[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 world’s

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 it’s 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 Facebook’s,Twitter’s, and

Google’s IPOs combined(19.766 billion USD). With their penetration of the world

market, the internet industry’s 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, Inc’s profit in 2013?

B. What was the value of Alibaba, Inc’s Initial Public Offering, dated September 18,

2014?

C. What was Alibaba, Inc’s profit during the 1st-3rd quarter of 2014?

D. What percentage increase is shown in Alibaba’s 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. Alibaba’s 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 entity’s 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 data’s 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 Alibaba’s 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 Alibaba’s IPO positively affected the

company’s 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 action-

camera 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 IPO’s $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 Alibaba’s 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 Net Income

Alibaba, Inc. $1,358,000,000

2. To be able to answer the second question, concerning the valuation of Alibaba’s

Initial Public Offering, Forbes.com’s 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 Alibaba’s IPO

compared to major technology companies.

Table 2: Valuation of IPOs of technology companies

Company

NameIPO Valuation (in millions USD)

Alibaba, Inc. 21,800,000,000 USD

Facebook 16,007,000,000 USD

Twitter 2,093,000,000 USD

Google 1,666,000,000 USD

3. As shown in Alibaba’s 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 Net Income

Alibaba,

Inc.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 Income2014−Net Income2013Net I ncome 2013

Thus, coming up with:

3,808,000,000USD−1,358,000,000USD1,358,000,000USD = 1.8041 or 180.41%

5. To be able to answer the fifth question, the researchers derived data from

Alibaba’s financial statements and used the following formulas:

Table 4: Profitability Ratios, 2014

Measure Formula Ratio

Gross Margin Gross ProfitRevenue +73.94

Operating Margin Operating IncomeRevenue +47.55

Pre-tax Margin Income BeforeTaxRevenue +51.05

Net Margin Net ProfitRevenue +44.41

Return on Assets Annual Net IncomeAverage Total Assets 27.01

Return on Equity Annual Net IncomeAverage Stockholders Equity 94.24

Return on Total Capital Net Income−DividendsDebt−Equity 39.71

Return on Invested

Capital

Net Income−DividendsDebt+Equity 45.78

A company’s 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 company’s 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

Alibaba’s Statement of Financial Position from 2012 – 2014

APPENDIX B

Alibaba’s Statement of Financial Performance for 2012- 2014

APPENDIX C

Comparison of Largest US Internet IPO

References

Dani, H. (2009). Profit and Loss Account.Balance Sheets (pp. 84-85). Delhi: Vision Books Pvt. Ltd.. (Original work published 2000)

Finance Glossary. (n.d.). - Search our online dictionary of financial terms. Retrieved October 6, 2014, from http://www.lse.co.uk/financeglossary.asp?

searchTerm=&iArticleID=1065&definiti on=pro

Hofstrand, D. (2009, December 1). Understanding Profitability. Iowa State University - Extension and Outreach. Retrieved October 6, 2014, from http://www.extension.iastate.edu/agdm/wholefarm/html/c3-24.html

McConaughy, D., Dhatt, M., & Kim, Y. (2004). Corporate Efficiency, Profitability, and Value Changes after the IPO. Journal of Entrepreneurial Finance, 3(2), 169-170. Retrieved October 7, 2014, from http://digitalcommons.pepperdine.edu/cgi/viewcontent.cgi?article=1151&context=jef

Profit Definition | Investopedia. (n.d.).Investopedia. Retrieved October 4, 2014, from http://www.investopedia.com/terms/p/profit.

Tunguz, T. (2012, September 10). Profitability and the IPO Market. TOMASZ TUNGUZ. Retrieved October 6, 2014, from http://tomtunguz.com/where-have-the-ipos-gone/

Valix, C., Peralta, J., & Valix, C. A. (2013). Conceptual Framework. Financial Accounting Volume 1 - First Part (2013 Edition ed., pp.40-41, 45). Manila: GIC Enterprises & Co., Inc..