Essay Example. Competitive Analysis Between Automatic Data Processing Inc. and SAP Software

In the information technology field, different companies hold various practices as they identify weaknesses and strengths within the market to gain a competitive advantage. With the consideration of market strategies, this helps in understanding how multiple companies adapt to the market and compete with each other for larger market shares. This paper will provide a competitive analysis between Automatic Data Processing, Inc. (ADP) and SAP Software company using the current ratios, debt ratios, profitability and performance ratios, and investment valuation ratios.

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Automatic Data Processing, Inc. (ADP) is an American company providing human capital management (HCM) solutions through services and software to employers (ADP Inc., 2020). Founded in 1949 by Henry Taub, with headquarters in Roseland, New Jersey, ADP Inc., operates through Employer Services and Professional Employer Organization Services segments (ADP Inc., 2020). The Employer Services segment provides HCM solutions and business outsourcing, such as benefits administration, payroll, human resource management, insurance, and time management. Meanwhile, the Professional Employer Organization Services segment offers employment outsourcing solutions like 401(k) plan administration, payroll tax filing, among other benefits (ADP Inc., 2020). ADP Inc.'s market is growing in that, as of 2017, the company had over 56,000 employees and recorded a revenue of approximately $11.7 billion as of 2016 and $13.3 billion in the 2018 financial year (ADP Inc., 2020; Macrotrends, 2020). Also, the company's market is growing in that of acquired Work Market, a software company in New York in 2018 (ADP Inc., 2020).

Comparatively, SAP SE is a European software company that provides enterprise software (ERP) to manage business activities and consumer relations (SAP SE, 2020). With its headquarters in Walldorf, Germany, and office in 180 nations, SAP was founded in 1972 by five IBM tech engineers (SAP SE, 2020). Helping companies operate at their best; around 77% of the world's transaction revenues go through an SAP software or system (SAP SE, 2020). Furthermore, the SAP market is growing at it recorded a revenue of EUR24.71 billion in 2018 and EUR27.553 billion in 2019 (SAP SE, 2020).

Through the debt to equity ratio for ADP Inc. between 2015 to 2020, it evaluates the company's financial leverage as it provides a measure of the degree to which ADP and SAP can finance its operations through debt against the company's assets. Notably, this reflects the ability of shareholder equity to service all the company debts. The debt to equity ratio indicates the percentage of company financing acquired from investors and creditors. As such, a higher debt to equity ratio implies that loans are being used in the company that investor financing. In this case, ADP Inc. shows a debt to equity ratio of 25.41, while SAP indicates debt to equity ratio of 41.93 (Macrotrends). Thus, one can draw the conclusion that ADP uses fewer loans to finance its practices compared to SAP SE. Also, the finding indicates that ADP is more likely to pay short-term debts compared to SAP SE.

In other cases, the current ratios provide details on the company's liquidity. A high current ratio implies that the company is likely to pay the creditors back and settle short-term liabilities. ADP's current ratio, as of December 2019, it indicates a current ratio of 1.02 while SAP SE's current ratio as of September 2019 was 1.01 (Macrotrends). A current ratio under 1.0 suggests that the company would experience difficulties to pay off its creditors. For healthy businesses, the ratio should be between 1 to 3 (Macrotrends). In this case, ADP Inc. is doing better than SAP since it has a higher current rate and lower equity-to-debt ratio, indicating its ability to pay current liabilities.

With a view on the operating performance and profitability in the past three years, both ADP and SAP indicate significant developments. For instance, the annual gross profit for ADP for 2017 was $5.128 billion, an increase of 6.21% from 2016, a gross profit of $5.517 billion for 2018 from 2017 which a 7.59% increase and a gross profit of $6.089 billion for 2019 from 2018, a 10.36% increase (Macrotrends, 2020). On the other hand, SAP SE marked a gross profit of $19.728 billion in 2017 from 2016 which is a 20.79% increase, an annual gross profit of $20.368 billion for 2018 from 2017, and an annual gross profit of $21.506 billion for 2019, a 5.59% rise from 2018 (Macrotrends, 2020).

