Introduction
Well-known financial technology firms PayPal and Affirm Inc. provide customers and merchants with digital payment choices. This study compares Affirm Inc. and PayPal’s financial data against those of the industry to determine how effective, liquid, and financially secure they are.
Market Analysis
We began by determining the typical ratios for the financial technology industry at the time. The four-digit SIC code with the most useful for this industry is 7389, “Business Services, Not Elsewhere Classified.”
The current industry average charges are listed below:
Leverage ratio: 0.37; gross profit margin: 75.12%; current ratio: 1.59.
Interest earned divided by the 27.63 turnovers of accounts receivable equals 18.45.
Stock rotation: N/A
16.84% revenue from sales.
Turnover of Assets: 0.52 8.74% Earnings on Assets Financial Leverage: 1.51 The return on the stock is 22.53 percent.
Gross Profit Margin
Compared to Affirm Inc.’s 63.45%, the industry’s average gross profit margin in 2022 was 75.12%. Affirm Inc.’s production costs are higher than the sector average. PayPal’s gross profit margin in 2022 was 59.82%, lower than the sector average.
Return on Sales
Affirm Inc.’s return on sales in 2022 was 10.65%, lower than the sector average of 16.84%. Affirm Inc. needs to do better at converting sales into revenue. PayPal’s return on sales in 2022 was 16.05 percent, around the average for the sector.
Recover your money
Affirm Inc. earned a 3.22 percent return on assets in 2022. This was under the 8.74 percent industry average return on investment for financial technology. This demonstrates that Affirm Inc. can do better in increasing capital returns (Hassan et al., 2015). The return on assets for PayPal in 2022 was 8.15 percent, or about average for the corporate world.
Return on Assets
Affirm Inc.’s return on equity in 2022 was 11.45% compared to the industry average of 22.53%. This demonstrates that Affirm Inc.’s shareholder return is lower than its rivals. PayPal’s return on equity in 2022 was 22.63%, closer to the industry average.
Return on Equity
Affirm Inc.’s asset turnover ratio is 2022 was 0.65, higher than the industry average of 0.52. This demonstrates how Affirm Inc. efficiently utilizes its resources to maximize profit. PayPal handed over its assets at a rate of 0.57 in 2022, lower than Affirm Inc(Yahoo Finance, 2022). The accounts receivable turnover figure reveals how successfully a business can collect a consumer debt. The figure demonstrates how promptly a company pays its bills when they are due. Affirm Inc.’s turnover ratio in 2022 was 6.71, higher than the industry average of 18.71. This demonstrates that Affirm Inc. collects debts more quickly than PayPal.
Inventory Turnover
This number cannot be used to contrast the two businesses because neither one turns over its stock.
Income from sales
The return on sales ratio (ROS) displays a company’s net Income as a percentage of sales. It shows the revenue generated by a company. It is defining Affirm Inc.
Net Income is the difference between Total Revenue and Return on Sales.
Return on Sales = -$15,2,000,000 / ($509.5,000,000)
Return on Sales is represented by -0.0298 or -2.98 percent.
PayPal’s Return on Sales is calculated as Net Income / Total Sales.
To determine the return on sales, divide $4.2 billion by $23.7 billion.
Return on sales is equal to 0.177, or 17.7%.
According to these figures, PayPal appears to have a substantially higher return on sales than Affirm Inc. Accordingly, PayPal outperforms Affirm Inc. in terms of profit per dollar earned.
It is critical to remember that return on sales should be considered with other financial indicators such as growth potential, market share, and competitors’ landscape. However, based only on this metric, PayPal appears more profitable than Affirm Inc.
Asset Turnover: The asset turnover figure reveals how well a company uses its assets to generate revenue. It may be calculated by dividing total Income by the value of all assets.
The asset change ratio for Affirm Inc. in 2022 can be calculated as follows:
Net Income / Total Assets = $2,116,206 / $1,490,223 = 1.42 is the asset turnover rate.
Accordingly, Affirm Inc. generated $1.42 in profit for every $1 in assets in 2022.
Return on Equity:
The profit generated by each dollar of assets is quantified by the return on assets (ROA) figure. To get the percentage, divide the net revenue by the total assets.
How to calculate Affirm Inc.’s return on assets in 2022 is as follows: ROA is calculated as Net Income/Total Assets, which equals $48.126/$1,490,0023 = 0.032, or 3.2%.
