Gill 1

Kaley Gill
ACCT 1120
Dec. 9 2016
Financial Statement Analysis: Amazon.com
Introduction:
Below is the financial Analysis of Amazon.com comparing the year 2012 with past years.
We analyzed Amazons ability to pay current asses, efficiently use assets, ability to pay long term
debt, profitability, and evaluating stock as an investment.
Ability to pay current Liabilities:
The first analysis was Amazon's ability to pay current Liabilities. This is determined
using Working capital, Current Ratio, Cash Ratio and Acid-test ratio. The ratios for Amazon.com
and the industry average are shown in Table 1.1. Working capital measures a companies ability to
meet short-term obligations, Amazon has a positive working capital which shows the company
has more assets than liabilities. The three additional ratios determine how well the company can
pay off its liabilities.
To start off, we will address Amazon's Current Ratio. The Current ratio measures a
company's ability to pay current liabilities from current assets. Amazon has a current ratio of
1.12 for 2012 and 1.17 for 2016. If you compare this to the industry average of 1.54, Amazon is
below average. Amazon has a weak current Ratio which shows the company is not liquid enough
and not using its assets effectively.
The second ratio used is the Cash ratio. The Cash Ratio measures a company's ability to
pay current liabilities from cash and cash equivalents. Amazon had a Cash Ratio of 0.42 for 2012

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and 0.35 for 2011. These ratios signify that company is using its cash effectively since it is not
above 1.0 and that it is not significantly low.
The third ratio used is the Acid-Test Ratio. The Acid-test ratio determines if a company
can pay its current liabilities is they came due immediately. Amazon had an acid-test reatio of
0.78 for 2012 and 0.82 for 2011. Amazon's Acid-test ratio decreased during 2012 and is below
the average. This shows Amazons capability of paying debt is decreasing and is lower than their
competitors.
Table 1.1
Current Ratio
Acid Test
Working Capital
Cash Ratio

2012
1.12
0.78
2,294m
0.42

2011
1.17
0.82
2594m
0.35

Industry Average
1.54
1:82

Ability to sell Merchandise inventory and collect Receivables:

The second analysis we will do is evaluating Amazon's ability to sell Merchandise
inventory and collect Receivables.This is determined by Inventory Turnover, Days' Sales in
Inventory, gross profit Percentage, Accounts Receivable Turnover Ratio, and Days' Sales in
Receivables.
We will begin by addresses inventory Turnover. Inventory turnover measures the number
of times a company sells its average level of merchandise during the year. The higher the
turnover rate is, the easier it is for the company to sell merchandise. Referring to table 2.1, we
can see Amazon has a significantly higher turnover ratio than its competitors despite the decline
over the years.
The second Ratio used is Days' sales in inventory. This measures the average number of
days merchandise inventory is held by the company. Amazon has a significantly lower Days'

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sales in inventory ratio. Amazon only holds its inventory for 44 days compared to the industry
average of 75 days. Which means it is able to sell its inventory quicker than its competitors.
The Third Ratio used is Gross Profit Percentage. This ratio measures the profitability of
each net sales dollar above the cost of goods sold. It reflects a businesses ability to earn a profit
on Merchandise inventory. The increase in the gross profit percentage is a good sign but it is still
lower than the industry average. This shows that Amazon needs to lower its cost of inventory and
increase its selling price.
The fourth ratio used is Accounts receivable turnover ratio. The AR Turnover ratio
measures the number of times the company collects the average receivables in a year. The higher
the ratio, the faster the company collects cash. Although Amazons ratio has decreased, it is
double the amount of the industry average. Amazon AR turnover ratio of 20.59 times a year
indicates that Amazon's credit is too high and can cause a loss of sales.
The fifth Ratio used is Days' Sales in Receivables. The Days' sales in receivables
determines how many days it takes to collect the average level of receivables. Amazon has a
ratio of 17.7 in 2012 and 15.8 in 2011. This is significantly lower than the industry average. This
ratio indicates that Amazon takes less time to collect receivables than its competitors.
Overall Amazon performs better than its competitors in this category. On average,
Amazon only holds its inventory for 44 days and collects its receivables quite quickly compared
to to the industry average of 75 days. Despite this ability, Amazon does have a lower Gross profit
Percentage which indicates that Amazon makes less gross profit than its competitors do, which
contributes to the higher AR turnover ratio of 20.59 times.
Table 2.1
Inventory turnover
Days' Sales in Inventory
Gross Profit Percentage

2012
8.3
43.98
24%

2011
9.1
40.11
22%

Industry Average
4.8
75.42
33.55%

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Accounts Receivable Turnover Ratio
Days' Sales in Receivables

20.59 times
17.7

23.13 Times
15.8

10.11 Times
36.11 Days

Ability to pay long-Term Debt:

