Research and Analysis Project

Topic No.5

“Analyse and Evaluate the Business and Financial Performance of a Company which has performed
exceptionally well over a three-year period with a critical analysis of the reason for its success.”

AMAZON

ACCA Registration Number: 2427634

Name: Hammad Ahmed

Part 1

Reasons for choosing the Topic.

My interest in financial analysis and my aspirations to become a financial analyst for a publicly traded
company led me to choose topic No.5 after reviewing the Oxford Brookes University Information Pack.
The topic requires analyzing and evaluating the financial and business performance of an organization
that has achieved exceptional success over a three-year period. Additionally, this topic will provide me
with practical experience in analyzing the financial statements and annual reports of listed companies,
which is essential for professional accountants. Moreover, the topic will allow me to apply the theoretical
knowledge of financial and business analysis that I have gained through several papers of my ACCA
qualification.

Reason for choosing the organization:

Due to the fact that I personally work for retail industry, I decided to choose the companies for my
research and analysis project from the retail industry that is Amazon as my primary company and for
benchmark purposes, I have chosen Walmart Company. Other logical reasons which make them good
comparison are listed below:

Amazon and Walmart are both major players in the retail industry, making them suitable for comparison
purposes. Both companies have a significant global presence and are considered among the largest
companies in the world in terms of revenue and market capitalization.

Additionally, Amazon and Walmart have different business models and strategies, which makes them
interesting subjects for comparison. Amazon is known for its focus on e-commerce, cloud computing,
and innovative technology while Walmart has traditionally focused on brick-and-mortar retail and has
been expanding its online presence in recent years.

Furthermore, both companies have been successful in their respective areas of focus, with Amazon
leading in the e-commerce and cloud computing spaces, while Walmart remains a dominant force in the
traditional retail space.

Comparing the financial success of these two companies can provide valuable insights into the different
approaches to retail and technology, and how these approaches impact their financial performance. It
can also help investors and analyst gain a better understanding of retail industry as a whole, including
emerging trends and challenges.

Research Aim and Objectives

The primary objective of this research is to conduct a comprehensive financial performance and position
analysis of Amazon and Walmart Companies, comparing their performance over the last three years.
This comparison aims to determine which company has been able to leverage the business environment
more effectively.

 Which company’s management has bee able to provide a higher return on capital employed by
deriving sales and controlling operational costs?
 Which company has a stringer liquidity ratio?
  Which company efficiently manages its working capital cycle, converting inventory and
receivables into cash while paying off payables?
 Which company has been proved to be a better investment for its investors?
 Which company has been able to take greater advantage of the prevailing business
environment?

Overall Research Approach

To ensure a comprehensive evaluation of the financial and business performance of Amazon and
Walmart, I adopted a thorough and systematic approach that incorporated a variety of data sources and
analytical techniques. This approach was designed to provide a reliable and objective assessment of both
the companies’ financial position and performance over the past three years, while also considering the
broader economic and industry factors that may have influenced their performance.

The first step of the approach involved gathering and reviewing both companies’ financial statements for
the past three years. This included analyzing their income statements, balance sheets, and cash flow
statements to gain insight into their financial performance in terms of revenue, expenses, assets,
liabilities, and cash flow. To evaluate the financial performance of both companies, all the information
was derived from their published annual accounts available on their website.

I conducted a financial ratio analysis that examined key performance metrics in areas such as liquidity,
profitability, working capital management, and investor ratios. This involved calculating and interpreting
key financial ratios.

In addition to financial ratio analysis, I conducted a SWOT analysis to evaluate the business environment
in which both companies operate. This involved gathering and analyzing secondary sources of
information from reputable sources such as financial news, business article, and the companies’ annual
reports and websites. The SWOT analysis enabled me to identify the strengths, weaknesses,
opportunities, and threats that both companies face, which in turn helped to explain their financial
performance over the past three years.

Finally, I drew conclusions and made recommendations based on the findings of the analysis. The
conclusions were based on a comprehensive evaluation of both companies’ financial and business
performance, taking into account their financial statements, financial ratios, and the broader business
environment in which they operate. The recommendations were designed to help both companies
improve their financial and business performance in the future, based on the insights gained from the
analysis.

