Memo

Date: December 05, 2015

To: Javaid Majid
From: Kenneth Philpot
Re: Amazon Analysis
The purpose of this essay is to evaluate the following details about Amazons Income
Statement and Balance Sheet. First I will evaluate Amazons ability to pay current liabilities,
followed by what their ability is to sell merchandise inventory and collect receivables. Next, i
will analyze their ability to pay long term debt, followed by their profitability and finally I will
be evaluating stock as an investment.

Ability To Pay Current Liabilities

After reviewing the financial statements for Amazons 2011-2012 fiscal years it was
apparent that Amazon has a huge amount of cash flow in their business. But would all this cash
going around cover investments if they became due? The way to get the answer to this question

is to use the Acid Test. The Acid Test is a simple formula and goes as follows: cash including
cash equivalents + short term investments / net current liabilities = Acid-Test Ratio. From
Amazons own records we can calculate what their ability is in paying debt and can compare
whether or not they are above, at, or below par when it comes to the industry average. Amazons
Acid-Test came back as 0.82 in 2011 and 0.78 in 2012. This essentially means that with every
dollar they currently owe they could pay today about 82 cents of each dollar. The industry
average for an online retailer is above in this category. Amazon could certainly improve but is
very capable or paying most of their debts if they became due right now.
Ability To Sell Merchandise Inventory And Collect Receivables
In order for us to determine the ability of Amazon to sell its merchandise we must use the
inventory turnover method and the days sales in inventory ratio. For Amazon to be above the
competition it must have a high turnover rate and a low days sales in inventory. Before we can
calculate the days ratio we must calculate inventory turnover, the average in the online sector is
4.8 times in one year and the average days sales in inventory is 75.42 days. For Amazon the
turnover was 8.3 in 2011 and 9.1 in 2012, that is almost double the industry average. Amazon is
certainly a powerhouse in this sense. Amazons days sales ratio was approx. 40 in 2011 and 44
in 2012. That is below the average, which is actually a good thing. It means that products are
moving fast through Amazon. They are definitely doing much better than the average industry
competitor.
Next I must calculate the ability to collect receivables, which is essentially figuring out
how quickly Amazon gets paid, so a smaller number than the average is desirable here. The way
to calculate this is to look at days in sales receivables to see how long the average is. For
Amazon the ratio is 15.8 for 2011 and 17.7 for 1012 which would be an average of around 17.

The industry average is 36. This means that Amazon is nearly at the halfway mark and thus
collects its money in about half the time of the average competitor. These are certainly good
numbers for a business to have.
Ability To Pay Long Term Debt
To evaluate Amazons ability to pay long term debt one must compare the total debt a
company has to its assets. The industry average is 34% but Amazons was 69% in 2011 and 75%
in 2012. This means that Amazons average is much higher than industry and they need to get
ahold of this quickly so that they dont someday turn insolvent due to high debts. Amazons
competitors have much less of a debt to asset ratio and could potentially have more freed up
capital for something in the future, which could hurt the company.
Profitability
Amazon is a highly profitable company but simply looking at a net loss of around 30
million in 2012 can really tell you to back away. But if you look at the cash flow and see where
the money is going you can see why that year there was a loss. There are a few tests I can do to
calculate its profitability. First of all I want to see what their net profit margin is and to do so I
simply divide net income by net sales. In 2012 this tells us that there was no profitability because
it was -0.06% but in 2011 it was 1.31%. Compared to the average of 2.87 you can see that
Amazon has been well below the industry average for these two years. If these are irregular
occurrences then it shouldnt be too much of problem but if there are more years of net losses of
income it is possible that Amazon may need to make some serious changes in the business.
According to the information from Amazon it appears that a lot of money in 2012 was invested
in technologies for their websites, etc. This could be why their debt ratio is so high and
profitability so low because they are investing heavily for greater rewards.

Evaluating Stock As An Investment

For someone to invest in stock they must see consistent results. Amazon had an amazing
price/earnings ratio in 2011. What this ratio tells us is how much money will be made from
dividends. In 2011, as I previously mentioned, Amazons stock had a 131.37 price/earnings ratio
while the industry average at that time was 47. During that year, an investor wouldve made
about three times as much money on every dollar invested in Amazon vs another company.
Unfortunately in 2012 the company had a terrible price/earnings ratio and the stock price dove
down. The ratio was -2,854.7 in 2011. That means that a lot of money was lost due to stock
prices going down and because the company had a net loss rather than a net profit. Based on this
provided information, Amazon is not a company you wanted to buy stock in at the end of 2011,
expecting large gains. However, years previous how good profit and it appeared to be a one of a
kind year. It may be smart to buy the stock that has gone down and make money when it goes
back over time. I am a risky kind of person and would choose to invest while stocks are low and
wait for a long term gain. If a short term gain is what is desired this might not be the best choice
as an investor.
Conclusion
After looking at the money coming in for Amazon and where it is going I would strongly
have to say that 2012 seems like a fluke year for having a loss in profit. Years previous show
strong returns and I feel that strong years are ahead. I would recommend to invest if the long
term gain is the goal. It appears that compared to competitors Amazon sells much more product
and get much lower profit margins. If 2013 does not require as much financing for projects then I
believe Amazon will have a year with similar profits to those in 2011. Amazon is a leader in
some areas and very bad in others, no business can be the best at everything.

References
Amazon Financial Reports 2011 and 2012.