Robert Bartlome

ACCT 1120-401
18 Nov. 2014
Executive Summary
Amazon.com, Inc.
I have reviewed the financial statements of Amazon.com, Inc. for December 2012 and
2011. My purpose is to assess the Companys financial position for the year of 2012. I will use
various ratios and formulas to determine five different aspects of the Companys financial
position: its ability to pay current liabilities; its ability to sell merchandise inventory and collect
receivables; its ability to pay long term liabilities; its profitability; and its use of investments in
stock. The ratios for each category will be shown in tables along with information for
Amazon.com, Inc. for the years 2011 and 2012 and also the industry averages, where available.
From this information I will be able to determine the overall financial health of Amazon.com,
Inc. for the year 2012.
Ability To Pay Off Current Liabilities

Industry Average
2012 Amazon
2011 Amazon

Working Capital
Unavailable
$2,294.00
$2,594.00

Current Acid-Test
Ratio
Ratio
1.54
0.82
1.12
0.78
1.17
0.82

Cash Ratio
Unavailable
0.43
0.35

Table 1

Table 1 shows four useful ratios I will use to assess Amazons ability to pay off its
current liabilities. The working capital measures the excess of current assets to current liabilities.
Amazons working capital deteriorated 12% from 2011 to 2012, but there is still some
allowance. The current ratio measures a companys ability to pay its current liabilities with its
current assets. Amazons current ratio for 2012 was lower than the industry average and shrunk
4% from 2011. Unless Amazon finds ways to increase their current assets or decrease their
current liabilities, the Company will find it hard to compete with the industry. The acid-test ratio

Bartlome, Amazon Project 2

measures how easily a company could pay off its current liabilities if all of them came due
immediately. The ratio shows that Amazon is doing well and is keeping up well with the industry
average. The cash ratio shows how much of a companys current liabilities it could pay off with
cash. In 2012 Amazon could pay off a little less than half of its current debts with cash, which
was a 22.9% improvement from the previous year. These four ratios suggest that although
Amazon has been generally consistent from 2011 to 2012 in its ability to pay current liabilities, it
would benefit by finding ways to decrease its liabilities in order to compete well in the industry.
Ability To Sell Merchandise Inventory And Collect Receivables

Industry Average
2012 Amazon
2011 Amazon

Inventory
Turnover
4.8
8.34
9.1

Days' Sales Gross Profit

in Inventory
Margin
75.42
33.55%
43.76
24.75%
40.11
22.44%

Accounts Receivable
Turnover Ratio
10.11
20.59
23.13

Days' Sales in
Receivables
36.11
17.73
15.78

Table 2

Table 2 shows five useful ratios that I will use to assess Amazons ability to sell
merchandise inventory and collect receivables. The inventory turnover shows how many times a
year a company is able to sell its average level of product inventory. The ratio shrunk 8% from
2011, but was 73.8% higher in 2012 than the industry average, which indicates that Amazon sells
its average inventory faster than its competitors. The days sales in inventory shows the average
number of days that inventory is held by a company until it is sold and replaced. This number
increased 9% from 2011, but was 42% lower in 2012 than the industry average, suggesting that
Amazons inventory is replaced more often than that of its competitors (probably due to its high
inventory turnover ratio). The gross profit margin shows how much profit is made from each
sales dollar, apart from the cost to produce the product. Though Amazons gross profit margin
increased 10% from 2011, it was 26% lower in 2012 than the industry average. Therefore the
Company does not produce as much profit as its competitors relative to their respective sales.

Bartlome, Amazon Project 3

The accounts receivable turnover ratio shows the number of times a year that a company collects
the average accounts receivable balance. Amazons ratio decreased 11% from 2011 to 2012, but
they collected payments twice as fast as the industry average. The days sales in receivables
shows how many days it takes to collect the average accounts receivable. It took longer on
average for Amazon in 2012 than in 2011 by 12%, but the Company was still 50% faster than the
industry average. These five ratios suggest that Amazon overall took longer in 2012 to sell its
products and collect the payments than in 2011, but made slightly more profit from it in 2012.
However, though Amazon was overall significantly faster at selling its products and receiving
payment than the industry average, the sales werent as profitable as that of competitors. Amazon
should look into ways to increase profit from its sales, perhaps by decreasing the cost of goods
sold and/or increasing the prices of the merchandise.
Ability To Pay Long Term Debt

