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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 ahoo 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 "nitial #ublic $ffering at the %ew ork stock

market to increase their working capital, and subse&uently solidify their name in the

world market. $ne of the most notable e'amples of this is (libaba, "nc.

(libaba, "nc. may seem unheard of to most of the human population, but it!s

starting to create a bu)) over at the %ew ork stock market. "ts "nitial #ublic $ffering

*"#$+ of stocks, valued at . billion /01, is much bigger than even

Facebook!s,Twitter!s, and Google!s "#$s combined*2.344 billion /01+. With their

penetration of the world market, the internet industry!s landscape might undergo a

si)eable change. "n light of this, the researchers used hori)ontal analysis of Financial

statements to be able to prove that the increased profitability of (libaba,"nc. is mainly

attributed to their "#$ at the %ew ork 0tock 5'change.

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 e&uity were re&uired, along with the

nominal accounts, e'penses, and income.


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The accounts stated in the prior paragraph were completely utili)ed in the study,

subse&uently being of utmost importance to the researchers. Their values showed

much information concerning the financial standing of (libaba, "nc. also6 various ratios

were used to further analy)e the financial statements of the company.

Research Problem

The research investigated the "nitial #ublic $ffering of (libaba, "nc. and its effect on

(libaba, "nc.!s profitability spike from 78 to 79. "t sought to answer the following

&uestions:

(. What was (libaba, "nc!s profit in 78;


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Hypothesis

The hypotheses of the study are as follows:

(. (libaba!s increase in net income from 78 to 79 is attributable to its "nitial

#ublic $ffering.


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income e'ceeds e'penses, otherwise it is a loss. "t positively affects e&uity and is the

most prominent measure of success in an enterprise.

#rofitability

The >ability of an investment, or a company to make a profit after costs,

overheads, etc.? *>#rofitability 1efinition,? n.d.+ is what we call profitability. "t is the state

or condition of yielding profit or gain. "n business, profitability is the primary goal of

every venture, thus, it has to be carefully measured through an income statement

*@ofstrand, 772+.

"ncome 0tatement

To &uote 1ani *772+, an income statement is, in essence, >a schedule which

sets out the income from e'penses of running a business over a period of time and then

gives a final figure representing the amount of profit earned or loss sustained.? "t 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.

0tatements 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 recogni)e

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

hori)ontal comparability while comparability between and across entities is known as


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intercomparability *=ali' et al., 78+. For this study, the researchers used hori)ontal

comparison to compare (libaba!s financial data.

"nitial #ublic $ffering *"#$+

(n "#$, as stated in "nvestopedia.com, is the >first sale of stocks by a company

to the public.? Termed in business as >going public,? having an "#$ will put a company in

the stock e'change market, allowing anyone to buy part ownership of the firm. This is

usually done by starting companies for e'pansion purposes because the economic

benefit gained through an "#$ is used as capital. "t can be used to fund research and

development or advertising, fund capital e'penditures or even pay off e'isting debts.

(nother advantage is an increased public awareness of the company because "#$s

often generate publicity by making their products known to a new group of potential

customers.

Review of Related Studies

"#$s and #rofitability

(s the researchers intended to point out that (libaba!s "#$ positively affected the

company!s profitability, similar studies and researches are shown below.

( study done by AcConaughy, 1hatt and Bim *229+, which involved 2-227

period of 77 firms that had their "#$s in 2 and another set of matched firms who

had their "#$s before 27, stated that "#$ firms have fared more profitable.

Furthermore, big companies who have undergone initial public offering for the last 7


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years have grown by 3D in the period of public sale. (lso, 7D of these firms

generated profits in the three years following the "#$ *Tungu), 7+. Go#ro, an action-

camera company, however, e'hibited contrary to the previous. @aving its "#$ last Eune

79, the corporation reported a wider &uarterly loss of 2. million dollars as

compared to a year prior to the "#$!s . milliion.

Methodology

The research is a descriptive analysis of the profitability of (libaba, "nc. and the

analysis of the effect of their "nitial #ublic $ffering on their income for 79. "t e'plained

this factor thru investigation of assets, liabilities, income, and cash flows of the business

entity as presented in their financial statements for 78 and the first 8 &uarters of 79,

using the profitability ratio.

