M.

Florencia Campos Yapura

November 29, 2016
ACCT 1120-003
Amazon 1Financial Statement Analysis Assignment
Part II
After gathering information about Amazon.com Inc.s finances in 2011 and 2012, an
analysis and conclusion on Amazons strength follows. The areas of importance are: the
companys ability to pay current liabilities, ability to sell merchandise inventory and collect
receivables, ability to pay long term debt, profitability, and evaluating stock as an investment.
They are evaluated in relation to change from one year to the other and to industry averages
(where available).
Ability to pay current liabilities
Working capital is a measure of a businesss ability to meet its short-term obligations
with its current assets. Its computation is obtained by subtracting current liabilities from current
assets. For both 2011 and 2012, Amazons working capital was adequate to meet its obligations,
without considerable change from one year to the other. No industry averages are available to
compare.
The current ratio measures the companys ability to pay current liabilities from current
assets. It is computed by dividing total current assets by total current liabilities. For 2011,
Amazons current ratio was 1.17 and for 1.12 in 2012. There was a slight decrease in the ratio in
2012. The industry average is 1.54, therefore, Amazon could improve.
The acid-test ratio is the ratio of the sum of cash, cash equivalents, short-term
investments, and net current receivables to total current liabilities. It tells whether the entity can

pay all tis current liabilities if they came due immediately. It is computed by adding cash,
including cash equivalents, short-term investments, and net current receivables divided by total
current liabilities. Amazons acid-test ratio for 2011 was .82 and .78 for 2012. The industry
average was .82. Although the ratio worsened, it is still close to the industry average.
The cash ratio is a measure of a companys ability to pay current liabilities from cash and
cash equivalents. It is calculated by adding cash and cash equivalents and dividing by total
current liabilities. Amazons 2011 cash ratio was .35 and .43 for 2012. A cash ratio larger than 1
may mean the company is letting too much cash sit idle. No industry average was available, but
Amazons cash ratio does not seem too high nor too low.
Amazon Inc.s ability to pay its current liabilities seems to have decreased slightly from
2011 to 2012, according to the above measures. Nonetheless, the company still seems to be able
to pay its current liabilities with no excessive difficulty, still remaining strong.
Sell merchandise and collect accounts receivable
Inventory turnover measures the number of times a company sells is average level of
merchandise inventory during a period. It is calculated by dividing cost of goods sold by average
merchandise inventory. Amazons inventory turnover was 9.1 in 2011 and 8.3 in 2012. The
industry average is 4.8. Although Amazons inventory turnover seems high, and slightly
decreased from one year to the other, in relation to the industry average, other factors can come
into account and it is not a bad sign immediately.
Days sales in inventory measures the average number of days that inventory is held by a
company. It is calculated by dividing the days in a year (365) by the inventory turnover.
Amazons days sales in inventory for 2011 was 40.1 days and 44 days for 2012. These figures

are considerable higher than the 75.42 days that is the industry average. Amazon seems to
effectively manage its inventory and how much it has on hand to fulfill demand.
Gross profit percentage measures the profitability of each sales dollar above the cost of
goods sold. It is calculated by dividing gross profit by net sales revenue. Amazons gross profit
percentage for 2011 was 22% and 24% for 2012. The industrys average is 33.55%. This means
that Amazon could keep improving (as it did from 2011 to 2012) to better assure profitability.
The accounts receivable turnover ratio measures the number of times the company
collects the average accounts receivable balance in a year. It is calculated by dividing net credit
sales by average net accounts receivable. Amazons accounts receivable turnover ratio was 23 in
2011 and 21 in 2012. The industry average is 10.11. The higher the ratio, the faster the cash
collections, so Amazon seems to collect receivables quite frequently.
Days sales in receivables is a ratio of average net accounts receivable to one days sales.
It tells how many days it takes to collect the average level of accounts receivable. It is calculated
by dividing the days in a year (365) by accounts receivable turnover ratio. For Amazon, the
days sales in receivables ratio for 2011 was 15.8 days and 17.7 days in 2012. The ratio increased
from 2011 to 2012, but without an industry average, it is hard to tell whether this is bad or not.
Amazon seems to be in a good financial position in regards to selling merchandise and
collecting accounts receivables for the most part.
Pay long-term debt
The debt ratio, also called debt to total assets ratio, shows the proportion of assets
financed with debt. It is calculated by dividing total liabilities by total assets. Amazons debt to
total assets ratio for 2011 was 69% and 74.84% for 2012. The industry average was 34%. This
denotes that Amazon finances its assets with almost twice the industry averages amount of