Throughout the research, I used the Harvard Reference Style to ensure proper attribution of the sources
used in the analysis. I also kept the word count limit of 7500 in mind, which ensured that the research
was concise, focused and highly relevant to the research questions. Overall, the approach was designed
to be thorough, objective and data-driven, providing valuable insights into the financial and business
performance of both Amazon and Walmart over the past three years.
Part 2

SOURCES OF INFORMATION:

Primary sources of information are original sources that provide firsthand accounts or direct evidence of
an event or phenomenon. These sources can include original data, research studies, and eyewitness
accounts.

Secondary sources of information are sources that provide information that has already been published
or produced. These sources include academic journals, textbooks, reports produced by government
agencies or other organizations, and news articles.

For my research project comparing the financial and business performance of Amazon and Walmart, I
have decided to rely primarily on secondary sources of information for several reasons. Firstly, both
companies are publicly traded and release detailed annual reports and financial statements, making it
easy to access the relevant data. Secondly, secondary sources can provide a broader perspective on the
market and industry trends, allowing for a more comprehensive analysis of the companies’ performance.
Thirdly, primary sources such as interviews or surveys would require significant resources and may not
be feasible given the time and budget constraints of this project. Lastly, relying on secondary sources can
help to reduce potential biases that may arise from the collection and interpretation of primary sources.
Additional reasons to rely on secondary sources include the convenience of being able to compare and
contrast multiple sources quickly and efficiently, as well as the ability to easily access historical data for
trend analysis.

METHODS TO COLLECT THE INFORMATION

There are methods used by me to collect the secondary sources of information to evaluate the financial
performance of companies Amazon and Walmart.

1. OBU Information Pack: The Oxford Brookes University (OBU) Information Pack provides guidance
on how to prepare a Research and Analysis Project (RAP) and specifies the word count limit and
formatting requirements. Adhering to the guidelines in the Information Pack is crucial to ensure
the quality of the RAP.
2. Company Annual Reports: As listed companies, Amazon and Walmart are require to prepare and
publish their annual reports to the public. These reports provide detailed information about the
company’s financial performance, operations, business risks, products, and strategies. Analyzing
these reports can give an insight into the company’s financial health, operations, and future
prospects.
3. Business Articles: Analyzing business articles from reputable sources, including online news
outlets, provided valuable insights into the company's performance, industry trends, and
potential risks. These articles can also help to ensure that the analysis is unbiased and not solely
based on the company’s management perspective.
4. Regulatory filings: Companies are required to file certain financial and non-financial information
with government agencies such as the Securities and Exchange Commission (SEC) in the United
States. These filings provided me additional insight into a company’s financial performance and
operations.
LIMITATION OF INFORMATION GATHERING

The limitations of the information gathering are listed below:

1. The reliability of these secondary sources of information may be questionable as the

information may not always be accurate or up to date.
2. Information from secondary sources may be biased or incomplete, depending on the source
and the purpose of the information.
3. The scope of information available from secondary sources may be limited, which can make
it difficult to obtain a comprehensive understanding of the subject matter.
4. The information available in secondary sources may be outdated and not reflect the current
situation.
5. Different secondary sources may present conflicting information, making it difficult to
establish the accuracy of the information.
6. Inability to ask questions: Unlike primary sources of information, secondary sources do not
allow for direct questioning of the sources, which can limit the depth of the information
obtained.
7. Some information of the companies might not be publicly available, limiting the amount of
information that can be gathered from secondary sources.

ETHICAL ISSUES

These are the ethical issues which I encountered while researching and preparing my report along
with the actions which I have taken to mitigate them.

Plagiarism: Using someone else's work or ideas without proper attribution can be considered
plagiarism, which is unethical. To mitigate this, I ensured to give credit to any individual work,
including financial analysts whose work is referred to in the report, by providing references through
Harvard Reference Style.

The information obtained from secondary sources may have a certain degree of bias, as the source
may have their own interests or agendas. To avoid this, I used multiple sources to obtain a balanced
perspective and make sure that the sources used are reliable and credible.

