Zynga Case Analysis

On the other hand, while Zynga has managed to keep a positive cash flow in operations for 2013, their cash flow in investment activities were positive for the first time. For a growth company, this could also be a tell-tale sign that the company is at a standstill in deciding what their next project should be.

Profitability Assessment

Return on Equity

Description: Return on Equity (ROE) indicates what each owner’s dollar is producing in terms of net income that is the rate of return on stockholder dollars. ROE is a common metric for assessing the value of a firm and most investors look to ROE first when deciding where to allocate their capital. As such, it is also an important measure for a CEO to monitor.

Present Position: Generating positive return on any kind of input is Zynga’s biggest issue at this point, with generating return on equity being the main issue in particular. Zynga has sustained negative ROE since its initial public offering, despite extremely attractive gross profit margins over the same time period. At first glance, a logical conclusion would be that Zynga is not doing a very good job of keeping its costs down in order to preserve the revenue that equity investors are helping to facilitate. But on closer inspection of the income statement, it becomes very clear that almost half of Zynga’s total revenue each year goes to research and development. This category is not included in the cost of revenue on the income statement, which is treated as Cost of Goods Sold (COGS) in this instance. But an expenditure of this amount seems to make sense, given the nature of the industry and its reliance on research and development of new intellectual property.

Suggested Improvements: The most straightforward approac...

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...e overall performance of the company given that the higher the margin, the more likely that the company will retain a profit after taxes have been withdrawn. It is calculated by subtracting the cost of interest from the earnings before income taxes.

Present Position: With Zynga’s current situation of negative earnings, it is difficult to see how profitable the company is before taxes are taken out. Over the past few years, Zynga has be consistent at improving their EBT.

Suggested Improvements: Using the income before tax margin is a very useful tool when comparing companies the each other. Sometimes, when revenues are similar when evaluating two companies, it can be difficult to see if a company is more profitable than another when using just earnings because companies are effected but different tax percentages. In order to improve their EBT, Zynga must improve