MelissaSaykham

ProfessorPaigePaulsen

Accounting1120

04/16/2017

AmazonFinancialStatementAnalysis

Introduction

TheintentofthisfinancialanalysispaperistoprovideaninsightfulevaluationofAmazons

historicalfinancialstatementsfortheperiodsof2011and2012fortheprimarypurposesofdetermining

thecompanysabilitytopaycurrentliabilities,effectivelysellthroughmerchandiseinventoryandcollect

receivables,paylongtermdebts,garnerprofits,aswellasassessthecompanyforpotentiallucrative

investmentopportunities.Amazonsfinancialstatementsfortheperiodsof2011and2012willbe

analyzedusingvariousratiosincluding,butnotlimitedtothecurrentratio,cashratio,acidtestratio,

inventoryturnoverratio,debtratio,etc.TheseratioswillhelptonumericallyconveyAmazonsfinancial

health,andgiveinsighttoitsoverallstandingasacompany.

AbilityToPayCurrentLiabilities

IndeterminingAmazonsworkingcapital,whichmeasuresacompanyscapabilitytosatisfy

shorttermfinancialobligationswithitscurrentassets,thecurrentratiocanbefirstconsidered.The

currentratioisaratiousedtodetermineacompanysabilitytopayitscurrentliabilitieswithitscurrent

assets.Whilemaintainingcurrentratiosof1.17and1.12fortheperiodsof2011and2012,Amazon

wasabletosufficientlysustainitsoperationalactivities,despitebeingbelowthecurrentratioindustry

averageof1.54.Generally,ahighcurrentratioisagoodindicatorthatacompanyhasadequatecurrent
assetstosustainnormalbusinessoperations,however,acurrentratiothatistoohigh,canbeindicative

thatacompanyisnotusingitsassetseffectivelyandmaybetooliquid.

ThesecondratiotobeconsideredisAmazonscashratio,whichmeasuresthecompanys

liquidityandconsiderscashinadditiontocashequivalentsdividedbythecompanystotalcurrent

liabilities.Fortheperiodsof2011and2012,Amazonhadcashratiosof0.35and0.43,whichare

consideredtobesatisfactory,beingthatbothnumbersarebelow1.0,whichwouldindicatethata

companyhasanunnecessarilylargecashsupplyamount.

ThethirdratiotobeconsideredinevaluatingAmazonsworkingcapitalistheacidtestratio,

sometimesalsoreferredtoasthequickratio,whichmeasuresAmazonsabilitytosatisfycurrent

liabilities,shouldtheybecomeimmediatelydue.Fortheperiodsof2011and2012,Amazonhad

acidtestratiosof0.82and0.78,whichwouldbeconsideredfairlypoor,asbothratioswerebelowthe

industryaverageof1.82.Consideringthebelowindustryaveragenumbers,Amazonwouldencounter

moderatedifficultywithsatisfyingcurrentliabilitiesintheeventthattheywereimmediatelydue.

AbilitytoSellM erchandiseInventoryandCollectReceivables

InevaluatingAmazonsabilitytosellmerchandiseinventoryandcollectreceivables,thereare

fiveratiostoconsider,thefirstbeingtheinventoryturnoverratiowhichdividesthecostofgoodssold

bytheaveragemerchandiseinventory,andmeasuresthenumericalamountoftimesthatacompanysells

merchandiseinventoryduringaparticularperiod.Fortheperiodsof2011and2012,Amazonhad

inventoryturnoverratiosof9.1timesand8.3times,whichwouldbeconsideredverygood,beingthat

thenumbersindicatethatAmazonissellingthroughinventoryataquickerratecomparedtotheindustry

average,whichis4.8times.
 Thesecondratiotoconsideristhedayssalesininventoryratio,whichmeasurestheaverage

amountofdaysthatacompanyholdsmerchandiseinventory,andcanassistacompanyindecipheringif

averagemerchandiseinventoryshouldbeincreasedordecreased,soastoreducetheriskofholding

datedinventory.Fortheperiodsof2011and2012,Amazonhaddayssalesininventoryratiosof40.1

daysand44days,whichwouldbeconsideredgood,asthesenumbersarebelowtheindustryaverage

of75.42days.ThisindicatesthatAmazonisholdingontoitsmerchandiseinventoryatashorterrate

thanthatofothercompaniesinthesameindustry.

