Introduction

The purpose of this paper is to analyze the integrity of Amazon.com as an investment in our
corporate investment package.
Ability to pay current liabilities
Two ratios help indicate Amazons ability to pay their current liabilities. The Current Ratio and
the Acid Test. The Current Ratio looks at the Amazons ability to pay current liabilities from
their current assets. Amazon is slightly lower than the industry average in its ability to pay its
liabilities from current assets, the ratio also decreased from 2011 2012, indicating a slight
increase in risk. In the Acid Test Amazon also had a decrease from 2011 - 2012. This indicates
that Amazons ability to pay all of its current liabilities if they came due immediately has
decreased, and risk to investors has slightly increased.
Table 1
2012
2011
Industry Avg.

Current Ratio
1.12:1
1.17:1
1.54:1

Acid Test
1:78
1:82
1:82

Ability to sell merchandise inventory and collect receivables

Two ratios of value in considering Amazons ability to sell merchandise inventory and collect
receivables are the Inventory Turnover Ratio and Days Sales in Receivables. The Inventory
Turnover will help us understand how able Amazon is to sell their merchandise inventory before
it expires or becomes obsolete. In Inventory Turnover Amazon is doing much better than the
industry average. It turned over its inventory 8.34 times in 2012. This is nearly twice the
industry average. Amazons Days Sales in Receivables Ratio is also very strong. However there
was a weakening trend from 2011 to 2012 that is concerning. Why did their Days Sales in
Receivables increase? Are they making more sales on credit? Have they had a change in their
collection policy? It may be that they are trying to broaden their customer base by allowing

more time for customers to pay for the goods and services they purchase. If this is the case, than
the increase in Days Sales in Receivables may be a good thing. In any case, Amazons ratios
show that their ability to sell merchandise inventory and collect receivables is much better than
the industry average.

Table 2

Inventory
Turnover
2012
8.34
2011
9.10
Industry Avg. 4.8 times

Days Sales in
Receivables
17.73
15.8
36.11

Ability to pay long term debt

Amazon has a weak debt to total asset ratio. At 75% debt to total assets in 2012 Amazon.com
has 45% more debt to total assets than the industry average.

Amazons Times interest earned

ratio in 2011 was very high, nearly three times the industry average. However in 2012, that fell
to slightly below industry averages. This indicates that Amazon in 2012 was as able as most
companies in the industry to pay the interest on their loans (they could pay their interest 5.22
times in 2012 their Earnings before Interest and Taxes (EIBT)).
Table 3

Debt to Total
Assets

2012
75%
2011
69%
Industry Avg. 34%

Times
Interest
Earned
5.22
15.19
5.33

Profitability
Since we are looking at Amazons stocks for corporate investment, one of the most relevant
ratios is the return on common stock holders equity. The industry average is 11.39%. Amazon
has never been that high. Of special concern is the negative Return on Common Stockholders
Equity in 2012. This prompts the questions, is amazon trending downward? Or was 2012 simply

a bad year? Amazons gross profit margin is also consistently lower than the industry average.

Table 4

Gross Profit
Margin
2012
24.75%
2011
22.44%
Industry Avg. 33.55%

Return on
Common SE
-0.49%
8.13%
11.39%

Net Profit
Margin
-0.06%
1.31%
2.87%

Evaluating stock as an investment

Amazons Price Earnings Ratio was very strong in 2011 (well above industry averages), however
in 2012 it was negative. This again begs the question, is Amazon trending downward, or was
2012 simply a bad year? What policy or economic factors caused the downturn in 2012?

Table 5

Price
Earnings
Ratio
2012
2011
131.37
Industry Avg. 47.17
Conclusion
I believe that more questions need to be asked about Amazons performance in 2012. Will this
trend in shareholder value continue? What is Amazon doing to increase shareholder value? Until
these questions can be answered satisfactorily, we should consider other options for our
investment package.