KELSEY EWELL

12/3/14
AMAZON.COM FINANCIAL STATEMENT ANALYSIS
INTRODUTION:
Financial statements are an important part in the ability to analyze any corporation. In
this paper the goal is to analyze the financial statements of Amazon.com for the year 2012 by
comparing it to 2011 and the industrial averages (Amazon.com, Inc., 2013). By analyzing a
companys finances you are able to determine if they are able to pay current liabilities, ability to
sell merchandise inventory and collect receivables, if they are able to pay long term debts, if the
company is profitable, and evaluating stock as a possible investment. When analyzing a
company you want to look at all available information for the current year and the previous
years, this way you can determine the direction the company is going.
This can be done many ways, first you can use the horizontal analysis where you
compare one year to the previous by calculating the change between the periods and the
percentage of that change. When calculating the change you want to take the later period
amount and subtract it by the earlier period amount. Then the calculation for the percentage is
the amount of change divided by the base period amount (or the earlier period amount) times by
100 (Nobles, Mattison, & Matsumura, 2014, p. 1013). The next analysis is the trend analysis,
which is a form of horizontal analysis that shows the direction the business/corporation is going
over a period of three or more years. When calculating you want to take any period amount
divided by the base period amount (or the amount you are comparing the periods to) times 100
(Nobles, Mattison, & Matsumura, 2014, pp. 1015-1016). The final analysis is the vertical
analysis, this measures the relationship of each item to the base amount which is set at 100%.
On the income statement to base amount is always net sales, and for the balance sheet the base is

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AMAZON.COM FINANCIAL STATEMENT ANALYSIS
always total assets. The calculation is simple, it is a specific item divided by the base amount
times 100 (Nobles, Mattison, & Matsumura, 2014, p. 1017).
LIABILITIES:
In order to determine if a company is able to pay its current liabilities you want to look at
a few ratios. The first ratio is working capital or the companys ability to meet short-term
responsibilities with the current assets that it has available, and it is calculated by subtracting
current assets (benefits to the business that it owns) by current liabilities (debts that it owes).
When you refer to Figure 1 you can see that from 2011 to 2012 the working capital has
decreased by 300, this could be due to the increase in accounts payable or the money that
Amazon.com owes. Current ratio calculates the companys ability to pay its current liability
with its current assets and is calculated by dividing total current assets by total current liabilities.
If you glance at Figure 1 you can see that the current ratio has decreased by 0.05 from 2011.
2012 shows that for every one dollar in liabilities Amazon.com had 1.12 dollars in current assets
available. If you compare 2012 to the industry average you can see that it is below, meaning that
Amazon.com has a harder time paying off current liabilities with current assets then other
industries. The cash ratio measures the companys ability to pay current liabilities with just cash
and cash equivalents and is calculated by dividing cash and cash equivalents by total current
liabilities. Figure 1 shows that in 2012 compared to 2011 the cash ratio increased meaning that
more cash in 2012 can go to paying current liabilities then in 2011. Finally, the acid-test ratio
shows if a company can pay all of its current liabilities if they came due instantly. The acid-test
is calculated by adding cash to short-term investments and net current receivables and dividing it
all by total current liabilities. If you look at figure 1 you can see that in 2012 the acid-test is

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AMAZON.COM FINANCIAL STATEMENT ANALYSIS
below the industry average, this can mean that Amazon.com could have more difficulty paying
off all current liabilities if they came due immediately compared to the industry (Nobles,
Mattison, & Matsumura, 2014, pp. 1023-1025).
Figure 1
Ratios/Equations:
Working Capital
Current Ratio
Cash Ratio
Acid-Test Ratio

(in millions)
2012
$2,294
1.12:1
0.43
0.78

2011
$2,594
1.17:1
0.35
0.82

Industry Averages
N/A
1.54:1
N/A
1:82

MERCHANDISE INVENTORY AND RECEIVABLES:

It is important for a company/business to sell its merchandise and collect receivables,
money owed the business, within a timely manner. In order to determine if the company or
business is seceding in this goal can be determined by five ratios. The first is inventory turnover,
or how many times the company sales its average inventory throughout the year. When
calculating inventory turnover you want to divide cost of goods sold (how much it cost to obtain
the merchandise) with the average merchandise inventory. In Figure 2 you can see in both 2012
and 2011 the times merchandise inventory sold throughout the year is grater then the industry
average, this means that Amazon.com is able to sell more merchandise than its competitors.
Next you want to find out how long the inventory is held by the company though the days sales
in inventory ratio; this ratio is calculated by dividing 365 days to the inventory turnover ratio.
When you examine Figure 2 you can see that Amazon.com holds its inventory for significantly
less than its competitors meaning that it holds its merchandise for less time. The next ratio to
examine is gross profit percentage, this ratio shows the profitability of each sales dollar above

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AMAZON.COM FINANCIAL STATEMENT ANALYSIS
the cost of the merchandise sold. To find the percentage divide gross profit (sales revenue minus
cost of goods sold) by net sales revenue (or the amount made on the sales of merchandise after
returns and discounts). Figure 2 shows that the gross profit percentage is below the industry
average, this could be because of the cost of the merchandise inventory could be too high or
Amazon.com may need to increase the selling price of its merchandise. When it comes to
receivables the faster you collect the better and to measure the number of times the company
collects the average balance of its receivables in the year is though the accounts receivable
turnover ratio. By dividing net credit sales by the average net accounts receivable you are able to
get the receivable turnover ratio. When you look at Figure 2 you can see that Amazon.com
collects receivables almost twice as much as the industry average, due to the higher inventory
turnover and the amount of business, but it has decreased from last year this could be because of
the change in the inventory turnover. Finally, you can see how many days it takes to collect
those receivables though the days sales in receivables; when calculating you want to divide 365
days by the accounts receivable turnover ratio. Figure 2 shows that Amazon.com collects its
receivables much faster than its competition almost twice as fast; however it is slightly lower
than it was last year (Nobles, Mattison, & Matsumura, 2014, pp. 1025-1028).
Figure 2
Ratios/Equations:
Inventory Turnover
Days Sales in
Inventory
Gross Profit %
Accounts Receivable
Turnover Ratio
Days Sales in
Receivables

(in millions)
2012
8.3 Times
43.98 Days

2011
9.1 Times
40.11 Days

Industry Averages
4.8 Times
75.42 Days

24%
20.62 Times

22%
23.10 Times

33.55%
10.11Times

17.7 Days

15.8 Days

36.11 Days

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AMAZON.COM FINANCIAL STATEMENT ANALYSIS
LONG TERM DEBT:
The ability to pay debts is important and its just as important to pay long-term debts.
When assessing a companys ability to pay these debts you will want to look at three key ratios.
The first is the debt ratio or the portion of assets funded by debts. To calculate the debt ratio you
will divide total liabilities by total assets and times by 100 to get the percentage. Figure 3 shows
that the majority of assets are financed with debts and this has increased from the previous year
and it is much higher than the industrial average. This shows that Amazon.com is high risk due
to the fact that three fourths of total assets is financed with liabilities. The next ratio is the debt
to equity ratio which shows the relationship between total liabilities to total equity (the owners
entitlement to assets), and is calculated by dividing total liabilities by total equity. The ratio
shows, in figure 3, that the majority of assets are financed by liabilities and not equity compared
to the industrial average which is almost three times lower, this shows that Amazon.com has
high financial risk. The last ratio shows the companys ability to pay interest expense or the
times-interest earned ratio, which is calculated by adding net income to income tax expense and
to interest expense and dividing it all by interest expense. Figure 3 shows that Amazon.com is
able to pay its debts slightly better than the industry average; however, it still has a high financial
risk (Amazon.com, Inc., 2013, pp. 1028-1029).
Figure 3
Ratios/Equations:
Debt Ratio
Debt to Equity Ratio
Times-Interest
Earned Ratio