Presentation, Analysis, and Interpretation of ata

. To answer the first &uestion on the amount of net income of (libaba, "nc. during

78, the researchers derived the data from (libaba!s "ncome statement. The

amount of net income was ,8,777,777 /0 1ollars, as shown in the table

below.Table : The net income of Alibaba, inc. during 2013

!"#$ %et IncomeAlibaba, Inc& ,8,777,777


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. To be able to answer the second &uestion, concerning the valuation of (libaba!s

"nitial #ublic $ffering, Forbes.com!s articles concerning this were utili)ed. (s

stated by Factset esearch 0ystems, the valuation of the "#$ was at

,77,777,777 /01 as of 0eptember , 79. The table shows (libaba!s "#$

compared to maHor technology companies.Table : Valuation of IPOs of technology comanies

'ompany %ame IP( )aluation *in millions +SAlibaba, Inc& ,77,777,777 /01

-aceboo. 4,773,777,777 /01/witter ,728,777,777 /01

0oogle ,444,777,777 /01

8. (s shown in (libaba!s "ncome statement for the first 8 &uarters of 79, the %et

income for Eanuary to 0eptember of 79 is valued at 8,7,777,777 /0 1ollars.Table 8: !et income for "anuary to #etember, 201$

!"#1 %et IncomeAlibaba, Inc& 8,7,777,777

9. To answer the fourth &uestion, which is to specify the percentage change in net

income from 78 to 79, the researchers used the formula:

Net Income2014Net Income2013

Net I ncome2013

Thus, coming up with:3,808,000,000 USD1,358,000,000USD

1,358,000,000USD I .79 or 7.9D

. To be able to answer the fifth &uestion, the researchers derived data from

(libaba!s financial statements and used the following formulas:Table 9: Profitability %atios, 201$


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Measure -ormula Ratio

0ross MarginGross Profit

Revenue J38.29

(perating Margin

Operating Income

Revenue J93.

Pre2ta3 MarginIncomeBeforeTax

Revenue J.7

%et MarginNet Profit

Revenue J99.9

Return on AssetsAnnual Net Income

AverageTotal Assets 3.7

Return on 45uity

Annual Net Income

Average Stockholers !"uit# 29.9

Return on /otal 'apitalNet IncomeDiviens

De$t!"uit# 82.3

Return on Invested

'apital

Net IncomeDiviens

De$t+!"uit# 9.3

( 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.


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(gain shown in Table 9, (libaba had a 93. increase in its operating

margin, e'hibiting a financially healthy company as it will be to retain 93. D

more of its revenue after paying variable costs of production.

#re-ta' profit is basically a company!s profit before ta'es accounted for. (

high pre-ta' profit margin of J.7, as e'hibited in Table 9, represents a healthy

and profitable firm.%et profit margin shows how much of each dollar of revenue is turned into

profits. (s seen in Table 9, (libaba had net profit margin of J99.9 which means

that J99.9 of its revenue is retained as profit. This rate is considerably high for

businesses.(nother profitability ratio, return on assets *$(+ measures the efficiency

of a business in utili)ing its assets to generate income. "t indicates the number of

cents earned on every dollar of assets. "t is also an indicator of how good a

business is managed. (libaba has an $( of 3.7D *Table 9+, again a high

percentage as compared to the usual 8D of other companies.eturn on e&uity *$5+ is a gauge of how profitable stockholders!

investments are. @igher values are generally favorable meaning that the

company is efficient in generating income on new investment. (n $5 of 29.9

indicates that 29.9 D of investments are utili)ed to generate income. @owever,

in order to ma'imi)e $5, it must be compared to the $5 of other companies.eturn on invested capital *$"C+ and return on total capital *$TC+ are

similar measures.


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investor capitalinto profits. Table 9 shows that (libaba has an $"C of 82.3 and

and $TC of 9.3, both e'tremely high and indicators of a higly profitable

business.

'onclusion

The researchers, having analy)ed the net income of (libaba, "nc. for 78 and

79, derived the subse&uent percentage increase, and searched for the valuation of

the "nitial #ublic $ffering of stocks at the %ew ork 0tock Aarket, have concluded that

the selling of stocks due to the "#$ have been part of the spike of increase in the net

income of (libaba, "nc., but it might not be the only reason.

( .3


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/pon studying and analy)ing the financial data of (libaba Group @oldings Ltd.,

the researchers have come up with the following recommendations:

. =erify if there were changes in marketing strategy during the period that may

have contributed to the boost in profitability. %ot all profit gained by the subHect

may be attributable to its initial public offering.

. Consider other sources of income aside from those included in the study.

8. Compare financial ratios and income trends with those of other companies in

order to have a yardstick for evaluations for more accurate decisions and

measurement.

APP4%I6 A


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(libaba!s 0tatement of Financial #osition from 7 M 79


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APP4%I6 7

(libaba!s 0tatement of Financial #erformance for 7- 79


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APP4%I6 '

Comparison of Largest /0 "nternet "#$


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