The third analysis we will do is evaluating Amazon's ability to pay long-term debt. This is
determined by Debt ratio, Debt to Equity Ratio and Times-Interest-Earned Ratio.
The first Ratio used is Debt Ratio. The Debt ratio shows the relationship between total
liabilities and total assets and shows how much of the assets are financed with debt. Referring to
table 3.1, we can see Amazon's Debt ratio for 2012 is 75% this is significantly higher than the
industry average. This indicated that most of the assets are financed with debt. Having this high
of a ratio indicates that Amazon is a financial risk and has a weak ability to pay its debts.
The second ratio used is Times-Interest-Earned Ratio. The Times-Interest-Earned Ratio
evaluates a company's ability to pay interest expense. Amazons ratio of 5.23, shows that they
have no difficulty paying their interest expenses. Despite being lower than industry average, they
are significantly higher than the U.S. norm of 3.0.
The third Ratio used is the Debt to Equity Ratio. In comparison with the industry
average, Amazon is doing poorly with debt. Just like the Debt, Ratio, Amazon's Debt to equity
Ratio is too High. This indicates that they are financing their debt with assets rather than equity.
This indicates the company is a financial Risk.
After analyzing Amazon's Ability to pay long-term debt, it has been determined that
Amazon can possibly be a financial risk. Both their Debt ratio and Debt to equity ratio are way
too high. It is recommended that Amazon stops financing with assets and needs to finance more
with equity, but the company also needs to bring in more equity to be able to do this. Despite the
high ratios with debt, the company has no difficulty paying for its interest expenses.

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Table 3.1
Debt Ratio
Times-Interest-Earned Ratio
Debt to Equity Ratio

2012
75%
5.23
297%

2011
69%
15.18
226%

Industry Average
34%
5.33 times
52%

Ability to Make a Profit:

The fourth analysis we will do is evaluating Amazon's ability to make a profit. This is
determined through Profit Margin ratio, Rate of return on total assets, Asset Turnover ratio, Rate
of return on common Stockholders equity, and earnings per share.
The first ratio used is the Profit Margin Ratio. Profit Margin Ratio shows how much a
business earns on every $1.00 of sales. Amazon has a ratio of 0.06%. This is significantly lower
than 2011 and even worse than the industry average. This shows that Amazon struggles to make
a profit and is less successful than its competitors. Amazon does not make enough to pay for
expenses because their profit margin is in the negative and they had a net loss in 2012.
The second Ratio is the Rate of Return on total assets. This measures Amazon's success
in using its assets to earn a profit. Referring to table 4.1, we can see Amazon has decreased
significantly from 3.16% to 0.45% within one year. This indicates that Amazon struggles to
finance its assets with equity.
The third Ratio used to determine profit is Asset turnover Ratio. This ratio measures how
efficiently companies uses its total average assets to generate sales. Amazon Asset Turnover ratio
is strong. This is interesting, considering they are doing poorly with the other two ratios. Having
An asset turnover Ratio of 2.11 indicates that Amazon makes more revenue per dollar of assets
that its competitors. This also shows that Amazon may have more expenses which is causing
them to have a lower profit.

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The final two ratios are Rate of return on Common Stockholders equity (Return on
equity) and Earnings per share. Return on equity shows how much income is earned for each
dollar invested by common shareholders. Amazons decrease to 0.49% indicated that the
difference between borrowing money and investing the money is too extreme. They are losing a
profit and doing worse than the industry average. This shows the company is earning less income
on borrowed money than its competitors.
Earnings per share, on the other hand, reports the amount of net income (Loss) for each
share of Amazon's outstanding Common stock. As shown in Table 4.1, this has significantly
dropped since 2011. The ratio of 0.09 indicates that Amazon needs to increase its net income so
it can remain competitive.
Currently Amazon is losing money on outstanding common stock. They are below
average with earning a profit. This can be from too many expenses .. Despite this, Amazon does
have a high Asset Turnover ratio, which shows the company has no problem earning more
revenue from assets.
Table 4.1

2012

2011

Industry
Average
2.87%
4.76%
1.66 Times
11.39%

Profit Margin Ratio

Rate of Return on Total Assets
Asset Turnover Ratio
Rate of Return on Common Stockholders

-0.06%
0.45%
2.11 Times
-0.49%

1.31%
3.16%
2.18 Times
8.63%

Equity
Earnings per Share
Evaluating Stock as an Investment:

-0.09

1.39

The Final Analysis is Evaluating Amazon's Stock as an Investment. This is done by using
by using the Price/Earnings Ratio, Dividend yield, and Dividend Payout. Although Amazon has a
negative Price-earnings ratio due to a net loss, Investors are still willing to pay more for

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Amazon's stock. Which means they see hope hop in Amazon that the company will succeed.
There is no Dividend yield or Divended payout ratios because the did not pay dividends.
Table 5.1
Price/Earning Ratio
Dividend Yield
Dividend Payout
Conclusion:

2012

2011
-2854.70
N/A
N/A

131.37
N/A
N/A

Industry Average
47.17

Comparing Amazon with the industry average and previous year we can see they sell plenty of
inventory and is capable of making plenty of revenue but they struggle with expenses and debt.
Amazon has too much debt and not enough income to cover its expenses. Despite these struggles
and the net loss in 2012, Investors still invest in the company. Therefore increasing revenue. All
Amazon needs to do is manage its expenses and needs to manage its inventory to bring in a
profit.

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Works Cited
LLC, A. S. (1996-2014). Annual Reports and Proxies. Retrieved December 5, 2016, from
Amazon.com: http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsAnnual
Tracie Nobles, B. M. (2016). Horngren's Accounting: The Financial Chapters (Common ed.).
New Jersey: Pearson Education, Inc