Charles Michaels Accounting 1120 Amazon Financial Analysis

In this paper we will be comparing Amazon to the industry average for the years

2011 and 2012. We will be analyzing Amazons ability to pay current liabilities, their

ability to sell merchandise inventory and collect receivables, ability to pay long-term

debt, their profitability, and evaluating stock as an investment.

The first topic is Amazons ability to pay their current liabilities. Liabilities are

similar to debts in that you owe someone money and will have to make a future payment

on it. Current liabilities are liabilities that are due in less than a year. Current assets are

cash or something that can be turned into cash very easily. In order to analyze their ability

to pay their current liabilities we calculated the Current ratio and the Acid-test ratio. The

Current ratio measures the companys ability to pay their current liabilities or debts with

their current assets or cash and cash equivalents. The Acid-test ratio measures the

companys ability to pay all their current liabilities if they all were due immediately.

Current Ratio Acid-test Ratio

Year 2011 1.17 0.82
Year 2012 1.12 0.78
Industry 1.54 1.82

Average
Current Ratio = Total current assets / Total current liabilities
Acid-test Ratio = Cash & cash equivalents + short-term investments + net current receivables /
Total current liabilities

As you can see both the Current ratio and the Acid-test ratio went down by a small

amount from 2011 to 2012. The industry average for both ratios is higher than Amazon

this means that in relation to Amazons competitors Amazon is not doing very well; its

not terrible but they might want to look into some of their liabilities and see if they are all

necessary and look into more ways to gain more current assets.
Charles Michaels Accounting 1120 Amazon Financial Analysis

The Next thing we are going to look at is Amazons ability to sell their inventory

and collect receivables. To analyze how they are able to sell their inventory and collect

receivables we calculated Inventory turnover, Gross profit percentage, and Days sales in

receivables. The Inventory turnover ratio measures the number of times a company sells

its average level of merchandise inventory during a period. We want this to be a high

number because that would mean they are able to sell inventory quickly. Gross profit

percentage measures the profitability of each sales dollar above the cost of goods sold.

We also want this to be a high number because that would mean the company is

profitable the way it buys and sells inventory. The last ratio Days sales in receivables

measures the number of days sales it takes to collect the average level of receivables. We

want this to be a low number because that would mean it doesnt take very long to collect

the money we are owed after we sell a product.

Inventory turnover Gross profit Days sales in

percentage receivables
Year 2011 1.17 times 22.4% 16 days
Year 2012 1.12 times 24.8% 18 days
Industry Average 4.8 times 33.55%
Inventory turnover = cost of goods sold / average merchandise inventory
Gross profit percentage = gross profit / net sales revenue
Days sales in receivables = 365 days / accounts receivable turnover ratio

As is shown in the table their inventory turnover has dropped between 2011 and 2012 and

is below the industry average. They may want to look at how they can market their

products to improve these numbers. Gross profit percentage is improving but is still

below industry average so they should try to find what caused it to improve and keep

trying to make it go up. Days sales in receivables is going up and that is not good
Charles Michaels Accounting 1120 Amazon Financial Analysis

because as was said before that means it is taking longer for Amazon to collect after they

sale a product

The third topic we are going to talk about is Amazons ability to pay long-term

debt. To analyze Amazons ability to pay long-term debt we need to calculate the Debt

ratio and the Times-interest-earned ratio. The Debt ratio measures the proportion of assets

financed with debt. We want this to be a low number because that would mean there is a

small amount of assets that we had to go into debt to buy. The Times-interest-earned ratio

measures the companys ability to pay interest expense. We want this to be a high number

because that would mean the company could easily pay interest expense.

Debt ratio Times-interest-earned

ratio
Year 2011 69% 15.18 times
Year 2012 75% 5.23 times
Industry Average 34% 5.33 times
Debt ratio = total liabilities / total assets
Times-interest-earned ratio = net income + income tax expense + interest expense / interest
expense

Amazons Debt ratio is much higher then the industry average for both years and appears

to be increasing. This is bad because if it keeps growing it will eventually become too

hard for Amazon to pay for the assets that are financed with debt, which can cause

problems for the collectors that Amazon is supposed to pay. In 2011 the Times-interest-

earned ratio is very much higher than the industry average and in 2012 it is just barely

below the industry average. This is good that they are keeping up with their competitors,

but they may want to look into why it dropped so much in just one year.

The fourth topic is Amazons profitability. To analyze Amazons profitability we

need to calculate Profit margin ratio and the Rate of return on common stockholders
Charles Michaels Accounting 1120 Amazon Financial Analysis

equity. The profit margin ratio measures how much net income is earned on every dollar

of net sales. The Rate of return on common stockholders equity measures the

relationship between net income available to common stockholders and their average

common equity invested in the company.

Profit margin ratio Rate of return on common

stockholders equity
Year 2011 1.31% 8.63%
Year 2012 -0.06% -0.49%
Industry Average 2.87% 11.39%
Profit margin ratio = net income / net sales
Rate of return on common stockholders equity = net income preferred dividends / average
common stockholders equity

The profit margin and the rate of return on stockholders equity is dropping from 2011 to

2012 and both of them are below the industry average this is bad because Amazon is not

doing very well in comparison to their competitors. They may want to look at how they

can improve their profit margin and their rate of return on stockholders equity.

The fifth topic is evaluating Amazons stock as an investment. To analyze

Amazons investing stock we have to calculate Price/earnings ratio. The Price/earnings

ratio measures the value the stock market places on $1 of a companys earnings.

Price/earnings ratio
Year 2011 131.37
Year 2012 -2,854.7
Industry Average 47.17
Price/earnings ratio = Market price per share of common stock / Earnings per share

In 2011 Amazon was doing very was doing very well, but in 2012 it dropped by a large

amount this could be because of their growing Debt ratio that we showed earlier. In 2012
Charles Michaels Accounting 1120 Amazon Financial Analysis

they are doing much worse than the industry average so they may want to look at what

they can do to change these numbers and restore investor confidence.

Throughout this paper we analyzed the different parts of Amazons abilities to

perform as a business. In most cases Amazon appeared to be getting worse as the years

went on, but in some cases they were still in good standing when compared to the

industry average. Amazon should still look and see how they can improve their business

through marketing and trying to be more efficient in their business process. To get a

better analysis on how Amazon is doing we would have to take more years into account

so we can have more to compare to.