A MAZON AND O VERSTOCK

A Comparison of their Financial Health for the

Potential Investor

Matthew Morgan and Trevor Fridell

4/10/2016

4/10/2016

AMAZON AND OVERSTOCK

A Comparison of their Financial Health for the Potential Investor
According to the U.S. Census Bureau of the Department of Commerce, U.S.
retail e-commerce sales (online shopping) have increased 14.7 percent from
the 4th quarter of 2014 to the fourth quarter of 2015, and continues to
increase. With online stores growing in popularity to consumers, one should
consider investing into this industry. We have set up an analysis to inform
investors on how to make a smart investment into the e-commerce sales
industry. Although there are a vast amount of online stores, we have chosen
to compare two companies that hold the most variety in merchandise:
Amazon and Overstock. Through our analysis of each companys financial
health between the years 2011-2015, we have concluded that Amazon would
be the better investment because the company consistently makes enough
profit to pay their debt, their profitability is higher than Overstocks, and
their market value is more desirable than that of Overstock.

SOLVENCY
Amazon has the most desirable Time Interest Earned Ratio of the two
companies. The Time Interest Earned Ratio is a ratio used to measure a
companys ability to meet their debt obligations. Throughout the five year
analysis, both companies were under the benchmark, but Overstock was
consistently in the negative; meaning the company has not earned enough to
pay toward all of their debt. Amazon, although also under the benchmark,
held positive through the years, meaning that they are earning enough to pay
their debtors and sustain their earnings. As you can see by the chart below,
Amazon has consistently stayed up with the benchmark for four of the last
five years. This shows that they are not only capable of paying toward all
their debt, but they are leveraging their debt and not paying it off too quickly
with money that could be used for other projects to help grow the company.
1

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With Overstock being in the negative, not only does that show they cant even
pay the interest owed on their debt, it shows that they arent making enough
profit to invest into their own company.
Amazon

Overstock

2011 Times Interest Earned

15.37

-6.86

2012 Times Interest Earned

6.91

-17.73

2013 Times Interest Earned

4.59

-143.60

2014 Times Interest Earned

.47

-337.72

2015 Times Interest Earned

4.42

-21.29

PROFITABILITY
Amazon consistently had the strongest increase in the annual sales from
2011-2015. Although Overstock also had their sales increase, they were more
volatile. Sales increase can directly correlate with return on equity. Return
on equity measures how much profit the company generates with the money
shareholders have invested into them. Although Amazon and Overstock are
both under the benchmark, Amazon consistently stays in the positive while
Overstock stays within the negative. This means that Amazon is generating a
profit from the money investors put into them, while Overstock is not; they
are generating a loss. Also contributing to their profitability, Amazons
Return on Assets is in the positive and Overstocks is in the negatives. The
Return on Assets shows how efficient management is at using assets to
generate income. In other words, Amazons management is effectively using
their assets and equity to produce income, while Overstocks management is
less proficient than Amazons.

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Sales/Revenue
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%

%-2011 to
2012

%-2012 to
2013

%-2013 to
2014

%-2014 to
2015

Overstock

4.76%

18.18%

15.38%

10.67%

Amazon

27.06%

21.87%

19.53%

20.25%

Amazon

Overstock

2011 Return on Assets

0.02

-0.11

2011 Return on Equity

0.08

-1.47

2012 Return on Assets

0.00

-0.08

2012 Return on Equity

0.00

-0.47

2013 Return on Assets

0.01

-0.28

2013 Return on Equity

0.03

-0.72

2014 Return on Assets

0.00

-0.02

2014 Return on Equity

-0.02

-0.07

2015 Return on Assets

0.01

-0.01

2015 Return on Equity

0.04

-0.02

MARKET VALUE
The market clearly agrees that Amazon is the better investment based on the
price earnings ratio and the earnings per share. The price earnings ratio tells
us the dollar amount a person can expect to invest into a company in order to
receive $1 of the companys earnings. So if we look at Amazon and
Overstocks 2-15 price earnings ratio, a person is willing to invest $534.13 in
order to receive $1 of the companys earnings, whereas a person investing
into Overstock is only willing to invest $9.70. What this means is that

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investors are expecting Amazon to continue to grow and become more

profitable and are less confident in Overstocks growth. The Price History
chart below illustrates this point further. When one wants to invest in a
company, their primary interest is generating a profit off of that company.
The earnings per share ratio helps us to see what type of dividend an investor
can expect from a company. From the chart below (Trend Line Chart on
EPS), we see that Overstock consistently has a negative earnings per share
and Amazon having a positive share 3 out of the 5 years. We ran a trend line
analysis which shows Amazon slowly sloping downward and Overstock slowly
sloping upward, which could initially be perceived as a warning sign, but
ultimately it shows that even though Amazon may be sloping slightly
negative, they are still paying out dividend while Overstock hasnt for the
past five years.

