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Amazon.

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Financial Statement Analysis 2012

Presented by:
Duane Bennett

Financial Statement Analysis 2012 (Amazon.com)

Ratio Analysis for Amazon.com


Our purpose in this document is to analyze ratios based upon data retrieved from the 2011
and 2012 financial statements of Amazon.com. These ratios are grouped by relationships. The first
group of ratios will demonstrate Amazons ability to pay off current liabilities. The second group will
reflect Amazons ability to sell merchandise inventory and collect receivables. The third group of
ratios will indicate Amazons ability to pay long term debt. The fourth group will establish Amazons
profitability. Group five will evaluate Amazons stock as an investment. This analysis will refer to
the year 2012.

Ability to Pay off Current Liabilities


Working Capital is a measure of a companys ability to pay off its current liabilities (debts) with its
current assets. Working Capital is calculated as current assets minus current liabilities. As of 2012,
Amazon would retain an excess of $2,294 million if that was to occur. Current Ratio shows the
ration of current assets over current liabilities. We show that Amazon is comparatively weaker in
relation to the industry average. The Cash Ratio demonstrates Amazons ability to pay off current
liabilities (debt) with only its cash and cash equivalents. The ratio of .425 means that for every $1
of debt, Amazon has cash and equivalents of $.425 available. Industry averages are not available
for comparison. The Acid-Test Ratio (Quick) is a measurement that represents Amazons ability
to pay all of its current liabilities immediately. This is calculated by summing cash and equivalents,
short-term investments and net of current receivables, then dividing the result by the total current
liabilities. While Amazon has available Working Capital, Amazons ability to pay off its debt is
weaker than the industry average on the whole. This may be an indicator that they took on too
many liabilities for the year.

Ratio

Information received

ONLINE RETAIL SALES


INDUSTRY AVERAGES

Working Capital

$2,294 Million

Current Ratio

1.12:1

1.54:1

Cash Ratio

.425

Acid-Test Ratio

.78

.82

Ability to Sell Merchandise Inventory and Collect Receivables


Inventory Turnover is the number of times that a company sold its average level of merchandise.
We see here that Amazon accomplished this at double the rate of the industry average; this is very
strong for Amazon. Days Sales in Inventory represents the average number of days
merchandise is held by the company. Amazons days sales in inventory is one-third less than the
industry average, which is very good. Gross Profit Percentage is calculated by subtracting the
cost of sales from the net sales revenue, then dividing that result by net sales revenue. Amazon did
poorly this year compared to the average for the industry. Accounts Receivable Turnover Ratio
represents the number of times the company collected on its average receivables balance over the
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Financial Statement Analysis (Amazon 2012)

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Financial Statement Analysis 2012 (Amazon.com)


year. The calculation performed is net credit sales divided by the average accounts receivable
balance for the year. This rate at which Amazon was able to collect on its receivables was double
that of the industry. Finally, Days Sales in Receivables represents the average amount of days
that it takes to collect on its average receivables. This is calculated as 365 divided by the accounts
receivable turnover ratio. Amazon collects on their receivables twice as fast as the industry
average, which is very good. Amazons ability to turnover product and collect on receivables could
be leveraged better in order to increase profits. This may mean increasing some prices on goods or
negotiating better rates from wholesalers.

Amazon.com

Information Received

ONLINE RETAIL SALES


INDUSTRY AVERAGES

Inventory Turnover

8.34 times

4.8 times

Days Sales in Inventory

43.76 days

75.42 days

Gross Profit Percentage

24.75%

33.55%

Accounts Receivable Turnover Ratio

20.587 times

10.11 times

Days Sales in Receivables

17.73 days

36.11 days

Ability to Pay Long Term Debt


Amazons ability to pay long term debts is analyzed using three ratios: debt ratio, debt to equity
ratio, and times-interest-earned ratio. Debt Ratio measures the portion of assets that are financed
with liabilities (debt). It is determined by dividing total liabilities by total assets. Amazons debt
ratio is double the industry average, which is very bad. Debt to Equity Ratio measures the
financial leverage against the company. This ratio of total liabilities divided by total equity shows
that Amazon is financing more with debt than with equity. This bad indicator shows Amazon at
almost six times a higher rate of financing through debt. The Times-Interest-Earned Ratio is the
measurement of a companys ability to pay interest expense. The formula for calculating this is net
income plus income tax expense plus interest expense, then dividing that result by interest
expense. Amazons ability to pay interest expense is fairly close to the industry average, this is a
good indicator. The large increase in long term liabilities that are shown this year come due to
financing warehouses and property purchases. The investing activity impacted these ratios the
hardest by showing an over 1200% increase in long-term liabilities. Issuing stock as an alternative
to financing with long-term payables should be explored in the future. This accumulation of liability
(debt) should be watched as it impacts profits as well.

