amazon financial analysis paper

Michelle Michaels Paige Paulsen Accounting 1120-002 7 April 2017 Amazon Financial Analysis Paper  Whether you own the business or are looking to inest in a business! you shoul" know the #inancial status o# the company co mpany be#ore pursuing with big "ecisions$ %he purpose o# this paper is to show Amazon&s #inancial state at the en" o# the year 2012$ ' will be showing Amazon&s Amazon&s ability to pay current liabilities an" long term "ebts! how long the y usually keep their inentory in the business! ability to sell inentory an" collect receiables! their pro#itability! an" ealuate their stock as an inestment$ ' will also be comparing Amazon&s Amazon&s calculate" totals in each o# these areas to the (nline )etail *ales 'n"ustry aerage$ +y "oing this it will show what position Amazon Amazon is in compare" to other companies in the same in"ustry$ Current Ratio:

When "etermining a company&s #inancial status! you shoul" always look at their ability to pay their current liabilities$ %he #irst ratio we are going to compare is the ,urrent )atio this ratio shows companies ability to pay current liabilities .this inclu"es all "ebts! e/penses! an" all other things the business owns #rom other people or  business&s  business&s #rom current assets .this inclu"es cash! inentory! inentory! an" all other things the company owns that coul" be b e sol" #or a pro#it$ %he ,urrent )atio is calculate" by

"ii"ing %otal ,urrent Assets by %otal ,urrent iabilities .,urrent )atio  %o %otal tal ,urrent Assets 3 %otal %otal ,urrent iabilities$ For the ,urrent )atio typically the higher the number the better$ '# this number is higher it means that you are more likely to be able to pay your  "ebts$ 4aing a high ,urrent )atio is help#ul when you are trying to borrow money #rom  banks because it shows that you are more likely to be able to pay back the money that you borrow$ As As shown below Amazon&s ,urrent )atio #or 2012 was lower than it was in 2011 this happene" because there was a big increase in liabilities #rom the two "i##erent years$ ,ompare" to the 'n"ustry

Current

Acid – Test

Ratio

Ratio

Amazon - 2011

1$17

0 $2

Amazon - 2012

1$12

0 $7

less likely #or a bank to len" them

Industry Average

1$5681

182

money because o# the "i##erence

 between Amazon an" other companies in the 'n"ustry$

Aerage Aerage o# 1$56! Amazon is not too #ar  o## but woul" be

Acid – Test Ratio:

%he secon" ratio we are going to compare is the Aci" 9 %est %est )atio this ratio shows the company&s ability to pay all its current liabilities .all things the company owes others "ebts! e/penses! notes! no tes! etc$ i# they became "ue imme"iately$ %he %he Aci" 9 %est %est )atio is calculate" by a""ing ,ash inclu"ing cash e:uialents! *hort-term inestments! an" ;et current receiables! an" "iing that amount by %otal current liabilities .,ash inclu"ing cash e:uialents e:u ialents < *hort-term inestments < ;et current receiables 3 %otal current liabilities$ '# this number is higher it means the company is in a better state #inancially because they are more likely to be able to pay pa y their "ebts with the assets they currently hae$ As shown aboe Amazon&s Aci" Aci" 9 %est )atio #or 2012 was lower than in 2011 this happene" because there was an increase in the amount o# liabilities between the two years$ %here is :uite a large "i##erence #rom Amazon&s totals an" the 'n"ustry aerage this "i##erence shows that Amazon is in a poor state #inancially an" they shoul" consi"er raising this amount$ Inventory Tu Turnover: rnover:

%he secon" thing we shoul" always look at when "etermining a company&s #inancial status is their ability to sell merchan"ise inentory an" collect receiables$ %he #irst ratio we are going to compare in "etermining this is the 'nentory %urnoer this ratio tells the number o# times a company sells its aerage leel o# merchan"ise inentory "uring a perio"$ %he 'nentory %urnoer is calculate" by "ii"ing ,ost o# =oo"s *ol" .also calle" ,ost o# *ales by Aerage Aerage Merchan"ise 'nentory .,ost o# =oo"s *ol" 3 Aerage Aerage Merchan"ise 'nentory$ %he higher the 'nentory %urnoer the better because it

tells that they sale their inentory on a regular basis an" it "oesn&t sit on the shel# #or a long time be#ore being sol"$ As shown below Amazon&s 'nentory %urnoer %urnoer in 2011 was higher than in 2012$ ,ompare" to the 'n"ustry aerage! Amazon is "oing a great >ob in this area by haing "ou "ouble ble the aerage o# others in the in"ustry$ %his helps to show that they "on&t hae a problem selling their pro"ucts an" that they hae a goo" amount o#  buyers$ Inventory

Gross Profit

ays! "a#es in

Turnover

Percentage

Receiva$#es

Amazon – 2011

?$1

26@

15$

Amazon – 2012

$

22@

17$7

Industry Average

6$

$55@

75$62

Gross Profit Percentage:

%he secon" ratio we are going go ing to compare in this area is the =ross Pro#it Percentage this ratio shows the pro#itability o# the money #rom each sale #rom cost o# goo"s sol"$ %he =ross Pro#it Percentage is calculate" by b y "ii"ing =ross Pro#it by ;et *ales )eenue .=ross Pro#it 3 ;et *ales )eenue$ %he higher the =ross Pro#it Percentage the better because that means that you a gaining a higher pro#it on your sales$ As shown aboe on the table! between the two years Amazon&s percentage percentage has "ecrease"$ Amazon also has a lower percentage perc entage than the 'n"ustry aerage! #or us as customers this shows that their prices are lower than their competitors #or the business this shows that they are losing a pro#it where they coul" be gaining more money o## sales$

ays! "a#es in Receiva$#es:

