Comprehensive Financial Analysis
Lauren Jo Moya
ACCT 1120-003
Prof. Monica Gardner
Amazon.com is a U.S. based virtual online retailer in business since 1995. Amazon.com
specializes in Seller, Consumer and Developer Costumer relations in an array of products from
appliances to wine. Seller Customers sell on the Amazon.com website. Consumer Customers
purchase from Amazon.com as well as other business owners through the Amazon.com website.
Developer Customers utilize Amazon.com e-commerce technology to pursue business ventures
of their own. Amazon.com takes the retail industry to the next level enabling virtual purchasing
power with low priced reliable shipping to please its massive consumer audience. The following
information is an analysis of Amazon.com, comparison of industry averages and trend analysis
which prove overall health of the firm during 2007 and 2008, using liquidity, profitability and
solvency ratios.
Liquidity – Ability to meet short term debt obligation
 Current Ratio – Provides insight to Amazon.com ability to pay short term debt. During
2007 the firm was able to meet this obligation with $1.39 of current assets for every
$1.00 of current liabilities. During 2008 the firm was able to meet this obligation with
$1.30 of current assets for every $1.00 of current liabilities. The industry average for
2008 was 1.37:1. Between 2007 and 2008 Amazon demonstrates a downward trend in
comparison to the industry average, for meeting short term debt obligation however, a
high ratio, as is the case here, is preferable.
 Acid Test Ratio – Measures immediate short term liquidity. During 2007 Amazon.com
was able to meet this obligation with $1.03 of highly liquid assets (cash, net receivables
and short term investments), for every $1.00 of liabilities. In 2008 Amazon.com was
unable to meet this obligation with only $.96 for every dollar of liabilities. The industry
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Comprehensive Financial Analysis
Lauren Jo Moya
ACCT 1120-003
Prof. Monica Gardner
average was 1:1. The downward trend is an indication that Amazon.com cannot meet
immediate liquidity obligations without a contribution from long term assets.
 Receivables Collection – Measures Amazon.com rate of receivables collection during a
period. In 2007 the firm collected receivables an average rate of every 13.36 days, in
2008, every 14.6 days. The industry average collection rate is every 12.32 days. The
collections liquidity rate for Amazon.com is acceptable.
 Inventory Turnover – Measures rate of sales of inventory. Amazon.com sells inventory
11.1 times during 2007 and slightly increased to 11.5 times in 2008. The industry rate of
inventory turnover is 10.8 times. The upward trend in Amazon.com indicates a growth in
turnover rate and in comparison to the industry trend is adequate.
Profitability – Success of Operations to generate revenue, finance equity and obtain debt
 Profit Margin – Indicates Net Income generated from each dollar of sales. Amazon.com
experienced an increase in its profit margin from 2007 with 3.21% to 2008 with 3.37%.
The industry average is 2.72%. The trend within Amazon.com is adequate.
 Asset Turnover – Measures efficiency of assets utilized to generate sales. Amazon.com
experienced a decrease in its average asset turnover rate from 2.74 times in 2007 to 2.59
times in 2008. The industry average in 2008 is 2.3 times. The decrease in asset turnover
indicates fewer sales for every dollar invested in assets, and is higher than the industry
trend.
 Return on Assets – An overall measure of profitability of assets. Amazon.com return on
assets increased significantly from 2007 with 6.43% to 11.90% in 2008 and is above the
industry average of 6.2%. The upward trend indicates growth in profitability at
Amazon.com.
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Comprehensive Financial Analysis
Lauren Jo Moya
ACCT 1120-003
Prof. Monica Gardner
 Return on Common Stockholders Equity – Profitability of the owners’ investment. This
ratio indicates net income generated from every dollar of owner investment. In 2007
Amazon.com generated 58.5% of its net income in 2007 from each dollar invested and in
2008, a lower 33.3%. The industry generates an average of 16.1% at this time. Amazon is
healthy in this regard yet from the stockholders viewpoint may affect the investment
trend. The rate of return on common stockholders’ equity is higher than the rate of return
on assets indicating that Amazon.com has used leveraging wisely.
