,000	210,000	141,000
	Income Before Tax	1,568,000	-111,000	506,000
	Income Tax Expense	950,000	167,000	161,000
Net Income		596,000	-241,000	274,000
	Preferred Stock And Other Adjustments	-	-	-
Net Income Applicable To Common Shares		596,000	-241,000	274,000

Table 2. Amazon Income Statement

Cash Flow

All numbers are quoted in thousands

Period Ending		12/31/2015	12/31/2014	12/31/2013
Net Income		596,000	-241,000	274,000
Operating Activities, Cash Flows Provided By or Used In
	Depreciation	6,281,000	4,746,000	3,253,000
	Adjustments To Net Income	2,486,000	1,363,000	1,181,000
	Changes In Accounts Receivables	-1,755,000	-1,039,000	-846,000
	Changes In Liabilities	12,608,000	6,898,000	5,315,000
	Changes In Inventories	-2,187,000	-1,193,000	-1,410,000
	Changes In Other Operating Activities	-6,109,000	-3,692,000	-2,292,000
Total Cash Flow From Operating Activities		11,920,000	6,842,000	5,475,000
Investing Activities, Cash Flows Provided By or Used In
	Capital Expenditures	-4,589,000	-4,893,000	-3,444,000
	Investments	-1,066,000	807,000	-520,000
	Other Cash flows from Investing Activities	-795,000	-979,000	-312,000
Total Cash Flows From Investing Activities		-6,450,000	-5,065,000	-4,276,000
Financing Activities, Cash Flows Provided By or Used In
	Dividends Paid	-	-	-
	Sale Purchase of Stock	-	-	-
	Net Borrowings	-3,882,000	4,426,000	-617,000

Table 3. Amazon Cash Flow Statement

Historical Etsy Information

Etsy - Balance Sheet All numbers are quoted in thousands
Period Ending	31-Dec-15	31-Dec-14	31-Dec-13
Assets
Current Assets
Cash And Cash Equivalents	271,244	69,659	36,795
Short Term Investments	21,620	19,184	18,075
Net Receivables	56,669	25,977	18,194
Inventory	-	-	-
Other Current Assets	9,521	12,241	3,721
Total Current Assets	359,054	127,061	76,785
Long Term Investments	-	-	-
Property Plant and Equipment	105,021	75,538	23,107
Goodwill	27,752	30,831	5,346
Intangible Assets	2,871	5,410	493
Other Assets	6,967	7,363	428
Deferred Long Term Asset Charges	51,396	-	-
Total Assets	553,061	246,203	106,159
Current Liabilities
Accounts Payable	45,635	21,083	10,389
Short/Current Long Term Debt	24,872	12,328	6,070
Other Current Liabilities	9,615	8,042	2,760
Total Current Liabilities	80,122	41,453	19,219
Long Term Debt	7,571	3,148	38
Other Liabilities	73,450	54,153	1,428
Deferred Long Term Liability Charges	61,420	149	1,259
Total Liabilities	222,563	98,903	21,944
Stockholders' Equity
Misc Stocks Options Warrants	-	80,212	80,212
Common Stock	113	44	33
Retained Earnings	-86,440	-32,377	-17,134
Treasury Stock	-	-	-
Capital Surplus	406,020	103,355	20,944
Other Stockholder Equity	10,805	-3,934	160
Total Stockholder Equity	330,498	67,088	4,003
Net Tangible Assets	299,875	30,847	-1,836

Table 1. Etsy Balance Sheet

Etsy - Income Statement All numbers are quoted in thousands
Period Ending	31-Dec-15	31-Dec-14	31-Dec-13
Total Revenue	273,499	195,591	125,022
Cost of Revenue	96,979	73,633	47,779
Gross Profit	176,520	121,958	77,243
Operating Expenses
Research Development	42,694	36,634	27,548
Selling General and Administrative	135,710	91,575	48,962
Total Operating Expenses	178,404	128,209	76,510
Operating Income or Loss	-1,884	-6,251	733
Income from Continuing Operations
Total Other Income/Expenses Net	-24,584	-3,419	-373
Earnings Before Interest And Taxes	-26,468	-9,670	360
Interest Expense	1,526	590	302
Income Before Tax	-27,994	-10,260	58
Income Tax Expense	26,069	4,983	854
Net Income	-54,063	-15,243	-796

