Professor: Miss Paige Paulsen (ACCT 1120)

Student: HUONG VY
Financial Statement Analysis Assignment - Amazon.com, Incorporated
My paper will analyze and conclude the Amazons strength, by using its financial statement
ratios and other information. By this way, I can well understand its ability in paying current
liabilities, selling merchandise inventory, collecting receivables, and also paying long term debt.
I will figure out the Amazons ability to pay their long-term liabilities and the companys
profitability, and will investigate its stock as an investment.
1. Ability to Pay Current Liabilities:

Working capital:

Year 2011

2594

Year 2012

2294

Determining the working capital is a good starting place to evaluate a companys ability to pay
its current liabilities. Working capital measures the ability to meet short-term obligations with
current assets. The Amazons working capital in 2012 is 2294, and 2011 is 2594. They are
positive, indicating that the company has more current asset than current liabilities.

Current ratio:

Year 2011

1.17

Year 2012

1.12

Online retail sales industry average

1.54:1

We use the current ratio to evaluate the Amazons business performance. It measures a
companys ability to pay its current liabilities with its current asset. The current ratio can be used
to take a rough measurement of a companys financial health. The Amazon current ratio in 2012
is (1.12), and in 2011 is (1.17). Those ratios were trending down, due to increasing short-term
debt and decreased short- term assets. Compared to online retail sales industry average of 1.54:1,
Amazon is below average. The company might not as capable of paying off its short-term debts.

Acid test ratio:

Year 2011

1:82

Year 2012

1:78

Online retail sales industry average

1:82

We are now using the acid test ratio, which is also used to measure a companys ability to pay its
current liabilities. It reveals whether the entity could pay all its current liabilities if they were to
become due immediately. The Amazons acid test ratio for 2012 is (1:78) and 2011 is (1:82).
Those ratios are lower than 1, it means it doesnt have enough liquid assets. Compared 2012 to
online retail sales industry average of 1:82, Amazon is below average but not too noticeable. This
ratio may suggest that the company is taking too much risk of not maintaining an appropriate
liquid resource.

Cash ratio:

Year 2011

35.37%

Year 2012

43.54%

Then, cash ratio is an important part of every business. It helps to determine a companys ability
to meet its short obligations and is calculated as cash plus cash equivalents divided by total
current liabilities. The Amazons cash ratio for 2012 is 0.4354, and 2011 is 0.3537. Notice for
both years, the ratio was below than 1, it means that the company needs more than just its cash
reserves to pay off its current debt. The ratio is increased slightly in 2012 compared to 2011. An
increasing Cash Ratio is a positive sign, showing that the company is better able to cover its
obligations to creditors.
2.

Ability to sell merchandise inventory and collect receivables:

Inventory turnover:

Year 2011

9.1

Year 2012

8.34

Online retail sales industry average

4.8

Now, I am talking about Amazons inventory turnover, which measures how rapidly merchandise
inventory is sold. A high rate of turnover indicates ease in selling inventory; a low rate indicates
difficulty. The Amazons inventory turnover for 2012 is 8.34, and 2011 is 9.1. Amazons
Inventory turnover declines slightly from 2011 to 2012, but it is much better than Online Retail
Sales Industry Average 4.8. It implies either strong sales or ineffective buying. This can indicate
better liquidity, but it can also indicate a shortage or inadequate inventory levels.

Days sales in inventory ratio:

Year 2011

40 days

Year 2012

44 days

Online retail sales industry average

75 days

Another key is days sales to inventory ratio. This ratio measures the average number of days
merchandise inventory is held by the company. The Amazons days sales in inventory for 2012
is 44 days, and 2011 is 40 days. It indicates that the company on average has 44 and 40 days
supply of inventory on hand. By the way, they are much lower than Online Retail Sales Industry
Average 75 days. This is preferable because it indicates that the company is able to sell its
inventory quickly.