 Earnings Per Share – Measures net income earned for each share of common stock. The
basic EPS is calculated using only outstanding weighted average common shares. The
dilutive EPS is calculated taking into account treasury stock. In 2007 the basic EPS of
Amazon.com was $1.15 in 2007 and $1.52 in 2008 indicating an upward trend, the
industry average was $1.58. The Dilutive EPS, which takes into account Treasury Stock,
was $1.12 in 2007 and $1.49 in 2008 which were high above the industry average at $.25
per share. The EPS for Amazon.com indicates a healthy trend and is acceptable.
 Price Earnings Ratio – Measures Market price per share in comparison to EPS in regards
to future earnings. In 2007 each share of common stock sold at 122.61 times (basic) and
125.90 times (dilutive) higher than the amount the firm earned on each share of common
stock. In 2008 each share of common stock sold at 101.32 times (basic) and 103.36 times
(dilutive) higher than the amount the firm earned on each share of common stock. The
industry average price earnings ratio is significantly lower at 78 times, than that of
Amazon.com indicating a high return through the market price of each share.
 Payout Ratio – Measures percentage of earnings distributed in the form of cash
dividends. Amazon.com did not distribute cash dividends in 2007 or 2008.
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Comprehensive Financial Analysis
Lauren Jo Moya
ACCT 1120-003
Prof. Monica Gardner
Solvency – Long term ability of survival
 Debt to Total Assets Ratio – Measures percentage of total assets that creditors provide
indicating the degree at which leverage is being utilized. In 2007 creditors had invested a
total of 81.54% of Amazon.com assets and in 2008 had invested a total of 67.86% into
Amazon.com total assets. The industry average of investment by creditors is 55% at this
time. The downward trend in Amazon.com indicates less dependency on creditors for
assets yet indicates a high risk in investing for creditors. Should Amazon.com fold, the
company may not be able to meet its obligations fully.
 Times Interest Earned Ratio – Measures the firms’ ability to meet interest payments as
they come due. The amount available to cover interest payments for Amazon.com is 9.57
times in 2007 and 13.69 times in 2008. Although there is an upward trend, Amazon.com
ability to meet interest expense is well below the industry average of 27.55 times.
The objective in analyzing Amazon.com financial statements in 2007 and 2008 is to
determine the liquidity, profitability and solvency of the firm. Note that the financial ratios
used above do not fully indicate the health of the firm. The ratios are but a screening of the
firm and many other factors should be taken into consideration when investigating the health
of a firm. The Liquidity of Amazon.com is slightly below the industry average in its ability to
meet short term and immediate debt paying ability and is higher than the industry average at
turning inventory and collections. The Liquidity ratios for Amazon.com indicate a healthy
standard and are adequate measurements in 2008. The Profitability ratios of Amazon.com
indicate the ability to make a profit using equity in operations at Amazon.com. Most
profitability ratios increased from 2007 to 2008 excluding asset turnover and return on
common stockholders’ equity. However, all ratios were significantly higher than the industry
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Comprehensive Financial Analysis
Lauren Jo Moya
ACCT 1120-003
Prof. Monica Gardner
average minus the basic earnings per share which was slightly below the industry average.
Amazon.com is able to produce high profits indicated by the ratios used above. However no
dividends were distributed in either 2007 or 2008 which indicates that retained earnings were
redistributed into the equity of the company. The Solvency of Amazon.com is very low. One
of the major ratios used to indicate health in a firm is the debt to total assets ratio. The ability
to pay principal and interest is indicative of a healthy firm. Amazon.com can potentially be
described as a high risk company in the eyes of investors upon evaluation of these ratios.
When using the above ratios the intention is to also find strengths and weaknesses of
Amazon.com. Both profitability and liquidity are indicative of strengths and solvency can be
indicative of potential weakness upon comparison to industry averages. Amazon.com shows
success in using financial leveraging, strength through operating profit, improvements in
return on assets and its price to earnings ratio is extremely high. Solvency however is
trending downward. Overall, Amazon.com is a healthy, young company and growing.
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