I ensured that all my research work remains confidential and is not shared with any fellows who are
also pursuing the degree. I also ensured that the entire work is carried out by myself and don’t take
assistance from anyone else apart from my mentor.
ACCOUNTING AND BUSINESS MODELS

ACCOUNTING MODEL

RATIO ANAYLYSIS

Ratio analysis is a method of analyzing and interpreting financial statements to gain insights into a
company’s financial performance, strengths, and weaknesses. Ratio analysis is a valuable tool for
investors, creditors, and other stakeholders to make informed decisions about investing in or lending
to a company.

PROFITABILITY RATIOS:

Return on Capital Employed (ROCE) is a financial ratio that measures how efficiently a company uses
its capital to generate profits. ROCE indicates the percentage return a company earns on the total
capital employed, which includes debt and equity. It is a widely used measure of a company’s
profitability and financial health.

The two components of ROCE are asset turnover and net profit margin. Asset turnover is a ratio that
measures how efficiently a company uses its assets to generate sales. It is calculated by dividing the
company’s sales revenue by its total assets. This ratio indicates how effectively a company uses its
assets to generate sales. A high asset turnover ratio indicates that the company is using its assets
efficiently to generate revenue, while a low ratio suggests that the company could be using its assets
more efficiently.

Net profit margin, on the other hand, measures a company’s profitability after accounting for all
expenses. It is calculated by dividing the net profit by the total revenue of the company. The net
profit margin ratio indicates how much profit a company is generating from its sales. A higher net
profit margin is generally better as it indicates that the company is able to keep more of its revenue
as profit.

By multiplying asset turnover and net profit margin, we can calculate ROCE. A high ROCE suggests
that a company is using its capital efficiently to generate profits, while a low ROCE indicates that the
company may not be using its capital as efficiently as it could be.

LIQUIDITY RATIO

Liquidity ratios is a financial ratios that measure a company’s ability to meet its short-term
obligations and its ability to convert its assets into cash to pay off its short-term liabilities. Current or
liquidity ratio is used to assess a company’s financial health and its ability to meet its financial
obligations.

CASH CYCLE:

The cash cycle is a measure of how long it takes for a company to convert its investment in inventory
into cash received from sales. It measures the efficiency of working capital management. It consists
of three components:
 1. Inventory Conversion Period (ICP): This is the time taken by a company to convert its
inventory into sales. It is calculated as the average inventory held by the company divided by
the cost of goods sold per day.
2. Receivables Collection Period (RCP): This is the time taken by a company to collect cash from
its customers after the sale has been made. It is calculated as the average accounts
receivable of the company divided by the sales per day.
3. Payables Deferral Period (PDP): This is the time taken by a company to pay its suppliers for
the goods and services received. It is calculated as the average accounts payable of the
company divided by the cost of goods sold per day.

The formula for calculating the cash cycle is:

Cash Cycle = Inventory Conversion Period + Receivables Collection Period – Payables Deferral Period

A shorter cash cycle is generally considered better for a company as it indicates that it is able to
convert its inventory into cash quickly and efficiently and is able to collect cash from customers in a
timely manner. However, a very short cash cycle could also indicate that the company is not holding
enough inventory to meet demand or is being too aggressive in collecting payments from customers,
which could lead to a negative impact on customer relations.

FINANCIAL RISK

The gearing ratio is a commonly used ratio to measure financial risk. It compares the amount of long-
term debt to equity, showing the proportion of a company’s funding that comes from debt
compared to equity. A high gearing ratio indicates that a company has a significant amount of debt
relative to equity, which increases the financial risk of the company. A low gearing ratio, on the other
hand, indicates that a company has a smaller amount of debt relative to equity, which suggests that
the company is less risky from a financial perspective.

Interest cover is a financial ratio that measures a company’s ability to meet interest payments on its
outstanding debt. It is calculated by dividing a company’s earnings before interest and taxes (EBIT) by
its interest expenses.