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Ratio

Information Received

ONLINE RETAIL SALES


INDUSTRY AVERAGES

Debt Ratio

74.8%

34%

Debt to Equity Ratio

297%

52%

Times-Interest-Earned Ratio

5.23 times

5.33 times

Financial Statement Analysis (Amazon 2012)

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Financial Statement Analysis 2012 (Amazon.com)

Profitability
The profitability for Amazon was measured by using the following four ratios: Profit Margin, Return
on Total Assets, Assets Turnover, and Return on Common Stockholders Equity; as well as a
determination of the Earnings per Share. Profit Margin Ratio was calculated by dividing net
income by net sales. The negative profit margin is a concern because, in 2012, it shows that for
every dollar of sales Amazon lost 6 cents in the transaction. This could be construed as a negative
by itself when compared to the industry average. Rate of Return on Total Assets measures the
companys success in using assets to earn a profit. The formula used to calculate this is net income
and interest expense combined, divided by average total assets for the year. The industry average
is 26 times higher than how Amazon performed in this area. This again is a direct correlation to the
large increase in liabilities (debts) that are being used to finance assets. The concern here for the
return on assets will also affect the stock as an investment, as will be shown. Asset Turnover
Ratio is net sales divided by total assets. This ratio tells us how effectively the company has been
able to use its assets to generate sales. The fact that the industry average is lower than that of
Amazons ratio is a large bright spot for profitability because it means that, despite taking on
liabilities, it has the potential to generate sales, which can be used in the future to pay off those
liabilities. Return on Common Stockholders Equity is determined from net income less
preferred dividends (Amazon declared no dividends the last two years), divided by the average
common stockholders equity. This rate describes the relationship between net income available to
common stockholders and their average equity (ownership) invested in the company. As Amazon is
primarily financing with debt, this ratio will reflect that financing decision, which will make it look
poorly as an initial investment. Last, Earnings per Share is the increase or decrease in the
amount earned per share. It is a quick glance at how much holding this companys stock will
benefit the stockholder. The amount is calculated: net income less preferred dividends with the
result divided by the weighted average number of common shares outstanding. Again, the stock
has lost ground due to Amazon financing its acquisition of assets with long-term liabilities. This is
unfavorable.

Ratio

Information Received

ONLINE RETAIL SALES


INDUSTRY AVERAGES

Profit Margin Ratio

-.06%

2.87%

Rate of Return on Total Assets

.18%

4.76%

Asset Turnover Ratio

2.11

1.66

Rate of Return on Common Stockholders


Equity

-.49 %

11.39%

Earnings per Share

-$.09

$10.54

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Stock as an Investment
As Amazon did not declare or pay dividends for the last two years, the Dividend Yield and Dividend
Payout cannot be calculated for our purposes, leaving Price/Earnings Ratio as the sole method for
evaluating Amazons stock as an investment. Price/Earnings Ratio is figured by taking the
Market price per share of common stock ($256.92 at writing) divided by the earnings per share.
Against the industry average, Amazons stock is performing abysmally. This is due to the increased
liability load that Amazon has assumed to acquire property and equipment, including internal-use
software and website development.

Ratio

Information Received

ONLINE RETAIL SALES


INDUSTRY AVERAGES

Price/Earnings Ratio

-2854.67

47.17

Dividend Yield

Amazon did not declare or pay


dividends

N/A

Dividend Payout

Amazon did not declare or pay


dividends

N/A

Conclusion
It is the opinion of this analyst, that despite utilizing a large amount of long term and current
liabilities to finance the company assets, those assets are primarily warehouses which increase
capacity for inventory and website development which streamlines their marketplace. That
inventory, if sold at the current efficiency and rates of the current and previous year, would
represent a substantial increase in profitability and an increase in the ability to pay off long term
debt. Subsequently, as the profit would increase, the viability of the stock as an investment would
go up as well. Further, it is the advice of this analyst that a greater portion of financing be derived
from issuing stock to limit the impact upon profits and manage the debt load that is carried.

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