Shopify Company Analysis: Average Industry Financial Ratios

This report focuses in the performance Shopify, a technological firm that provides one-stop solutions for individuals and companies that want to start and eCommerce business. The purpose of the report is to evaluate the company’s financial performance in terms of profitability, liquidity, financial gearing, and efficiency using financial ratios. The ratios are compared horizontally, against the industry average, and against one of Shopify’s central competitors, BigCommerce. First, the paper provides an overview of Shopify’s position in light of latest news and industry reports. Second, the report focuses on analysis of crucial financial data for the last three years. Third, the report focuses on the analysis of financial ratios. The paper is concluded with recommendations for investment.

Current Situation of Shopify

Shopify has developed into a prominent company in the information technology industry since its founding. Online retailers may access consumer engagement, marketing, payments, and delivery capabilities through the Shopify platform. Shopify was one of the top 20 Canadian public corporations by market capitalization as of July 2022 (Bosa, 2020). According to recent reports, Shopify is continuously upgrading its platform to enhance the user experience. Business Wire (2022) reports that Shopify Inc. and Balance, the market leader in B2B e-commerce payments, have announced a cooperation integration. This collaboration was revealed in June 2022, only a few months after Shopify unveiled its new B2B offering to use a single platform for retail and wholesale clients. With a B2B-specific payment interface that provides the same ease and convenience as B2C, Balance will make this achievable. B2B businesses will be able to give their customers the option of deferred payment for up to 60 days and price in various ways, including ACH, credit card, or cheque, with the help of the Balance app.

Shopify has also done well in the market, as shown by the company’s stock price. According to a Pit (2022) story, Shopify’s shares increased 17% after the e-commerce firm announced third-quarter losses that were less than anticipated and earnings that exceeded Wall Street’s expectations. The Pit (2022) article also reveals that, compared to the third quarter of 2021, the total value of goods sold on the platform increased by 11% to $46.2 billion in the third quarter, a $4.4 billion increase. Shopify expects operating expenses to rise. In comparison to the third quarter, the rate will consistently decrease in the fourth quarter. In summary, recent reports demonstrated that Shopify is expected to grow in the nearest future.

Crucial Financial Data Overview

Shopify demonstrated outstanding performance in terms of financial growth during the past three years. In particular, the company’s net sales grew from $1.58 billion in 2019 to $4.61 billion in 2021, which demonstrated almost a 300% growth (Yahoo Finance, 2022). Moreover, the company’s net profit grew to $2.48 billion in 2021 from a net loss of $124.84 million in 2019 (Yahoo Finance, 2022). The company’s profits grew exponentially during the past three years, which is a sign of positive dynamics in company’s financial performance.

The company’s assets also grew considerably during the past three years. Shopify’s total assets increased from $2.74 billion in 2019 to $13.34 billion in 2021, which is almost a 500% growth in two years. The majority of assets are financed by equity, which takes 83.4% of the company’s assets. However, it should be noted that the company’s performance in terms of profits and assets was partially contributed to selling 1,180,000 Class A shares in 2021 for $1,551,700,000 to “to strengthen its balance sheet and provide flexibility to fund its growth strategies” (Shopify, 2022, p. 24). Overall, the company earned $2,86 billion from sales of securities. Thus, even though the company demonstrated a significant growth in 2021 in comparison with previous years, the numbers on the financial statement may be misleading to additional sales of shares. Table 1 below demonstrates critical data that may was used for analysis of financial performance in this the following section.

Table 1. Crucial financial data overview

2021 2020 2019
Net sales 4,611,856 2,929,491 1,578,173
Cost of sales 2,130,712 1,387,971 712,530
Gross Profit 2,481,144 1,541,520 865,643
Net Profit 2,914,659 319,509 -124,842
EBIT 3,140,592 240,364 -95,815
Non-current assets 4,800,852 885,149 744,751
Current assets 8,539,320 6,877,756 2,744,728
Total Assets 13,340,172 7,762,905 3,489,479
Non-current liabilities 1,504,098 923,850 157,363
Current liabilities 702,733 438,332 316,382
Total Liabilities 2,206,831 1,362,182 473,745
Capital Employed 12,637,439 7,324,573 3,173,097
Stock (inventory) 0 0 0
Cash and equivalents 7,768,093 6,387,967 2,455,194
Interest 1,150 8,575 0
Equity 11,133,341 6,400,723 3,015,734
Receivables 667,954 421,542 240,701
Payables 392,366 258,581 218,253

Ratio Analysis

This section focuses on the analysis of financial ratios of Shopify in terms of profitability, liquidity, efficiency, and leverage. The ratios are compared to the average ratios of the business service industry and BigCommerce, one of Shopify’s biggest competitors. All the numbers are taken from the company’s financial reports and the official site of Ready Ratios (BigCommerce, 2022; Ready Ratios, 2022; Shopify, 2022). The calculations of all the ratios are provided in a Microsoft Excel attached to this report.

Profitability

Shopify’s profitability was measured using four ratios, including gross profit margin (GPM), net profit margin (NPM), return on capital employed (ROCE), and return on equity (ROE). The results of ratio calculations are provided in Table 2 below.

