Robert Holtry

ACCT 1120

Amazon Financial Statements Assignment

This paper will be reviewing the financial abilities of Amazon. It will go over their ability to pay

current liabilities, sell merchandise inventory, collect receivables, pay long term debt,

profitability, and evaluate stock and investments. Through going over these different abilities of

the company, the reader will be able to distinguish the health of the company financially.

Amazon is a rapidly growing entity – this paper will investigate what their financials are and

how they are doing behind the scenes as a company. The first section will start by looking at

their ability to pay current liabilities.

Ability to pay current liabilities

Cash is ultimately a major part of every business. A way that businesses keep track of their cash

is by analyzing their ability to pay off their current liabilities and short-term obligations. The way

that businesses can track this is by using the current ratio. The current ratio is total current assets,

or the property owned by the company including cash, divided by the total current liabilities, or

the current amount the company owes in debts. The higher the ratio, the more able the company

is to pay off their debts and liabilities. Below is a list of Amazons cash ratios for the years 2011-

2012 as well as the industry average.

Company 2011 2012

Amazon 1.17 1.12

Industry Average 1.54 1.54

As you can see, Amazon has been below the industry average for the two years listed. This being

said, they are still easily able to pay off their liabilities. The closer that a company is able to get

to 1.0 the more likely they are to pay off their liabilities. The higher above 1.0 the company is,

the more excess cash it has. Amazon has steadily increased their current ratio. They have risen

.05 in their ratio in one year. Based on this, for both years listed, Amazon is able to pay their

current liabilities while still having excess cash.

Ability to sell merchandise inventory and collect receivables

In addition to a company’s ability to pay current liabilities, its ability to sell their merchandise

and collect on receivables is another indication of how well the business is doing. Below is listed

the metrics needed to discuss this topic.

Sales Metric Amazon 2011 Amazon 2012 Industry average

Inventory Turnover 9.1 8.3 4.8 times

Days Sales in 40.12 days 43.98 days 75.42 days

Inventory

Gross Profit Margin 22% 24% 33.55%

Accounts Receivable 23.13 20.59 10.11

Turnover

Days sales in inventory is the average amount of inventory that the company would need for a

certain amount of days of sales. For Amazon, their inventory is about half of what the industry

standard is. This is clear when looking at the inventory turn over ratio. Inventory turn over is the

amount of times the company will sell its average amount of inventory during the year. They are
roughly double what the industry standard is, meaning that Amazon has a lower initial inventory

with a higher turnover rate but overall is about equal with the industry standards when you take

both into consideration. For income and receivables, currently, Amazons gross profit margin is

below average. A gross profit margin is how much the company makes on the merchandise after

accounting for the cost of good sold. Amazon is an average of 10% lower than the industry

standard. As for its receivables, Amazon is above the industry standard for the receivable

turnover. Receivable turnover is the average amount of times the company will collect is average

receivables during the year. Amazon has steadily doubled the industry standard and is doing well

at collecting on receivable accounts.

Ability to pay long term debt

A company’s ability to pay its long-term debt is crucial in its ability to stay functional. Below are

listed the debt ratios for Amazon compared to the industry average.

Ratio Amazon 2011 Amazon 2012 Industry Average

Debt to Total Assets 69% 75% 34%

Debt to Equity 2.26 2.97 2.23

Times Interest Earned 15.18 5.23 5.33

The debt to total assets and the debt to equity ratios show what amount of the assets the company

has are financed through either debt or equity. The higher percentage for debt to total assets, or

the higher the ratio for debt to equity shows that more of the company’s assets are finances

through debt. As you can see, Amazon has a higher debt ratio than most companies. This means
that Amazon does not use as much financing by equity. With the higher ratios, the company is at

a greater financial risk. This being said, they are in good standing with their ability to pay off

their debts. The interest earned ratio shows the ability of the company to pay the interest of their

debts. The higher the ratio, the more easily the company can pay its interest in debts. Amazon

did much better in 2011 in this regard but is average in 2012.

Profitability

Above all other topics mentioned, the main goal of any company is being profitable. Below are

the ratios/metrics of the profitability of the company compared to the industry average.

Ratio 2011 2012 Industry Average

Returns on Assets 2.57% -.45% 4.76%

Return on Equity 8.63% -.49% 11.39%

As you can see, the return on assets, or the ability of the company to use its assets to generate

income, is much higher in 2011 than 2012. As well, the return on equity, or the relationship

between net income available to common stockholders and their average equity invested, is

much lower in 2012. Across the board, Amazon has been below the industry average. This shows

that Amazon is not as profitable as other companies.

Evaluating stock as an investment

Below are the ratios for the stock investment of Amazon compared to the industry average.
 Ratio Amazon 2011 Amazon 2012 Industry Average

Book Value per $182.61 $256.92 $10.54

common share

Price/Earnings ratio 131.37 -2,857.7 47.17

The book value per common share of stock for Amazon is much higher than the industry

average. As well, their price/earnings ratio, or the ratio of the market price of a share of common

stock to the company’s earnings per share, was much higher than the industry average in 2011

but was much lower in 2012. When evaluating an investment to the company, Amazon does not

pay dividends for common stock.

Overall, Amazon is a financially strong company. They have more debt than the industry average

for their assets, but they are able to sell enough product to make a profit as well as pay their

liabilities and debts. Amazons business standing has increased over the last few years and based

off calculations, they will continue to grow and become more profitable in the future.