Another ratio we shoul" compare in this area is the Bays& *ales *ales in )eceiables this ratio shows the number o# "ays& sales it takes to collect the aerage leel o# receiables$ %he Bays& *ales in )eceiables is calculate" by "ii"ing C5 by the Accounts )eceiable %urnoer )atio .C5 3 Accounts )eceiable %urnoer )atio$ %he lower number #or the Bays& *ales in )eceiables the better because that means you sell your inentory on a more regular basis an" it "oesn&t sit on the shel# #or a long time  be#ore it is sol"$ As As shown aboe on the table Amazon ha" a larger Bays& *ales in )eceiables in 2012 than in 2011 this coul" be "ue to loss o# customers or less a"ertising$ Amazon "oes hae a lower amount than the 'n"ustry Aerage! Aerage! which coul"  bring sales #or them because it shows that the "eman" #or their pro"ucts is higher than than competitors$ Times–Interest–%arned Ratio:

Another thing we shoul" compare when analyzing a company&s #inancial status is their ability to pay long-term "ebts$ %he ratio we are going to compare in this area is the %imes9'nterest9Darne" %imes9'nterest9Darne" )atio this ratio tells the business&s ability to pay interest e/pense$ %he %imes-'nterest-Darne" %imes-'nterest-Darne" )atio is calculate" by a""ing ;et income! 'ncome ta/ e/pense! 'nterest e/pense! an" "ii"ing that amount by 'nterest e/pense .;et income < 'ncome ta/ e/pense < 'nterest D/pense 3 'nterest D/pense$ %he higher this number the  better because it tells that you are more likely to pay your interest e/penses$ As shown  below on the table Amazon ha" a higher %imes-'nterest-Dar %imes-'nterest-Darne" ne" )atio in 2011 than in

2012$ %he table also shows that Amazon ha" a higher rate in 2011 than the 'n"ustry aerage but lower in 2011$ Times-Interest-%arned Ratio Amazon – 2011

15$1

Amazon – 2012

5$2

Industry Average

5$

Profit &argin Ratio:

%he ne/t area we shoul" ealuate when analyzing #inancial statements is the company&s pro#itability$ pro#itability$ %he #irst ratio we are going g oing to talk about in this area is the Pro#it Margin )atio this ratio tells how much net income is earne" on eery "ollar o# net sales$ %he Pro#it Margin )atio is calculate" as ;et 'ncome "ii"e" by ;et *ales .;et 'ncome 3  ;et *ales$ %o %o "etermine whether it is better to hae this number higher or lower you shoul" be looking at the 'n"ustry Aerage$ Aerage$ Accor"ing to the table below! Amazon&s Amazon&s Pro#it Margin is below the 'n"ustry Aerage Aerage #or both years by b y a large amount$ Profit &argin Ratio

Rate of Return on Common "toc'(o#der!s %)uity

Amazon – 2011

1$1@

$C@

Amazon – 2012

-0$0C@

-0$6?@

Industry Average

2$7@

11$?@

Rate of Return on Common "toc'(o#der!s %)uity:

Another )atio we shoul" look at is the )ate o# )eturn on ,ommon *tockhol"er&s *tockhol"er &s D:uity this ratio tells the relationship between net income aailable to common stockhol"ers an" their aerage common e:uity ineste" in the company$ %he )ate o# )eturn on ,ommon *tockhol"er&s *tockhol"er &s D:uity is calculate" by subtracting Pre#erre" "ii"en"s #rom ;et 'ncome then "ii"ing that number nu mber by the Aerage Aerage ,ommon *tockhol"ers& *tockho l"ers& D:uity .;et 'ncome 9 Pre#erre" Bii"en"s 3 Aerage ,ommon *tockhol"ers& D:uity$ %he higher this number the better be tter because this tells that there is more net income le#t oer  #or stockhol"ers! which coul" help to gain more stockhol"ers an" you more money as a result$ Accor"ing to the table aboe! Amazon is in a poor con"ition compare" to the 'n"ustry Aerage! Aerage! especially in 2012 which it "roppe" a great amount #rom 2011$ Price*%arnings Ratio:

%he ne/t area you shoul" look at when analyzing #inancial statements is ealuating stock as an inestment in the company$ %he ratio to use when "etermining this is the Price3Darnings )atio this tells the alue the stock market places on E1 o# a company&s earnings$ %he Price3Darnings )atio is calculate" by "ii"ing the Market price  per share o# ,ommon *tock by Darnings per share .Market price per share o# ,ommon *tock 3 Darnings per share$ 't is better to hae a higher number #or this ratio because becau se that tells you that your stock is alue" highly in the market$ As shown in the table below! Amazon&s Price3Darnings in 2011 is a lot higher than the 'n"ustry Aerage! Aerage! but in 2012 is was a lot lower than both the preious year an" the 'n"ustry Aerage$ Aerage$ From the amount

they receie" in 2012 they shoul" seriously consi"er making some ma>or changes  because haing that low o# a negatie number is ery ba"$ Price*%arnings Ratio Amazon – 2011

11$7

Amazon – 2012

-2!56$7

Industry Average

67$17

(erall! Amazon was in a poor state "uring the year 2012 compare" to both the 'n"ustry Aerages Aerages an" Amazon&s preious year amounts .2011$ %he totals #or each o# the ratios were lower in 2012 than they the y were 2011$ %hey weren&t >ust a #ew numbers lower  but most were ery "rastic changes$ A#ter A#ter analyzing these reports an" comparing them to the preious year! '&m curious to see what happene" in 2012 to cause the change$ 'n 2011! Amazon seeme" to be "oing #airly well but eery single total change" to be the opposite$ %here ha" to be something big change to hae that big o# an impact in the amounts$