Affirm Inc. profited 3.2% on each dollar of assets it owned in 2022.
The financial leverage ratio calculates the debt a company needs to operate. Divide the total assets by the entire ownership to calculate it.
The ratio of total assets to total equity for Affirm Inc. in 2022 is $1,490,023 divided by $812,249, or 1.83. Affirm Inc. has more debt than stock when operating its business. Rate of Return: The return on equity (ROE) ratio calculates the revenue generated by each dollar of shareholder stock. Divide net Income by the total amount of equity shareholders own to calculate return on equity.
The ROE for Affirm Inc. in 2022 is $48,126 / $812,249, or 0.059, or 5.9%. ROE is defined as Net Income / Total Shareholder Equity. As can be seen, Affirm Inc. returned 5.9% of every dollar invested to shareholders in 2022.
Analyzing the competition
A prominent competitor in the payments industry is PayPal. Let us compare some financial data for 2022 for PayPal and Affirm Inc.
Compared to Affirm Inc., PayPal has a better gross margin, net Margin, and return on equity. On the other hand, Affirm Inc. has a better asset change ratio and return on assets. Both Affirm Inc. and PayPal utilize debt to fund their operations. However, Affirm Inc. uses more debt than PayPal does equity (Yahoo Finance, 2022).
Gross Margin = Gross Profit / Total Sales. For PayPal, Gross Margin = $6.46 billion / $14.54 billion = 44.5%.
Net Margin = Net Income / Total Revenue. PayPal’s Net Margin is $885 million / $14.54 billion = 6.1%.
Asset Turnover = Total Income / Average Total Assets. For PayPal, Asset Turnover = $14.54 billion / ($149.94 billion + $129.8 billion) / 2 = 0.45
Return on Assets (ROA) = Net Income / Average Total Assets. PayPal’s ROA is $885 million / ($149.94 billion + $129.8 billion) / 2 = 2.7%.
Financial Leverage = Average Total Assets / Average Total Equity. PayPal’s Financial Leverage = (($149.94 billion + $129.8 billion) / 2) / (($51.56 billion + $44.32 billion) / 2) = 1.9
Return on Equity (ROE) = Net Income / Average Total Equity. PayPal’s ROE is $885 million / ($51.56 billion + $44.32 billion) / 2 = 18.1%.
Conclusion
Affirm Inc. has demonstrated solid financial performance regarding its profitability and efficiency ratios and its Return on Equity (ROE) and Asset Turnover ratios based on examining financial measures and comparisons with its rivals.
Affirm Inc. also has a cautious funding structure, indicated by its low financial leverage ratio. In terms of risk management, this is advantageous.
It is crucial to remember that the company’s current ratio is low, which indicates that it can struggle to obtain funds quickly. Future difficulties for the business may arise from this, significantly if it expands further.
Affirm Inc. faces stiff competition from well-established companies like PayPal, which enjoys a more secure position in the market and offers a more excellent selection of goods and services. However, Affirm Inc.’s focus on providing multiple payment options and a user-friendly interface can provide a competitive edge in the swiftly expanding e-commerce business.
The overall financial performance and market position of Affirm Inc. are strong. However, in a corporate environment that is constantly evolving, there are risks and obstacles to consider, just like with any organization.
References
Affirm. (2021). Q3 FY 2021 Earnings Presentation. https://investors.affirm.com/static-files/4a4e4c0e-83cc-4ed8-8d6e-5efc9a6a9c60
Affirm. (2022). Annual Report 2022. https://investors.affirm.com/static-files/c1b3c9b8-764e-44f5-a5dd-cb5c203d7331
PayPal Holdings, Inc. (2022). Annual Report 2022. https://investor.paypal-corp.com/static-files/92505d04-f295-4a28-970c-15ae4e4e8d48
S&P Global Market Intelligence. (2022). Financial data for Affirm Inc. and PayPal Holdings Inc.
Yahoo Finance. (2022). Stock price data for Affirm Inc. and PayPal Holdings Inc.
Hassan, R., Marimuthu, M., & Kaur Johl, S. (2015). Diversity, corporate governance and implication on firm financial performance. Diversity, Corporate Governance and Implication on Firm Financial Performance, 7(2), 28-35.
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