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E-commerce / E-selling
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Application
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Retail
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Software
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The report is an investment analysis on Shopify and Lightspeed to determine which company in the same e-commerce industry is more worthy of investing in. Shopify Inc. is an international e-commerce firm providing online stores and retail point-of-sale systems with its headquarter in Ottawa, Ontario, Canada. Lightspeed is also a provider for a point-of-sale and e-commerce platform headquartered in Montreal, Quebec, Canada. In this report, we have analyzed both firms’ balance sheets to calculate different aspects: Growth and Profitability, Solvency, Debt, Efficiency, and decided which firm would be chosen to move forward to investment.
Looking at the Revenue Growth, the revenue, after eliminating the costs of revenue, of Shopify grew at a slightly higher percentage than Lightspeeds, 85.63% and 83.80%, respectively. However, the net revenues of Shopify generally contribute more significant amounts at $2,929,491 in 2021 and $1,578,173 in 2020 while the revenues of Lightspeed generate much lesser amounts at $221,728 in 2021 and $120,637 in 2020. All in all, we can conclude that Shopify performed better in terms of Revenue Growth than Lightspeed. However, we have to look at other ratios to determine their actual growth and strengthen our statement. That leads to our next formula of Net Profit Growth which contains costs of both companies resulting in net profit.
Ultimately, the objective of this Net Profit Growth ratio is to demonstrate if there was an improvement or loss of the firm's profit. Net Profit also means Net Income or Net Loss. Shopify experienced a remarkable increase of up to 355.93% between 2 years with 2021 again at $319,509 despite a negative net profit (net loss) at -$124,842 in 2020. Meanwhile, Lightspeed's net profit continued to suffer two losses at -132.16% in both years: the first loss in 2020 at -$53,531 and the second one in 2021 at -$124,278. Therefore, we can conclude that Shopify performed better than Lightspeed regarding Net Profit Growth.
A higher gross profit margin means a company can make a better profit on sales and a lower profit margin means the company won't make much profit. By looking at the figures we can say that Shopify has a less gross profit margin which is $0.5262 and probably will have to make a good number of sales in order to make a profit.
A higher net profit margin means the company can make sales into actual profit. Shopify has less profit margin ($0.1090) than LightSpeed ($0.5866). LightSpeed is on Net Loss for both the years of 2020 and 2021 whereas Shopify was in a loss in 2019 and they recovered it in 2020.
Overall lower profit margin means the company can have more returning customers and have more sales. In this respect, we probably could invest in Shopify.
Shopify’s ROE has improved from 2019 to 2020 which is mainly because the company has made profits in 2020 compared to a loss in 2019. Lightspeed’s ROE has improved year on year mainly because the equity has increased in 2020, probably due to a share issue. losses have increased despite the share issuance, which is not a good sign.
Shopify’s ROA has improved year on year mainly because the company has become profitable in 2020 compared to 2019, and assets have increased. Lightspeed’s ROA has improved but this is mainly because of the increase in assets and not due to reduction in losses or profits. This shows the company is using the shareholders funds to expand the company but still the company is making losses at the end of day. Company should focus on cost controls and analyse its pricing with its customers to ensure it's profitable.
Many of the current assets for Shopify are liquid only. Which is the reason why both Current ratio and quick ratio are the same value. Shopify is a service company for many small businesses therefore inventory will not be included in the quick ratio calculation. Lastly Shopify is exceedingly wealthy to take care of its current liabilities 15 times over.
Since Shopify has a high working capital it means that it can fulfill short term financial obligations with ease. This could also infer that Shopify is very efficient with their day to day expenses.
Shopify has more opportunities to grow throughout time since the current assets far exceed current liabilities. As for lightspeed, it is operating beyond its capacity to operate as a business since its current ratio is below 1 which is very low.