Gross profit percentage:

Year 2011

22.44%

Year 2012

24.75%

Online retail sales industry average

33.55%

Merchandisers use several ratios to evaluate their operations, and among them is the gross profit
percentage. It reflects a businesss ability to earn a profit on its merchandise inventory. The
Amazons gross profit percentage for 2012 is 24.75%, and 2011 is 22.44%. It increased slightly
from 2011 to 2012, signifying that Amazon is increasing the percentage of gross profit of its
sales. By the way, they are lower than Online Retail Sales Industry Average 33.55%. Amazon
should consider increasing the amount of profit it is earning on its merchandise inventory.

Account receivable turnover ratio:

Year 2011

23.13

Year 2012

20.59

Online retail sales industry average

10.11

The account receivable turnover ratio measures the number of times the company collects the
average receivables balance in a year. The higher ratio, the faster the cash collections. Amazons
receivable turnover ratio for 2012 is 20.59. This is significantly better than Online Retail Sales
Industry Average of 10.11. It means Amazons efficiency in collections is good, and the average
time between purchases and account collections is relatively brief.

Days sales in receivables:

Year 2011

15.78

Year 2012

17.73

Average Accounts Receivable collection

36.11
period

Days sales in receivables, called the collection period, indicates how many days it takes to
collect the average level of the account receivable. Those numbers should be close to the number
of days customers are allowed to make payment when credit is extended. The Amazons days
sales in receivable in 2012 is 17.73, and 2011 is 15.78. On average, it takes Amazon 18 and 16
days to collect its account receivable. Those numbers are below the average accounts receivable
collection period, which is 36.11. The length of the collection period is longer.
3.

Ability to Pay Long-Term Debt:

Debt to total asset ratio:

Year 2011

69.31%

Year 2012

74.83%

Online retail sales industry average

34%

The relationship between total liabilities and total assets, called debt ratio, shows the proportion
of assets financed with debt. The debt ratio can be used to evaluate a businesss ability to pay its
debt. The Amazons debt ratio for 2012 is 74.83%, and 2011 is 69.31%. Those ratios are above
than 50%, which means a bad sight because most of its assets are financed through debt, not
equity. They are also very high compared to Online Retail Sales Industry Average of 34%.

Debt to equity ratio:

Year 2011

226%

Year 2012

297%

Online retail sales industry average

52%

Next, the relationship between total liabilities and total equity, called the debt to equity ratio,
shows the proportion of total liabilities relative to total equity. This ratio is used for measuring
financial leverage. Amazons debt equity ratio for 2012 is 297%, and for 2011 is 226%. They are
very high compared to Online Retail Sales Industry Average 52%. Generally, a high debt-toequity ratio indicates that a company may not be able to generate enough cash to satisfy its debt
obligations.

Time interest earned ratio:

Year 2011

15.18

Year 2012

5.23

Online retail sales industry average

5.33

Investors use the time interest earned ratio to evaluate the businesss ability to pay interest
expense. This ratio measures the number the number of time earnings before interest and taxes
can cover the interest expense. Amazons interest earned ratio for 2012 is 5.23, and 2011 is
15.18. The decreasing are a bad record, and would appear that the company cannot easily cover
its interest expense. Amazons ratio of 5.23 is comparable to Online Retail Sales Industry
Average of 5.33.
4.

Evaluating profitability:

Profit margin ratio:

Year 2011

1.31%

Year 2012

(0.06%)

Online retail sales industry average

2.87%

The profit margin ratio shows the percentage of each net sales dollar earn as net income and
focuses on the profitability of a business. Amazons profit margin ratio for 2012 is (0.06%), and
2011 is (1.31%). The 2012 ratio is slightly weaker compared to the Online Retail Sales Industry
Average of 2.87%. It can be interpreted as indicating that a companys profitability is not very
secure. By the way, they have seen a slight increase in the last year that signals an important
increase in income.