The interest cover ratio indicates how many times a company can cover its interest expenses with its
earnings. A higher ratio indicates that the company is more capable of meeting its interest
obligations, while a lower ratio suggests a higher level of financial risk.

INVESTORS RATIOS:

EPS (Earnings per share) and DPS (Dividends per share) are two key ratios that can help investors
evaluate the financial performance of a company and make investment decisions.

EPS measures the amount of profit a company generates per share of its outstanding common stock.
It is calculated by dividing the company’s net income by the number of outstanding shares. EPS is an
important indicator of a company’s profitability and can be compared to the EPS of other companies
in the same industry to determine its relative performance. A higher EPS suggests that the company
is generating more profit per share and is generally considered more attractive to investors.
DPS, on the other hand, measures the amount of dividends a company pays out per share of its
outstanding common stock. It is calculated by dividing the total dividends paid out by the company
by the number of outstanding shares. DPS is important for investors who are looking for a regular
income stream from their investments.

LIMITATION OF RATIO ANALYSIS

1. Ratio analysis provides only quantitative information, and it cannot provide information
about qualitative factors such as management competence, employee morale, market
trends, and consumer preferences.
2. Companies may manipulate their financial statements to make them appear more favorable.
Therefore, the ratios based on these financial statements may be misleading.
3. Ratios may be affected by external factors beyond the company’s control, such as changes in
economic conditions, government regulation, and natural disasters.
4. Ratios are based on financial statements, which may not provide complete information
about a company’s operations or financial position.
5. Companies may use different accounting policies, making it difficult to compare financial
ratios between companies.

BUSINESS MODEL

SWOT

The SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis is a strategic planning tool
that helps in evaluating the internal and external factors that affect the organization’s performance.
It helps in identifying the company’s strengths and weaknesses in relation to the opportunities and
threats present in the business environment.

Strengths: The SWOT analysis helps in identifying the company’s core competencies and competitive
advantages that set it apart from its competitors.

Weaknesses: It helps in identifying areas where the company needs to improve.

Opportunities: SWOT analysis helps in identifying potential growth areas for the company.

Threats: It helps in identifying external factors that could impact the company’s performance
negatively.

LIMITATIONS OF SWOT MODEL

The SWOT model can be a useful tool for evaluating a company’s business environment by
identifying its internal strengths and weaknesses, as well as external opportunities and threats.
However, there are limitations to its effectiveness as a strategic tool. These include oversimplification
of complex issues, reliance on subjective assessments, and neglect of underlying causes and
interrelationships among factors. In addition, the SWOT model does not provide a clear framework
for prioritizing or addressing the identified issues, which can limit its usefulness in developing
actionable strategies. Therefore, it is important to use the SWOT model in conjunction with other
analytical tools and to exercise critical judgement in interpreting its results.
PART 3

BUSINESS ANALYSIS

SWOT MODEL

Strengths:

1. Online retail dominance: Amazon is the world's largest online retailer, with a dominant
position in e-commerce. In 2020, Amazon’s net sales amounted to $386 billion, with more
than half of that revenue generated from online sales. This represents a significant
competitive advantage over Walmart, which has a smaller online presence. (“US E-
commerce Market Shares by Company.”2021).
2. Diversified Revenue Streams: Amazon has a diversified revenue stream that includes not
only online retail, but also cloud computing (Amazon Web Services), advertising, and
subscription services such as Amazon Prime. This diversification has helped the company
maintain its profitability even during the times of economic uncertainty. (“Amazon.com, Inc.
Annual Report 2020,”2021)
3. Innovation: Amazon is known for its innovative culture, with a focus on developing new
technologies and disrupting traditional industries. For example, the company’s introduction
of the Amazon Echo and Alexa digital assistant helped to popularize the concept of smart
speakers and voice-activated technology. (“Amazon.com, Inc. Annual Report 2020,” 2021)

Weaknesses:

