Shaun Austin

Javaid I. Majid

Accounting 1120
30 November 2016

Accounting Paper
Introduction
Amazon.com is an online business, known as one of the most profitable online retailers.
Some people wonder if Amazon is a good online business to invest in, or if it is a bad online
business to invest in. When you invest in a company you want to look at its liquidity, ability to
sell merchandise and collect accounts receivable, profitability, and its investment. You do this to
check the companys status. Short term creditors invest in a company based on their liquidity.
Long-term creditors and stockholders invest in a company based on its profitability. So it
depends on what you are looking for when you want to invest so you can see if you even want to
invest at all.
Liquidity / Ability to Pay Current Liabilities
Liquidity is the companys ability to pay maturing obligations and meeting its unexpected
needs for cash. The way you would look at a companys liquidity is by looking at the liquidity
ratios to see how liquid the company is. Working capital determines the businesss ability to meet
its short-term obligations with its current assets. Working Capital for 2012 was $2,294 and
$2,594 for 2011. This shows that Amazon met its short-term obligations for both years. The ratios
that help you make a decision based on working capital are the current ratio, acid-test ratio, and
the cash ratio.

The current ratio is used for evaluating a companys liquidity and short term debt paying
ability. Amazons currents ratio was 1.12 in 2012 and 1.17 in 2011. The online retail sales
industry average current ratio was 1.54:1. Amazons 2011 current ratio was a little better than
their 2012. The acid-test ratio is a measure of a companys immediate short-term liquidity.
Amazons acid-test ratio was .78 in 2012 and .82 in 2011. The online retail sales industry average
acid-test ratio was 1.82. Amazons immediate short-term liquidity was better in 2011 than it was
in 2012. The cash ratio measures a companys ability to pay current liabilities from cash and cash
equivalents. Their cash ratio for 2012 and 2011 was 0.43 and 0.35. For both years the ratio was
below 1.0. This shows that Amazon has a good amount of cash supply. Over all, Amazons
liquidity was better in 2011 than it was in 2012.
Ability to Sell Merchandise & Collect A/R
There are a total of five ratios to help measure a companys ability to sell merchandise
inventory and collect receivables: inventory turnover, days sales in inventory, gross profit
percentage, receivables turnover, and days sales in receivables. The inventory turnover ratio
calculates the number of times on average the inventory is sold during the period. Amazons
inventory turnover ratio was 8.3 times in 2012 and 9.1 times in 2011, so their inventory turnover
ratio was better in 2011. The online retail sales industry average for inventory turnover was 4.8
times, which shows that Amazon is doing better than the online retail sales industry. Days sales
in inventory is the average number of days that inventory is held by a company. The Days sales
in inventory was 44 days for 2012 and 40 days in 2011. Their industry average for this was 75.42
days. These are good numbers for the days sales in inventory because theyre not over the
industry average. The gross profit percentage measures the profitability of each sales dollar
above the cost of goods sold. This is the most carefully watched measurers of profitability. The

gross margin was 24% in 2012 and 22% in 2011. The industry average was 33.55%. These
numbers, for the past two years, need to improve to meet or to be above the industry average.
This means that Amazon needs to decrease the cost of their merchandise or increase their revenue
to improve these numbers.
The last two ratios are the receivable turnover ratio and the days sales in receivables. The
receivables turnover ratio is how many times the company collects receivables during the
period. Amazon collected receivables 20.59 times in 2012 and in 2011 it collected receivables
16.2 times. The online retail sales industry, on average, collected receivables 10.11 times so they
were a lot faster than their average. Amazons receivables turnover ratio was better in 2012. The
days sales in receivables indicates how many days it takes to collect the average level of
receivables. For 2012, it was about 18 days and for 2011 it was about 22.5 days. They did better
in 2012 on this.
Profitability
Profitability measures the income or operation success of a company for a given period of
time. The way you would look at profitability is you would use the ratios for profitability; by
calculating the ratios you will see how profitable the company is. The ratios for profitability are
profit margin, asset turnover, return on assets, return on common stockholders equity, and
earnings per share.
The profit margin ratio is a measure of the percent of each dollar of sales that results in
net income. Amazons profit margin was -0.06% in 2012 and 1.31% in 2011. The online retail
sales industry average profit margin is 2.87%. This shows that Amazon didnt do very well for
these two years. They were extremely below their industry average for both years, especially for
2012. They want to strive for a higher number to show that they have more sales dollars that will

end up as profit. The asset turnover ratio measures how efficiently a business uses its assets to
generate sales. Amazons asset turnover was 2.11 times in 2012 and 1.66 times in 2011. The
online business average asset turnover ratio is 1.66 times. This shows that they are making more
net sales for each average dollar of total assets invested. The return on assets ratio is an overall
measure of profitability. Amazons return on assets was -0.45% in 2012 and 1.96% in 2011. The
online businesses average return on assets is 4.76%. They are far from meeting the industry
average and they need to improve on this. Return on common stockholders equity ratio
measures profitability from the common stockholders viewpoint. Amazons return on common
stockholders equity was -0.49% in 2012 and 8.63% in 2011. The online retail sales industry
average was 11.39%. Amazon is not doing very well in this category and they need to improve.
The earnings per share (EPS) ratio is a measure of the net income earned on each share of
common stock. Amazons (EPS) was $-0.09 / share in 2012 and $1.39 / share in 2011. The price
earnings ratio is an often quoted measure of the ratio of the market price of each share of
common stock to the earning per share. Amazons price earnings ratio is -2,854.7 in 2012 and
131.37 in 2011. The online retail sales industry average price earnings was 47.17. Based on the
ratios above, Amazons profitability was doing better than the online retail sales industry
averages in 2011, but was doing worse in 2012. Amazons profitability was better in 2011 than it
was in 2012.
Evaluating Investment
The last thing that you want to look at before you invest in a company is evaluate the
companys stock. The best way to evaluate stock is two use three ratios: price-earnings ratio,
dividend yield, and dividend payout. The price-earnings ratio measures the value that the stock
market places on $1 of a companys earnings. Amazons price-earnings ratio was -2,854.7 in

2012 and 131.37 in 2011. The online retail sales industry average was 47.17. This ratio needs to
be higher in the future to be more in line with the industry average. The dividend yield ratio
measures the percentage of a stocks market value that is returned annually as dividends to
stockholders. This cant be calculated because Amazon does not reward their shareholders with
dividends. The dividend payout is the ratio of dividends declared per common share relative to
the (EPS) of the company. Once again, this cant be calculated because Amazon did not issue any
dividends.
Conclusion
In conclusion, Amazons overall liquidity was lower in 2012 and higher in 2011.
Amazons ability to pay current liabilities was better during 2011 because its not too high and its
not low. Based on the ratios and trend analysis, Amazons profitability was better in 2011. In
2012, Amazons had a net loss which resulted in unwanted results. So now that we have looked at
Amazons liquidity, ability to sell merchandise and collect accounts receivable, profitability, and
investments we can decide if we want to invest or not. If it were a short-term creditor then they
wouldnt invest in Amazon because its liquidity is going down. If you were to invest in the
business then the good thing is that Amazon is capable of surviving because its probability is
good. If it were me, I wouldnt invest in Amazon because if you look at the ratios and the trend
analysis you can see that the financial health of the business is worse in 2012 than in 2011.