Sarah Christensen

Accounting 1120
27 April 2016
Financial Analysis of Amazon.com
Companies are constantly growing and wishing to expand their business. Part of doing
that includes gaining new investors as well as being able to borrow money from creditors. When
either party are looking into investing or helping a company out they use various tools to get a
better idea of the companys financial situation. The use of horizontal analysis is used to compare
a companys performance based on different years. You can also use a vertical analysis and
compare that company against another. Lastly, which is what we will focus on, is using ratio
analysis to compare a companys financial standings with the industry. A financial analysis has
been done using Amazon.coms financial statements. I am going to review those findings with
the industry average for online retail sales to judge Amazon.coms ability to pay current
liabilities, sell merchandise and collect receivables, pay long term debt, profitability, and
evaluate stock as an investment.
Current ratio is determining the companys ability to pay current liabilities. The average
in the industry is 1.54, and Amazon.com is 1.17 in 2011 and 1.12 in 2012. The ratio is not too
much lower than the average, however, we would like it to be higher. This ratio is showing us
that Amazon.com is not as liquid as the average company in the online retail sales industry. Not
only do we want a company to be able to pay its current liabilities with its assets, we also want to
determine if a company can pay their liabilities right away if it needed to. The results for an
asset-test ratio on Amazon.com concludes that amazon is higher than the average with a ratio in

2011 at .815 and lowering in 2012 at .779. If decided that this is too low, a company can solve
the problem by having more of their assets liquid.
Next, we need to evaluate Amazon.coms ability to sell merchandise and collect
receivables. The inventory turnover is the number of times a company sells its average level of
merchandise inventory during a period of time. The inventory average was 4.8 times and
Amazon.com was much better at 9.1 in 2011 and 8.3 in 2012. It did lower slightly within the
year, but they are still high over the industry average and able to sell its merchandise quicker.
The same concept holds for the days sales in inventory, counting the number of days a company
will hold merchandise before it is sold. In order to sell product faster, you want to have a lower
amount of days in inventory, which Amazon.com passes greatly. The industry average holds
inventory for 75.42 days and amazon had 40.1 and 43.8 in 2011 and 2012. This shows investors
that they are able to sell their product quicker than other companies in the same industry.
We have analyzed Amazon.coms inventory rates, but we also need to determine how
well they can collect their receivables. Companies will sell and release products to customers
giving them a 30 day, or even sometimes a 45 day, promise to pay the invoice. The accounts
receivable turnover will show how many times a company collects average receivables in a year.
The industry average is 10.11 times a year, while Amazon.com has shown they were able to
collect 23.12 times in 2011 and slightly lowering that amount to 20.59 in 2012. Amazon.com was
able to collect over twice the amount of times as the average and that means they were able to
collect more outstanding cash. Also, the industry took an average of 36 days to collect
receivables, but Amazon.com only took 18 days in 2012 to collect.
33.55% is the industry average debt to asset ratio. This determines what proportion of
assets were financed with debt, or loans. Amazon.com went from 22% to 24% in 2011 and 2012.

Having these lower percentages shows investors that Amazon.com is lower risk than other
companies in the industry. Before investing in a company, you need to see how well the company
is able to pay their interest expenses. Typically, you dont want your ratio to be lower than the
average because that shows you arent able to pay it as well. Unfortunately, this is the current
situation for Amazon.com. In 2011, Amazon did very well with a times interest earned ratio of
15.18 and an industry average of 5.33 times. However, it significantly dropped to 5.23 times in
2012, which is slightly lower than the industry average.
Profit is a huge part of business and keeping a business growing. We need to determine
how much income is earned from every dollar of net sale using the profit margin ratio. The
industry average was 2.87%. Sadly, Amazon.com had -0.06% in 2012, which means they are
losing money from sales. Secondly, if a company is able to earn income based off their assets,
they are at a better standing. In 2011 and 2012, Amazon.com had .58% and .18%. Meanwhile,
the industry average was 4.76%, showing that Amazon.com has not had good success creating a
profit off their assets. Even though Amazon.com did not do too well creating an income from
assets, they were able to create a good asset turnover. They were able to use their average total
assets to generate sales in 2011 and 2012 at 2.18 and 2.11, while the average was 1.66 times.
Part of determining if a company would be good to invest in is finding out how much
income is earned for each dollar invested. The return on common stockholder equity average was
11.39% which is very good for the industry. However, Amazon.com had lower percentages in
2011 and 2012, 8.13% and -0.48% which means a loss for investors in 2012. Lastly, we
determine the price/earnings ratio to be 47.17 industry wide, while Amazon.com shows
-2994.40, which is low. This does need to increase in the years to come for the companies
earning to match the market price of a share of common stock.

We have thoroughly researched Amazon.coms financial statements to compare their

statistics to the industry average. All information was received from the official financial
statements for 2012 and 2011 off Amazon.com. A comparison is important to determine how
smart it would be to invest in a company and whether you may get a return back on your
investment. This comparison determined that in 2012, Amazon.com was only slightly lower than
the industry when it came to paying back currently liabilities. Secondly, we were able to
determine they are able to sell and collect receivables at a much faster rate. Amazon.com is lower
risk to investors and creditors because they have a lower amount of assets purchased by debt, but
they have shown to have some struggles paying back their interest debt. Overall, in 2012,
Amazon.com was losing money from sales and didnt give the expected return to investors. Still,
you should review the notes for the financial statements to get a more in depth understanding
why and also conduct vertical and horizontal analysiss on the financial statements.