Anthony V Davis

Accounting 1120

04/13/2018
Amazon Financial Analysis

Amazon is arguably the most successful e-commerce company ever created. This

document will provide an analysis of the financial performance and overall stability of

Amazon.com in 2011 & 2012. Included in this analysis will be Amazon’s performance in the

following categories: ability to pay current liabilities, ability to sell merchandise inventory and

collect receivables, ability to pay long-term debt, profitability, and evaluation of stock as an

investment. Additionally, we will compare this performance to industry averages to evaluate how

Amazon is performing in comparison to other organizations in the e-commerce market.

Ability to Pay Current Liabilities

In order to assess Amazon’s stability, it is important to understand Amazon’s relationship

with its current debts. Accounting tools like the acid and current ratio provide insight into

Amazon’s debt. It is also important to assess Amazon’s working capital available and cash on

hand. Amazon’s acid ratio is fairly healthy overall, considering the significant amount of non-

liquid assets tied up in inventory. Amazon’s acid ratio has slipped marginally from 2011 to 2012,

yet is performing with the industry. Amazon’s current ratio is behind the industry average.

Overall, Amazon's ability to pay its current liabilities is acceptable but still behind the industry

average. Refer to Table 1 for the ratios and relevant data presented in this section.

Table 1

Presented Data 2012 2011 Industry Average

Acid Ratio 1:78 1:7 1:82

Current Ratio 1.12:1 1.17:1 1.54:1

Working Capital 2294* 2594* N/A

 Anthony V Davis

Accounting 1120

04/13/2018
Cash 8084* 52699* N/A

*In millions

Ability to sell merchandise inventory and collect receivables

Amazon’s success is dependant on its ability to sell its merchandise, services, and yield a

profit. It is equally important that Amazon is able to successfully collect on credit sales for those

transactions. Amazon’s inventory turnover in 2012 was behind the industry average but showed

improvement from 2011. The rate of inventory turnover for Amazon is strong but could be

improved to keep up with the industry. Amazon’s day’s sales in inventory rates are greater than

the industry average. Amazon is significantly above the industry average in the rate and time

frame it takes to collect on credit transactions; Amazon’s account receivables rate is

approximately double the industry average. Amazon’s day’s sales in receivables rate are

excellent; on average Amazon takes approximately half as much time to collect on credit

transactions. Amazon’s gross profit percentage is the weakest performing metric in this area.

Amazon is profiting approximately nine percent less than their competitors. Refer to Table 2 for

relevant rates and percentages.

Table 2

Presented Data 2012 2011 Industry Average

Inventory Turnover Rate 8.34 Times 9.1 Times 4.8 Times

Days’ Sales in Inventory 43.76 Days 40.1 Days 75.42 Days

Receivables Turnover Rate 20.59 Times 23.13 Times 10.11 Times

Days’ Sales in Receivables 20.59 Days 23.13 Days 36.11 Days

Gross Profit Percentage 24.8 % 22.4 % 33.55 %

 Anthony V Davis

Accounting 1120

04/13/2018

Ability to Pay Long-Term Debts

When evaluating Amazon's ability to pay long-term debts we need to compare

outstanding debt to Amazon’s assets and equity. The results of the debt to equity ratio shows that

Amazon has significantly more debt than assets. This ratio has increased significantly from 2011

to 2012. If Amazon’s sales drop they could have difficulty affording the expenses relative to this

debt. Additionally, Amazon has almost six times the debt to equity ratio compared to

competitors. The debt to assets ratio reflects that Amazon has over double the debt to assets ratio

compared to the industry. This ratio indicates that Amazon has been aggressive with financing its

growth through debt. This result can lead to volatile earnings because of interest expenses

connected with this debt. We can calculate Amazon’s ability to afford this debt with a time

interest earned ratio. The times interest earned for Amazon is and on-par with the industry

standard. Despite Amazon's debts, it can clearly afford the debts it has incurred. The times

interest earned ratio has dropped from 2011 to 2012 but it remains solid. Amazon’s debt is

significant and does come with risk. Refer to Table 3 to see the rates discussed in this section.

Table 3

Presented Data 2012 2011 Industry Average

Debt to Equity 297% 226% 52%

Debt to Total Assets 74.83% 69.31% 34%

Time Interest Earned 5.23 Times 15.18 Time 5.33 Times

Ability to Generate Profit

 Anthony V Davis

Accounting 1120

04/13/2018
Amazon’s net profit margin for 2012 was negative, meaning they are actually losing

money on each dollar of revenue earned. Amazon was successful in turning a profit in 2011

however, both years were under the industry average. Amazon's return on assets was also below

the industry average, indicating that Amazon is not generating as much profit with its assets as

its competitors. However, Amazon’s asset turnover ratio is strong compared to its competitors.

As such Amazon is quite capable of turning a profit, but Amazons expenses are affecting its

ability to generate profit. Amazon’s ability to return income on shareholders equity is below the

industry average. In 2011 this rate was slightly behind the industry average, but in 2012 they

yielded a negative return in this area placing them significantly behind the industry average. The

amount of earning per share in 2012 was negative resulting in lost money in 2012 for

shareholders. Amazon had a rough year in 2012 for its own profit and the profits of its investors.

Refer to Table 4 for presented figures in this section.

Table 4

Presented Data 2012 2011 Industry Average

Profit Margin -0.06% 1.31% 2.87%

Return on Assets 0.45% 3.16% 4.76%

Asset Turnover 2.11 Times 2.18 Times 1.66 Times

Return on Equity -0.49% 8.63% 11.39%

Earnings per Share -$0.09 $1.39 N/A

Stock as an investment

Amazon’s price earning ratio was exponentially behind the industry average in 2012 due

to the company's net loss in its earning per share. In 2011 the price earning ratio was
 Anthony V Davis

Accounting 1120

04/13/2018
significantly ahead of the industry average in 2011 due to the high demand and value of Amazon

stock. Amazon does not pay a dividend which makes it stock investments marginally less

enticing to investors looking for dividends. Amazon may have had a poor performance in its

price-earnings ratio in 2012 but is still has incredible demand, indicating a confident investor

base. Refer to Table 5 for data surrounding this section.

Table 5

Presented Data 2012 2011 Industry Average

Price-Earnings -2854.66 131.37 47.17

Dividend Yield N/A N/A N/A

Dividend Payout N/A N/A N/A

Conclusion

Amazon is a huge retailer and has an incredible ability to sell inventory and generate

revenue. Despite Amazon's strengths it does appear to have a few weaknesses surrounding its

debts and expenses. In 2012 Amazon does appear to have fallen behind its competitors in

numerous performance areas. The company appears to be generating solid revenue and

generating investor demand. Amazon does appear to be taking some significant risks with debt

but appears to be generating the revenue to afford it. In the e-commerce industry, some measure

of risk is inherently necessary to be the leader in online retail.