Etsy versus Amazon in the Market for Artisan Goods As an ope

Etsy versus Amazon in the Market for ‘Artisan’ Goods

As an operational risk manager by Etsy, I will discuss the operational strategy for the management team by presenting the analysis of both management and operations at both Etsy, and Amazon. To be able to relate simple problems and data to the management, I will present Etsy\'s financial statements in comparison to Amazon\'s financial statement. So the easiest way to present and discuss the ratios is to subdivide them into three subcategories: 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 (Readyratios.com, n.d.). So for both Amazon and Etsy, the asset management ratio cannot be calculated for the year 2013 as we have considered average and we do not have data for 2012, which means we do not have data for opening balances for the year of 2013.
The Inventory Turnover Ratio is equal to Revenue/Average Inventory (Jan, 2013). So it is clear that the above calculations have no inventory for Etsy, so we would not be able to include the data and calculate the inventory turnover ratio for Etsy. However, calculation for Amazon shows there has not been much change from year 2014 to 2015.
The Receivable Turnover Ratio is equal to Revenue/Average receivables (Investopedia.com, n.d.). This 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 the previous years. With this case, it is also the same with Etsy, so the ratio has decreased from 8.86 to 6.62. Even though the decline is not as high as Amazon, it can be assumed that there are trends in the industry that lenders are now asking for longer credit duration which is clear from the ratios. The ratio of Etsy compared to Amazon is lower because Etsy is just building up compared to Amazon.
The Payable Turnover Ratio is equal to Cost of Revenue/Average Payables (Investopedia.com, n.d.). The payable turnover ratio for Etsy is lesser with a considerable range from 4.68 to 2.91 which the payable for Etsy becomes 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 two periods. When we compare amazon’s payable ratio with that of Etsy, it seems Etsy now has a better ratio close to industry standards.
The Profitability ratios show how the business is doing to achieve the primary objective of earning returns. The profitability ratios are divided into the Net margin, Return on Assets (ROA) and Return on Equity (ROE) (Investopedia.com, n.d.).
The Net Margin is equal to Net Income/Revenue multiplied by 100. This ratio helps us to find out the net margin that the business is earning on its revenue (Jan, 2013). In our example, Amazon’s margin has improved as well as compared to previous years. Although the ratio is too low, this might be the scenario in the industry. The industry works on value creation rather than earning high profits. However, Etsy has been making massive losses and with every year passed the losses have increased concerning revenue earned which might be due to Etsy’s efforts for rapid expansion.
The Return on Assets is equal to Net Income/Total Assets multiplied by 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 (Myaccountingcourse.com, n.d.). 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.
The Return on Equity (ROE) is equal to Net Income/Equity multiplied by 100. This ratio shows a return concerning the equity invested in the business (Komashie, 2014). The picture here is entirely different. The trend for Etsy is not falling as in the other two ratios which mean 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 have been witnessed which is a result of being so long in the business.
The most used leverage ratio is a debt to equity ratio which covers the long-term solvency, and we would discuss using the same. The Debt/Equity is equal to Long-term Debt/Shareholder’s Equity (Averkamp, n.d.). Considering the long-term debt for simple calculation purpose, in comparing Etsy with Amazon, Etsy has less debt by using a comparison to its equity, so it is low leverage in comparison to Amazon. However, the debt proportion rose concerning 2013 standards for both the companies. For Amazon, has a higher debt ratio which certainly would lower its cost of capital resulting in higher returns. Also, in this situation, because Etsy is newer in comparison to Amazon and its credit rating would not be such that it governs a lower interest rate.

Question:

PROFITABILITY RATIOS AMAZON ETSY 2015 2014 201 2015 20142013 NET INCOME 596000 241000 274000 -5406315243 796 REVENUE EQUITY TOTAL ASSETS 107006000 88988000 74452000 13384000 107410009746000 65444000 54505000 40159000 273499 195591 125022 330498 67088 553061 246203 106159 4003 NET MARGIN RETURN ON ASSETS (ROA) RETURN ON EQUITY (ROE) 0.56% 0.91% millll 4.45% 0.27% 0.37%; 140,44% 11 0.68% 12.24% 1 231% -19.77% -9.78% -7.79% -6.19% -0.64% -0.75% 1

Solution

From the picture we can see that for both Etsy as well as Amazon, Revenue has increased but for Etsy Net income is decreasing continuously (Decreasing margin ratio).

We can see that Margin ratio is positive for Amazon but very less and for Etsy it is Negative and continuously decreasing.

So Etsy will experience Profitability problem here however Amazon may have this problem as their Net Margin ratio is very less.

Also here we can see leverage ratio for both firms as below:-

From here it is clear that Etsy is reducing its debt from 2013-2015 whereas Amazon has kept its debt ratio almost constant between 3-4. This is the reason for Etsy margin ratio being negative but after 2015 it will increase as Etsy will become almost debt free firm.

So after 2015 Etsy will not exxperience profitability problem.

For amazon, we have leverage ratio in the range of 3-4 and still its ROE is very less (As more leverage helps in more ROE) So only numerator of ROE i.e. Net Income is very less for Amazon which leads to low ROE for Amazon.

So for amazon Profitability problem may occur in future i.e. after 2015 because of low Net Margin.

So here we can say that Currently Etsy is experiencing problem with profitability due to reduction of its debt from 2013-2015 and in the same financial year Amazon had positive but very low net magin ratio (May be the same scenario in industry) so no problem with profitability for amazon.

But in future i.e. after 2015, Etsy will become debt less firm which will definetely increase its profitability in future and for amazon the case will not be the same.

Thank You!!

	Amazon	Etsy
	2015	2014	2013	2015	2014	2013
Total Assets	65444000	54505000	40159000	553061	246203	106159
Total Equity	13384000	10741000	9746000	330498	67088	4003
Liability	52060000	43764000	30413000	222563	179115	102156
Debt to equity	3.889719	4.074481	3.120562	0.673417	2.669852	25.51986