EBAY Cash flow Bericht !

Hi all,

EBAY has finally released its 10-K, which is the full annual report for 1999. Although the income statement and balance sheet were released along with earnings a few weeks ago, this is our first chance to see the cash flow statement. The more I've learned as an investor, the more valuable the cash flow statement has become to me. For example, we can use this statement to figure out two ratios to evaluate a company that are superior to net profit margin.

First, I'll reproduce below the parts of the cash flow statement that are pertinent to this discussion, then get to the meat of things afterward (all numbers in 000s):
                                                      Year ended:                                                   1997    1998    1999Cash flows from operating activities: Net income...................................... $7,061  $7,273  $10,828 Adjustments to reconcile net income to net cash  provided by operating activities:   [Many adjustments deleted]   Changes in assets and liabilities:     Accounts receivable......................... (1,302) (8,369)  (28,884)     Other current and non-current assets........   (742) (3,702)  (15,336)     Accounts payable............................  3,104  (3,112)   21,541     Accrued expenses............................    769   3,164    25,973     Income tax payable..........................    363     (35)   17,247     Other liabilities...........................    579   1,765     3,342                                                   ------ -------   ------- Net cash provided by operating activities........ 11,627   6,041    66,564                                                  -------  ------  ---------Cash flows from investing activities: Purchases of property and equipment............. (2,990)(12,758)  (86,432)

Also, if you're going to check my math (strongly suggested ), you'll need these revenue figures off the income statement:
                         1997     1998     1999                          ----     ----     ----Total net revenues       41,370   86,129   224,724


The most important line in all that mess above is in bold... Net cash provided by operating activities. To quote Matt Richey of the Rule Maker port: "Net income is a fiction; cash from operations is reality. For an investor, operating cash flow is the profit that really matters. Net income involves all sorts of distortions that muddy the waters of understanding the true cash profitability of a company."
http://www.fool.com/portfolios/rulemaker/1999/rulemaker990921.htm

In that article, Matt explains the superiority of operating cash flow margin (cash provided by operating activities / revenues) to net profit margin (net income / revenues). Net income can be manipulated in many ways, but cash provided by operating activities cannot.

With that as a background, then, here's what eBay's margins look like over the past three years:
                                  1997       1998      1999                                   ----       ----      ----Net profit margin                  17.1%      8.4%      4.8%Operating cash flow margin         28.1%      7.0%     29.6%

As you can see, although net profit margin has been trending downward (for reasons most us are aware of), the cash flow margin for 1999 tells the real story.

Now, however, let's look at cash flow net margin, which has become one of the Rule Maker portfolio's new criteria (which they named "Cash King Margin"). CFNM is the same as cash flow margin, except capital expenditures are subtracted from net cash provided by operating activities before it's divided by revenues. Capital expenditures (listed as "Purchases of property and equipment" above) are what a company has to spend to maintain its physical plant or purchase new equipment to keep its business running. By subtracting this out of the cash provided by operating activities, it provides better way to look at how profitable a company really is. After all, if a company has to spend a certain amount each year on capital expenditures, then this should be accounted for. So, here's the updated table with CFNM added:
                                  1997       1998      1999                                   ----       ----      ----Net profit margin                  17.1%      8.4%      4.8%Operating cash flow margin         28.1%      7.0%     29.6%Cash flow net margin               20.8%    -14.8%     -8.8%

At first glance, this looks disheartening. If the CFNM is a really a better measure of a company's profitability than plain ol' cash flow margin, then those negative numbers are telling a negative story. However, let's remember that Meg (the eBabe) and the rest of management is still in the process of spending heavily to upgrade the company's entire computer and server infrastructure. They're doing this because they have to in order to increase the reliability of the site. These expenditures soon will tail off considerably... once the upgrade is complete, eBay will no longer have to outlay that kind of cash every year. The CFNM will then move upward, much closer to CFN.

In my opinion, then, the cash flow margin is the truer picture of eBay's profitability in 1999... and that pictures looks pretty good.

Cheers,

orangeblood