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Memo
To: Jeffrey Preston
Subject: Executive Summary of Financial Statement Analysis
Mr. Preston,
Below you will find a Summary of Financial Statement Analysis for Amazon.com in years 2011
and 2012. The statement compares Amazon’s performance with the industry average. We will
analyze the ability of the company to pay its current liabilities, ability to sell merchandise
inventory, ability to pay long term debts, profitability, and the evaluation of the stocks as
investment.
Description
Gross Profit Margin
Net Profit Margin
Return on Common Stockholder's Equity
Average Accounts Receivable Collecting period
Inventory Turnover
Current Ratio
Acid-Test Ratio
Debt to Total assets Ratio
Times Interest Earned Ratio
Price/Earnings ratio
2012
24%
0.06%
-0.49%
17.7
8.3
1.12
0.78%
75%
5.23
-2854.7
2011
22%
1.31%
8.63%
15.8
9.1
1.17
0.82%
69%
15.18
131.37
Industry Averages
33.50%
2.87%
11.39%
36.11 days
4.8 times
1.54
1.82
34%
5.33 times
47.17
1. Ability to pay current liabilities:
The Current Ratio measures the capacity of the company to pay its current liabilities which
represents the obligations the company has to pay in a short period of time (less than a year);
the ratio shows a slight decrease between 2011 and 2012. This shows that the company was
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in better condition in 2011 to pay their current liabilities. Amazon was below the industry
average for both years.
2. Ability to sell merchandise inventory
The ability to sell inventory is calculated through inventory turnover that measures the number of
times the company sells its average level of merchandise during a year. Amazon turned over its
inventory twice as fast as the industry average in 2011 and 2012. Amazon had a collecting
period of 15.8 days in 2011 and 17.70 in 2012 while the industry average was 36.11
3. Ability to pay long term debts
The ability to pay the long term debts are measured by Debt to total asset ratio. The ratio is
expressed by dividing the total liabilities or obligations by the total assets. “A ratio of 1 shows
that all assets are financed with debt”. Amazon reported 69% in 2011 and 75% in 2012 while
industry average was 34%. Amazon had a 6% increase in assets that were financed between
2011 and 2012. Their ratio is almost double compared to the market industry. Which means that
75% of their assets are financed.
4. Profitability
Profitability is measured using the profit Margin ratio which shows how much net income is
earned on every dollar of net sales. The formula is “Net income divided by net sales” which
means that more sales dollars are converted into profit. The average profit margin in the industry
is 2.8% and Amazon posted 1.31% in 2011 and decreased in 2012 to 0.06%. The company was
profitable but with a lower margin.
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5. Evaluating stocks as investments
The stocks evaluations are a measure of price earnings ratio which is expressed by
dividing the market price per share of common stock by earnings per share. It can also be
evaluated by looking at the rate of return on common stockholder’s equity. It shows the
relationship between net income available to common stock holders and their average
common equity invested in the company. The formula is net income- preferred dividend/
average common stockholders’equity. The industry average was 11.9% and Amazon had
8.63 % in 2011 and negative 0.49% in 2012. The investors had a slight loss of 0.49% in
2012 and made 8.63 for each dollar invested in 2011.
In conclusion the company did well overall experiencing a small decline in 2012.
Amazon continued to be profitable with a low margin. Compared to the industry average
they excelled in recovering their receivables and moving their inventory, an average of
72% of their assets are financed. Their profitability from 2011 was under the average but
was not bad, however 2012 had a dramatic drop and the stocks had 8.63% and 2012
dropped to -0.06 which is not attractive to investors.