Amazon Financial Statement Analysis

Tiffany Brito
Acct 1120
Amazon Financial
Statement Analysis
Everyone has heard of Amazon, most use their website frequently, but have you ever
stopped to consider their financial well-being? I intend to do just that by examining five aspects
of the company; 1) their ability to pay their current liabilities, 2) their ability to sell their
merchandise inventory and collect receivables, 3) their ability to pay their long term debt, 4)
their profitability, and 5) their stock as an investment.
First, lets take a look at their ability to pay their current liabilities. Another way to
think about this is what is Amazons ability to pay off their debts quickly? One ratio that can
give you an idea of this ability is the current ratio (fig. 1). Amazons current ratio is quite low
compared to the industry average and getting
lower. This means they have less current assets
than industry average that could be used to pay
Industry
Average
Current Ratio 1.12:1 1.17:1 1.54:1
Acid-Test Ratio 1:.78 1:.82
1:.82
Fig. 1
2012
2011
off current debts. Amazons ratio of assets to debts seems to be in a slightly decreasing trend.
This may due to increased debt or because their assets have been decreasing for any number of
reasons. Another ratio to consider when looking at Amazons ability to pay their current debts is
the acid-test ratio (fig. 1). This ratio gives us an idea of whether the company could pay their
debts if they came due immediately. Amazons ratio is very comparable with the industry
average, but again seems to have a slight decreasing trend. Based on these two ratios I would
conclude that Amazon is in a safe range for their ability to pay their debts, but I would want
more information on why they seem to be in a decreasing trend.
The next thing that is important when evaluating Amazons financial state is their ability
to sell their merchandise inventory and collect receivables. Amazons company depends on
being able to sell merchandise, collect revenue and make a profit. The ratios shown in figure 2
Inventory Turnover
Days Sales in Receivables
Gross Profit Percentage
2012
2011
8.3 times
17.7 days
24%
9.1 times
15.8 days
22%
Industry
Average
4.8 times
36.1 days
33.55%
Fig. 2
help to evaluate their

ability to do just that. The
inventory turnover (fig.
2) shows the number of
times the company sells its average inventory in a year. A higher number shows an ease of
turning over inventory. Amazons inventory turnover rate is nearly 2 times the industry average,
showing us that Amazon has no problem turning over its inventory. It is worth mentioning that
its rate, while still significantly above industry averages, is decreasing. The second ratio shown
in figure 2, days sales in receivables, indicates how many days it takes for a company to collect
receivables. Amazon takes significantly less time to collect their receivables, or the money owed
to them, than the industry average, but from 2011 to 2012 their ability to collect has decreased by
nearly 2 full days. Lastly Amazons gross profit margin (fig. 2) is lower than the industry
average by nearly 10%. This means their profitability is lower than the industry standard. Their
profitability has increased slightly from 2011 to 2012 which may mean they are in an upward
trend. Based on the ratios show in figure 2, despite have a great inventory turnover rate and
ability to collect receivables quickly, Amazon should work to find a way increase their profit
margin.
Another aspect of Amazons financial well-being is their ability to pay long term debt.
The debt to total assets ratio (fig. 3) is the proportion of assets that are financed with debt.
Amazon is well above industry averages in this rate. This puts them at a much higher risk or
being unable to pay their long-term debts. They are also showing an increasing trend which puts
them at an ever-increasing risk. Their times interest earned ratio (fig. 3) can be seen as helping to
counteract their high debt to assets ratio.
This ratio shows the companys ability
to pay the interest expenses on their
Debt to Total Assets

Times Interest Earned
2012
2011
75%
5.23
69%
15.18
Industry
Average
34%
5.33
Fig. 3
debts. In 2011 Amazon had a dramatically high times interest earned rate. Nearly three times the
industry average. They did show a massive drop from 2011 to 2012, but 2012s rate still is in line
with industry standards. Due to the huge variation from 2011 to 2012, these two ratios together
raise many questions about the companys ability to pay long-term debts.
The fourth aspect of analyzing Amazons financial state is looking at their profitability.
As you can see in figure 4 Amazons profit margin is very low compared to industry standards,
even dipping below zero in 2012. This ratio shows how much net income is earned on every
2012
2011
Profit Margin -.06%

Return on Common SE -.49%
1.31%
8.63%
Industry
Average
2.87%
11.39%
Fig. 4
dollar of net sales. This means in 2012

the net income was negative. This
should raise a lot of red flags. This,
added to their ability to pay long term
debt, could be an indication of further financial hardship in the future. The return on common
stockholders equity seems to echo these concerns. This ratio shows how much income is earned
in relation to the amount invested by common stockholders. Amazons ration is under industry
standards and dropping quickly, again falling below zero in 2012.The sharp drop from just below
industry standards to negative is especially alarming. Based on these ratios it would seem that
Amazon was not a profitably company in 2012 and is trending towards becoming less profitable.
The last area to evaluate is Amazons stock as an investment. The Price/Earnings ratio
(fig. 5) shows the market value of $1 of
earnings. Based on this rate Amazons
Price/Earnings
2012
2011
-2854.7
131.37
market value took a huge dive from 2011 to
Industry
Average
47.17
Fig. 5
2012. In 2011 the ratio was more than double the industry average, but in 2012 it fell to
drastically below zero. This combined with the other ratios make stock as an investment look
like an extremely risky move.
After examining the five areas of evaluating Amazons financial statements it appears
that 2012 was a year of big changes for Amazon. Many of their ratios were trending negatively,
some very drastically so. At first glance it may seem that Amazon is headed for financial ruin. I
would conclude, though, that a bigger picture needs to be looked at. Perhaps the reason for 2012
looking drastically worse than previous years was based on a strategic move by Amazon. I would
suggest looking further into the reasons behind the decreases in ability to pay long-term debt,
profitability, and stock value. Also, I would suggest looking back a few years and following up
in the next few year to see if the negative trends continue. It may be that 2012 numbers are
misleading after looking at explanations for the unusually low ratios and a wider trend analysis.

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What does the analysis examine about Amazon's financial well-being?

What conclusions can be drawn about Amazon's ability to pay current liabilities based on the ratios presented?

Tiffany Brito

help to evaluate their

Debt to Total Assets

Profit Margin -.06%

dollar of net sales. This means in 2012

market value took a huge dive from 2011 to

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