McKay 1

Heather McKay
Paige Paulsen

Accounting 1120

4/7/2018

Amazon Financial Statement Analysis Paper

Introduction

The commonly known tech giant Amazon is said to be one of the largest internet retailers

in the world. As measured by revenue and market capitalization. In this paper, we are going to

be analyzing Amazon’s ability to pay current liabilities, to sell merchandise inventory and collect

receivables, to pay long-term debts, profitability, and evaluating stock as an investment. In order

to see Amazon’s capability, we will be using these ratios to analyze Amazon’s Financial

Statements from 2011 and 2012.

Ability to Pay Current Liabilities

When analyzing a company’s ability to pay current liabilities you should start off by

evaluating the company’s Working capital. Working capital measures the business’s ability to

meet its short-term obligations with its current assets.

AMAZON.COM, INC.
PARTIAL CONSOLIDATED BALANCE SHEETS
2012 2011
Total current asset 21,296 17,490
Total current liabilities 19,002 14,896
Working capital (Current assets – current Liabilities) 2,294 2,594

In our case, it is shown that Amazon’s Working capital for 2012 and 2011 was totaled at

$2,294 and $2,594. This indicates that for both 2012 and 2011 Amazon’s Working capital is

positive, meaning that Amazon has more current assets than current liabilities. After evaluating
 McKay 2

Working capital there are also three ratios that can be used to help measure a company’s ability

to pay current liabilities. These three ratios are cash ratio, acid-test ratio, and current ratio.

AMAZON.COM, INC.
2012 2011 Industry Average
Cash Ratio 0.43 0.35
Acid-Test Ratio 0.78 0.82 1:82
Current Ratio 1.12 1.17 1.54:1

The cash ratio is used to measure a company’s ability to pay current liabilities from cash

and cash equivalents. It is shown that Amazon’s cash ratio for both 2012 and 2011 were 0.43 and

0.35. This indicates that there was an increase in their cash ratio. For both 2012 and 2011,

Amazon’s cash ratio stayed below 1.0, which indicated that Amazon had more current liabilities

than cash and cash equivalents.

The acid-test ratio is used to determine whether a company is capable of paying all of its

current liabilities if they came due immediately. In the table, it is shown that Amazon’s acid-test

ratio was 0.78 in 2012 and 0.82 in 2011. Their ratio deteriorated during the year 2012 and for

both years the industry’s average was greater. Because Amazon’s ratio was below one in both

years it means that Amazon did not have enough liquid assets to pay off their current liabilities.

The current ratio is used to measure a company’s ability to pay current liabilities from

current assets. In 2012 and 2011 Amazon’s current ratio was 1.12 and 1.17. Once again,

Amazon’s ratio deteriorated in 2012 but because their ratios were still greater than one, they

were still more likely to be capable of paying off their obligations.

After evaluating Amazon’s working capital, cash ratio, acid-test ratio, and current ratio for

both of the years 2011 and 2012 we can make the assumption that Amazon’s ability to pay off its

current liabilities was greater in 2011.

 McKay 3

Ability to Sell Merchandise Inventory and Collect Receivables

There are five different ratios that can be used to evaluate a company's ability to sell

merchandise inventory and collect receivables. These five ratios are the inventory turnover, days’

sales inventory, gross profit percentage, accounts receivable turnover ratio, and the days’ sales in

receivables ratio.

AMAZON. COM, INC.

2012 2011 Industry Average
Inventory turnover ratio 8.3 times 9.1 times 4.8 times
Days’ sales in inventory ratio 44 days 40 days 37 days
Gross profit percentage ratio 24.8% 22.4% 33.55%
Accounts receivable turnover ratio 20.58 times 23.13 times 10.11 times
Days’ sales in receivables ratio 18 days 16 days 75.42 days

The inventory turnover ratio calculates the number of times a company sells its average

level of merchandise inventory during a period of time. Amazon’s inventory turnover ratio for

2012 and 2011 was 8.3 and 9.1 times. It is shown in the table that the industry average was 4.8

times. Which means that for both 2012 and 2011 Amazon was ahead of their retail competitors.

