To Whom It May Concern:
The purpose of this paper is to analyze the company Amazon. Com LLC. ‘s
liquidity, profitability, and solvency. While the company publishes its Annual Reports,
this paper will help to guide anyone who may not understand the technical terms of
Accounting, by bringing the terms down to business matters. The overview of the three
topics will provide enlightenment to anyone who is interested in the investment
standpoint of Amazon.Com LLC.
The Liquidity of Amazon.Com LLC
While there are many time consuming formula’s to work through to configure the
liquidity of a company, they all add up to help one decide as to whether it is best to invest
in a company or not. To understand as to whether a company has good liquidity or not,
one must look at the: Current Ratio as well as what is known as the Acid-Test Ratio. The
Current Ratio for Amazon.Com as of December 31, 2012 is rated at 1.12. Compared to
the Online Retail Sales Industry Averages at 1.54, Amazon’s Current Ratio is considered
to be strong and poses a low risk to the business, which is a good sign for the investors.
The Acid-Test Ratio rates at .78 whereas the average for industries is 1.82. This ratio is
much lower than the average, which is acceptable in this industry seeing as how most
ratings fall between .90 and 1.00. Basing the liquidity off of these two ratios,
Amazon.Com LLC is considered to be rather high and in good terms for those who are
interested in investing.
The Profitability of Amazon.Com LLC
To understand the profitability of Amazon.Com, one must take a look at the
Inventory Ratio, Day’s Sale Inventory, Gross Profit Percentage, Accounts Receivable
Turnover, and Days Sale in Receivables. The Inventory Ratio is the number of times a
company sells its average level of merchandise inventory during a period. For the 2012
year, the ratio rate is 8.3. The average rate runs about 4.8. Amazon’s rate is nearly double
that of the average, which means that it the company has enough inventory to handle
sales for nearly 44 days. The 44 days worth of inventory is found using the Day’s Sale
Inventory. To find this one must take the year (365 days) and divide it by the Inventory
Ratio. As for the Gross Profit Percentage, this formula will explain the profitability of
each sales dollar above the cost of goods sold. Amazon’s rate is computed at 24.8%
compared to the average of 33.55%, it is slightly lower therefore needs to be looked upon
from previous years in order to determine as to whether it is a point that Amazon.Com
needs to work on or if it is simply a minor setback of the year. Then to the Accounts
Receivable Turnover, the ratio falls at 17.7 whereas the industrial average is 10.11. With
a higher ratio than the average, Amazon.Com has a higher number of times the company
collects the average receivables balance in a year. A good return rate can definitely
reflect a good return for the investor. Finally, Days Sale in Receivables is the number of
days’ sales it takes to collect the average level of receivables. Amazon.Com rates at
roughly 21 days while the average sits at 36 days. The shorter amount of days reflects
that Amazon’s average day’s sales are better than the industry average. The outlook for
now is a positive one that benefits both the company as well as the investor.
The Solvency of Amazon.Com LLC
The solvency of Amazon.Com is based off of Debt to Total Asset, Times Interest
Earned Ratio, Profit Margin, Return on Common Stockholder’s Equity, and
Price/Earnings Ratio. The Debt to Total Asset Ratio is the proportion of assets financed
with debt and for the industrial average it sits at 34%. Amazon.Com has their ratio for
2012 at 75%. With a much higher number than the average, it poses a higher risk factor
for the solvency of the company. Times Interest Earned Ratio is a business’ ability to pay
expenses. Amazon.Com has their ratio sitting at 5.23 whereas the average is 5.33. With
this slightly lower difference in rates, it shows that Amazon.Com has little difficulty
servicing the debt, or paying the liabilities. The Profit Margin for Amazon.Com sits at
-0.06% while the average is roughly 2.87%. With the extremely low number, there is
evidence that Amazon.Com may actually be losing income on every dollar of net sales
for the year ended 2012. The Return on Common Stockholder’s Equity is the relationship
between net income available to common stockholders and their average common equity
invested in the company. The average holds at 11.39% while Amazon has -0.49%. The
major decrease shows that Amazon has taken a hit from this year and needs to improve in
the coming years. The Price/Earnings Ratio is the value the stock market places on $1 of
a company’s earnings. For Amazon.Com, the ratio is at -2854.67. The industrial average
is 47.17. Amazon’s ratio needs to be drastically increased if they are to draw in more
investors. Based on the Solvency ratings, the year of 2012 was not the time to invest in
Amazon.Com stock.
Conclusion
In conclusion, the liability and efficiency prove to be noteworthy of Amazon’s
investment, however upon review of the solvency previous years need to be looked at
before a decision is made. Every once and a while a company may have a rough spell
with terms such as a poor sales period due to recession or just a period where people
don’t use the market much. Through and through, Amazon.Com LLC has proved to be a
promising company within the previous years and shall continue to do so at the success
of their company as well as for any businessmen interested in purchasing stock from
them.