Zachari Kingston

Paige Paulsen
Accounting 1120
4-15-2018
Amazon Financial Statement Analysis

Introduction

If I were to ask you to tell me what you think the most successful business in the world was,

what would you say? Some would say Walmart, others would say Microsoft, and some would

say some other company. When I think of the most successful businesses I think of

Amazon.com. Many others also believe this which is why they were ranked #12 in the 2017

Fortune 500 as well as being ranked as the most trust worthy company by the Fortune group.

Amazon is the company that I will be doing a financial statement analysis specifically for the

reason of them being one of the top companies in the world. A financial statement analysis is the

process of reviewing and evaluating a company’s financial statements to gain an understanding

of the financial health of the company. The main documents we need to look at to complete a

financial statements analysis are the balance sheet, income statement and statement of cash

flows. I will explain what those are once we get to them. The overall goal of a financial

statement analysis is to decide whether investing in a company is a good idea, so by the end of

this analysis, we’ll be able to see if it’s smart to invest in the billion-dollar company, Amazon.

Ability to Pay Current Liabilities

One of the most important things to know when deciding whether to invest in a company is

looking at its ability to pay its current liabilities, also known as their current debt. Why does this

matter? If a company cannot pay its debt, then how is the company ever going to pay its
investors? To see if Amazon can pay its current liabilities we need to look at four different

things. The first thing that we should look at is the working capital. Working capital is a

business’s ability to meet its short-term obligations with its current assets, which means that the

company is worth more than it must spend. The working capital for Amazon in 2012 was $2294

and it was $2594 for 2011. This means that it was able to cover its short-term obligations with

money to spare in each year, which is good. The next thing we will look at is the current ratio.

The current ratio shows the company’s ability to pay current liabilities from current assets. So, it

shows how many dollars of current assets it has for every one dollar in liability. The current ratio

for 2012 was 1.12 and the current ratio for 2011 was 1.17. The average current ratio in the

industry is 1.54. So, their current ratio is a little worse than average however, it is still higher

than 1, which means that it can pay back its creditors. The next ratio we will look at is the cash

ratio which is the company’s ability to pay current liabilities from cash and cash equivalents.

Amazon’s cash ratio in 2012 was 0.43 and it was 0.35 in 2011. That is very low as you want

your cash ratio to be above 1. So, Amazon must be low on cash but enough other assets to keep

their current ratio above 1. The final ratio we will look at is their acid-test ratio which is the

company’s ability to pay all its current liabilities or debts if they came due at once. Amazon’s

acid-test ratio for 2012 was 0.78 while in 2011, it was 0.82. This means that if all their creditors

came forward at the same time and told Amazon to pay all its debts right now, Amazon could

only pay 78% of them in 2012 and 82% of them in 2011. The average acid-test ratio in the

industry is 1:82. So, Amazon is lower than average. This would not be good for them as it could

force them to go out of business. Overall, Amazon is not in a very good situation when it comes

to being able to pay their current liabilities. They were better in 2011 than in 2012, but both years
were very underwhelming. In all categories, they were worse than average. So, if you were

thinking about investing in Amazon, this would be the first red flag.

Ability to sell merchandise and collect receivables.

Amazon is one of the largest online retailers, so they should be able to pass this field with

excellence, right? Based on what we as an average consumer see, it looks like they can sell

merchandise very well. Well, let us take a look. The first thing we’re going to look at is the

inventory turnover. Inventory turnover is the number of times a company sells its average level

of merchandise inventory during a period. Amazon’s inventory turnover was 8.34 in 2012 and

9.1 in 2011. The industry average for this is 4.8 So, Amazon does well in this category which

should surprise nobody. The next thing we’re going to look at is the days’ sales in inventory

which means the average number of days inventory is held for a company. The days’ sales in

inventory for Amazon was 44 days for 2012 and 40 days for 2011. The industry average is 75.42

days. Amazon does well in this category because you don’t want to be sitting on merchandise for

too long. It’s not making a profit if it’s sitting in a warehouse. The gross profit percentage is the

next thing we’ll see. The gross profit percentage is the percentage of profit you make after

selling an item. The industry average for this is 33.55%. Amazon doesn’t do very well in this

section as their GPP was 24.8% in 2012 and only 22.4% in 2011. The next thing we’re going to

look at is the accounts receivable turnover ratio. Amazon’s ratio was 20.59 in 2012 and 16.2 in

2011 meaning they collected receivables 20.59 times in 2012 and 16.2 times in 2011. The

industry average is only 10.11 times so Amazon collects receivables a lot faster than usual. The

final category we’ll look at in this paragraph is very similar to the last one. This one is called the

Days’ sales in receivables which means the number of days it takes to collect the average level of

receivables. Amazon’s days sales in receivables was 17.7 days in 2012 and 15.8 days in 2011.
The industry average was 36.11 days so once again, Amazon is very fast when it comes to

collecting receivables. Amazon did very well in this whole section especially compared to the

last one so, we’ll move on and see how they do in the next section.