The days’ sales in inventory ratio, measures the average number of days that inventory is

held by a company. Amazon’s days’ sales in inventory ratio for 2012 was 40 days and in 2011 it

was 44 days. Fortunately for Amazon, they were able to stay below the industry average during

both years.

The gross profit percentage ratio is used to measure the profitability of each sales dollar

above the cost goods sold. Gross profit is known for being the first level of profitability. Gross

profit shows investors and analysts how well a company is doing regarding creating products or

providing services compared to its competitors in the industry. As shown in the table Amazon’s

gross profit percentage for 2012 was 24.8% and in 2011 it was 22.4%. Compared to the

industry’s average ratio Amazon was at a disadvantage during both years.

 McKay 4

The accounts receivable turnover ratio is used to calculate the number of times a company

collects the average accounts receivable balance in a year. The greater the ratio, the faster the

cash collections. Amazon’s accounts receivable turnover ratio of 20.58 times from 2012 and

23.13 times from 2011 are much faster than the industry’s average ratio of 10.11 times.

Comparing both years, during 2012 Amazon’s ratio slightly deteriorated from the amount it was

in 2011.

Last but not least, the days’ sales in receivables ratio. This ratio tells how many days it

takes to collect the average level of accounts receivable. Amazon’s collection period ratio in

2012 was 18 days and 2011 it was 16 days. The industry’s average was 75.42 days, this indicates

that Amazon’s collection period was much faster during both years.

After evaluating all five of these ratios we are now able to see Amazon’s capability of

selling merchandise inventory and collecting accounts receivables throughout both of the years

2011 and 2012.

Ability to Pay Long-term Debt

When evaluating a company’s ability to pay long-term debts there are three ratios that you

must use. The debts ratio, debt to equity ratio, and the times-interest-earned ratio.

AMAZON.COM, INC.
2012 2011 Industry’s Average
Debts ratio 75% 69% 34%
Debts to equity ratio 2.97% 2.26% 52%
Times-interest-earned ratio 5.23 times 15.18 times 5.33 times

Starting off with the debt ratio, this ratio is used to show the portions of assets financed

with debt. The greater the debt ratio, the greater the company’s financial risk. This ratio can also

be used to give insight into a company’s ability to pay its debts. As shown in the table, Amazon’s

ratio was greater than the industry’s average percent. In 2011 Amazon’s ratio was at 69% but
 McKay 5

during 2012 the ratio deteriorated. Considering both years Amazon’s debt ratios were rather

high, implying that they were at a financial risk during 2012 and 2011.

The debts to equity ratio is used to measure portions of total liabilities relative to total

equity. In both 2012 and 2011, Amazon’s debts to equity ratios were greater than one, this

indicates that Amazon was financing more assets with debt than with equity. Amazon’s ratios of

2.97% and 2.26% were still fairly better than the industry’s average of 52%.

AMAZON.COM, INC.
2012 2011 Industry’s Average
Times-interest-earned ratio 5.23 times 15.18 times 5.33 times

The last ratio used to measure a company’s ability to pay long-term debts is the times-

interest-earned ratio. This ratio is commonly used by analysts and investors to evaluate a

business’s ability to pay interest expense. As shown in the table in 2011 Amazon’s ability to pay

interest expense was fairly lush and its ratio was even greater than the industry’s average. During

the year 2012 Amazon’s ratio deteriorated quite a bit compared to 2011.

Now that we have evaluated these three ratios we are now able to draw a conclusion of

Amazon’s ability to pay off its long-term debts in 2012 and 2011. From the results shown in the

table, we can make the assumption that Amazon was more capable of paying off its long-term

debts in 2011.

Profitability

Profitably indicates a company’s ability to earn a profit. When analyzing a company’s

profitably there is five ratio that we can use. Those ratios are profit margin ratio, the rate of

return on total assets ratio, assets turnover ratio, the rate of return on common stockholders’

equity, and earnings per share ratio.

 McKay 6

AMAZON.COM, INC.
2012 2011 Industry’s Average
Profit margin ratio -0.06% 1.31% 2.87%
Rate of return on total assets ratio -0.45% 2.57% 4.76%
Assets turnover ratio 2.11 times 2.18 times 1.66 times
Rate of return on common stockholders’ equity -0.49% 8.63% 11.39%
Earnings per share ratio $-0.09 $1.39

The profit margin ratio shows the percentage of each net sales dollar earned as net income.

