Term Paper: Amzn Company Overview Amazon

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[. . .] This means that operating income declined to just 1% of total revenue in 2012, a very fine line that is close to a loss. Combined with the increase income tax, Amazon slipped from profit to loss over the course of two years, just on the increase in the two major expense line items. If the growth in selling, general and administrative expense and the growth in research & development expense cannot be curtailed, the company will continue to lose money, even though it is holding or improving its gross margin.

The vertical analysis technique can also be applied to the balance sheet to analyze how each line item has changed as a percentage of total assets over the years. The vertical analysis of the past three balance sheets for Amazon is as follows:

Vertical Analysis

2012

2011

2010

Cash

11448

35.2%

37.9%

46.6%

Receivables

10.3%

10.2%

8.4%

Inventories

18.5%

19.7%

17.0%

Current Assets

21296

65.4%

17490

69.2%

13747

73.1%

PPE

21.7%

17.5%

12.8%

Intangibles

7.8%

1955

7.7%

7.2%

Total non-Current

11259

34.6%

30.8%

26.9%

Total Assets

32555

25278

18797

Payables

13318

40.9%

11145

44.1%

42.8%

Current Accrued

17.5%

14.8%

12.3%

Total CL

19002

58.4%

14896

58.9%

10372

55.2%

LT Debt

9.5%

1.0%

3.4%

other non-current

7.0%

9.4%

4.9%

Total non-Current

16.5%

10.4%

8.3%

Total Liabilities

24363

74.8%

17521

69.3%

11933

63.5%

Total Equity

25.2%

30.7%

36.5%

The vertical analysis of Amazon's balance sheets reveals a few things. The first is that there has been a significant increase in the non-current assets from 26.9% of total assets in 2010 to 34.6% in 2012. Most of this growth has come from the plant, property and equipment line, which has increased from 12.8% of the balance sheet to 21.7% of the balance sheet in two years. The offsetting decline has come mainly from cash, which still has grown significantly. However, cash as a percentage of the balance sheet has decreased. That said, it is hard to argue that Amazon needs $11 billion in its bank account, so if there are opportunities to spend that cash on plant, property and equipment and earn a better return, then Amazon should pursue those opportunities. It is worth considering, that if Amazon has spent some of that money on R&D in the past few years, but the results of that spending are still not on the market, then Amazon may yet earn a strong ROI on that increased spending. When it does, perhaps its profits will increase again, but that is entirely speculative. The key is that Amazon is spending some of its cash to increase its fixed asset base, but at this point profits have not increased as the result of that spending.

Ratio Analysis

Ratio analysis is a technique where a company's financial statements are broken down with different ratios, and these ratios are analyzed in order to better understand the information that is contained in the financial statement. There are several different categories of ratios -- liquidity, financial leverage, asset management, profitability and market value ratios being the most important ones.

Liquidity ratios are based on the balance sheet and measure the firm's ability to meet its pending debt obligations for the coming year. The three main liquidity ratios are the current ratio, the quick ratio and the cash ratio. The current ratio is defined as the current assets divided by the current liabilities. This was 1.12 last year. The quick ratio is the current assets less the inventories, divided by the current liabilities. For Amazon, this is 0.80. Both of these figures are healthy, as is the cash ratio of 0.6. Amazon has no pending liquidity issues, and in part that explains why the company was able to borrow $3 billion at rock bottom interest rates last year.

The financial leverage ratios include the debt ratio and the long-term debt-to-equity ratio. A third ratio in this category, times interest earned, is not possible to calculate because Amazon just issued its debt and therefore did not pay a full year's interest on that debt last year. The debt ratio for Amazon is74.8% and the long-term debt-to-equity ratio is 37.6%. The first of these figures is relatively high, but Amazon is still considered to be a growing company. Moreover, most of the company's liabilities are in accounts payable, which are current liabilities. The relatively low amount of long-term debt indicates that Amazon has good long-term financial leverage and is at fairly low risk of problems due to debt load.

The asset management ratios include things like total asset turnover and inventory turnover. For a retailer, inventory turnover is a critical ratio, because unsold inventory often must be cleared as a discount. It is important to move inventory through the company as quickly as possible to recognize revenues from all goods that have been purchased by the company. The inventory turnover ratio is the COGS / average inventory. For Amazon in 2012, this was 8.3x, for an average inventory life of 43 days. This is a decent number, but not great. Two years ago, when the company hit a peak net profit over $1 billion, the inventory turnover was 9.88 times, or 37 days. A decline in inventory turnover is a sign of weakness, although in this case tempered by Amazon's ability to maintain margins.

The total asset turnover reflects the ability of the company to generate sales from its asset base. The formula is the revenue / average total assets. The total asset turnover this past year was 2.11 times, which is a decent number. Two years ago at the time of peak profit, Amazon had a total asset turnover of 2.09, so there has been little change in this performance metric, even as the company has increased its total assets significantly. It is positive that even if the inventory turn has decreased in the past couple of years, total asset turnover has not.

The profitability ratios indicate the company's profit position. The gross profit and net profit are two major examples of this type of ratio. The gross profit last year was 24.8%, and this is higher than it was two years ago when the company was at its most profitable. The gross margin in 2010 was 22.3%. The net margin, however, is lower. The company lost money in 2012, so the net margin was 0, whereas two years ago Amazon had a net margin of 3.3%. The erosion of the company's net margin is one of the most pressing financial concerns for Amazon.

The market ratios do not reflect the performance of the company, but rather the reaction of the stock market to this performance. Thus, market measures reflect market sentiment, introducing another variable to the financial analysis. One on hand, introducing a fuzzy, irrational variable like market sentiment makes little sense if one is to understand the actual performance of Amazon, but on the other hand the company's managers are beholden to the interests of shareholders. This is especially true for a company like Amazon that does not pay dividends to its shareholders -- growth in the share price is one of the metrics against which management will be evaluated. Using the P/E ratio is tricky, because the price is updated continually, whereas earnings are not. The market does not know the earnings of the company at the end of the fiscal year, for example, and only can adjust to those earnings a few weeks later when the earnings are announced. Thus, it is best to examine the current P/E for Amazon, which MSN Moneycentral lists as negative. This is because the denominator, the earnings, remain negative at this time. The market, however, believes that the lack of profitability is temporary, hence the fairly high market value for the company's shares. Another measure is the price to book value, which is presently $297.90 / 19.11 = 15.6. This is a fairly high number, implying that the market sees strong growth continuing in the foreseeable future for Amazon. The market clearly feels that Amazon's market position is strong, and that it will continue to dominate technologically in its industry in order to maintain that strength even as more bricks and mortar companies turn to online retailing in order to fuel growth.

Overall, the ratio analysis indicates that Amazon is a healthy company. There are some points of concern that have been highlighted, specifically with respect to the recent increase in costs that have not translated into increased revenue, but overall Amazon is a healthy company. The market seems to realize that the company is in great shape as well, giving it a high price/book ratio and a high price despite a lack of earnings in the short-run.

ROE DuPont

The DuPont analysis is intended to illustrate where the company's return on equity is coming from. The three constituent numbers are the profitability, the operating efficiency and the degree of financial leverage. The profitability… [END OF PREVIEW]

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Amzn Company Overview Amazon.  (2013, September 14).  Retrieved June 26, 2019, from https://www.essaytown.com/subjects/paper/amzn-company-overview-amazon/1921277

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"Amzn Company Overview Amazon."  Essaytown.com.  September 14, 2013.  Accessed June 26, 2019.
https://www.essaytown.com/subjects/paper/amzn-company-overview-amazon/1921277.