(in millions)
2012
75%
2.97
5.23 Times

2011
69%
2.26
15.18 Times

Industry Averages
34%
.52
5.33 Times

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AMAZON.COM FINANCIAL STATEMENT ANALYSIS
PROFITABILITY:
Profitability is important to every business and to measure profitability can be
accomplished by looking at five ratios. The first ratio is the profit margin ratio which shows the
percentage of each dollar earned as net income, or the amount after all expenses are taken out.
To calculated profit margin, divide net income by net sales and times by 100 to get the
percentage. Figure 4 shows that in 2012 Amazon.com had a net loss resulting in a negative
profit margin and even in 2011 it was lower than the industry average. This shows that
Amazon.com isnt earing as much net income from its net sales. The rate of return on total
assets evaluates the companys ability to earn a profit. This is done by adding net income to
interest expense and dividing it all by the average total assets. In Figure 4 you can see that
Amazon.com is well below the industry average meaning that average total assets out ways net
income and interest expense. In fact in 2012 because of the net loss Amazon.com didnt have
much of a profit. The asset turnover ratio shows the mount of net sales generated for every
dollar of total assets financed and is calculated by dividing net sales by average total assets.
Figure 4 shows that Amazon.com has an asset turnover ratio higher than the industry average
showing that more net sales is generated for every dollar of total assets financed. The rate of
return on equity shows the correlation between income available to common stockholders and
average equity invested in the company. This can be calculated by net income subtracted by
preferred dividends all divided by average common stockholders equity. Figure 4 shows that
Amazon.com is performing worse than the industry average with a negative percent due to the
net loss for 2012. Finally, earning per share shows the amount of net income or net loss for each
share of the companys outstanding common stock (stock that is held by stockholders). This can

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AMAZON.COM FINANCIAL STATEMENT ANALYSIS
be calculated by taking net income and subtracting preferred dividends and dividing it all by
weighted average number of common shares outstanding. Figure 4 shows that from 2011 to
2012 the earnings per share decreased and became negative due to the net loss during 2012
(Nobles, Mattison, & Matsumura, 2014, pp. 1030-1033).
Figure 4
Ratios/Equations:
Profit Margin Ratio
Rate of Return on
Total Assets
Asset Turnover Ratio
Rate of Return on
Equity
Earnings Per Share

(in millions)
2012
-0.06%
-0.44%

2011
1.31%
2.57%

Industry Averages
2.87%
4.76%

2.11 Times
-0.49%

2.18 Times
8.63%

1.66 Times
11.39%

-0.09

1.39

STOCK:
There are three ratios that can help evaluated the companys stock as an investment. The
first is the price/earnings ratio which shows the ratio of the market price compared to the
earnings per share. This can be calculated by dividing the market price per share of common
stock to the earnings per share. Figure 5 shows the difference between 2011 and 2012 showing
that due to the net loss Amazon.com experienced during 2012. The next two ratios are dividend
yield (annual dividends per share to the market price per share) and dividend payout (annual
dividends declared per earnings per share). Amazon.com has never declared a dividend (a
distribution of a companys earnings to stockholders) which makes it difficult to compare year to
year or even Amazon.com to the industrial average (Nobles, Mattison, & Matsumura, 2014, pp.
1033-1035).

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AMAZON.COM FINANCIAL STATEMENT ANALYSIS
Figure 5
Ratios/Equations:
Price/Earnings Ratio
Dividend Yield
Dividend Payout

(in millions)
2012
-2,854.7
No Dividend Paid
No Dividend Paid

2011
131.37
No Dividend Paid
No Dividend Paid

Industry Averages

CONCLUSION:
While analyzing Amazon.coms financial statements I have noticed that during the year
2012 Amazon was less profitable then 2011. They are able to move merchandise with ease as
well as collect receivables quickly. However, due to a sudden decrease in net income resulting
in a significant loss Amazon.com is having problems earing a profit and should fix the problem
to avoid further loss. The financial statements also show that Amazon.com has a large amount of
debt and may have a hard time paying off those debts. Considering the direction that the
financials are going Amazon.com is in trouble and should reconsider some of the decisions that
are being made considering liabilities and future acquisitions of assets.
Works Cited:
Amazon.com, Inc. (2013, April). Annual Reports and Proxies. Retrieved from Amazon.com:
http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsAnnual
Nobles, T., Mattison, B., & Matsumura, E. M. (2014). Horngren's Accounting The Financial
Chapters. New Jersey: Pearson.