Brianna Richards
Financial Analysis
04/19/2015
Introduction
The purpose of this paper is to analyze Amazon.com and the company’s ability to pay
current liabilities, sell merchandise inventory and collect receivables will be outlined in this
paper. I will be evaluating Amazon’s ability to pay their long term liabilities and the company’s
profitability. Finally I will analyze Amazon’s stock as an investment for the year 2012.
Current Liabilities
First we will start with Amazons ability to pay its current liabilities. A current liability is
debt due to be paid to a creditor within the next twelve months. A company’s current liabilities is
found on the balance sheet, current liabilities include short term debt, accounts payable, and
accrued liabilities. The current ratio is how you see the company’s ability to pay their debt, the
higher the ratio the more capable the company is of paying its obligations. Amazons current ratio
is 1.54 this means that Amazon had one and a half as many assets as it does liabilities. According
to csimarket.com the retail industry typically has a current ratio of less than one. The acid test
ratio is a measure of how well a company can meet its short-term financial liabilities, the higher
the ratio the more financially secure the company is in the short term. The general principle is
that any companies with an acid-test ratio of greater than one are sufficiently able to meet their
short term liabilities. Amazon’s acid-test ratio is 1:82 so they are able to almost pay their short
term liabilities two times over with their assets. This means the Amazon is in good financial
shape in the short term at least, later in the paper I will discuss Amazon’s ability to pay its short
term debt.
Brianna Richards
Financial Analysis
04/19/2015
Sell Merchandise & Collect Accounts Receivables
Inventory turnover is a measure of the number of times inventory is sold in a year. A low
turnover is usually a bad thing because it means that products stay in the warehouse and the
company’s sales are poor. Amazons inventory is 4.8 meaning that the average amount of
inventory in stock has been renewed or turned over 4.8 times in the year. The days in sales
inventory gives investors an idea of how long it takes a company to sell their inventory in other
words turn it into cash. The general principle is that the company wants to sell within 90 days.
Amazon’s day in sales is 75 days so it does fall under the general guidelines. The gross profit
margin is the percentage of money left over from revenue after paying the cost of goods sold.
Amazon’s gross profit margin is 33.55% that means that for every dollar that Amazon makes the
only have a profit of about 34 cents at the end of the day. Accounts receivable is basically credit
sales that a company collects money on, turnover is each time the company collects its average
receivables. The ratio shows how efficient the company is at collecting credit sales owed to
them. Amazon’s average accounts receivable collection period is 36 days. The goal for collection
is sixty to ninety days, Amazon’s collection period is better than average.
Pay Long-Term Debt
The debt to total assets ratio is an indicator of financial leverage. It tells you the
percentage of totals assets that were financed. Amazon’s debt to total assets ratio is 34% that
means that 34% of their assets are financed, that is a pretty good percentage, and the best case
scenario is always less than half. Debt to equity is also considers a company’s financial leverage,
Brianna Richards
Financial Analysis
04/19/2015
it indicates what proportion of equity and debt the company is using to finance its assets.
Amazon’s debt to equity ratio is 52%. According to ReadyRatios.com the lower the ratio the
better, if the ratio is increasing than the company is being financed by creditors rather than its
own financial sources. Times interest earned ratio is a measure of a company’s ability to honor
its debt payments. Larger ratios are considered more favorable than small ratios because it is a
measure of how many times a company can pay interest before tax income. Amazon’s timesinterest ratio is 5.33; this means that they can pay their interest about 5 times before tax.
Profitability Ratios
A company has two types of profit margins, the gross profit margin and the net profit
margin. Gross profit margin is the money left over from revenue after accounting for the cost of
goods sold. Net profit margin is the percentage of revenue left after all operating expenses,
interest, taxes and preferred stock dividends. The net profit margin is more accurate in
profitability because it is the total revenue minus all expenses, so the percentage is significantly
lower than gross profit. Amazons gross profit margin is 33.55 % and the net profit margin is
2.87%, this means that the company has about 3% profits after all the bills are paid. The return
on assets ratio is a profitability ratio that measures the net income produced by total assets during
a period. In other words the larger the ratio the better the company is at turning their assets into
cash. Amazon’s return on assets is 4.76%, so for every dollar that Amazon invests during the
year produces .0476 of a cent. That’s not a very good ratio, but in their industry they don’t make
huge asset purchases like for example a construction company would. The asset turnover ratio
measures a company’s ability to generate sales from its assets. Amazon’s asset turnover ratio is
1.66 times. According to myaccountingcourse.com a ratio of 1 means that the net sales of a
Brianna Richards
Financial Analysis
04/19/2015
company is generating one dollar of sales for every dollar invested on the asset. So Amazon is
makes $1.66 for every dollar they invested in their assets. The return on equity ratio measures the
ability of a firm to generate profits from its shareholder’s investments in the company. This
basically is showing how much profit each dollar of common stockholders’ equity generates.
Investors want to see a high return on equity ratio, because it means that the company is using
the investor’s money the right way. Earnings per share measures the amount of net income
earned per share of stock outstanding; it shows how profitable a company is on a shareholder
basis. A higher ratio is always better because it makes the stock price of a company rise,
Amazon’s earnings per share ratio is for 2012 is -.09 this state that the company didn’t have
enough profits to distribute to the shareholders.
Evaluating Investments
The price-earnings ratio is the company’s current share price compared to its per-share
earnings; the price-earnings ratio usually comes from the last four quarters. Amazons price
earnings ratio is 47.17; low price-earnings ratio is below 15. Dividend yield is a financial ratio
that shows how much a company pays out in dividends each year relative to its share price.
According to Amazon’s annual report in their message to their shareholders they yielded 838%
revenue growth, serving more than 1.5 million people.
Conclusion
In conclusion, Amazon is a growing profitable company, like any other company they
have their bad years. I only found two negative things during this analysis was that Amazon’s
earnings per share for 2012 were in the negative, and that the company’s debt to equity ratio was
Brianna Richards
Financial Analysis
04/19/2015
52% that means that Amazon is being financed by creditors rather than having its own financial
resources. All in all it is a good time to be investing in Amazon.com because of their increasing
revenue which is leading to profitability.