Ability to pay long term debt

This one is very quick. All we need to do is see if Amazon can pay its long-term debt at a

reasonable pace. If they can pay its long-term debt off in a quick amount of time, you’ll get your

money from investing in them a lot faster as well. The first thing we look at is the debt to total

assets ratio which is just the amount of assets that is financed with debt. Amazon’s debt to total

assets ratio was 75% in 2012 and 69% in 2011. The industry average was 34%. This is not good

for Amazon as it means that Amazon is using a lot more of its assets to pay off debt than most

companies use. The next ratio is the debt to equity ratio which means the amount of liabilities the

company has compared to its equity. Amazon’s debt to equity ratio was 33.6% in 2012 and it

was 44.3% in 2011. The industry average was 52% which means that Amazon did better than the

industry. If you have a high debt to equity ratio it means that you may not have the cash to

satisfy any debt obligations. Amazon has a low debt to equity ratio meaning that it has the cash

needed to satisfy those needs. The last ratio we’ll look at is the times-interest-earned ratio which

is just a business’s ability to pay interest. Amazon’s times-interest-earned ratio was 5.23 times in

2012 and 15.18 times in 2011. The industry average was 5.33 times meaning that in 2011

Amazon did very well in paying off interest expenses but in 2012, they were worse than average.

Overall, Amazon doesn’t do too well when paying off long term debt, but it doesn’t do too bad. I

would watch this one year to year very close as Amazon fluctuates a lot in this section.

Evaluating Profitability
With the amount of money Amazon makes per year, you’d think they’d have to excel in profits,

right? That’s what we’re going to find out now. The first ratio we’re going to look at is the profit

margin ratio which is the amount of net income that is earned on every net sale. Amazon’s profit

margin ratio for 2012 was -0.06% and it was 1.31% in 2011. The industry average net profit

margin is 2.87%. Amazon actually lost money in 2012. They really didn’t do well in the first test

of profitability. On to the next one, rate of return on total assets. This is the amount of success a

company has in using its assets to earn income. Amazon’s rate of return on total assets was -

0.45% in 2012 and 1.96% in 2011 while the industry average was 4.76%. Amazon once again

underwhelmed in this category and lost money in 2012. The next thing we need to look at is the

asset turnover ratio. This shows how efficiently a company uses its assets to generate sales.

Amazon’s asset turnover ratio was 2.11 times in 2012 and 1.66 times in 2011. The industry

average was 1.66 times. So, in 2012 Amazon did better than average because they’re showing

that they make more assets than they spend in sales. We also need to look at the return on

common stockholder’s equity. This one is very important as it shows the relationship between

net income available to common stockholders and their average common equity invested. So, it

shows how much you get back for every dollar you put in. Amazon’s rate of return on common

stockholder’s equity was -0.49% in 2012 and it was 8.63% in 2011. As you can see there is an

enormous difference in this. What’s the industry’s average in this category? 11.39%. So, either

way, you lose if you choose to invest with Amazon. One year it was close the other year, it was

terrible. The final thing we need to look at to evaluate profits is the Earnings per Share. Earnings

per share is also very important as it tells you the amount of a company’s net income for each

share of its outstanding common stock. It tells you how much money the company has per share.

Amazon’s EPS for 2012 was -$0.09 and it was $1.39 in 2011. Once again, lost money in this
category. Amazon does not make enough money to support all its stocks shares, at least not

enough in these two years. As you can see, Amazon seems to have a tough time making profit,

so this would be another red flag when deciding whether to invest in Amazon. We have one

more section to look at before we decide whether investing in Amazon really is a good idea.

Evaluating stock as an investment

This is the most important category as it shows the exact amounts of money you will make as

you put it in. So, let’s get started. The Price/Earnings ratio will be the first thing we look at. It is

the value the stock market places on $1 of a company’s earnings. So, Amazon’s Price/Earnings

Ratio for 2012 was -2854.7 in 2012 and it was 131.37 in 2011. The industry average was 47.17.

In 2012, Amazon’s Price/Earnings ratio was bad, but in 2011 it was good. So, we can see that

Amazon’s stock value fluctuates a lot. Dividend yield and payout would typically be the next

thing we look at, but Amazon doesn’t return dividends to shareholders, so there isn’t any way to

calculate either of those.

Conclusion

Overall, Amazon can be risky as it doesn’t seem to stay the same or even close to the same at all

over the years. If you happen to invest on a good day or good year, you might get lucky. But,

with the data we have now we can see that Amazon can’t pay its debts and so they may never get

around to paying you. A long-term investor may eventually be able to win out with Amazon and

make some money because they’ve proven they’re capable of staying afloat. But especially if

you’re a short-term investor, I would stay away from them.