Rate of return on total asset:

Year 2011

3.16%

Year 2012

0.45%

Online retail sales industry average

4.76%

The rate of return on total asset measures a companys success in using the asset to earn a profit.
Amazons rate of return for 2012 is 0.0045; which is much lower than Online Retail Sales
Industry Average of 0.0476. This shows how inefficiently a company is using its assets to
generate earnings before contractual obligations must be paid.

Asset turnover ratio:

Year 2011

2.18

Year 2012

2.11

Online retail sales industry average

1.66

The asset turnover ratio measures a number of net sales generated for each average dollar of
total assets invested. This ratio measures how well a company using its assets to generate sales

revenue. Amazons asset turnover ratio for 2012 is 2.11 times, generates higher than Online
Retail Sales Industry Average dollar of total assets invested at 1.66 times. This is desirable and
tells us that Amazon was produced efficiently $2.11 of sales revenue for each dollar of asset
invested.

Rate of return on common stockholders equity:

Year 2011

8.63%

Year 2012

(0.49%)

Online retail sales industry average

11.39%

The rate of return on common stockholders equity shows the relationship between net income
available to common stockholder and their average common equity invested in the company.
Amazons return on common stockholders equity was bad for 2012 (0.49%) compared to return
in 2011 at 8.63%, and even worse compared to Online Retail Sales Industry Average dollar off
at 11.39%. The negative return is a warning sign that the company might no longer as strong as it
once was.

Earnings per share:

Year 2011

1.39

Year 2012

(0.09)

Earnings per share are the most widely quoted of all financial statistics. It reports the amount of
net income (loss) for each share of the companys outstanding common stock. Amazons
earnings per share for 2012 is -0.09, and for 2011 is 1.39. The value below zero means the
company was losing money and tells us exactly how much money the company lost per share of
outstanding stock, which is why you'll also see it called net loss per share.
5.

Evaluating Stock as an Investment:

Price/earnings ratio:

Year 2011

131.37

Year 2012

(2854.66)

Online retail sales industry average

47.17

The price/earnings ratio is the ratio of the market price of a share of common stock to the
companys earnings per share. It shows the market price of $1 of earnings, and measures the
value that the stock market places on a companys earnings. Amazons price/earnings ratio in
2012 is -2854.66, and in 2011 is 131.7. Amazons ratio was decreased and was significantly

lower in 2012 compared to Online Retail Sales Industry Average of 47.17. Which means this
year this company had not profited.

Dividend yield:

Year 2011

NA

Year 2012

NA

The dividend yield is the ratio of annual dividends per share to the stocks market price per share.
This ratio measures the percentage of the stocks market value that is returned annually as
dividends to shareholders. Amazons dividend yield for 2012 and 2011 are 0. They said they
have never declared or pay cash dividends on the common stock. The three reasons include:
avoiding tax, keeping the profit for safety, or re-investment.

Dividend payout:

Year 2011

NA

Year 2012

NA

Dividend payout is the ratio of annual dividends declared per common share relative to the
earnings per share of the company. This ratio measures the percentage of earnings paid annually
to common shareholders as a cash dividend. Amazons dividend payout for 2012 and 2011 are 0.
This is a sign of a stable dividend, and may be a plus because it leaves room for consistent
dividend growth.
6.

Conclusion:

By this information, it seems like the Amazon collect assets with more debt than equity (such as
the decline of ability to pay short-term debts by using short-term asset). The company meets the
obstacle in paying all of its current liabilities without affecting cash flow operations. The turning
inventory is higher than the industry average, which is the good sight. In contrast, the high cost
of goods sold gave a warning that Amazon needs to improve the gross profit percentage by
increasing selling goods with less cost. The credit term looks like be using efficiency for
declining days in sales receivables. By the way, this company tends to finance asset with debt
instead of equity. Finally, Amazons dividends to the common stock are 0, but still get good
earnings per Share and a higher stock market value. Even though if I am an investor, I will be
paying attention.
Sources:
https://view.ebookplus.pearsoncmg.com/
http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual