Abraham Lopez

Accounting 1120-400

Amazons financial statement analysis

Amazon is a company that was founded on July 5, 1994. It is a public company
thats in the business of E-commerce. In this paper Im going to analize different ratios
and find out how Amazon.com performed in the years 2011-2012. I will also compare
Amazon to the industry averages; this will include Amazons ability to pay current
liabilities, ability to sell merchandise inventory, ability to pay long term debt, profitability,
and evaluating stock as an investment.
Ability to pay current liabilities
Current liabilities is defined as the amount the needs to be payed back to
creditors within 12 months. The first ratio I will use for this analysis is the Current Ratio
which is defined as the companys ability to pay current liabilities from current assets. In
order to get this ratio you divide total current assets with total current liabilities.
Amazons current ratio was 1.12 and 1.17 for years 2012 and 2011. This indicates that
for every dollar Amazon had for liabilities they had $1.12 or $1.17 in assets. The higher
the ratio the better it is for the company; in this case the Industry average was 1.54
which meant that in the years 2011-2012, Amazon wasnt performing at its full potential.
This would hint that Amazon did not have many assets over liabilities when comparing it
to similar companies. Another ratio I used for this section was the Acid-Test ratio, this is
used to determine a company's ability to pay back all current liabilities if they came due
immediately. This is an important ratio because it takes into account all factors to help
determine how financially balanced Amazon was in 2011-2012. Amazons Acid-Test ratio
was .815 and .779 for the year 2011 and 2012. Usually the higher the ratio the better; in
this case the industry average was 1.82 which would indicate that Amazon was well
below average when comparing to other companies. Both the current ratio and the acid
test ratio show us that Amazon.com did not have a good standing ability to pay back
current liabilities.
Ability to sell Merchandise
Every company has one goal in mind, sell. When it comes to investors they look
at companys financial statements and decide whether or not a certain company is a
good investment or not. One important thing to note when determining a company's
ability to sell merchandise is by looking at the inventory turnover. This ratio helps
compare how good a company is at selling their products. When we take a look at
Amazon financial statements, we see that its turnover ratio was 9.1 and 8.3 for the
years 2011 and 2012. With this ratio the higher the number the better turnover rate a
company has. In the years 2011-2012 the average for the industry was 4.8 times. This
indicates that during these years Amazon was doing extremely well when it came down

to selling their inventory. Amazon had almost twice the amount of the average industry
ratio. This is a good sign to look for especially if it's a company related to Ecommerce.
Ability to pay long term debt
When a company has a good standing ability to pay long term debt, its usually a good
sign that a company is doing good or its balancing its debts correctly. When analysing
this section we would use the Debt ratio and the Times-Interest-Earned Ratio. First we
start by calculating the debt ratio; we do this by dividing liabilities with total assets. This
results will show us the proportions assets financed with debt. The results for Amazon is
75%, 69% for the years 2012 and 2011. This shows that in 2012 Amazon financed 75%
of its assets with debt. The average for the industry that year was 34% which would
indicate that Amazon was financing its assets with debt twice as much as its
competitors. This is a good indicator to look for when trying to determine if a company is
financing its assets intelligently. Another important thing to know is how good a
company is at paying its interest of its debt. We do this by adding the net income to the
income tax expense and the interest expense. After we add them all up we divide the
total with interest expense. For Amazon this gives us, 15.18 and 5.23 for the years
2011-2012. Just like all the other ratios weve gone over, the higher the number the
better. The industry average for this ratio was 5.33 which proves that in 2011 Amazon
did three times better at paying its interest compared with its competitors; but we also
have to point out that Amazon dropped the following year and was slightly lower than
the average.
Profitability
Finding out if a company is being profitable is probably one of the most important things
not only for the CEO but for investors. The way we determine if a company is being
profitable is by using the gross profit ratio and the days sales receivables ratio. First we
calculate the gross profit margin percentage. This will indicate the percentage of how
much Amazon is making of a dollar. To get this ratio we divide gross profit over net sales
revenue. This gives us 22% for 2011 and 24% for 2012. This would indicate that in 2011
Amazon made 22 cents off every dollars. In my opinion for how big of a company
Amazon is 22-24% looks good but when we compare it to the industry average which
was 33.55% Amazon is below average. This is one of the most important ratios because
it takes the size of the company out of the equation and it gives you fair comparison
with competitors of all sizes. Next we calculate the Days sales in Receivables. This
ratio is useful because it measure how many days a company takes to collect the
accounts receivables. When get the ratio for Amazon the results are 15.8 days and 17.7
days for the years 2011 and 2012. The competitors average on this was 36.11 days.
Unlike my other calculations the lower the number the better. So in this case Amazon
did better than its competitors when it came down to collecting accounts receivables.
Evaluating stock as an investment
This section has the most important ratios if you are looking for a company to invest in.
Usually companies will either sell bond or sell stocks to raise money. If the company you

are interested in sell common stocks then it is important to look at the Rate of return on
Common stockholder's equity. We calculate this by subtracting preferred dividends from
net income and dividing it all up by the average common stockholders equity. When we
input the number from Amazon we get 8.63% and -0.49% for years 2011 and 2012. The
two number differ greatly but when comparing it its competitors we see that the Industry
average is 11.39%. With this calculation the higher the percentage the better. So when
we compare to the average we see that in 2011 Amazon was low but when we take a
look at 2012 we see that Amazons return rate on stockholders equity is terrible. The last
calculation were going to take a look at is the Price/Earning ratio. This ratio will give us
an insight if the companys stock price and the earning the company gets is fair. This
ratio is probably the one that constantly changes because of fluctuating prices for
stocks. In 2011 the stock price was $182.61 and the earnings per share for Amazon was
1.39. When we calculate the ratio it gives us 131.37; at this time the industry average
was 47.17 which is an extremely good indicator for investors because it was almost
three times more than the average. When we take a look at year 2012 the stock price
was 256.92 but the earnings per share was at a negative .09. This resulted in the ratio
for 2012 being -2854.7 which is extremely low when comparing it to the average. From
this we learn that companys price/earning ratio is subject to extreme fluctuations. This
is a strong indicator that we need to constantly rely on this ratio when investing in a
company.
Conclusion
We have analyzed Amazon's financial statements for the year 2011 and 2012 and we
compared their numbers to the industry averages. In summary I can conclude that the
Amazon we know of today was very different a few years ago. We can see that overall
the company struggled in almost every aspect when comparing them to its competitors;
but when it came to collecting receivables Amazons did really well. The probable
reason is because Amazon is an online store (for the most part) therefore people use
credit or debit cards, this helps fulfill transactions and it helped Amazon collect its
receivables a lot faster than its competitors. This gave Amazon an edge and has helped
it grow into a massive company that it is today.