Amazon's Financial Health—2012

Amazon.com (Amazon) is one of the market leaders in e-commerce. But company size

does not guarantee success. Amazon's financial health is important to be aware of for customers,

businesses, and government agencies. Using ratio analysis we can understand what Amazon's

financial situation is in five different areas.

Ability to pay current liabilities:

The first area is Amazon's ability to pay current liabilities: debts and payments owned

within a year. Amazon's working capital (see Table 1) shows that if Amazon had to pay its

current liabilities with current assets it would have about $2.45 billion current assets left. Current

assets are cash and easily sold/liquidated resources such as short-term investments, money owed

to Amazon, inventory, prepaid expenses, etc. Between 2011 and 2012 there was a decrease of

$300 million in Amazon's working capital; indicating that Amazon's ability to pay it current

liabilities is worsening. This weakness is highlighted again by the current ratio, which shows the

amount of current assets relative to current liabilities. In 2012 Amazon's current ratio dropped 5

cents and both years was below industry average. The acid test ratio and cash ratio give a similar

indication that Amazon does not have a significantly higher amount of current assets than current

liabilities. While Amazon can pay its current liabilities, there would be little left afterward

without successfully selling its goods and services.

2012 2011 Industry Average

Working Capital $2,294,000,000 $2,594,000,000 --- ---
Current Ratio 1.12:1 1.17:1 1.54:1
Acid Test Ratio 0.78 1.17 1.82
Cash Ratio 0.43 0.35 --- ---
Table 1.

Selling Merchandise and Collecting Receivables:

 Amazon's ability to sell goods and services and collect money for them can be evaluated

with five different ratios. The first two discuss selling speed. Amazon's inventory of merchandise

for sale is sold about twice as fast as the industry average (see Table 2). Though 2012 had

smaller ratios than 2011, inventory had to be replaced 8.3 times that year; about every six weeks.

This is very good. The gross profit margin shows that Amazon makes less money than the

average online retail company off of the price they purchase their merchandise for. But this

number did improve in 2012; hopefully that improvement continues.

2012 2011 Industry Average

Inventory Turnover 8.3 times 9.1 times 4.8 times
Days Sales in 43.98 days 40.11 days 75.42 days
Inventory
Gross Profit Margin 24.75% 22.44% 33.55%
Accounts Receivable 20.59 times 23.13 times 10.11 times
Turnover
Days Sales in 17.73 15.78 36.11
Receivables
Table 2.

The money customer's owe Amazon is labeled accounts receivable. Amazon's high

accounts receivable turnover was, like inventory, double the industry average for both years. This

indicates that Amazon does better than average at collecting the money due it for sales and

services. Because it took Amazon a little longer than the previous year to collect on the accounts

in 2012, it would be good to keep an eye on that part of the business.

Paying long term debt

Amazon's ability to pay its long term debt is very important. Long term debt is debt

which is not due in the next year. The total amount of debt (short and long term) Amazon has

relative to all of it assets (money, equipment, buildings, land, inventory, licenses, etc.) is its debt

ratio. Amazon's debt ratio shows that 59% of Amazon's assets were financed by debt in 2011 and
58% were in 2012. This is higher than the industry average (see Table 3) indicating that investing

in or lending money to Amazon is risky.

Amazon's debt to equity (owner/stockholder value) ratio was very high in both years,

especially compared to the industry average. This means that Amazon uses more debt than equity

(stock) for financing. This is another big risk.

2012 2011 Industry Average

Debt to Assets Ratio 58% 59% 34%
Debt to Equity Ratio 232% 192% 52%
Times-Interest Earned 5.23 5.18 5.33
Ratio
Table 3.

The times interest earned ratio is how many times Amazon could pay only its interest

expenses off of its net income (money earned after businesses expenses are paid) after taxes. The

industry average is 5.33 times. Amazon is quite close to that at 5.18 and 5.23 times in 2012. It

would be good if this ratio to continues to rise, but it is better than a number of their other debt

ratios.

Profitability

From 2011 to 2012 Amazon experienced a decrease in net profit margin (see Table 4). In

2011, after all expenses, Amazon's take home gain was 1.3 cents for every dollar spent on

inventory; below the industry average of 2.87 cents spent on inventory. Then, in 2012, even

though Amazon was able to initially gain more on inventory, after all expenses, there was a net

loss of 0.06 cents. This seems to indicate that expenses increased. Amazon's consolidated

statement of operations for 2012 shows that there was an increase in total operating expenses by

28%. Amazon could look to reduce expenses or significantly increase the gross profit margin to

meet the increase in expenses.

 2012 2011 Industry Average
Net Profit Margin -0.06% 1.3% 2.87%
Return on Assets 0.18% 3.16% 4.76%
Asset Turnover 2.11 times 2.18 times 1.66 times
Return on Common 0.49% 8.63% 11.39%
Stockholder's Equity
Earnings per Share -$0.09 $1.37 --- ---
Table 4.

The return on assets shows that Amazon does not use its assets to earn income as well as

the rest of the industry. Even though Amazon's return on assets is low, their asset turnover is high

like their inventory and accounts receivable turnover ratios. The asset turnover ratio is an

indicator of how well a company is using its assets to get sales. The industry average for asset

turnover is is 1.66. Amazon preformed above the industry average with 2.18 times in 2011 and

still 2.11 times in 2012. This appears to be one of Amazon's strengths; using assets to make sales.

But it needs to improve its ability to earn a profit from those sales.

Looking more particularly at profit for investors, Amazon does not have a high return on

stockholder's equity. While the industry average is 11.39% of a return, Amazon had a return of

8.63% in 2011 and a severe drop to 0.49% in 2012. Amazon's earnings per share also

deteriorated from a minor profit per share to a loss. This loss, as with the price/earning ratio, will

likely deter investors from shares in Amazon's stock.

Investments

Amazon has a policy of not paying dividends to its stockholders. This is probably a

determent to some investors because it means the dividend payout and dividend yield is always

zero. But Amazon's stock is still valuable. The price of Amazon's stock on the market relative to

the company's earnings was very inconsistent between 2011 and 2012 (see Table 5). Both years

Amazon's yield was very distant from the industry average. In 2011, it was very high. In 2012, it
was terribly low. It would be good for Amazon to improve and stabilize this ratio if they want to

keep getting funding from investors.

2012 2011 Industry Average

Price/Earnings Ratio $-2,854.7 $131.37 $47.17
Book Value per $18.04 $17.05 $10.54
Common Share
Table 5.

Investors who trade stock on the basis of market value might consider purchasing

Amazon's stock because Amazon's book value per common share is above industry average.

Even is 2012, when the company experienced a loss, its book value increased.

Conclusion

Amazon is in a financially precarious situation. In order to improve, the company should

find ways to reduce expenses while continuing to give the kind of services which allow it to

make such a high rate of sales. It might also consider using less debt to finance its operations and

instead use more stockholder's equity. There may be ways to do this without having to start

paying dividends.
 End Note

Industry averages were provided by the instructor.

Numbers and figures for Amazon.com were calculated by the writer, using Amazon.com's

financial statements in the annual reports for 2011 and 2012, pages 36-39 and 37-41,

respectively.