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# Michelle Michaels

Paige Paulsen

Accounting 1120-002

7 April 2017

## Amazon Financial Analysis Paper

Whether you own the business or are looking to invest in a business, you should

know the financial status of the company before pursuing with big decisions. The purpose

of this paper is to show Amazons financial state at the end of the year 2012. I will be

showing Amazons ability to pay current liabilities and long term debts, how long they

usually keep their inventory in the business, ability to sell inventory and collect

receivables, their profitability, and evaluate their stock as an investment. I will also be

comparing Amazons calculated totals in each of these areas to the Online Retail Sales

Industry average. By doing this it will show what position Amazon is in compared to

## other companies in the same industry.

Current Ratio:

When determining a companys financial status, you should always look at their

ability to pay their current liabilities. The first ratio we are going to compare is the

Current Ratio; this ratio shows companies ability to pay current liabilities (this includes

all debts, expenses, and all other things the business owns from other people or

businesss) from current assets (this includes cash, inventory, and all other things the

company owns that could be sold for a profit). The Current Ratio is calculated by
dividing Total Current Assets by Total Current Liabilities (Current Ratio = Total Current

Assets / Total Current Liabilities). For the Current Ratio typically the higher the number

the better. If this number is higher it means that you are more likely to be able to pay your

debts. Having a high Current Ratio is helpful when you are trying to borrow money from

banks because it shows that you are more likely to be able to pay back the money that

you borrow. As shown below Amazons Current Ratio for 2012 was lower than it was in

2011; this happened because there was a big increase in liabilities from the two different

## years. Compared to the Industry

Current Acid Test
Average of 1.54, Amazon is not too far
Ratio Ratio
off but would be
Amazon - 2011 1.17 0.82

Amazon - 2012 1.12 0.78 less likely for a bank to lend them
Industry Average 1.54:1 1:82 money because of the difference

## other companies in the Industry.

Acid Test Ratio:

The second ratio we are going to compare is the Acid Test Ratio; this ratio

shows the companys ability to pay all its current liabilities (all things the company owes

others; debts, expenses, notes, etc.) if they became due immediately. The Acid Test

## Ratio is calculated by adding Cash including cash equivalents, Short-term investments,

and Net current receivables, and diving that amount by Total current liabilities (Cash

## including cash equivalents + Short-term investments + Net current receivables / Total

current liabilities). If this number is higher it means the company is in a better state

financially because they are more likely to be able to pay their debts with the assets they

currently have. As shown above Amazons Acid Test Ratio for 2012 was lower than in

2011; this happened because there was an increase in the amount of liabilities between

the two years. There is quite a large difference from Amazons totals and the Industry

average; this difference shows that Amazon is in a poor state financially and they should

## consider raising this amount.

Inventory Turnover:

## The second thing we should always look at when determining a companys

financial status is their ability to sell merchandise inventory and collect receivables. The

first ratio we are going to compare in determining this is the Inventory Turnover; this

ratio tells the number of times a company sells its average level of merchandise inventory

during a period. The Inventory Turnover is calculated by dividing Cost of Goods Sold

(also called Cost of Sales) by Average Merchandise Inventory (Cost of Goods Sold /

Average Merchandise Inventory). The higher the Inventory Turnover the better because it
tells that they sale their inventory on a regular basis and it doesnt sit on the shelf for a

long time before being sold. As shown below Amazons Inventory Turnover in 2011 was

higher than in 2012. Compared to the Industry average, Amazon is doing a great job in

this area by having double the average of others in the industry. This helps to show that

they dont have a problem selling their products and that they have a good amount of

## Gross Profit Percentage:

The second ratio we are going to compare in this area is the Gross Profit

Percentage; this ratio shows the profitability of the money from each sale from cost of

goods sold. The Gross Profit Percentage is calculated by dividing Gross Profit by Net

Sales Revenue (Gross Profit / Net Sales Revenue). The higher the Gross Profit

Percentage the better because that means that you a gaining a higher profit on your sales.

As shown above on the table, between the two years Amazons percentage has decreased.

