Amazon.com
Project
Financial Analysis
Susie Addams
"Amazon.com is the largest virtual supermarket on the globe." (Financial Accounting)
The purpose of this essay is to analyze the public financial information given by Amazon.com (Amazon)
and compare the information to the industry averages that is the average numbers and percentages of
other companies in the same industry as Amazon, in order to evaluate the company for investing
purposes.
In order to evaluate a company, investors and creditors examine multiple years' worth of data. In this
case, 2006, 2007, and 2008 financial information analyzed to map the trends of these three years. This
information is analyzed via horizontal analysis (from one period to the next), as well as vertical analysis
(items on a financial statement in relation to the sales). First, we will exam the financial information of
Amazon horizontally to determine ability to pay current liabilities, ability to sell inventory and collect
receivables, ability to pay long-term debt, profitability, as well as to analyze Amazon's stock as an
investment. Next, we will analyze Amazon’s financial statement in relation to the sales. Lastly, we will
draw a conclusion regarding the overall financial health of the business based on the results of the
analysis of the listed categories.
Horizontal Analysis
Ability to pay current liabilities:
Working capital is the capital of a business that the company is using in its day-to-day trading
operations, calculated as the current assets minus the current liabilities. The working capital for Amazon
is $1411 for 2008 and $1432 for the previous year.
The current ratio measures the ability to pay current liabilities with current assets. In general, a
higher current ratio indicates a stronger financial position. The business has sufficient current assets to
maintain its operations. The norm, as reported by the Risk Management Association, is around 1.5. The
current ratio industry average being 1.37, Amazon has a current ratio of 1.30 for the 2008 year and a
ratio of 1.39 for the previous year. This means they have enough assets to pay their current liabilities 1
and .3 times over for 2008.
The acid-test ratio tells us whether the entity could pass the acid-test of paying all its current
liabilities if they came due immediately. An acid-test ratio of .90 to 1.00 is acceptable in most industries.
The aid-test ratio industry average being 1.00%, Amazon has a 0.96% for the 2008 year and a ratio of
1.03% for the previous year.
Ability to sell inventory and collect receivables:
The inventory turnover measures the number of times a company sells its average level of
inventory during a year. A faster turnover indicates ease in selling inventory. The inventory turnover
average for the industry is 10.8 times, Amazon has an inventory turnover average of 11.5 times for the
2008 year and a rate of 11.1 times for the previous year.
Days’ sales in inventory measures the company's performance that gives investors an idea of
how long it takes a company to turn its inventory into sales. Generally, the lower the better. The
industry average is 34 days. Amazon’s days’ sales in inventory for 2008 is 32 days and 33 days for the
previous year.
Accounts receivable turnover measures the ability to collect cash from customers. The accounts
receivable turnover industry average is 29.6 times. Amazon’s accounts receivable turnover rate for the
2008 year is and for the previous year.
The days’ sales in receivables ratio shows how many days’ sales remain in Accounts Receivable.
The industry average for days' sales uncollected is 12.32 days. Amazon has a days’ sales uncollected
ratio of 14.6 days for the 2008 year and 13.6 days for the previous year.
Ability to pay debts:
The debt ratio tells us the proportion of assets financed with debt. A debt ratio of 1 reveals that
debt has financed all of the assets. The higher the debt ratio, the greater the pressure the company has
to pay interest and principal. The lower the ratio, the lower the risk. The industry average debt ratio is
55%. Amazon has a debt ratio of 68% for 2008 and 82% for the 2007 year.
The times-interest earned ratio calculation is to measure the number of times operating income
can cover interest expense. A high interest coverage ratio indicates ease in paying interest; a low value
suggests difficulty in paying the interest expense acquired by the company. The times interest earned
ratio average for the industry is 27.55 times. Amazon has a times interest earned ratio of 11.9 times for
2008, and 8.5 times for 2007.
Measuring profitability:
The rate of return on sales shows the percentage of each sale dollar earned as net income. In
other words, for each dollar of profit what percentage is from sales? Rate of return on total assets
measures a company’s use of its assets to earn a profit. The return on assets industry average is 6.20%.
Asset turnover measures the efficiency of a company's use of its assets in generating sales
revenue or sales income to the company. Companies with low profit margins tend to have high asset
turnover, while those with high profit margins have low asset turnover. Companies in the retail industry
tend to have a very high turnover ratio due mainly to cutthroat and competitive pricing. (Wikipedia)
The industry average for asset turnover rate is 2.3 times. Amazon’s asset turnover rate is 1.45 times
during 2008 and 2.74 times for the previous year.
Rate of return on common stockholders’ equity, return on equity (ROE), shows the relationship
between net income and common stockholder’s investment in the company, how much income is
earned for every dollar invested. The return on equity average for the industry is 16.10%. Amazon has a
return on equity percentage of 33.30% for 2008, and 58.50% for 2007.
The earnings per share of common stock, earnings per share (EPS), is the amount of net income
earned for each share of outstanding common stock. The basic earnings per share industry average is
$1.58. Amazon has a EPS of $1.52 for the 2008 year and $1.15 for the previous year.
Fully diluted shares is the total number of shares that would be outstanding if all possible
sources of conversion, such as convertible bonds and stock options, were exercised. The industry
average for fully diluted earnings per share is $0.25. Amazon’s fully diluted earnings per share is $1.49
for 2008 and $1.12 for the previous year.
