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To: Professor Yerbury
From: Sherry Gott
Date: November 16, 2013
Subject: Analysis of Amazon Corporation Financial Statement
I analyzed the 2007-2008 financial statements of Amazon Corporation, and present the following
analysis of the financial health of Amazon Corporation. This analysis measures liquidity,
profitability, and solvency, and provides as well an indication of the efficiency of the corporation
and its’ attractiveness as an investment. Each section includes the ratios and figures which
directly apply to these categories, with a conclusion regarding applicability following each
formula. Each result is also compared to the industry averages (the online retail sales industry).
Finally, a conclusion of my overall findings and recommendations is given.
Please do not hesitate to contact me if you have additional questions or concerns regarding
Amazon Corporation’s financial health. Sherry Gott; sgott@bruinmail.slcc.edu; 801-419-7204.
I appreciate the opportunity to provide the information presented, and hope you will find it
useful.
Liquidity:
1. The first ratio I looked at was the current ratio, which is current assets/current
liabilities. The current ratio for Amazon for 2008 is 1.30, .10 less than 2007’s 1.40 ratio.
The ratio means that for every dollar of current liabilities Amazon has, it has $1.40 of
current assets. The average current ratio of the Online Retail Sales Industry is 1: 1.37, so
Amazon’s average is in keeping with the industry trend.
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2. The 2nd ratio is the acid –test ratio (aka as “quick”); it measures Amazon’s immediate
short-term liquidity. I measured this by dividing the sum of cash+short-term investments
+ net receivables by current liabilities. For 2008, the ratio is 1: .96, and for 2007, it is 1:
1.03; the industry average acid-test ratio is 1: 1, so again it is possible to determine
Amazon is in keeping with the industry trend.
3. Receivables turnover is the third measure used in the financial analysis. It represents the
number of times on average Amazon collects receivables during the accounting period.
Measured as net credit sales/average net receivables (net credit sales = net sales – cash
sakes, if company has cash sales.), the average Accounts Receivable Turnover for the
Online Retail Sales Industry is 29.6 times. Amazon’s receivables turnover is 14.6 days
for 2008, and 13.6 days for 2007, making it slightly less than half the industry average.
The conclusion drawn from receivables turnover is Amazon collects funds more rapidly
than the industry trend, which improves its short-term liquidity.
4. Finally, the 4th measure of liquidity is inventory turnover, which determines the number
of times inventory is sold on average during the accounting period. This formula is cost
of goods sold/average inventory. Amazon has an inventory turnover of 11.5 for 2008,
and 11.1 for 2007, just slightly higher than the average industry trend of 10.8. In
conclusion for this measure, Amazon successfully turns its inventory faster than industry
as a whole, resulting in having less cash tied up in inventory and having less chance of
inventory obsolescence. Conclusion regarding Liquidity of Amazon: based on the
forgoing ratios and measures of inventory turnover and receivables turnover, I am able
to confidently determine Amazon has liquidity on a par with its industry.
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Profitability:
Profitability ratios measure income or operating success of Amazon for a given period of time. It
affects the company’s ability to obtain debt and equity financing, which in turn affects its ability
to grow. There are seven measures of profitability which I analyzed for Amazon and compared
to the Online Retail Sales Industry Averages:
1. Profit margin (also referred to as rate of return on sales) is a measure of the % of each
dollar of sales which results in net income. Formula for profit margin is net income/net
sales. Amazon’s profit margin is 3.37% for 2008; 3.21% for 2007. Industry average is
2.72%. Conclusion is Amazon has a higher than industry average profit margin which is a
very positive figure.
2. Asset turnover measures efficiency in using assets to generate sales and is calculated as
net sales/average (total) assets, shows dollars of sales produced by each dollar invested
in assets. Amazon’s 2008 asset turnover was 2.59; its 2007 asset turnover was 2.74, and
the industry average was 2.3. Conclusion is Amazon’s turnover is very much in line with
the average.
3. Return on common stockholder’s equity measures profit from the viewpoint of a common
stockholder, and shows how many dollars of net income the company earned for each
dollar invested by the owners (stockholders). Net income/average common stockholder
equity is the formula. The industry average is 16.1%; Amazon’s figure is 33.3% for
2008, and 58.5% for 2007. Conclusion is even though the return is less for 2008 than for
2007, Amazon’s return on common stockholder’s equity is double the industry average,
making it very attractive to investors.
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4. Return on assets (net income/average (total) assets) is an overall measure of
profitability. Amazon’s return on assets is 8.7% for 2008, 8.8 for 2007; with an industry
average of 6.2%. Conclusion is Amazon’s turnover is approximately 25% higher than the
industry average, putting them in a very good profitability position
5. Earnings per share (EPS) measures net income earned on each share of common stock,
and is calculated net income/weighted-average common shares outstanding during
the year. EPS and net income per share refer to the amount of new income applicable to
each share of common stock. Amazon has 1.52 earnings per share in 2008 (per the
income statement), compared to an industry average of 1.58; leading to an obvious
conclusion Amazon is strongly comparable to the stock of other online retailers.
6. The price-earnings ratio is market price per share of stock/earnings per share. It
reflects an investor’s assessment of a company’s future earnings. Amazon’s P-E ratio is
101.32 for 2008, 122.61 for 2007. The industry average is 78. Conclusion is Amazon’s
P-E ratio, as a strong indicator of investor enthusiasm, is very favorable.
7. The payout ratio measures the percentage of earnings distributed in the form of cash
dividends. There were no dividends paid out by Amazon for 2008 which is directly
comparable to an industry average of zero dividends for 2008.
Solvency:
Solvency ratios measure a company’s ability to stay in business for the long-haul. Stockholders
and long-term creditors have particular interest in whether a company is able to repay debt at
maturity (bonds), and to pay interest as it accrues. The two ratios used are:
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1. Debt to total assets ratio measures the percentage of total assets creditors provide and is
determined by the formula total debt/total assets. A company’s degree of leverage is
indicated by this result, as well as an indication of its ability to undergo some degree of
loss without hurting its creditors. The lower this figure, the better, because a high number
may mean the company is at risk of defaulting on its maturing debts. Amazon’s debts to
total assets ratio improved in 2008 by dropping to .68, from .82 in 2007. The conclusion
here is even though the Amazon ratio us higher than the industry average of .55, it is
trending in the right direction and does not pose a significant concern to investors.
2. Times interest earned ratio gives an investor an indication of the company’s ability to
meet interest payments when they are due. Times interest earned is calculated as
income before income taxes and interest expense/interest expense. The times interest
earned ratio for Amazon for 2008 was 11.9 and for 2007 was 8.5; both of which were
good, although it is concluded the industry average of 27.55 times is better as a whole.
Conclusion:
In conclusion, I would not hesitate to recommend Amazon Corporation to potential investors as a
company with sound operating and financial principles, whose overall comparison to the online
retail sales industry averages are predominantly favorable. This report in no way constitutes a
solicitation of investment capital, and is not offered as brokerage advice.