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To whom it may it concern:

This is a financial analysis review of Amazon.com for year 2012. This is a

company that has grown tremendously since it first opened its doors back in 1997. Since
often times the pressures of meeting Wall Streets profit expectations can be detrimental
to the long term growth and health of a company, Amazon.com seems to have chosen a
long term growth that creates value to its stockholders thru its ever higher stock valuation
ignoring profitability in the short term which is what Wall Street wants. In this financial
analysis the following financial information will be review. The ability to pay current
liabilities, the ability to sell merchandise inventory and collect receivables, the ability to
pay long term debt, profitability, and stock evaluation as an investment. This is to
determined the financial health and strength of the company.

Ability to pay current liabilities

In 2012 Amazon.com current ratio deteriorated from 1.17 in 2011 to 1.12 in 2012
which means that its currents assets decreased. It may be at risk of facing difficulty
paying its current liabilities. This is also taking in consideration that the current ratio for
the retail industry average is 1.54 which is a lot higher than Amazon.com current ratio.
Now a more strict ratio to measure Amazon.com strength when it comes to paying its
current liabilities is the Acid-test ratio. In this case, for 2012 it was .78 compared to .82 in
2011. It tells us that Amazon.com will have difficulty paying its current liabilities if all of
the sudden they were due. The industry average was 1:82. This should be an area of
concern for stockholders and investors thinking about buying Amazon.com stock.
Amazon.com needs to improve on its current ratio and acid-test ratio to be able to
improve on its ability to pay its current liabilities.

2012
Current ratio
Acid-Test Ratio

1.12
.78

2011

Industry

1.17
.82

Average
1:54
1:82

Ability to sell merchandise inventory and collect receivables

Amazon.com is performing well in this area. When it comes to its ability to sell
merchandise inventory and collect receivables, Amazon.com beats the industry average
on all of them. Even though its Inventory Turnover ratio deteriorated to 8.34 times in
2012 from 9.10 times in 2011 is well adobe the industry average of 10.11 times.
Amazon.com has a strong turnover ratio and no problem selling its merchandise. Now its
Gross Profit Margin percentage was 24.8 % in 2012 which means that Amazon.com
improved compared to 22.4% in 2011. It seems that amazon increased its ability to profit
on the merchandise inventory and thus it ability to cover its operation expenses.
However, Amazon need to improve its Gross Profit Margin percentage compared to the
industry average which is 33.5% in 2012. Amazon.com Days Sales Inventory ratio
increased to 44 days 2012 from 40 days a year earlier in 2011. However, 44 days in Days
Sales Inventory is still really strong compared to the industry average which is roughly
more than 75 days. And finally Accounts Receivables Turnover was 17.73 times which is
an improvement over last years ratio of times. It means that Amazon.com improved its
ability to collect cash from customers. However, a word of caution, the industry average
10.11 times is lower than its 2012 Account Receivables Turnover ratio. This could
possible mean that its credit terms are tight and that it may be losing sales from good
customers thus affecting negatively the bottom line. Overall, for Amazon.com this is an
area that does well. It performs well compared to the industry average, however at the
same time it needs to keep improving its ratios consistently. Some of its ratios in this area
deteriorated year over year.

2012
2011
Industry

Inventory

Gross

Days Sales in Accounts

Turnover

Profit

Inventory

Receivable

8.34 times
9.10 times
10.11 times

Margin
24.8 %
22.4 %
33.55%

44 days
40 days
75.12 days

Turnover
17.73 times
15.8 times
10.11 times

Average

Ability to pay long term debt

This is another area for concern. This so because over the course of the year 2012
its ability to pay long term debt worsen. In 2011 it already had a high Debt to Total Assets
ratio of 69 % compared to the industry average of 34 %. And on top of that it seems that
Amazon.com took on more debt thus risk. Its Debt to Total Assets ratio in 2012 was 75%
which is getting close to have almost all of its assets bought with debt according to this
ratio. Amazon.com is highly leverage and might find itself in financial difficulty when
facing a downturn. Another key indicator that Amazon.com ability to pay its long-term
debt deteriorated is the Time-Interest Earned ratio. This ratio measures the ability of a
company to pay interest and in 2011 it was 15.8 times, however in 2012 was 5.23 times
which is below the industry average of 5.33 times. Amazon.com needs to improve this
area immediately otherwise it may face financial difficulty long term.

Debt to Total

2012

2011

Industry Average

75%

69 %

34 %

5.23 times

15.8 times

5.33 times

Assets Ratio
Interest-Earned
Ratio

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Profitability
Amazon.com profitability worsen year over year. Its Net Profit Margin in 2011
was 1.31 %, and in 2012 it was -.09%. During 2012 Amazon.com Profit Margin was
negative. It is already low compared to the industry average which is 2.87%, but then in
2012 it was even negative. Per Amazon.com growth strategy of razor thin profits is
expected however this is a negative number which is a cause for concern. Another key
indicator on profitability is Return on Common Stockholders Equity which was negative
for 2012. The industry average was 11.39 % and Amazon.com was -.49% in 2012. In
2011 it was already below industry average at 8.63 %. More information is needed to
create a better understanding of the erosion in profits for 2012.
2012

2011

Industry Average

Net Profit

-0.06 %

1.31 %

2.87 %

Margin
Return on

-o.49 %

8.63 %

11.39 %

Common
Stockholders
Equity
Evaluating stock as an investment.
For 2012 Amazon.com stock performed well. Its market price in 2011 was
$182.61, and it increased to $256.92 in 2012. Looking at this seems that Amazon.com is
creating value for its stockholders thru its long-term strategy. Even as Price/ Earnings
ratio was negative at -$2854.7 its stock price ended up higher in 2012 than 2011 which it
was $131.37. This can translate to investors thinking Amazon.com will continue to do
well for the future.
Book Value per

2012
$256.92

2011
$182.61

Industry Average
$10.54

Common Share
Price/ Earnings

-$2854.7

$131.37

$47.17

ratio

Conclusion
In conclusion, Amazon.com strategy of pursing long term growth and stability
seems to be working so far. Even as some of its key financial areas are not as strong such
as its ability to pay short term and long term liabilities, investors continue to reward the
company with higher and higher stock valuation. Amazon.com was not profitable in
2012, this should be a warning sign that better financial management is needed to
improve the financial health of the company. Another issue is for 2012 is that
Amazon.com borrowed and invested heavily compared to 2011. This could be the the
reason short term and longs term liability ratios deteriorated during this period. Overall,
this is a growing company that is creating value for its stockholders, however it must
improve on its ability to pay short term and long term liabilities to avoid financial
difficulties in the future.

Reflection paper

This paper clarified the key financial aspect of the performance of a company. In this
case, for Amazon.com I see that it is following its long-term strategy. This is to create value for
its stockholders thru the growth of the company and not thru short term gain and moods of Wall
Street. What I mean with this is that, Amazon.com invests its resources as it sees it will be best
long term, not short term. I also realized that following this strategy for Amazon.com a
downside. On several of its key financial areas Amazon.com is doing poorly. Perhaps a less
leverage financial position would be better, and increasing its cash reserves will help
Amazon.com be better prepare for the future. On the bright side, I learned that Amazon.com has
grown tremendously during the last two decades and is the leading online retailer. This
assignment will helped me be better prepare for my field of study because it is helping me better
understand finance, and financial terms.