The gross profit margin industry average is 24.46%. Amazon reports a gross profit margin of
22% for 2008 and 23% for the previous year.
Analyzing stock investments:
The price/earnings ratio is the ratio of common stock price to earnings per share. The
price/earnings ratio industry average is 178.57%. Amazon has a price/earnings ratio of 101.31% for
2008 and 122.61% for the previous year. This percentage is a good number in that the industry average
price is higher than Amazon’s price per earnings.
Dividend yield is the ratio of dividends per share of stock to the stock’s market price. Preferred
stockholders pay special attention to this ratio because they invest primarily to receive dividends. In this
case, dividends were not paid and the analysis is in regards to the analysis of common stock purchase.
The book value per share of common stock indicated the recorded accounting amount for each
share of common stock outstanding. The book value per common share industry average is $7.17, while
Amazon’s book value per common share is $6.24 for 2008 and $2.88 for the previous year.
Trend Analysis
2008
2007
2006
2005
Net Income:
645
476
190
359
Sales:
19,166 14,835 10,711 8,490
NI %
180%
133%
Sales %
226%
175% 126%
53%
100%
100%
The analysis above reflects that in relation to 2005, being the base year, in 2006 Amazon had a
decrease of 47% in net income, an increase of 133% in 2006, and an increase of 180% in net income in
for the 2008 year. 2008 being the best year so far, also had an increase of 226% in sales in relation to
the base year, this means they sold twice plus twenty-six percent of what was sold in 2005. The sales
are increasing. There was a dramatic drop in Net Income for 2005, but according to the trends, Amazon
seems to be doing well now.
In regards to the trend percentages for the 2008 year, the findings are as follows: (a negative
number is accompanied by a parenthesis, a generally accepted accounting principle)
Gross Profit Margin: (0.01)
Return on Sales: 0.16%
Return on Equity: (25.20%)
Return on Assets: (0.59%)
Days' Sales Uncollected: 1
Inventory Turnover: 0.04
Days' Sales in Inventory: (1)
Asset Turnover: (1.29)
Accounts Receivable Turnover: 0.38
Current Ratio: (0.09%)
Acid-Test Ratio: (0.07%)
Debt Ratio: (14%)
Times Interest Earned Ratio: 3.4
Book Value per Common Share: $3.36
Fully Diluted Earnings per Share: $0.37
Basic Earnings per Share: $0.37
Price/Earnings ratio: (21.30%)
Working Capital: ($21.00)
In 2008, Amazon had a slight decrease in the Gross Profit Margin. The Return on Sales increased slightly,
however, there was a decrease of 25.20% in the Return on Equity, as well as a slight decrease in the Return on
Assets. The collection rate as well as Accounts Receivable Turnover increased slightly meaning that monies
were collected slighter quicker on credit extended to customers, this could also mean they did not extend as
much credit this year. Inventory Turnover increased slightly. The Current Ratio decreased slightly, meaning
the company’s ability to pay current liabilities with current assets reduced slightly. The Acid-Test Ratio,
reduced slightly, meaning that the entity has a slight decrease in the ability to pay all its current liabilities if
theyConclusion
come due immediately. The Debt Ratio decreased by 14%, meaning that the proportion of a company’s
assets that is financed with debt decreased. This is good. The Times Interest Earned Ratio, increased by 3.4,
this means that the company is 3.4 times more capable to pay interest expense with operating income than
last year. The Book Value per Common Share increased by $3.36, as well as there was an increase in the Basic
Earnings per Share. The Price per Earnings Ratio decreased by 21.30%, meaning that, the cost has decreased
when considering the earnings. Lastly, Working Capital decreased slightly.
Vertical Analysis
Vertical Analysis Income Statement
Net Sales
Cogs
Gross Profit
Operating Expenses
Income from operations
Interest Income
Interest expense
Other Income
Non Operating Expenses
Income before taxes
Provision for income taxes
Equity method investment activity
Net Income
Vertical Analysis Balance Sheet
Current Assets
Fixed Assets
Deferred tax assets
Goodwill
Other Assets
Total Assets
19166
14896
4270
3428
842
83
71
47
59
901
247
9
645
1.000
0.777
0.223
0.179
0.044
0.004
0.004
0.002
0.003
0.047
0.013
0.000
0.034
6157
854
145
438
720
8314
0.7405581
0.1027183
0.0174405
0.0526822
0.0866009
1
Upon Vertical Analysis of the Income Statement, it is relevant that only 4.4% of the income from operations
comes from Net Sales, as well as only 3.4% of Net Income comes from Net Sales.
Conclusion
Upon
Vertical Analysis of the Balance Sheet, it is relevant that 74% of the total assets are current assets,
while 5% is goodwill and 8.7% are Other Assets.
Conclusion
Upon analysis of the 2006, 2007, and 2008 financial data of Amazon.com it is relevant that in relation to the
average market industry Amazon that the return on sales is good. The Account Receivable turnover is low
meaning that the majority of sales are on a cash basis, the debt ratio is a little higher than average, the
times interest ratio is low compared to industry, and the basic earnings per share is average. The price per
earnings ratio is lower than average, which is good. However, due to the decrease in Return on Equity and
the Return on Assets, I would say that Amazon is a poor choice, at least in 2008. Also, Amazon appears to
be a weak company in that only 4% of their annual income is a result of operations.