Amazon also has a lower percentage than the Industry average, for us as customers this

shows that their prices are lower than their competitors; for the business this shows that

they are losing a profit where they could be gaining more money off sales.
Days Sales in Receivables:

Another ratio we should compare in this area is the Days Sales in Receivables;

this ratio shows the number of days sales it takes to collect the average level of

## receivables. The Days Sales in Receivables is calculated by dividing 365 by the

Accounts Receivable Turnover Ratio (365 / Accounts Receivable Turnover Ratio). The

lower number for the Days Sales in Receivables the better because that means you sell

your inventory on a more regular basis and it doesnt sit on the shelf for a long time

before it is sold. As shown above on the table Amazon had a larger Days Sales in

Receivables in 2012 than in 2011; this could be due to loss of customers or less

advertising. Amazon does have a lower amount than the Industry Average, which could

bring sales for them because it shows that the demand for their products is higher than

competitors.

TimesInterestEarned Ratio:

## Another thing we should compare when analyzing a companys financial status is

their ability to pay long-term debts. The ratio we are going to compare in this area is the

TimesInterestEarned Ratio; this ratio tells the businesss ability to pay interest expense.

## The Times-Interest-Earned Ratio is calculated by adding Net income, Income tax

expense, Interest expense, and dividing that amount by Interest expense (Net income +

Income tax expense + Interest Expense / Interest Expense). The higher this number the

better because it tells that you are more likely to pay your interest expenses. As shown

below on the table Amazon had a higher Times-Interest-Earned Ratio in 2011 than in
2012. The table also shows that Amazon had a higher rate in 2011 than the Industry

## average but lower in 2011.

Times-Interest-Earned Ratio

## Profit Margin Ratio:

The next area we should evaluate when analyzing financial statements is the

companys profitability. The first ratio we are going to talk about in this area is the Profit

Margin Ratio; this ratio tells how much net income is earned on every dollar of net sales.

The Profit Margin Ratio is calculated as Net Income divided by Net Sales (Net Income /

Net Sales). To determine whether it is better to have this number higher or lower you

should be looking at the Industry Average. According to the table below, Amazons Profit

Margin is below the Industry Average for both years by a large amount.

## Profit Margin Ratio Rate of Return on

Common Stockholders

Equity

## Industry Average 2.87% 11.39%

Rate of Return on Common Stockholders Equity:

## Another Ratio we should look at is the Rate of Return on Common Stockholders

Equity; this ratio tells the relationship between net income available to common

stockholders and their average common equity invested in the company. The Rate of

## Return on Common Stockholders Equity is calculated by subtracting Preferred dividends

from Net Income then dividing that number by the Average Common Stockholders

## Equity (Net Income Preferred Dividends / Average Common Stockholders Equity).

The higher this number the better because this tells that there is more net income left over

for stockholders, which could help to gain more stockholders and you more money as a

result. According to the table above, Amazon is in a poor condition compared to the

Industry Average, especially in 2012 which it dropped a great amount from 2011.

Price/Earnings Ratio:

The next area you should look at when analyzing financial statements is

evaluating stock as an investment in the company. The ratio to use when determining this

is the Price/Earnings Ratio; this tells the value the stock market places on \$1 of a

companys earnings. The Price/Earnings Ratio is calculated by dividing the Market price

per share of Common Stock by Earnings per share (Market price per share of Common

Stock / Earnings per share). It is better to have a higher number for this ratio because that

tells you that your stock is valued highly in the market. As shown in the table below,

Amazons Price/Earnings in 2011 is a lot higher than the Industry Average, but in 2012 is

was a lot lower than both the previous year and the Industry Average. From the amount
they received in 2012 they should seriously consider making some major changes

## because having that low of a negative number is very bad.

Price/Earnings Ratio

## Industry Average 47.17

Overall, Amazon was in a poor state during the year 2012 compared to both the

Industry Averages and Amazons previous year amounts (2011). The totals for each of the

ratios were lower in 2012 than they were 2011. They werent just a few numbers lower

but most were very drastic changes. After analyzing these reports and comparing them to

the previous year, Im curious to see what happened in 2012 to cause the change. In 2011,

Amazon seemed to be doing fairly well but every single total changed to be the opposite.

There had to be something big change to have that big of an impact in the amounts.