Thethirdratiotoconsideristhegrossprofitpercentage,alsosometimesreferredtoasthegross

margin.Thisratiomeasureshowprofitableeachnetsaledollarabovethecostofgoodssoldis,andis

calculatedbytakingthegrossprofitanddividingitbynetsalesrevenue.Amazonsgrossprofit

percentagefor2011and2012was22%and24%,whichisconsideredlow,whencomparedtothe

industryaverageof33.55%.However,theslight2%increasein2012upfrom2011potentiallysignifies

ariseinincomeandcouldbeindicativeofotherfutureincreases.Tofurtherincreasegrossprofit

percentage,Amazonwillneedtoeitherlowerthecostofmerchandiseinventoryorincreasetheselling

priceinattempttogeneratemorerevenue.

Thefourthratiotoconsideristheaccountsreceivableturnoverratio,whichmeasuresthe

numberoftimesacompanycollectstheaveragereceivablesinayear.Fortheperiodsof2011and

2012,Amazonhadaccountsreceivableturnoverratiosof23.13timesand20.59times,whichismore

thandoubletheindustryaverageat10.11times.Thesehighernumbersindicatethatcashcollectionson

receivablesareconsistentandbeingcollectedatanaboveaveragerate.

ThelastratiotoconsiderintermsofAmazonsabilitytocollectreceivablesisthedaysinsales

inreceivablesratio,alsoknownasthecollectionperiodthisratiomeasureshowmanydaysittakesto
collecttheaveragenumberofreceivables.Fortheperiodsof2011and2012,Amazonhaddaysin

salesinreceivablesratiosof15.8daysand17.7days,bothperiodsarelowerthantheindustryaverage

of36.11days,whichsuggeststhatAmazonhasquickeraccesstocashthatcanbeputbackinto

businessoperations,sinceitscollectionperiodsareshorter.

AbilitytoPayLongTermDebt

InassessingAmazonsabilitytopaylongtermdebt,whichareaccountstermedatperiodsthat

exceed12months,thedebtratio,orthedebttototalassetsratiocanbefirstconsidered.Thedebtratio

measurestheamountofassetsthatarefinancedwithdebt.Amazonsdebtratiofortheperiodsof2011

and2012was69%and75%,whichwasabovetheindustryaverageof34%,giventhesehigher

numbers,itcanbedeterminedthatAmazonpossessedahigherfinancialriskthanothercompaniesinthe

sameindustryduringtheseperiods,beingthatmorethanhalfofitsassetswerefinancedwithdebtduring

2011and2012.

AnotherratiothatcanbeusedtoevaluateAmazonsabilitytopaylongtermdebtisthedebtto

equityratio,whichmeasurestherelationshipofacompanystotalliabilitiesinrelationtoitstotalequity.

Fortheperiodsof2011and2012,Amazonhaddebttoequityratiosof226%and297%,whichwas

severaltimeshigherthantheindustryaverageof34%duringthattime.Likethedebtrationumbers,

thesehigherdebttoequityrationumbersindicatethatAmazonwassignificantlyfinanciallyriskier,

becauseitwasfinancingassetswithmoredebtthanequity,incomparisontoothercompanies.

Thelastratiotoconsiderinregardstolongtermdebtsisthetimesinterestearnedratio,also

sometimesreferredtoastheinterestcoverageratio,whichmeasuresacompanysabilitytopayinterest

expenses.Fortheperiodsof2011and2012,Amazonhadinterestcoverageratiosof15.18timesand
5.23times.In2011,Amazonhadaverystrongabilitytosatisfyinterestexpenses,whencomparedto

theindustryaverageof5.33timeswhereasin2012,Amazonhadaslightlybelowacceptableabilityto

satisfyinterestexpenses.

