UNDERSTANDING BUSINESS AND STRATERGY

ASSIGNMENT

COMPANY: AMAZON

SUBMITTED BY – AASTHA JAIN (IBEF-1702)

FATIMA MUBARAK (IBEF-1707)
HARDEEP KAUR (IBEF -1711)
INTRODUCTION
Amazon is the world’s largest online retailer and is indeed a pioneer in the online retailing space.
Though it started as an online bookstore, its success in its venture spurred it to diversify into
selling anything that can be sold online. Further, Amazon has also expanded globally and now
operates around the world through a combination of localized portals and globalized delivery and
logistics platforms.

Amazon.com opened its virtual doors on the World Wide their web in July 1995. They seek to be
Earth’s most customer-centric company. They are guided by four principles: customer obsession
rather than competitor focus, passion for invention, commitment to operational excellence, and
long-term thinking. In each of our two geographic segments, they serve our primary customer
sets, consisting of consumers, sellers, enterprises, and content creators. In addition, they provide
services, such as advertising services and co-branded credit card agreements.

They serve consumers through our retail websites and focus on selection, price, and convenience.
They design our websites to enable millions of unique products to be sold by us and by third
parties across dozens of product categories. Customers access our websites directly and through
our mobile websites and apps.

They also manufacture and sell electronic devices, including Kindle e-readers, Fire tablets, Fire
TVs, and Echo, and they develop and produce media content. They strive to offer our customers
the lowest prices possible through low everyday product pricing and shipping offers, and to
improve our operating efficiencies so that they can continue to lower prices for customers.

They also provide easy-to-use functionality, fast and reliable fulfillment, and timely customer
service. In addition, they offer Amazon Prime, an annual membership program that includes
unlimited free shipping on tens of millions of items, access to unlimited instant streaming of
thousands of movies and TV episodes, and other benefits.
 FINANCIAL RATIOS OF AMAZON
2017 2016 2015
(12/12/2017 (12/12/2016 (12/12/2015
) ) )
LIQUIDITY RATIOs
CURRENT RATIO 1.04 1.04 1.05
QUICK RATIO 0.76 0.78 0.75

PROFITIBILITY RATIOS
GROSS MARGIN 37% 35% 33%
OPERATING MARGIN 2% 3% 2%
PROFIT MARGIN 2% 2% 1%
RETURN ON EQUITY (PRE-TAX) 14% 20% 12%

ANALYSIS
LIQUIDITY RATIOS:
CURRENT RATIO

 The current ratio of a company indicates its ability to meet its short term obligations.
Generally, companies would aim to maintain a current ratio of at least 1 to ensure that the
value of their current assets cover at least the amount of their short term obligations.
 As we can see from the above table, Amazon’s current ratio for the past three years has
been 1.04. There hasn’t been much change in Amazon’s current ratio this implies that
Amazon has been able to maintain a stable liquidity position.
 Amazon is a retail sector company and as per norm current ratio of lower than 1 might
also be considered acceptable in this sector. This is because such retailers are able to
negotiate long credit periods with suppliers while offering little credit to customers
leading to higher trade payables as compared with trade receivables. Such retailers are
also able to keep their own inventory volumes to minimum through efficient supply chain
management.

QUICK RATIO
 Quick ratio shows the extent of cash and other current assets that are readily convertible
into cash in comparison to the short term obligations of an organization.
 Amazon’s quick ratio in 2015 was .75, in 2016 was .78 and in 2017 was .76.There have
been slight fluctuations in its quick ratio but they are not very significant.
 Amazon is a leader in the e-retail market and therefore is able negotiate very favourable
credit terms with suppliers due to its dominance in the market leading to relatively high
 current liabilities in comparison to their liquid assets. The business environment is also
relatively stable in the retail sector and the expansion of operations is incremental which
allows it to maintain lower acid test ratios without taking too much risk.

PROFITABILITY RATIOS:

GROSS PROFIT MARGIN RATIO

 Gross Profit Margin Ratio is the percentage of gross profit relative to the revenue earned
during a period. It shows the underlying profitability of an organization's core business
activities.
 Amazon’s GP margin ratio has shown a steady increase in the past three years. It has been
increasing by 2% each year.
 GP Margin Ratio can be influenced by internal as well as external factors. It can vary
drastically not only from industry to industry but also within different market segments of
the same industry.
 Amazon’s GP Margin Ratio is higher than the industry’s average which a very good
indicator of its financial health.
OPERATING PROFIT MARGIN RATIO

 Operating Profit Margin Ratio is the percentage of operating profit (i.e. profit before
interest and tax) relative to the revenue earned during a period. It is a measure of an
organization's profit generation efficiency.
 Amazon’s operating profit ratio has ranged between 2% to 3% for the past three years.
 The operating profit ratio for Amazon has decreased between 2016 and 2017 but its GP
margin ratio has increased, this can be due to recent expansion of business into new
markets whose revenue potential has not yet been realized like India, etc.
NET PROFIT MARGIN RATIO

 Net Profit Margin Ratio is the percentage of net profit relative to the revenue earned
during a period. It indicates the proportion of sales revenue that translates into net profit.
 Amazon has had a net margin of less than or equal to two percent, but sports a market
capitalization of over $600 billion.
 It has been seen that each year the net margins among the retail industry are low. This is
especially true for web-only retailers, like Amazon.
 This can be due to cyclical consumer spending patterns. Certain markets, such as retail
electronics and retail clothing, have to adapt to constant changes in consumer tastes.
 The Internet makes it easier than ever to compare prices and shop from around the world.
 There is a relatively high price elasticity of demand for retail goods, which makes it
difficult to raise prices.
RETURN ON EQUITY

 ROE measures the ability of a firm to generate profits from its shareholders’ investments
in the company. It shows how much profit each dollar of common
stockholders' equity generates.
 Amazon has seen a fluctuating ROE over the past three years. It was 12% in 2015 then it
increased to 20% in 2016 and then fell down to 14% n 2017.
 Factors that affect changes in ROE include positive or negative revenue changes as well
as increases or decreases in expenses. It can also be affected by irregular profit activities
and financing activities.
 Amazon took various steps in 2016 that might explain the high ROE in that period, like it
tested a major sponsored product algorithm change, it took various counterfeit sellers to
court, it enhanced brand contact for 3P sellers, etc.