Table 2. Etsy Income Statement

Etsy - Cash Flow All numbers are quoted in thousands
Period Ending	31-Dec-15	31-Dec-14	31-Dec-13
Net Income	-54,063	-15,243	-796
Operating Activities, Cash Flows Provided By or Used In
Depreciation	18,717	17,291	12,388
Adjustments To Net Income	55,236	10,593	5,910
Changes In Accounts Receivables	-15,764	-10,172	-7,739
Changes In Liabilities	25,126	16,884	8,741
Changes In Inventories	-	-	-
Changes In Other Operating Activities	-41	-7,266	-1,962
Total Cash Flow From Operating Activities	29,211	12,087	16,542
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures	-11,116	-1,304	-7,762
Investments	-2,448	-1,110	2,722
Other Cash flows from Investing Activities	-9,719	-18,309	-9,985
Total Cash Flows From Investing Activities	-23,283	-20,723	-15,025
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid	-	-	-
Sale Purchase of Stock	199,041	41,915	1,140
Net Borrowings	-3,377	-1,480	-1,265
Other Cash Flows from Financing Activities	-	-75	-
Total Cash Flows From Financing Activities	199,608	45,237	-103
Effect Of Exchange Rate Changes	-3,951	-3,737	446
Change In Cash and Cash Equivalents	201,585	32,864	1,860

Table 3. Etsy Cash Flow Statement

Answer 1

Let us divide our discussion into the 3 ratios that have been asked to compute. Asset management ratios are better known as activity ratios that are computed to understand the credit policy of the company or even its inventory management cycle. Let us calculate that for both Amazon and Etsy. It is to be noted that asset management ratio cannot be calculated for year 2013 as we have taken average into consideration and we donot have data for 2012, that means we do not have data for opening balances of 2013.

Inventory Turnover Ratio=Revenue/Average Inventory

As it is clear from the above calculations that Etsy maintains no inventory and hence we cannot calculate the inventory turnover ratio for Etsy. However, calculation for Amazon shows there has not been much change from year 2014 to 2015.

Receivable turnover Ratio=Revenue/Average receivables

The receivable turnover has decreased from 29.23 to 17.78 for amazon which shows that amazon has been giving higher debt period outlay to their debtors as compared to previous years. The same is the case with Etsy as well. The ratio has declined from 8.86 to 6.62. Although the decline is not so high as compared to Amazon however it can be assumed that there is a general trend in the industry that debtors are now asking for longer credit duration which is clear from the ratios. Also the ratio of Etsy in comparison to Amazon is quite low which might be due to Etsy being a smaller and newer player as compared to amazon.

Payable Turnover Ratio=Cost of Revenue/Average Payables

The payable turnover ratio for Etsy has decreased considerably from 4.68 to 2.91. The payable for Etsy are the artisans. This ratio shows a rise in the time period for payment to artisans which means Etsy is trying to reduce its working capital requirements by prolonging the payments to artisans. On the other hand, for amazon it has somewhat remained constant over the 2 periods. When we compare amazon’s payable ratio with that of Etsy, it seems Etsy now has the ratio nearer to industry standards.

Profitability Ratios

Profitability ratios show how the business is doing to achieve the primary objective of earning returns. The profitability ratios are divided into Net margin, Return on Assets(ROA) and Return on Equity (ROE).

Net Margin = Net Income/Revenue * 100

This ratio helps us to find out the net margin that the business is earning on its revenue. In our example, Amazon’s margin has improved well as compared to previous years. Although the ratio is too low but this might be the scenario in the industry. The industry works on value creation rather than earning high profits. However, Etsy has been making huge losses and with every year passed the losses have increased with respect to revenue earned which might be due to Etsy’s efforts for rapid expansion.

Return on Assets=Net Income/Total Assets * 100

This ratio helps to find what income the company has been able to generate as a part of the total investments made in the business. Amazon again has fared well with a higher ROA in 2015 as compared to Etsy which has all negative due to negative net income. However, the case of Etsy is worse because the trend is falling.

Return on Equity (ROE) = Net Income/Equity * 100

This ratio shows return with respect to the equity invested in the business. The picture here is quite different. The trend for Etsy is not falling as in the other 2 ratios which means that there has been a conscious effort to meet the expectations of the equity shareholders and not to make them unhappy. For amazon the ratio is very healthy and very promising upward trends has been witnessed which is a result of being so long in the business.

LEVERAGE RATIO

The most used leverage ratio is debt to equity ratio which covers the long term solvency and we would discuss using the same.

Debt/Equity = Long term Debt/Shareholder’s Equity

In our case we have considered the long term debt for easy calculation purpose. Firstly, when we compare Etsy with amazon, we realize how less debt Etsy is using in comparison to its equity and hence it has a quite low leverage in comparison to amazon. However, the debt proportion risen with respect 2013 standards for both the companies. For amazon it has a higher debt ratio which certainly would lower its cost of capital resulting in higher returns. Also, we see this scenario because Etsy is newer in comparison to amazon and its credit rating would not be such that it governs lower interest rate.