EvaluatingProfitability

IndeterminingAmazonsprofitability,fiveratioscanbeconsidered,whicharetheprofitmargin

ratio,therateofreturnontotalassetsratio,assetturnoverratio,rateofreturnoncommon

stockholdersequityratio,andtheearningspershareratio.Theprofitmarginratiomeasurestheportion

ofeachsalesdollarthatisearnedasincome.Fortheperiodsof2011and2012,Amazonhadprofit

marginratiosof1.31%and 0.06%,thesenumbersareconsideredunsatisfactorywhencomparedto

theindustryaverageof2.87%.Consideringtheselowerpercentages,itcanbeconcludedthatAmazon

wasnotaccomplishinghighprofitmarginsduring2011and2012.

Therateofreturnontotalassetsratiomeasuresacompanysabilitytoeffectivelyuseassetsto

earnprofits.During2011and2012,Amazonhadrateofreturnontotalassetsratiosof3.16%and

0.18%,thesenumberswerebelowtheindustryaverageof4.76%,andsuggeststhatincomparisonto

othercompanies,Amazonhadabelowsatisfactoryabilitytouseitsassetseffectivelyingenerating

profits.

Theassetturnoverratiomeasurestheportionofsalesaccruedforeachdollaroftotalassets

invested.Fortheperiodsof2011and2012,Amazonhadassetturnoverratiosof2.18timesand2.11

times,whichexceededtheindustryaverageof1.66times.ThesenumbersindicatethatAmazonwas

generatingmorenetsalesforeachdollaramountoftotalinvestedassets,whencomparedtoother

companies.
 Therateofreturnoncommonstockholdersequity,alsosometimesreferredtoasreturnon

equity,measuresthedifferencebetweennetincomeavailabletocommonstockholdersandthemedian

commonequityinvestedinthecompany.Fortheperiodsof2011and2012,Amazonhadreturnon

equityratiosof8.63%and 0.49%,whichisconsideredunsatisfactory,whencomparedtotheindustry

averageof11.39%.

Theearningspershareratiomeasurestheamountofnetincomeorlossforeachshareofthe

companysoutstandingcommonstock,andisconsideredtobetheprimaryratioindetermininga

companysprofitability.Fortheperiodsof2011and2012,Amazonhadearningspershareratiosof

$1.39and $0.09,whichwouldbeconsideredveryunsatisfactory,whencomparedtotheindustry

averageof$10.54.TheselownumberssuggestthatAmazonwaspoorlycompetitivewithother

companiesinthesameindustryduringtheseperiods.

EvaluatingStockasanInvestment

ThelastevaluativeaspectofassessingAmazonsfinancialhealthconsistsofpotentialfuture

investorswhomaypurchasesharesofAmazonstock,whichwouldsubsequentlyincreasetheamountof

capitalthecompanyhastoworkwith.Whenconsideringtheprice/earningsratio,whichisaratiothat

measuresthemarketpriceofashareofacompanyscommonstockinrelationtoitsearningspershare,

Amazonexhibitedsignificantfluctuationbetween2011and2012.In2011,Amazonhada

price/earningsratioof131.7,whichwasabovetheindustryaverageof47.17andisconsideredvery

satisfactorywhereasin2012,Amazonhadaprice/earningsratioof 2,854.7,whichindicatesthatthe

companysstockdidnotsellaswellasintheprioryear.
 WhenconsideringpurchasingsharesofAmazonsstockasaninvestment,potentialinvestors

mayalsowishtoconsiderboththedividendyields,aswellasthedividendpayoutsthatAmazonmay

potentiallyoffer.Fortheperiodsof2011and2012,Amazondidnotdeclareorpaycashdividendsto

commonstockholders,whichmayhavedecreasedincentivesforpotentialfutureinvestors.

Conclusion

Insummation,ananalysisofAmazonsfinancialstatementsfortheperiodsof2011and2012

indicatethatthecompanyfaredbelowaverageinitsabilitytopaybothcurrentliabilitiesaswellas

longtermdebt,consideringtheratiovaluesspecifiedabove.However,thecompanysaboveaverage

abilitytosellthroughmerchandiseinventoryanditsslightincreaseingrossprofitbetween2011and

2012indicategoodpotentialforcompanygrowth,andincreasedreceivablesduetoincreasedsales.

Amazonsprofitmargins,rateofreturnsontotalinvestments,debttoequity,andlackofdividend

payoutslikelydecreasesthecompanysappealtopotentialinvestors,andwouldsuggestthatthe

companyisfinanciallyriskierthanothercompaniesinthesameindustry.