Price History
$2,500.00

$800.00

S&P 500 Axis

$600.00
$500.00

$1,500.00

$400.00
$1,000.00

$300.00
$200.00

$500.00

Company Stock Axis

$700.00
$2,000.00

$100.00
$-

$-

Years
Market Close

OverStock Close

Amazon Close

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Trend Line Chart on EPS

2.00

1.00
0.00
1

-1.00
-2.00
-3.00
-4.00
Amazon

Overstock

Linear (Amazon)

Linear (Overstock)

POTENTIAL RETURN TO THE INVESTOR

Since an investors primary goal is to gain a profit off a company they invest
in, we have compared Amazon and Overstocks monthly market return to the
S&P 500 and the ten year T-Bond, over the past 60 months. The reason we
have chosen the S&P 500 is because it is the markets overall benchmark and
the T-Bond was chosen because it is considered a risk-free investment of your
money. Overall, this will show the investor the historical returns that they
could potentially expect in the future. Over the 60 month period, the mean
average monthly return for the S&P 500 was 0.010, Amazons was 0.025 and
Overstocks 0.015. Although both companys monthly return is above the S&P
500 return, Amazons return is clearly the most profitable. The T-Bond 60
month return mean was 0.002; this is expected to be the lowest because there
is no chance of loss of your money. As an investor, if you are willing to accept
more risk in your investment, your potential returns become much higher in
the form of excess monthly returns. Excess monthly returns are essentially

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the extra amount of return that is made above the risk-free return. The S&P
500 excess monthly mean return was 0.008, Amazons was 0.017 and
Overstocks was 0.007. Again, this shows the value of investing into Amazon
rather than Overstock, where Amazon has a higher excess return than the
market benchmark and Overstock is not.

Summary Table

S&P 500

Overstock

Amazon

T-Bond

Return
Monthly Return
Mean
Min
Max
Excess Monthly Return
Mean
Min
Max
CAPM Estimated Return

0.010
-0.082
0.108

0.015
-0.316
0.688

0.025
-0.132
0.258

0.008
-0.085
0.106

0.007
-0.278
0.672
0.012

0.017
-0.719
0.417
0.014

0.038

0.165
1.290
11.029
0.045

N/A

0.002
0.001
0.003
N/A
N/A
N/A
N/A

Risk (Excess Returns)

Standard Deviation
Beta
Coefficient of Variation
Sharpe Ratio

N/A
3.995
0.198

0.196
1.629 N/A
3.450
0.088

RISK
Although Amazon shows greater return values in the market, the investor
also needs to be aware of the risk involved in investing into the company. We
ran a risk analysis on Amazon and Overstock, comparing their Standard
Deviation and Coefficient of Variation.
The Standard Deviation tells the volatility of a company; the higher the
standard deviation, the more volatile the stock is. S&P 500 standard
deviation is 0.038, Amazons is 0.196 and Overstocks is 0.165. As you can see,
Amazon has the highest risk when investing, however, with a higher risk
there is a higher chance of greater return to investor.

0.000
0.240
0.000

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The Coefficient of Variation helps us to determine how much risk the investor
can assume compared to the amount of return they can expect from an
investment. The lower the ratio, the better risk-return trade-off. S&P 500
was 3.995, Amazons 3.450 and Overstocks was 11.029. So essentially what
we are seeing here is that Amazon, although it may be the riskier
investment, is overall the better trade-off for the risk the investor assumes.

CONCLUSION
Amazon is the better investment between Amazon and Overstock because
they strategically manage their debt and sustain their profits, they produce
more revenue than Overstock, and they are more valuable in the market than
Overstock is. We believe that Amazon is not just a fad company, but will be in
the e-commerce industry for many years, while continuing to grow. However,
with any investment, there are risks. For example, the trend line chart for
earnings per share suggests that Amazon isnt interested in paying dividends
at this present time; their main focus is reinvesting back into their company
to become leaders of the e-commerce sales industry. For an investor looking
for immediate high dividend payouts, Amazon may not be the first choice, but
would be a good choice for a long term investment.

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