liabilities. This seems pretty high, and might be of concern, especially since the ratio increased
from 2011 to 2012.
The debt to equity ratio measures the proportion of total liabilities relative to total equity.
It is calculated by dividing total liabilities by total equity. Amazons debt to equity ratio for 2011
was 2.97 and 2.25 for 2012. The industry average is .52. Amazons ratio seems high, but this
must be looked at together with other factors.
The times-interest-earned ratio evaluates a businesss ability to pay interest expense. It is
calculated by adding net income, income tax expense, and interest expense and dividing by
interest expense. Amazons times-interest-earned ratio for 2011 was 15.18% and 5.23% for 2012.
The industry average is 5.33%. Amazons ratio decreased from 2011 to 2012. The higher the
ratio, the better the company is able to pay interest. Amazon did not do as well with this ratio.
Amazon does not seem as well equipped to pay its long-term debts according to the
above ratios analysis. This could be of concern, but since a company can spread the paying of
these types of liabilities in a longer period of time, it is wise to continue to evaluate the trends.
Profitability ratios
Profit margin is a profitability measure that shows how much net income is earned on
every dollar of net sales. It is calculated by dividing net income by net sales. Amazons profit
margin was 1.31% and (0.06%) in 2012. The industry average is 2.87%. Amazons profit margin
is below industry average, decreasing from 2011 to 2012. This is of concern, due to Amazon
losing money throughout 2012 according to this ratio.
The rate of return on total assets ratio measures the success a company has in using its
assets to earn income. It is calculated by adding net income and interest expense and dividing by
average total assets. Amazons rate of return on total assets for 2011 was .75% and (.45%) in

2012. The industry average was 4.76%. Amazons ratios were considerably lower than the
industry average, and decreased from year to year. This is alarming, since no profit was made in
2012.
The asset turnover ratio measures how efficiently a business uses its average total assets
to generate sales. It is calculated by dividing net sales by average total assets.
Amazons asset turnover ratio was 2.18 in 2011 and 2.11 in 2012. The industry average is 1.66.
Although this ratio decreased slightly from 2011 to 2012, it was still above the industry average,
which is favorable.
The rate of return on common stockholders equity shows the relationship between net
income available to common stockholders and their average common equity invested in the
company. It is calculated by subtracting preferred dividends from net income and dividing by
average common stockholders equity. Amazons rate of return on common stockholders equity
for 2011 was 8.63% and (.49%) in 2012. The industry average is 11.39%. Amazons rate of
return is not favorable, due to it decreasing so dramatically and ending so low in relation to the
industry average.
Earnings per share is the amount a companys net income or loss for each share of its
outstanding common stock. It is calculated by subtracting preferred dividends from net income
and dividing the weighted average number of common shares outstanding. Amazons earnings
per share for 2011 was $1.37 and ($0.09) in 2012. This seems pretty low, especially since it
decreased from 2011 to 2012. There is no industry average to compare.
According to these ratios, Amazon is not going through a time of high profitability. It did
not always perform this lowly, which means it might improve in the future.
Evaluating investment

Price-earnings ratio is the ratio of the market price of a share of common stock to the
companys earnings per share. It measures the value that the stock market places on $1 of a
companys earnings. The calculation is market price per share of common stock divided by
earnings per share. Amazons price-earnings ratio for 2011 was 131.37 and (2,854.7) for 2012.
The industry average was 47.17. Amazon did well in 2011, but really sank in 2012, obviously
falling below industry average. This is not a good indicator of strength.
Dividend yield is a ratio of annual dividends per share of stock to the stock markets price
per share. It measures the percentage of a stocks market value that is returned annually as
dividends to stockholders. It is calculated as annual dividend per share divided by market price
per share. Amazon does not give dividends, therefore, this ratio does not help evaluate this
company.
Dividend payout is a ratio of dividends declared per common share relative to the
earnings per share of the company. It is calculated by dividing annual dividend per share by
earnings per share. Amazon does not give dividends, therefore, this ratio does not help evaluate
this company.
Amazon, at the end of 2012, did not seem as a very profitable company in which to
invest.
Conclusion
After analyzing Amazon Inc.s financial statements and computing the varied ratios for
the years 2011 and 2012, it is plain to see that Amazon is not doing so well at the end of 2012.
Other than being able to be solvent enough to pay its debts, Amazon does not have the desired
profitability, return on investment, nor sales to be considered strong in relation to past

performance, and even less by industry standards. Amazon has performed well in the past, but
needs to effect changes to return to that past favorable performance.