Raheel Gandhi

rgandhi1@umbc.edu

A FINANCIAL ANALYSIS OF
ALIBABA GROUP HOLDING LTD.
FISCAL YEAR 2014
BALANCE SHEET, INCOME STATEMENT AND CASH FLOW STATEMENT

Raheel Gandhi
rgandhi1@umbc.edu

Background
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 Alibabas 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 19 th September, 2014. At the time the company was

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valued at $231 billion and the IPO itself raised $25 billion making it the largest IPO
launch in history.
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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Alibaba Balance Sheet Liabilities and Equity

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Balance Sheet Analysis

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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

Companys

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 companys 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
companys 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.

Key Points Of Interest:

Raheel Gandhi
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While scanning through Alibabas balance sheet, a few things catch the interest
instantly.

Alibabas 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 eCredit policy. Alibaba has jointly launched its 120-day e-Credit line with two
Government Banking Agencies to take advantage of Chinas 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.
Alibabas Working Capital Management reflects conformity with their new eCredit policy as well.
Working Capital

Formula

Management
Days Sales

AR Balance/

Outstanding

(Annual

Accounts

Revenue/365)
Sales/Avg. AR

Receivable

Alibaba Group

Amazon Inc.

Holding Ltd.
109.57

23.01

4.94

17.1

Turnover
As seen in the table above, the days sales outstanding for Alibaba seem critical
when compared to Amazons 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.

Raheel Gandhi
rgandhi1@umbc.edu

Short-term investments in current assets as well as total investments and

advances sharply increased last year. This is the balance sheets representation
of Alibabas 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 ecommerce 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 Alibabas balance sheet shows goodwill tells
us that not only did Alibaba buy out certain companies but also paid above their

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valuation to generate trust and goodwill. This further establishes that these
investments are strategic alliances and not just revenue sources.

Liquidity Ratios:
Liquidity

Formula

Alibaba Group

Amazon Inc.

Holding Ltd.
Cash Flow To

Cash Flow/Total
0.38

0.0983

Debt
Working

Debt
Current Assets (CA)

Capital

Current Liabilities

$4,767 million

$3.238 million

Current Ratio
Quick Ratio

(CA)
CA/CL
(CA Inventory)/CL

1.79

1.11

1.79

0.50

(Acid Test)
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. Alibabas 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 Amazons 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.
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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 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 Amazons model.
Current and Quick Ratio: Alibabas current ratio (1.79) seems to be much better
than Amazons (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, Alibabas quick ratio is identical to its current ratio. This is
because Alibaba has zero inventory, while Amazons quick ratio takes a plunge due
to its high inventory. This may look good as a ratio but there are talks about
whether Alibaba can compete with Amazons 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.

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Measures Of Profitability:
MOP
Gross
Margin %
Return On

Formula

Alibaba

Alibaba

Amazon

2013

2014

2014

Gross Margin/Revenue
71.46%

73.93%

28.21%

0.18

0.24

0.07

1.06

0.66

0.417

0.34

0.51

0.05

Net Income/Assets

Assets
Return On

Net Income/Stockholders

Equity
Return On

Equity
Net Income/Revenue

Sales
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.

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Raheel Gandhi
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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.
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.

Financial Leverage:
Financial

Formula

Leverage
Debt to Equity
Interest

(ST + LT debt)/Equity
Cash Flow/Interest

Alibaba

Alibaba

Amazon

2013
4.77

2014
1.73

2014
4.24

7.55
Coverage

12.11

21.36

Expense

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.

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Raheel Gandhi
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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.
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.

Income Statement And Cash Flow Statement Analysis

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

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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. Amazons 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 havent really eaten into each others market share
yet. That will change with Alibabas presence growing in the United States. The
general reason for the increase of both their gross profit margin is that the ecommerce 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.

Fixed Cost And Efficiency

As a percent of sales Alibabas 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

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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.

Key Points Of Interest In Cash Flow

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 Alibabas 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-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

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and received another loan for $4.9 billion dollars at a lower interest rate
enabling them to pay off the previous years loan with a higher interest rate
saving them future interest expenses.

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Summary
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.
References:
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
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

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http://quotes.wsj.com/AMZN/financials/annual/cash-flow

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Alibaba Income Statement

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Alibaba Cash Flow Statement Operating And Investing Activities

Alibaba Cash Flow Statement Financing Activities

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Amazon Balance Sheet Assets

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Amazon Balance Sheet Liabilities And Equity

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Amazon Income Statement

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Amazon Cash Flow Statement Operating and Investing Activities

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Amazon Cash Flow Statement Financing Activities

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