Many of the current assets for Shopify are liquid only. This is the reason why both the current ratio and quick ratio are the same value. Shopify is a service company for many small businesses therefore inventory will not be included in the quick ratio calculation. The is exceedingly wealthy to take care of its current liabilities 15 times over. With lightspeed being a software company the inventory under current assets will not be considered non-liquid assets. As Lightspeed, being a company with a software as a service (Saas)model inventory will not be included. Not much information was provided in the annual regarding the type of inventory it offered which made it difficult to determine a turnover rate for the inventory. Also, it makes the analysis between the 2 companies more consistent.
TOTAL DEBT RATIO The total debt ratio takes into account all debts of all maturities to all creditors. It can be defined in several ways, the easiest of which is:
Total debt ratio = [ Total assets − Total equity ] /Total assets = [ $7762905 − 6400723 ] / $7762905 = 0.175 for Shopify and Similarly [$2,105,319-$1,934,283]/$2,105,319 = 0.08 for Lightspeed.
Another measure would be the time interest earned ratio known as the TIE ratio for short as you can see Shopify has a greater TIE ratio compared to Lightspeed. Therefore, Shopify is able to meet short-term debt priorities while lightspeed is making a loss by not meeting its debt obligations. This is due to Lightspeed’s operating income not exceeding its current expenses. TIE Ratio can be negative. If it's negative, then it means the company is unable to pay the creditors. As per the Total Debt Ratio and the TIE Ratio, we conclude that Shopify is a better company to invest in.
Days sales in inventory are when the number of days in a year is divided by inventory turnover i.e. Now to calculate the Inventory turnover, we will first have to calculate the below. Costs of Goods Sold / Inventory will then give us the Inventory turnover.
From the income statement for Shopify, we have taken the value of Costs of Goods sold as the cost of revenues which was the cost of merchant solutions and the costs of subscription solutions, in case of Lightspeed, the Cost of goods sold has been taken from the income statement under the head Direct costs of Revenues.
Because Shopify is an e-commerce service company, the Inventory of any goods is not mentioned either in the Income statement or the balance sheet of the company so, the Day’s sale in Inventory is not available for Shopify, but Inventory is available for Lightspeed in the Balance sheet and accordingly, the values have been calculated and Days sale in Inventory for Lightspeed = 365 / Inventory turnover = 365 / 60.03 = 6.08.
As we can clearly deduce from the calculations that Shopify has a lower day’s sales in comparison to Lightspeed, which means the chances of receiving the day’s sales turnover is more in Lightspeed, which means if this is the only factor to determine, if we should invest in the company, and we had to choose between these two, Lightspeed would be the company which should be chosen to invest the money in.
We have tried to forecast the stable growth of both companies to determine which could be a reliable investment. All in all, based on our financial analysis of both companies, we can conclude that Shopify will be a better choice for future investment in comparison to Lightspeed.
In terms of Growth and Profitability, although the performance of Lightspeed is better regarding Gross Profit Margin and Net Profit Margin, Shopify has proven to be a better performer since it had noteworthy Revenue Growth and Net Profit Growth while Lightspeed had suffered Revenue Loss and Net Loss significantly. In terms of Efficiency, It is clearly evident that Shopify does not have any inventory associated with the company, so in terms of managing the goods and their absent turnover, which is good since there is one less thing to think about while making the decision based on inventories of the company, but when it comes to the day’s sales in receivables, because of the fact that Lightspeed has inventories to manage and sell them over the year, the receivables will be better for Lightspeed and that is what we have deduced from the calculations.
Finally, when we analyze the Gross Profit Margin, Net Profit Margin and Efficiency we find out that Light Speed is a good company to invest in. However, when we analyze ROE, ROA, Revenue Growth, Net Profit Growth, Total Debt Ratio, TIE Ratio we conclude that Shopify is a better company to invest in. Therefore, in short, based on the above factors, we will choose Shopify over Lightspeed for our investment.
Both the Financial Statements of Shopify and LightSpeed are downloaded from www.sedar.com