[TYPE TITLE HERE]

Garcia, Tristan
Trinidad, Jessu
2AAC

College of Arts and Sciences

San Beda College
October 8, 2014

Introduction
With the dawn of a new era, a new generation, and the advent of technology, most
internet-based companies are now defining the stock markets all over the world.
Companies such as Facebook, Twitter, Google, and Yahoo are now openly trading their
stocks at large amounts, showing the dominance of these companies in the worlds
business. With this, Chinese technology companies are trying to penetrate the worlds
market thru the same platform, launching an Initial Public Offering at the New York stock
market to increase their working capital, and subsequently solidify their name in the
world market. One of the most notable examples of this is Alibaba, Inc.
Alibaba, Inc. may seem unheard of to most of the human population, but its starting to
create a buzz over at the New York stock market. Its Initial Public Offering (IPO) of
stocks, valued at 21.8 billion USD, is much bigger than even Facebooks,Twitters, and
Googles IPOs combined(19.766 billion USD). With their penetration of the world
market, the internet industrys landscape might undergo a sizeable change. In light of
this, the researchers used horizontal analysis of Financial statements to be able to
prove that the increased profitability of Alibaba,Inc. is mainly attributed to their IPO at
the New York Stock Exchange.
To be able to fully comprehend the study, specific accounting terms such as profitability
were used at a regular basis. To be able to derive the values of these terms, account
details such as assets, liabilities, and equity were required, along with the nominal
accounts, expenses, and income.

The accounts stated in the prior paragraph were completely utilized in the study,
subsequently being of utmost importance to the researchers. Their values showed
much information concerning the financial standing of Alibaba, Inc. also, various ratios
were used to further analyze the financial statements of the company.

Research Problem
The research investigated the Initial Public Offering of Alibaba, Inc. and its effect on
Alibaba, Inc.s profitability spike from 2013 to 2014. It sought to answer the following
questions:
A. What was Alibaba, Incs profit in 2013?
B. What was the value of Alibaba, Incs Initial Public Offering, dated September 18,
2014?
C. What was Alibaba, Incs profit during the 1st-3rd quarter of 2014?
D. What percentage increase is shown in Alibabas income from 2013 to 2014?
E. By how much did the Initial Public Offering of Alibaba, Inc.s stocks affect their
income for 2014?

Hypothesis
The hypotheses of the study are as follows:
A. Alibabas increase in net income from 2013 to 2014 is attributable to its Initial
Public Offering.
B. Initial Public Offerings are good ways of increasing profit

Review of Related Literature

Income
As stated by Valix, Peralta and Valix (2013), income is the boost in economic
benefit which a business entity receives in the form of inflows or increase in asset or
decrease in liability. It must be gained during the accounting period, its source not an
equity participant and must result to a increase in equity.
Expense
An expense is defined as a decline in the economic benefit of a business entity
during the accounting period. It may be in the form of outflows or asset reduction or
liability increase but must not come from distribution to stakeholders. Expenses result to
decrease in equity (Valix et al., 2013).
Profit
According to Investopedia.com (n.d.), profit is the total surplus a company
receives after deducting total expenses from its total income. Profit is only gained if

income exceeds expenses, otherwise it is a loss. It positively affects equity and is the
most prominent measure of success in an enterprise.
Profitability
The ability of an investment, or a company to make a profit after costs,
overheads, etc. (Profitability Definition, n.d.) is what we call profitability. It is the state
or condition of yielding profit or gain. In business, profitability is the primary goal of
every venture, thus, it has to be carefully measured through an income statement
(Hofstrand, 2009).
Income Statement
To quote Dani (2009), an income statement is, in essence, a schedule which
sets out the income from expenses of running a business over a period of time and then
gives a final figure representing the amount of profit earned or loss sustained. It is the
primary tool to measure an entitys profitability. Through the use of various financial
ratios, the financial health of a business can be derived from the income statement.
Statements over a period of years can also be tracked to identify profitability trends.
Comparability
Comparability of financial information is achieved when it is possible to recognize
and understand similarities and differences between data sets. For data to be
comparable, it has to be made or recorded under consistent accounting methods.
Comparability within an entity, with regards to datas accounting period, is known as
horizontal comparability while comparability between and across entities is known as

intercomparability (Valix et al., 2013). For this study, the researchers used horizontal
comparison to compare Alibabas financial data.
Initial Public Offering (IPO)
An IPO, as stated in Investopedia.com, is the first sale of stocks by a company
to the public. Termed in business as going public, having an IPO will put a company in
the stock exchange market, allowing anyone to buy part ownership of the firm. This is
usually done by starting companies for expansion purposes because the economic
benefit gained through an IPO is used as capital. It can be used to fund research and
development or advertising, fund capital expenditures or even pay off existing debts.
Another advantage is an increased public awareness of the company because IPOs
often generate publicity by making their products known to a new group of potential
customers.

Review of Related Studies

IPOs and Profitability
As the researchers intended to point out that Alibabas IPO positively affected the
companys profitability, similar studies and researches are shown below.
A study done by McConaughy, Dhatt and Kim (1994), which involved 1985-1990
period of 100 firms that had their IPOs in 1985 and another set of matched firms who
had their IPOs before 1980, stated that IPO firms have fared more profitable.
Furthermore, big companies who have undergone initial public offering for the last 20

years have grown by 27% in the period of public sale. Also, 80% of these firms
generated profits in the three years following the IPO (Tunguz, 2012). GoPro, an actioncamera company, however, exhibited contrary to the previous. Having its IPO last June
2014, the corporation reported a wider quarterly loss of $19.8 million dollars as
compared to a year prior to the IPOs $5.1 milliion.

