Three-Year Returns
The three-year return on the stock price for Amazon is equal to 139.54% (C6, Amazon Stock History). This means that since 2016, Amazon stock has increased by 139.54% on average. The one-year return on the stock price for Alibaba is equal to 29.66% (C8, Alibaba Stock History). This means that since 2018, Alibaba stock has increased by 29.66% on average. It can be seen that on average, Amazon stock has performed better than Alibaba stock. This means that those who invested in Amazon stock earned 139.54% of the value of the initial stock price. Those who invested in Alibaba stock earned only 29.66% of the value of the initial stock price. In other words, it was more feasible to invest in Amazon stock in the past.
Industry Averages
Both companies belong to the consumer electronics industry, so they can be compared on the same basis. Over the past three years, Amazon outperforms its industry in terms of the price-to-earnings ratio. This means that future confidence in the earning power of the business is high. In turn, the P/E ratio of Alibaba is much lower, which indicates that the investor demand for the company’s shares was lower. Amazon’s debt-to-equity ratio is too high, compared to the industry average, which means that the company mainly uses debt to finance its activities. Thus, the company’s financial health in terms of solvency is rather unsatisfactory. Amazon outperformed the industry in terms of return on equity, which once again highlights the profitability of the company. However, the net profit margin of Amazon is lower than the industry average.
Alibaba outperforms its industry in terms of debt-to-equity ratio, which means that the company relies on its own funds to finance its operations. Unlike Amazon, Alibaba uses less debt financing, which speaks of its better solvency. Alibaba’s profitability is much higher than the profitability of Amazon and the industry average, based on the net profit margin. Alibaba also outperforms the industry in terms of return on equity, which means that the company is efficient at generating income. However, Alibaba underperforms the industry in terms of EPS. Considering EPS values, one may note that Amazon generates more money for each share of its stock than Alibaba.
Performance over Time
Amazon’s free cash flows are positive and increase over the past three years (R16-T16, Amazon Balance Sheet). There is a 31% increase in free cash flow in 2017 and a 45.28% increase in free cash flow in 2018. The return on equity ratio mainly increased over 2016-2018 (R13-T13, Amazon Balance Sheet). Despite a small decrease of 11% in 2017, the ROE ratio increased by 111% in 2018. Thus, it is possible to state that one of the company’s strengths is its profitability.
The P/E ratio increased from 153.07 to 190.09 over 2016-2017, yet there is a major decrease of 47% in 2018 (R11-T11, Amazon Balance Sheet). This means that in 2018, investors were not prepared to pay for Amazon shares as much as they were prepared to pay in 2017. However, the EPS ratio increased by 311% since 2016, which means that net income earned by each Amazon share has increased (R15-T15, Amazon Balance Sheet). The debt-to-equity ratio did not change much in 2017, yet there is a 27% decrease in 2018 (R12-T12, Amazon Balance Sheet). One may note that the company used less debt in relation to stockholders’ equity to finance its operations (R12-T12, Amazon Balance Sheet). Still, the debt-to-equity ratio is much higher than the industry average. Solvency is a major weakness of the company, which means that it may be not able to meet its long-term obligations, and its profitability is its main strength.
The P/E ratio of Alibaba increased from 25.19 in 2016 to 81.27 in 2017 and decreased to 44.73 in 2018 (P11-R11, Alibaba Balance Sheet). Investors were not willing to pay for Alibaba shares in 2018 as much as they were willing to pay for its shares in 2017 (which is also the case for Amazon). There is a slight increase in the debt-to-equity ratio during 2016-2018, yet the ratio is relatively low (P12-R12, Alibaba Balance Sheet). Thus, the company is able to meet its short- and long-term obligations successfully.
In 2016, ROE was 32.85%, yet it decreased to 14.79% in 2017 and slightly increased to 16.79% in 2018 (P13-R13, Alibaba Balance Sheet). This means that the company’s profitability in relation to equity has decreased. EPS ratio decreased from $3.49 in 2016 to $2.12 in 2017 and increased to $3.06 in 2018 (P14-T14, Alibaba Balance Sheet). There was a dramatic decrease of 63% in the net profit margin in 2017, which further decreased by 6% in 2018 (P15-T15, Alibaba Balance Sheet). In turn, free cash flows have significantly increased over the last three years due to an increase in net income. The company does not have remarkable weaknesses except for low EPS compared to the industry average, and its strengths are profitability and solvency.
The price-to-earnings ratio of Amazon is much higher than that of Alibaba, as well as the EPS ratio. Thus, investors consider that it is more feasible to invest in Amazon shares. On the other hand, Alibaba is a more reliable business as the percentage of debt that it uses to finance its operations is much lower than that of Amazon. Both companies have high ROE ratios, yet those of Amazon are a bit higher. Alibaba has a higher net profit margin ratio, which may be explained by a higher amount of net income and a lower amount of net sales. Amazon has generated more free cash flows than Alibaba over the past three years.
Investment
These companies can be considered growth companies for several reasons. Firstly, both Amazon and Alibaba shares have a 10+% growth rate for the last couple of years (Amazon has a 139.54% growth rate, and Alibaba has a 29.66% growth rate). Secondly, both companies have strong ROE ratios, compared to the industry average. Based on all the above-said, Amazon is considered to be a better investment option than Alibaba.
Even though both companies have growth stocks, which means that they are able to generate sustainable positive cash flows and their earnings increase at a faster rate than the industry average, Amazon outperforms its competitor in all spheres of financial health except for solvency. Almost all of Amazon’s financial ratios are higher than the industry averages. Moreover, over the last three years, investors were more willing to invest in Amazon stock.
Reference
Your Name. (2019). Financial ratios – Part A.