Industry Average
2012 Amazon
2011 Amazon

Debt to Total
Assets Ratio
34%
75%
69%

Debt to
Equity Ratio
.52
2.97
2.26

Times Interest
Earned Ratio
5.33
5.23
15.18

Table 3

Table 3 shows three ratios I will use to assess Amazons ability to pay its long term
liabilities. The debt to total assets ratio shows that for 2012, 75% of Amazons assets were
financed with debt. This is a 9% increase from 2011, and is 120% higher than the industry
average. The debt to equity ratio also suggests that Amazon has a high level of debt. A debt to
equity ratio higher than 1 means more assets of the company are financed with debt than with
equity. Amazons debt to equity ratio increased 31.4% from 2011 to 2012, and was almost six
times higher than the industry average. The times-interest-earned ratio shows a companys
ability to pay interest expense with its earnings before interest and taxes. Amazons high 2011

Bartlome, Amazon Project 4

ratio indicates the Companys ease in doing this, but its ability to do so dropped 66% in 2012,
which was closer to the industry average. These three ratios suggest that Amazon.com, Inc. has
substantially more debt than the industry average, and therefore has more financial risk than
other companies in the industry.
The Companys Profitability

Industry Average
2012 Amazon
2011 Amazon

Net Profit
Margin
2.87%
-0.06%
1.31%

Return on
Assets
4.76%
0.18%
3.16%

Asset
Turnover
1.66
2.11
2.18

Return on Common Earnings Per

Stockholder's Equity Share (EPS)
11.39% Unavailable
-0.49%
-$0.09
8.63%
$1.39

Table 4

Table 4 shows five ratios which I will use to assess Amazons profitability. The net profit
margin shows that in 2011, Amazon earned 1.31% of every sales dollar as net income. In 2012,
the Company suffered a net loss instead of income, so the net profit margin was negative. For
both years, Amazon was much lower than the industry average. The return on assets measures
how well a company uses its assets to earn a profit. This ratio also plummeted from 2011 to 2012
by 94% due to Amazons net loss and in both years was substantially lower than the industry
average. The asset turnover ratio indicates how well a company uses its assets to generate sales.
Amazon stayed reasonably consistent from 2011 to 2012 in this aspect with only a 3% drop, and
was 27% higher than the industry average in generating sales. The return on common
stockholders equity shows the relationship between common stockholders available net income
and their equity. In 2011 the rate of return was 24% lower than the industry average, but since
Amazon suffered a net loss in 2012, the ratio was negative. The earnings per share ratio shows
how much net income or loss there was for each share of outstanding common stock issued by a
company. In 2011 Amazon had a 1.39 ratio, and since the Company suffered a net loss for 2012
the ratio was negative. These five ratios indicate that in 2011 and 2012, Amazon generated more

Bartlome, Amazon Project 5

sales from its assets, but wasnt as capable of making a profit off of their sales as other
companies in the industry. Amazon should look into ways to increase profit from their sales.
Stock As An Investment

Industry Average
2012 Amazon
2011 Amazon

Price/Earnings
Ratio
47.17
-2854.7
131.37

Dividend
Yield
Unavailable
0
0

Dividend
Payout
Unavailable
0
0

Table 5

Table 5 shows three ratios which I will use to assess how well Amazon.com, Inc. uses
stock as an investment. The price/earnings ratio shows the market value of $1 of a companys
earnings. In 2011, Amazons price/earnings ratio was higher than the industry average by almost
280%, which means the market value of the Companys stock was worth significantly more than
the industry average, selling at 131.37 times its yearly earnings. But since Amazon suffered a net
loss in 2012, the price/earnings ratio was significantly negative. The dividend yield and the
dividend payout show how big the annual dividends were compared to the market price and the
earnings per share of a company, respectively. Amazon didnt declare any dividends for either
2011 or 2012. These three ratios would inform investors that they shouldnt expect dividends,
and the sudden drop in the price/earnings ratio could drive away potential investors.
Regarding the overall financial health of Amazon.com, Inc., the Company was more
successful than the industry average in generating sales in 2012. However, Amazon seems to be
having a challenge in generating profit from those sales, and furthermore has an excessive
amount of debt. Amazons problems of profit and debt increased from 2011 to 2012, putting the
Company at a greater financial risk. It is my opinion that without an increase in profit, Amazon
will face financial problems in the future because of an inability to pay off its excessive debt, and
will therefore find it very hard to successfully compete with other companies in the industry.