Margo Nelson

Shauna Hatfield
Acct 1120
December 12, 2015

Financial Statement Analysis of Amazon.com

This analysis is to determine Amazon.coms ability to pay current liabilities, sell merchandise
inventory and collect receivables, pay long term debt, profitability, and assess their stock as an
investment.

Ability to pay Current Liabilities

In 2012, Amazon was less able to pay their debts using current assets than they were in 2011.
Both years fell below the industry average and indicate that Amazon has too much debt to be
paid with their current assets. Two tools to determine a companys ability to pay their current
liabilities are the current ratio, and acid-test (quick) ratio.
The current ratio measures the companys ability to pay their current liabilities from current
assets. In 2012, Amazons current ratio was 1.12 down from 1.17 in 2011. This is below the
current ratio industry average for the online retail sales industry which is 1.54.
The acid-test ratio or quick ratio tells if a company can pay all of its current liabilities if they
were to come due immediately. In 2011, the acid-test ratio for Amazon was .82 and dropped to .
78 in 2012. The industry average is .82. This shows that Amazon was right on target in 2011
and dropped slightly in 2012.

Ability to sell Merchandise Inventory and Collect

Receivables
Amazon is able to sell merchandise inventory and collect receivables well above the industry
average. They are able to cycle through their inventory and collect on accounts well above the
industry average but still fall behind in making a profit compared to their competitors.
Their inventory turnover ratio is almost double the industry average of 4.8 times a period, at 8.3
times in 2012 which slightly lower than their 2011 turnover ratio of 9.1 times. The inventory
turnover ratio measures how many times a company sells the average level of merchandise in a
period. This equates to a days sales in inventory of 44 days in 2012 and 40 days in 2011. The
days sales in inventory ratio measures the average number of days merchandise inventory is
held by the company. This is far below the industry average of 75 days, which reflects on the
company well.
Accounts receivable turnover ratio measures the number of times the company will collect the
receivables balance in a year. The industry average accounts receivable turnover rate is 10 times.
Amazons turnover rate for 2012 and 2011 were 21 and 23 times respectively.
The accounts receivable turnover ratio is used to calculate days sales in receivables. Days sales
in receivables, the collection period, tells how may days it takes to collect on receivables. In
2012 the average collection period for Amazon was 18 days and 16 days in 2011. This is far
below the industry average of 36 days. This indicates that Amazon is able to collect on accounts
faster than the industry average and is able to have access to cash.
The gross profit percentage measures the profitability of each sales dollar above the cost of
goods sold. This reflects the companys ability to earn a profit on inventory. This must be high

enough to cover remaining operating expenses and earn income. In 2011, the gross profit
percentage was at 22% and rose to 24% in 2012. This is a good indicator for the company
because it indicates a small rise in income for Amazon. However, the industry average for gross
profit margin is 34%.

Ability to Pay Long Term Debt

Amazons ability to pay long term debt does not look good. Most of their assets are financed
through debt and not equity in the company. This indicates a high risk for the company to be
able to meet its financial obligations. A companys ability to pay long-term debt is measured
using the debt ratio, debt to equity ratio and time interest earned ratio.
The debt ratio shows the relationship of assets financed through debt. The industry average debt
ratio is 34%. Amazons debt ratio for 2011 was 69% and 75% in 2012. This indicates that most
of Amazons assets are financed through debt.
Debt to equity ratio shows the proportion of total liabilities relative to total equity measuring
financial leverage. The industry average debt to equity ratio is 0.52. Amazons debt to equity
ratio is 2.97, which is up from 2.26 in 2011. This shows that Amazon is financing more of its
assets with debt than it is equity. This is a high risk factor because it is so much higher than the
industry average.
Times-interest earned ratio evaluates a businesss ability to pay interest expense. In 2012
Amazons times interest earned ratio was 5.23 and 5.18 in 2011. While there was growth in this
area, the industry average is 5.33. While Amazon is close to the industry average they are still
falling below the average which indicates that they are at risk of not being able to pay interest
expense.

Profitability
Every businesses goal is to earn a profit. In 2012 Amazon was not able to meet this goal and had
an overall loss. There are five ways to measure a companys profitability: the profit margin ratio,
rate of return on total assets, asset turnover ratio, rate of return on common stockholders equity
and earnings per share.
Profit margin ratio shows how much net income a business earns on every $1 of sales. Amazons
profit margin for 2012 was -0.06%, a significant decrease from 1.31% in 2011 and both fell
below the industry average of 2.87%.
Rate of Return on Total Assets measures a companys success in using assets to earn a profit. In
2012 Amazons rate of return on assets was -0.45% and was 2.57% in 2011. The industry
average is 4.76%. With Amazon falling below the average and into the negative indicates that
they are heavily in debt and borrowing cash to purchase assets.
Asset turnover ratio measures how efficiently a business uses its average total assets to generate
sales. Industry average for asset turnover is 1.66 times. Amazon reports an asset turnover ratio
of 2.11 in 2012 and 2.18 in 2011. This means that they are using their assets to generate sales
revenues effectively.
Rate of return on common stockholders equity shows how much income is earned on each dollar
invested in the company by the shareholders. In 2012 the return on common stockholders
equity was -0.49% down from 2.57% in 2011. The average return on common stockholders
equity if 11.39%.

Earnings per Share is the amount of a companys net income or loss for each share of its
outstanding common stock. -0.09 in 2012 and 1.39 in 2011. However the book value per
common share is $18.04 in 2012 and $17.05 in 2011 with the industry average of $10.54 per
share.

Evaluating Stock as an Investment

Investors hope to earn a return on investments, however, 2012 was not a good year for investors
at Amazon. With a price/earnings ratio of -2854.2 down from 131.7 in 2011. The P/E ratio
measures the value that the stock market places on $1 of a companys earnings. The industry
average for P/E is 47.17
Overall Amazon has many risk factors to consider when looking at the company for investment.
They are currently able to pay their current liabilities however their current ratio showed decline
from 2011 to 2012. Their ability to turnover merchandise inventory and collect on receivables
soars above the industry average, but they are unable to maintain a profit margin high enough to
meet long term debts and are financed through borrowing that shows they are a high risk
investment. I would recommend keeping analyzing Amazon over time to measure if they are a
risk worth taking.