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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
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.
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
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.
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.
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
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.
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
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