Methodology
The research is a descriptive analysis of the profitability of Alibaba, Inc. and the
analysis of the effect of their Initial Public Offering on their income for 2014. It explained
this factor thru investigation of assets, liabilities, income, and cash flows of the business
entity as presented in their financial statements for 2013 and the first 3 quarters of 2014,
using the profitability ratio.

Presentation, Analysis, and Interpretation of Data

1. To answer the first question on the amount of net income of Alibaba, Inc. during
2013, the researchers derived the data from Alibabas Income statement. The
amount of net income was 1,358,000,000 US Dollars, as shown in the table
below.
Table 1: The net income of Alibaba, inc. during 2013
2013
Alibaba, Inc.

Net Income
$1,358,000,000

2. To be able to answer the second question, concerning the valuation of Alibabas

Initial Public Offering, Forbes.coms articles concerning this were utilized. As
stated by Factset Research Systems, the valuation of the IPO was at
21,800,000,000 USD as of September 18, 2014. The table shows Alibabas IPO
compared to major technology companies.
Table 2: Valuation of IPOs of technology companies
Company Name
Alibaba, Inc.
Facebook
Twitter
Google

IPO Valuation (in millions USD)

21,800,000,000 USD
16,007,000,000 USD
2,093,000,000 USD
1,666,000,000 USD

3. As shown in Alibabas Income statement for the first 3 quarters of 2014, the Net
income for January to September of 2014 is valued at 3,808,000,000 US Dollars.
Table 3: Net income for January to September, 2014
2014
Alibaba, Inc.

Net Income
3,808,000,000

4. To answer the fourth question, which is to specify the percentage change in net
income from 2013 to 2014, the researchers used the formula:
Net Income 2014Net Income 2013
Net I ncome 2013
Thus, coming up with:
3,808,000,000 USD1,358,000,000USD
1,358,000,000USD

= 1.8041 or 180.41%

5. To be able to answer the fifth question, the researchers derived data from
Alibabas financial statements and used the following formulas:
Table 4: Profitability Ratios, 2014

Measure

Ratio

Gross Margin

Formula
Gross Profit
Revenue

+73.94

Operating Margin

Operating Income
Revenue

+47.55

Pre-tax Margin

Income Before Tax

Revenue

+51.05

Net Margin

Net Profit
Revenue

+44.41

Return on Assets

Annual Net Income

Average Total Assets

27.01

Return on Equity

Annual Net Income

Average Stockholders Equity

94.24

Return on Total Capital

Net IncomeDividends
Debt Equity

39.71

Return on Invested

Net IncomeDividends
Debt + Equity

45.78

Capital

A companys gross margin represents how much of each dollar of

revenue is retained as profit after incurring direct cost of producing goods

and services. As shown in Table 4, an increase of 73.94 would mean that
Alibaba now retains more revenue as profit as compared to its prior
operations. With the increase being material, the company is deemed
profitable.

Again shown in Table 4, Alibaba had a 47.55 increase in its operating

margin, exhibiting a financially healthy company as it will be to retain 47.55 %
more of its revenue after paying variable costs of production.
Pre-tax profit is basically a companys profit before taxes accounted for. A
high pre-tax profit margin of +51.05, as exhibited in Table 4, represents a healthy
and profitable firm.
Net profit margin shows how much of each dollar of revenue is turned into
profits. As seen in Table 4, Alibaba had net profit margin of +44.41 which means
that +44.41 of its revenue is retained as profit. This rate is considerably high for
businesses.
Another profitability ratio, return on assets (ROA) measures the efficiency
of a business in utilizing its assets to generate income. It indicates the number of
cents earned on every dollar of assets. It is also an indicator of how good a
business is managed. Alibaba has an ROA of 27.01% (Table 4), again a high
percentage as compared to the usual 13% of other companies.
Return on equity (ROE) is a gauge of how profitable stockholders
investments are. Higher values are generally favorable meaning that the
company is efficient in generating income on new investment. An ROE of 94.24
indicates that 94.24 % of investments are utilized to generate income. However,
in order to maximize ROE, it must be compared to the ROE of other companies.
Return on invested capital (ROIC) and return on total capital (ROTC) are
similar measures. Both are gauges of the return an investment generates for
those who contribute capital. These ratios signify how effective a company is at
turning capital into profits. A firm's ROIC and ROTC can be excellent indicators of
the size and strength of its foundations. If a company is able to generate ROIC of
15-20% year after year, it has developed a great method for turning

investor capital into profits. Table 4 shows that Alibaba has an ROIC of 39.71 and
and ROTC of 45.78, both extremely high and indicators of a higly profitable
business.

Conclusion
The researchers, having analyzed the net income of Alibaba, Inc. for 2013 and
2014, derived the subsequent percentage increase, and searched for the valuation of
the Initial Public Offering of stocks at the New York Stock Market, have concluded that
the selling of stocks due to the IPO have been part of the spike of increase in the net
income of Alibaba, Inc., but it might not be the only reason.
A 21.7 Billion USD Offering may have been a focal point of the increase in net
income, but as with any business entity, a more aggressive marketing plan could have
been put into place clandestinely, so as to make bystanders, such as the researchers,
attribute the net income spike to their Initial Public Offering. As such, the researchers
have also deduced that Initial Public Offerings are not mainly good ways of increasing
profit, but rather a way to increase the working capital of a company so as to further and
expand their market reach. In the context of Alibaba, Inc., the move was made to be
able to penetrate the United States, and subsequently the world markets in technology
and e-commerce, in order to be a formidable force in the technology industry.

Recommendations

APPENDIX A

Alibabas Statement of Financial Position from 2012 2014

APPENDIX B
Alibabas Statement of Financial Performance for 2012- 2014

APPENDIX C
Comparison of Largest US Internet IPO

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