Fin 488 - Financial Analysis

Financial Analysis

Risks

Risk Factors

Liquidity Services has relevant risks that an investor must take into consideration. The company relies heavily on contracts. These contracts can change and it is possible that Liquidity Services could be outbid which would result in the loss of these contracts. The contracts account for around forty percent of the company’s entire revenue. Another risk an investor must be aware of is the intense competition in this particular industry. The company competes against other ecommerce providers, auction websites, government agencies, and other traditional liquidators. The competitive environment is supposed to increase in the near future and this company may lose market share to their competitors. 3

Financial Risks

Liquidity Services does not currently have a revolving credit facility that they can use to gain funds. They would most likely rely on the issuance of new equity which would affect the stockholders. The company would need to issue new stocks which could lower the stock price and share-holder value. The company is known to have fluctuating operating results which leads to volatility. Each year is significantly different and relying on past information may not be accurate. They rely on sellers to provide them with their assets and do not generate any assets by themselves. If these sellers have a bad year it is likely Liquidity Services will also suffer.  Since Liquidity Services operates in many different countries they must also be aware of the currency exchange rates. This could cause them to lose profits if they conduct business using a different currency to purchase the assets than what currency they receive in return. 3

Financial Analysis

Profitability

In the last few years Liquidity Services has suffered with sustaining profitability. Every profitability ratio has underperformed in the period of 2014-2016. The ratios were steady before taking a heavy dip. In figure 1 you can see that 2015 was the weakest year and that the company has rebounded in 2016.  The company operates with a very small profit margin. They act as a middleman so their margins are very low. They consistently have a net profit margin of less than 10%. Their return on assets had the biggest drawback. The company lost a large portion of their total assets in 2015 and 2016 and also suffered from heavy net income losses. The assets that they had were not providing income to the company. 2

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Liquidity

Liquidity Services has strong liquidity ratios. This is a key aspect in their business plan. They rely on providing liquidity for their suppliers. They have consistently outperformed the industry standard with their quick ratio and current ratio. The industry average quick ratio is close to .5. Liquidity Services typically ranges from 1-2.5. They are 2x-5x better than the rest of the industry when comparing their quick ratios. This is attractive to investors because the company will be able to pay off short term liabilities with assets. The company has thousands of buyers which plays a role into the liquidity. They continuously sell their assets quickly for cash. They will not purchase an asset that they do don’t believe they will be able to sell quickly. 1,2

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Asset Management

Liquidity services has a high inventory turnover ratio. They are able to continuously sell their inventory. The average inventory turnover rate in their industry is around 5. As you can see in Figure 5 this company has a much larger inventory turnover rate. This is due to their large number of buyers and liquidity that the company provides. The company also has a consistently high asset turnover. There has been little variability between 2007-2016. The turnover rate has stayed between 1.15-1.8. They are efficient in using their assets to generate sales revenue. 1,2