Natalie Bigelow

Accounting 1020
Chpt.17 Statement Analysis
7/27/2016
Looking at the 2012 Annual Report of Amazon.com we are able to perform an analysis of
the companys financial status and holdings. Using the 2012 and 2011 financial statements, that
were published by the Amazon.com corporation, after the audit performed by Ernst&Young, in
comparison to the industry averages for online retail sales, we are able to determine the strength
of the companys current status. From this summary we are able to conclude if Amazon.com is
able to pay its current liabilities, efficiently use its assets, able to pay long term debt, the
profitability of the company and if their stock is a good investment. In the following analysis you
will be shown an unbiased analysis of the companys current standings.

Ability to Pay Current Liabilities

The corporations ability to pay its current liabilities or in other words the companys
ability to pay off its debts and creditors within the current year can be determined from two main
ratios, current ratio and the acid-test ratio. The current ratio measures the companys ability to
pay its current debts using the assets that are easily liquid and the acid-test ratio measures the
possibility to pay all of its liabilities if they were due immediately.

Current Ratio
Acid-Test Ratio

2012

2011

Industry Average

1.12:1
1:78

1.17:1
1:82

1.54:1
1:82

Looking at the calculations for these ratios we can see that the current ratio for Amazon is
well below the industry average meaning that they would struggle to cover all of their debt with
the assets that they currently hold. From the acid-test ratio we see that Amazon is right on target

with the rest of the industry if they needed to pay off their debt immediately. Amazon has slightly
dropped below the industry average in 2012 but are still in good standing with our asset to debt
ratio.
Efficient Use of Assets
We are able to determine how efficiently Amazon.com is using its assets by looking at its
ability to sell its merchandise inventory, its ability to collect their receivables and their overall
use of assets. Using the days sales in inventory ratio, which determines how long a piece of
merchandise is in a store before it is sold, and the inventory turnover rate, which is the how many
times Amazon can sell its inventory within a fiscal period, we are able to determine how
efficiently they are selling their inventory.
2012
2011
Industry Average
Days Sales in Inventory 43.98
40.11
75.42
Inventory Turnover
8.3
9.1
4.8
Looking at the days sales in inventory ratio we see that Amazon is selling its inventory in
under 45 days which is more than 30 days less than the industry average. We also see that
Amazon is turning its inventory into cash at almost double the rate of the industry average. Even
though the ratios have decreased slightly between 2011 and 2012, we can still see a very strong
ability to sell and replenish its inventory.
When we are looking at Amazons ability to collect its receivables or their ability to
receive cash for inventory sold on credit there are two main ratios which are the days sales in
receivables ratio and the accounts receivable turnover rate. The days sales in receivables ratio is
showing us how long it takes to collect cash on the inventory they sold on credit and the accounts
receivable turnover rate determines how many times each year Amazon is able to collect all of
the money they are owed when their customers purchase items on credit.
2012

2011

Industry Average

Days Sales in Receivables

17.7

15.8

36.11

Accounts Receivable Turnover Rate

20.59 23.13 10.11
From the days sales in receivables ratio we see that compared to the industry average,
Amazon is able to receive cash for the items they have sold on credit in less than half of the time
that the rest of the industry is receiving its cash. The accounts receivable turnover rate shows us
that they are able to turn their receivables over 20 times a year, which means they are able to
receive cash from their billing very quickly. These calculations show us that Amazon is able to
turn their receivables over very quickly to stimulate the cash flow of the company.
Looking at the inventory and receivables together helps us to determine how well
Amazon is using its assets, to do this we calculate the asset turnover rate. The asset turnover rate
determines how efficiently a company is using all of its assets to maximize its sales.
Asset Turnover Ratio

2012
2.11

2011
2.18

Industry Average
1.66

Comparing 2012 and 2011 to the industry average we can see that they are well above the
average of most of their competitors in the maximizing of their assets to maximize their sales.
From all of the calculations done to determine how well Amazon is using its assets we are able to
see that Amazon as a whole is doing extremely well to produce the highest amount of return and
the quickest return of cash possible, far surpassing the industry average in the efficient use of
assets.

Ability to Pay Long Term Debt

The next step in our financial analysis is to determine the ability of Amazon to pay off its
long term debt. When looking at Amazons ability to pay their long term debt we need to
evaluate three key areas which are the amount of assets that the company went into debt for,
using the debt ratio, what the amount of total liabilities is compared the companys total equity,

using the debt to equity ratio and if they are able to pay all of the interest on their debt, which is
calculated using the times-interest-earned ratio.
2012

2011

Industry Average

Debt Ratio

75%

69%

34%

Debt to equity ratio

297

226%

52%

Times-interest-earned ratio

%
5.23

5.18

5.33 times

Looking at these ratios we see that compared to the rest of the industry, Amazon has a
high level of debt. Most of their assets have been financed but they are able to pay for the interest
on these assets close to the level of the rest of the industry. Comparing these numbers to the
Statement of Cash Flow we are able to see that even with the high level of depreciation, which
doubled from 2011 to 2012, they are still able to cover their debt and their interest while
maintaining a good cash flow.
Profitability
Determining the profitability of Amazon as whole is done as we look at the amount of net
income they are able to make and how they are using the net income to generate more profits.
Our first step in determining the profitability of Amazon is to calculate how much profit is being
made from each dollar or sales over the cost of the goods sold, which is also known as the gross
profit percentage. The next step in determining the profitability is to look at the profit margin,
which determines how much income is being made off each dollar of net sales. Our third step
profitability calculations are to look at the net income available to the common stockholders and
the average amount of common equity that has been invested in the company, also known as the
rate of return on common stockholders equity. The final step in determining profitability is to

look at the rate of return on total assets, which shows how successful the company is as a whole
when it is using its assets to earn income.
Gross Profit Percentage
Profit Margin
Return of Common

2012
24%
-.06%
-.49%

2011
22%
1.31%
8.63%

Industry Average
33.55%
2.87%
11.39%

Stockholders Equity
Rate of Return on Total Assets -.45%
2.57%
4.76%
From the comparison of all of the assets above we are able to see that are making a profit
from each sale as they are able to cover the cost of the goods sold from each dollar sold but in
comparison to the rest of the industry the amount made on each item is below most of the
industry. As we continue the comparison of the calculations above we are able to see that the
company is carrying a loss because the depreciation is so high that most of the profit they are
making from the sales is going to cover the depreciation that doubled from 2011 to 2012. The
large increase in depreciation is causing a large decrease in the profitability of Amazon.
Evaluating Stock as an Investment
Our final step in evaluating Amazons financial status is to determine if the Amazon stock
is a good investment or not. To determine if this would be a wise investment or not we need to
look at the value the stock market places on $1 of a companys earning, also known as the Price
to Earnings Ratio.
Price/Earnings Ratio

2012
-2854.7

2011
131.37

Industry Average
47.17

When evaluating the financial ratios to the market value of the stock, the stock appears to
be way over valued. However, when you adjust the net income and other ratios by the high level
of depreciation for the year the market value appears reasonable. Assuming that Amazon can
continue to grow on their upward trend of high asset return ratio to keep the cash flow going

price/earnings ratio should trend upward. This means that even though the price/earnings ratio is
so large Amazon stock could potentially still be a good investment.

My overall conclusion after analyzing Amazons 2012 and 2011 financial statements is
that though they are highly leveraged with debt from their acquisition of assets they are still
earning enough income to cover all depreciation, which causes me to believe they are in good
financial standing. From the acid-test ratio we are able to determine that if need be Amazon
would be able to pay all of their liabilities at the liquidation of their assets. Looking at the asset
turnover ratio we are able to determine that Amazon is using its assets efficiently. We are able to
see that Amazon is in a substantial amount of debt from acquiring their assets but are still able to
cover the large amount of depreciation and interest expense. Amazon was profitable in 2011 but
because of the large depreciation they showed a loss in 2012 but were still able to cover all of
their company costs. In our final step of analysis, we see that the stock is overvalued but in
comparison to the depreciation we find that it would still be a reasonable investment. Amazon as
a whole is in a large amount of debt, but with the reasonable management of the company they
will continue to grow in an upward trend. My analysis of Amazons 2012 financial statements
would lead me to believe that the company is in a good financial growth pattern in comparison to
the rest of the industry.