Fernando Barrozo
Professor: Robert V. Powell
Accounting 2010
5 May 2014
Financial Statement Analysis Assignment
This is a report on financial position of Amazon for the year 2008 with a
comparative analysis with the prior year and benchmark figures. For this study I will be
using information collected from Amazon’s 2008 Annual Report and use data from the
various financial statements included in the Annual Report. Form this information; I
calculated the different ratios which can provide a great portrait of how well a company
is performing. These ratios also allowed me to compare Amazon to other businesses
from the same industry. I will focus on Amazon’s liquidity, efficiency, solvency,
profitability and attractiveness as an investment and provide a conclusion of this
company’s financial stability.
Liquidity
Liquidity refers to a company’s ability to pay current liabilities. This information is
used by short-term creditors such, as bankers and suppliers, who are must know how
easy it will be for the company to pay them back. There are three ratios that assist in
determining how well a company is able to pay for these debts: Working Capital, current
ration, and acid-test ratio.
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1. Working Capital = Current Assets – Current Liabilities): Measures the ability
to pay current liabilities with current assets.
Amazon’s Working Capital = $6,157 (Current Assets) - $4,746 (Current
Liabilities) = $1,411. This indicates that Amazon is well positioned as it it’s able
to pay its current liabilities with current assets.
2. Current Ratio = Current Assets / Current Liabilities
It measures the ability to pay current liabilities with current assets.
Amazon’s Current Ratio is in 2008 was 1.3, and in 2007 1.39. Amazon’s current
ratio was down in 2008, but compared to the benchmark of 1.37, Amazon is still
in a strong position as its current assets are greater than current liabilities.
3. Acid-Test Ratio = Cash + Short-Term Investments + Net current Receivable
/ Current Liabilities
It measures if an entity could pay all its current liabilities if they came due
immediately. It uses narrower base to measure liquidity than current ratio does.
Amazon’s Acid-Test Ratio was 0.96 in 2008 and 1.03 in 2007. As the current
ratio, amazon’s acid-test ratio also went down slightly.
Benchmark is 1 so
although Amazon is below average, they are still strong in this area.
As discussed, Amazon’s liquidity position is still within industry average, but its ability to
quickly pay current liabilities decreased over the past year. Amazon should begin to
study its current liabilities and assets to ensure this does not become a trend.
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Profitability
Profitability measures how successful a company is at generating earning as
compared to its expenses. There are four ratios that help determine this information:
return on sales, return on assets, return on equity, and earnings per share
1. Return on Sales = Net Income / Net Sales
This ratio shows the percentage of each sales dollar earned as net income.
Companies strive for a high rate of return on sales as that means more profit is
generated by sales dollars. Amazon’s Return on Sales, or Profit Margin, in 2008
was 3.37%, and 3.21% in 2007. That indicates that for every sales dollar,
$0.0337 cents ends up as net income. That seems very low, but when compared
to industry average of 2.72%, Amazon is doing well.
2. Return on Assets = Net Income + Interest Expense / Average Total Assets
It measures a company’s success in using assets to earn a profit. Amazon’s
2008 ROA was 9.68%. The industry average is 6.2% so Amazon performance in
using assets to generate income is more favorable.
3. Return on Equity = Net Income – Preferred Dividends / Average
Stockholder’s equity
It measures how much income is earned for every dollar invested. Amazon’s
ROE was 33.3% in 2008, down from 58.5% in 2007. There was a considerable
decrease in ROE from 2007, which is a negative change for Amazon. However,
16.1% is the industry average so Amazon is still performing better than most
other companies.
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4. Earnings per Share = Net Income – Preferred Dividends / Average Number
of Shares of Common Stocks
This ratio shows the amount of net income earned for each share of outstanding
common stocks. Amazon’s EPS decreased from $122.61 in 2007 to $101.31 in
2008, which is bad news for the company. Most companies strive to increase
their EPS by 10% to 15% per year. However, compared to industry average of
$78, Amazon still looks strong.
Amazon profitability sector is well above industry average; however, each and every
ratio here discussed had a negative change from 2007 to 2008 so next year’s number
will be very important in determine if 2008 was simply and bad year or if there are other
more serious issues in the way business is being handled.
Solvency
In the liquidity section, we were concerned with the ability to use current assets
to pay for current liabilities. Solvency deals with the ability to total liabilities, in other
words, it deals with a company’s ability to survive over a long period of time. Here are
the two ratios that help us analyze this ability: Debt Ratio and Times Interest Earned.
1. Debt Ratio = Total Liabilities / Total Assets.
This ratio tells us the proportion of assets financed with debt. A ratio of 1 reveals
that all assets are being financed with debt. Therefore, the higher the ratio the
more pressure to pay interest and principal. The lower the ratio, the lower the
risk. Amazon’s debt ratio decreased from 82% to 68% from 2008 to 2007. This
is good news for Amazon as a ratio of 82% means more risk for the company.
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Also, this improvement in debt ratio brought Amazon closer to the industry
average of 55%.
2. Times-Interest-Earned Ratio = Income From Operations / Interest Expense
This ratio measures the times operating income can cover interest expense. A
high ratio is what companies want to see as it indicates ease in paying interest; a
low value suggests difficulty in this area. Amazon’s ratio increased from 8.2 in
2007 to 11.9 in 2008. That demonstrates that Amazon is now better able to
cover interest expenses from operating income. Although Amazon has improved
in this area, it is still well below the industry average of 27.55 times.
Although both the debt ratio and times-interest-earned ratios are below average, it
seems as though Amazon is taking action to improve both ratios as demonstrated by
the positive changes.
Conclusion
Amazon’s ratios suggest that the company is operating well as 2008 shows the
company is well above average in most areas. The performance in 2008 negatively
impacted most of these ratios which demonstrates a decrease in performance.
However, only two years of data is not enough to make a conclusive analysis and
determine whether Amazon is failing as a company or if it was simply not a good year.
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