The higher the profit margin ratio, the more sales dollars end up as profit. In 2012 and 2011

Amazon’s profit margin was -0.06% and 1.31%. Comparing both years to the industry’s average

Amazon was at a disadvantage.

The rate of return on total assets ratio is used to measure how well a company uses its

assets to earn profit. Amazon’s return on assets was -0.45% in 2012 and 1.96% in 2011. The

industry’s average ratio is 4.76%. Amazon was once again during both years at a disadvantage

compared to the industry’s average.

The asset turnover ratio measures how effectively a company uses its average total assets to

generate sales. In 2012 and 2011 Amazons ratios were 2.11times and 1.66 times. Comparing

both ratios to the industry’s average Amazon had an advantage over their competing retailers.

The higher the ratio, the better the company is performing and generating more revenue per

dollar of assets.

The rate of return on common stockholders’ equity shows the relationship between net

income available to common stockholders and their average common equity invested in the

company. Analysts and investors generally have more confidence in companies with a high and

sustainable rate of return on common stockholder’s equity ratio. It is shown in the table that

Amazon’s rate of return on common stockholders’ equity was -0.49% and 8.63% for the years

2012 and 2011. Amazon’s ratios for 2012 and 2011 were also lower than the industry’s average.
 McKay 7

This indicates that during both years Amazon wasn’t able to generate an efficient amount of cash

flows.

AMAZON.COM, INC.
2012 2011 Industry’s Average
Earnings per share ratio $-0.09 $1.39

The last ratio we have is the earnings per share (ESP) ratio. This ratio reports the amount of

net income or loss for each share of the company’s outstanding common stock. In other words,

this ratio breaks down a company’s profits on per share basis. Earnings per share (ESP) ratio is

commonly perceived as one of the most important variables in determining a share’s price. As

shown in the table we can see that Amazon’s ratio deteriorated dramatically during the year

2012. This indicates that in 2012 Amazon was losing money per share on its stocks.

After evaluating these five ratios we now can draw the conclusion that during both years

Amazon’s profitability was more promising in 2011. In 2012 Amazon’s ratios rates were

unfortunately low and the majority of them were below the industry averages.

Stock as an investment

Before we finish we need to evaluate Amazon’s stock as investments. The three final ratios

we will be using to evaluate Amazon’s stock as investments are the price/earnings ratio, dividend

yield ratio, and dividend payout ratio.

AMAZON.COM, INC.
2012 2011 Industry Average
Price/earnings ratio -2854.7 131.37 47.17
Dividend yield ratio N/A N/A N/A
Dividend payout ratio N/A N/A N/A

The price/earnings ratio is the ratio of the market price of a share of common stock to the

company’s earnings per share. Generally, a high price/earnings ratio indicates investors and

analysts are expecting higher earnings of growth in the future. Amazon’s ratio were -2854.7 and
 McKay 8

131.37 during the years 2012 and 2011. During 2012 Amazon’s price/earnings ratio deteriorated

dramatically. In 2011 Amazon’s ratio was able to exceed the industry’s average rate.

The dividend yields ratio is the ratio of annual dividends per share to the stocks market

price per share. This ratio measures the percentage of stock’s market value that returned annually

as dividends to shareholders. The dividend payout is the ratio of annual dividends declared per

common share relative to the earnings per share of the company. This ratio measures the

percentage of earnings paid annually to common stockholders as cash dividends. For the

dividend yield and dividend payout ratio we are not able to determine these rates because

Amazon does not grant their shareholders with cash dividends.

Conclusion

We have now completed the process of analyzing Amazon’s ability to pay current

liabilities, to sell merchandise inventory and collect receivables, to pay long-term debts, to

evaluate stock as an investment, and profitability throughout the years 2011 and 2012. It was

clear that from the data we collected Amazon stumbled in 2012. Throughout each of the tables,

many of Amazon’s 2012’s rates were below the industry’s average rates. It is safe to make the

assumption that Amazon was, in fact, more capable in these different aspects in 2011.