Table 2. Profitability ratios

Shopify BigCommerce Industry
2021 2020 2019 2021 2021
Gross Profit Margin 53.80% 52.62% 54.85% 77.95% 58.40%
Net Profit Margin 63.20% 10.91% -7.91% -34.88% -2.70%
ROCE 24.85% 3.28% -3.02% -15.57%
ROE 26.18% 4.99% -4.14% -55.45% -13.40%

The results of the calculations demonstrate that Shopify demonstrated an outstanding performance in terms of profitability in 2021 at the first glance. In particular, NPM grew by 50.69% in 2021 in comparison with 2020, ROCE grew by 21.57%, and ROE grew by 21.19% in the same period. Shopify outperformed BigCommerce in 2021, as net profits, and earnings before interest and taxes were negative were negative for BigCommerce in 2021. Similarly, Shopify outperformed the industry average in terms of NPM and ROE in 2021. However, the ratios may be misleading due to the fact that Shopify received $2,860,086,000 in non-operation income in 2021 due to sale of shares. As a result, the company’s NPM was higher than its GPM. The analysis demonstrates that Shopify had somewhat stable performance in terms of GPM during the past three years (between 52.62% and 54.85%). In 2021, Shopify underperformed in terms of GPM (53.8%) in comparison with BigCommerce (77.95%) and industry average (58.4%). Thus, the company’s performance in terms of profitability may be questionable. In particular, the company’s net income was $2.48 billion even though the company earned $2.86 billion in non-operating income. Thus, the company’s profitability would likely be negative if the securities were not sold.

Liquidity

The company’s liquidity was assessed using the current ratio. It is also considered beneficial to measure companies’ liquidity using acid test (quick) ratios. However, since neither Shopify nor BigCommerce hold any inventory due to the digital nature of their services, both quick and current ratios had the same values. The results of the calculations are provided in Table 3 below.

Table 3. Liquidity ratios

Shopify BigCommerce Industry
2021 2020 2019 2021 2021
Current Ratio 12.15 15.69 8.68 1.28 1.51
Acid Test (Quick) Ratio 12.15 15.69 8.68 1.28 1.31

The results of the calculations demonstrate that, historically, Shopify’s liquidity has been high for the past three years. The company’s current ratio was as high as 8.68 in 2019, 15.69 in 2020, and 12.15 in 2021. The central reason for the fact is that the company holds large amounts of cash in reserve. In particular, Shopify’s cash and equivalents were $6.39 billion in 2020 and $7.77 billion in 2021. This may be a sign of concern, as Shopify may be failing to invest the cash in the development of the company. In 2021, the Shopify’s current ratio (12.15) was as higher than that of BigCommerce (1.28) and industry average (1.51). Overall, the analysis of the company’s liquidity states that it has enough current assets to cover its current liabilities.

Efficiency

The company’s efficiency was measured using asset turnover, receivables turnover, and payables turnover ratios. The results of the calculations are provided in Table 4 below.

Table 4. Efficiency ratios

Shopify BigCommerce Industry
2021 2020 2019 2021 2021
Asset turnover 0.35 0.38 0.45 0.40 0.6
Receivables Turnover 8.47 8.85 8.44 7.01 6.4
Payables turnover 6.55 5.82 4.94 1.69

The results of the calculations demonstrate that Shopify’s efficiency of asset use was deteriorating during the past three years, as asset turnover ratio decreased from 0.45 in 2019 to 0.35 in 2021. Last year, the company’s asset turnover ratio (0.35) was lower than that of BigCommerce (0.4) and the industry average (0.6), which demonstrates underperformance. However, the company’s receivables and payables turnover ratios were higher that the industry averages and the ratios of BigCommerce. Thus, even though Shopify demonstrates that it can effectively collect cash from credit sales and pay its bills in time, the problem with asset use is growing consistently, which may be a problem in the future.

Financial Gearing

Financial gearing or leverage was measured using debt ratio and interest cover ration. The results of leverage ratios calculations are provided in Table 5 below.

Table 5. Financial gearing ratios

Shopify BigCommerce Industry
Gearing Ratios 2021 2020 2019 2021 2021
Debt Ratio 0.17 0.18 0.14 0.75 0.61
Interest Cover Ratio 2730.95 28.03 -302.01 0.01

The calculations demonstrate that Shopify had not been using debt to finance its assets aggressively. In particular, the company’s debt ratio was stable between 0.14 and 0.18 during the past three years, which is significantly lower than BigCommerce’s debt ratio of 0.75 in 2021 and the industry average of 0.61. Similarly, Shopify could cover its interest payments more than 2730 times, while BigCommerce demonstrated a negative performance. This implies that the company’s risks are minimal and they can easily increase the level of financial leverage in the future if needed.

Recommendation

The results of analysis of Shopify revealed that the company demonstrated a significant increase in revenues and profits. Moreover, the company’s liquidity and financial gearing ratios were also favorable for the past three years. However, it is not recommended to invest in Shopify short-term. The fact that Shopify decided to sell security to improve its balance sheet performance appears questionable. It is more likely that the company was trying to improve its profitability performance, as the total money cash earned from the sales of securities was higher than the net income of the company in 2021. Therefore, Shopify’s profitability appears to be unpredictable next year, which makes the investment in the company asosicated with significant uncertainty. Therefore, it is recommended to wait until the annual report for 2022 is issued to re-evaluate the company.

References

BigCommerce. (2022). Annual report 2021. Web.

Bosa, D. (2020). Canadian tech rises again as Shopify becomes the second-most valuable company in Canada. CNBC. Web.

Business Wire. (2022). Balance Launches Shopify Integration to Provide Self-Serve Payments to US B2B Merchants. Balance Launches Shopify Integration to Provide Self-Serve Payments to US B2B Merchants | Business Wire. Web.

Pitt, S. (2022). Shopify shares pop 17% on smaller-than-expected loss. CNBC. Web.

Ready Ratios. (2022). Business Services: average industry financial ratios. Web.

Shopify. (2022). Annual report 2021. Web.

Yahoo Finance. (2022). Shopify. Web.

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