Although both companies appear to be doing okay with the increasing profitability and operating performance over the past three years, SAP SE is doing better than ADP Inc. mainly, SAP SE indicates a high level of gross profits compared to ADP, which signifies on the financial performance and profitability of the company.

Consideration of the cash flow indicators and investment valuation rations, they include price to earnings (P/E) ratio, price to operating profit (P/OP) ratio, price to sales (P/S), and price to book value (P/BV) ratio. In the comparison between ADP and SAP, the P/E ratio can be considered to determine which company is more likely to satisfy stockholders. Precisely, the P/E ratio offers the number of years within which it takes for the firm to earn back the stock price paid by a stockholder. As of March 2, 2020, ADP's share price is $154.7, and the earnings per share for the fiscal year ended December 2019 was $5.66 (Guru focus, 2020). Hence, the P/E ratio is 27.34 (Guru focus, 2020; CSI Market, 2019). Comparatively, SAP SE's share price as of March 2, 2020, is $123.57 with Earnings per Share for trailing twelve months ended December 2019 is $3.1 (Guru focus, 2020). As a result, SAP SE's P/E ratio is 39.90 (Guru focus, 2020).

Since the earnings are never constant, growing revenues mean that the fewer years for the company to earn back the stock price while declining profits mean more years to earn back the amount paid to buy the stock. As the stockholder wants to earn money back as soon as possible, it indicates that a low P/E stock is better than a high P/E stock given that the PE ratio remains positive. Similar to ratios such as the PS ratio and operating performance ratios, PE Ratio indicates the valuation of stocks. In this case, ADP is more likely to have satisfied stockholders since it gives a lower P/E ratio, and the investors want to earn their money back soon. Despite both ADP and SAP, indicating excellent performance, ADP's stock valuation seems to be doing better than SAP.

As an investor, I would choose to invest in ADP Inc. Based on the different stock valuation ratios and profitability analysis, there is sufficient information about the possibility of high returns on investment for ADP. Although SAP owns a high level of profitability, the debt-to-equity ratio indicates that ADP is likely to pay the current liabilities faster, which is critical to ensure stockholder returns. Additionally, the current ratio implies that ADP is doing better, which is fundamental in every investment decision. In other cases, the PE ratio confirms the high chances of higher returns in ADP Inc. hence supporting my decision to invest in ADP Inc.

In conclusion, some of the non-financial factors I would consider in the investment appraisal between ADP and SAP include the company's ability to compete with other competitors. With the drastic changes in technology, competitive advantage is fundamental, particularly in IT-related firms. A company with an appropriate competitive advantage is likely to produce better results and profitability regardless of the external effects and competition. Also, I would consider a company that matches the industry standards and policies by guarding consumer preferences and shareholder objectives. The relationship between a company and consumers is vital. Hence, I would consider the company a proper framework for consumer relationships. In other cases, corporate social responsibility is fundamental in protecting the community. When choosing between SAP and ADP, considering the company with a proper framework for social responsibility would help in the decision. By looking at a company's mission and objectives, one can quickly evaluate the company's projection. Thus, I would consider the company with growth potential for markets, products, and consumers.

References

ADP Inc. (2020). About ADP. Adp.com. https://www.adp.com/about-adp.aspx.

CSI Market. (2019). Automatic Data Processing Inc (ADP) Valuation Ratios Comparisons to Industry Sector and S&P. Csimarket.com. https://csimarket.com/stocks/ADP-Valuation-Comparisons.html.

Guru focus. (2020). ADP PE Ratio | Automatic Data Processing - GuruFocus.com. Gurufocus.com. https://www.gurufocus.com/term/pettm/ADP/PE-Ratiottm/Automatic-Data-Processing-Inc.

Guru focus. (2020). SAP PE Ratio | SAP SE - GuruFocus.com. Gurufocus.com. https://www.gurufocus.com/term/pettm/SAP/PE-Ratiottm/SAP-SE.

Macrotrends. (2020). SAP SE Gross Profit 2006-2019 | SAP. Macrotrends.net. https://www.macrotrends.net/stocks/charts/SAP/sap-se/gross-profit.

SAP SE. (2020). Stock | SAP Investor Relations. SAP. https://www.sap.com/investors/en/stock.html.