Refer to the ratio analysis example (listed below) and update these ratios for Amazon, Sears, and eBay based on their 2015, 2016, and 2017 annual reports. Review other applicable areas of the annual report, such as the footnotes and MD&A and tell us what the results mean in your own words. What do you think could explain the changes?

Defining Ratio Analysis (Continued) You will use ratio analysis throughout the rest of the course. For now, consider the following basic analysis to see how it can provide valuable information. You will be looking at the net profit margin (also known as the return on sales), the asset turnover, and the gross profit margin for Amazon, Sears, and eBay Net Profit Margin Net profit margin tells us how much of every sales dollar the company can keep after the expenses have been subtracted. The higher the number, the better This number varies considerably for different industries. Net margin is typically pretty low for retail but can be high for a manufacturer net profit marginnet income + sales What does Figure 3.1 tell you? Return on Sales Amazon.com 2009 Sears Holdings 2009 eBay 2009 ($ in millions) Net income Sales revenue Return on sales 2010 2008 2010 2008 2010 2008 1,152 34,204 3.4% 902 24,509 3.7% 645 19,166 3.4% 150 43,326 0.3% 297 44,043 0.7% 46,770 0.2% 1,801 9,156 19.7% 2389 8,727 27.4% 1779 8,541 20.8%) A/B Figure 3.1. Return on Sales Amazon's net profit margin, ranging from 3.4% to 3.7%, remained consistent over the three years. Investors like consistency and slight growth. Sears had a very low net profit margin of less than 1% in this time frame, and eBay shows the highest net profit margin numbers, but they jumped considerably over the three years You would want to investigate eBay's numbers to see if there is a logical reason for the jump. For example, the company could have sold a building at a huge gain, which would have increased net income in 2009, You wouldn't expect to see this type of gain on a regular basis, so the 27% would be more of the outlier. Industry benchmarks for these years would add another dimension of depth to this analysis. Asset Turnover This ratio looks at how efficiently a company uses its assets to generate revenues. For this ratio, a higher number indicates more efficient use of assets. asset turnover- sales revenuetotal assets What does Figure 3.2 tell you? Asset Turnover Amazon.com 2009 Sears Holdings 2009 (S in millions) Sales revenue Total assets Asset turnover 2010 2008 2010 2008 2010 2009 2008 34,204 18,797 1.8 24,509 13,813 1.8 19,166 8,314 43,326 24,268 1.8 44,043 24,808 1.8 46,770 25,342 1.8 9,156 22,004 0.4 8,727 18,408 0.5 8,541 15,592 0.5A/B Figure 3.2. Asset Turnover Sears's asset turnover remained the same over the three years, while sales showed a small decline every year. The eBay asset turnover declined slightly over this time frame, while sales increased slightly. You can see that the company purchased more assets, but so far that hasn't had a big impact on the bottom line. Amazon gleaned $1.8 million in sales for every $1 million in assets for 2010 and 2009, but this worsened from $2.3 million in 2008. What could have caused this negative trend? You can see that assets more than doubled for Amazon in 2010 from 2008. What new assets did the company purchase? Are the benefits of these assets going to be seen in future periods? They're certainly not showing up in 2010 How can a company increase this ratio? One of the easiest ways is to sell assets that it no longer uses. Is there a piece of equipment in the factory collecting dust that no one uses anymore? If so, the company needs to get rid of it. Gross Profit Margin (Gross Margin) This ratio looks at the basic profitability of selling the product before considering expenses and overhead costs. Certainly, the higher the number, the better here, too gross profit margin-gross profit + sales What does Figure 3.3 tell you? Gross Profit Margin Amazon.com 2009 Sears Holdings 2009 eBay 2009 (S in millions) Gross Profit Sales Revenue Gross Profit Margin Figure 3.3. Gross Profit Margin 2010 2008 2010 2008 2010 2008 7,643 34,204 22.3% 5,531 24,509 22.6% 19,166 22.3% 11,878 12,219 12,652 44,043 27.7% 43,326 27,4% 46,770 27.1% 6,592 9,156 72.0% 6,248 8,727 71.6% 6,313 8,541 73.9%) A/B Which company is the most profitable in terms of gross profit? For the years shown, eBay shows the highest gross profit margin by a long shot. Does this mean eBay is run much better? Not necessarily, because eBay's business is a bit different from the others: It brings buyers and sellers together for a fee, so it's a service. Sears and Amazon have inventory, though it wouldn't be surprising if Amazon holds less inventory these days. Because Sears and Amazon show inventory and eBay doesn't, this drastically affects cost of sales, which is an expense that would decrease gross profit. You can't compare eBay to Sears and Amazon using this ratio, as it's not apples to apples. You can compare Sears and Amazon, though. Even though both companies show pretty stable results, Sears has a higher gross profit margin for this indicated time frame. Does this surprise you? Given the two companies' respective situations in more recent years, it should. Do you think this would be the case today