1. Limited physical store presence: Amazon primarily operates as an e-commerce platform

and has limited physical store presence, whereas Walmart has a large physical store
network. This gives Walmart an advantage in terms of providing customers with the
option to shop in-stores, as well as online. Additionally, Walmart’s physical stores serve
as fulfillment centers for online orders, allowing for faster and more efficient delivery.
According to a report by eMarketer, Walmart has the largest share of in-store and online
retail sales in the United States, with a market share of 21.3% in 2020. In contrast,
Amazon’s share of retail sales in the US was 12.1%. (eMArketer. (2021).
2. Dependence on third-party sellers to provide a wide range of products to customers.
This dependance on third-party sellers can lead to issues with the product quality and
counterfeit products, which can harm Amazon’s reputation. In contrast, Walmart has
more control over the products sold in its physical stores. According to CNBC, there have
been several instances of counterfeit products being sold on Amazon, which has led to
negative reviews and damaged trust among customers. (CNBC. (2019).
3. Limited grocery offerings: While Amazon has made strides in the grocery industry with
its acquisition of Whole Foods and the launch of Amazon Fresh, its grocery offerings are
still limited compared to Walmart’s. Walmart has a well-established grocery business
with a large selection of products and competitive pricing. According to data from
Statista, Walmart was the leading grocery retailer in the United States in 2020, with a
market share of 22.2%. In contrast, Amazon had a market share of just 1.4%. (Statista.
2021).
OPPORTUNITIES:

1. Brick-and-mortar presence: Walmart has an extensive brick-and-mortar presence

with over 11,000 stores worldwide, including 4,700 stores in the United States
alone. This physical presence allows Walmart to provide a seamless shopping
experience for its customers, with the option to shop online or in-store. Amazon has
recently started to expand its brick-and-mortar presence with Amazon Go stores and
its acquisition of Whole Foods, but Walmart’s physical footprint is still much larger.
According to eMarketer, Walmart’s share of the US e-commerce market is projected
to increase from 5.3% in 2020 to 6.1% in 2021, largely due to its in-store pickup and
delivery options. In contrast, Amazon’s share is projected to decrease from 38.3% to
37.7%. (eMarketer, 2021)
2. Grocery and household goods: Walmart is one of the largest grocery retailers in the
United States, with a significant portion of its revenues coming from grocery and
household goods sales. In 2020, Walmart’s US e-commerce sales grew by 79%,
largely due to its grocery pickup and delivery services. Amazon, on the other hand,
has been trying to break into the grocery market with its acquisition of Whole Foods
and the launch of Amazon Fresh and Amazon Go Grocery stores. However, Amazon’s
market share in the US grocery market is still relatively small compared to Walmart.
According to eMarketer, Walmart is projected to have a 25.2% share of the US
grocery market in 2021, compared to Amazon’s 1.9%. (eMarketer, 2021)
3. Advertising: Walmart has been investing heavily in its advertising business in recent
years, leveraging its vast trove of customer data to offer targeted advertising to
brands. In 2020, Walmart’s advertising business grew by 79% making it the fastest-
growing advertising business in the United States. Amazon also has a significant
advertising business, with estimated US ad revenues of $13.18 billion in 2020.
However, Walmart’s advertising business is growing at a much faster pace, and it has
the advantage of being able to offer in-store advertising as well. (eMarketer, 2021)

THREATS:

1. Increased competition in e-commerce market: Amazon faces intense competition

from other e-commerce companies such as Walmart, Alibaba, and JD.com, which
can affect its market share and financial performance. For example, in 2020,
Walmart’s e-commerce sales increased by 79% while Amazon’s e-commerce sales
increased by 38%. This increased competition can also lead to price wars and
pressure on profit margins for Amazon (Reuters, 2021).
2. Dependence on third-party sellers: A significant portions of Amazon’s revenue
comes third-party sellers who use Amazon’s platform to sell their products.
However, this dependence on third-party sellers can be a weakness as Amazon does
have controls over the quality and availability of these products. Moreover, Amazon
faces increased competition from other e-commerce platforms that also offer third-
party selling services (Bloomberg, 2021).
3. Regulatory scrutiny: Amazon Faces regulatory scrutiny from various authorities,
including antitrust and data privacy concerns. For example, in 2020, the European
Union launched two antitrust investigations into Amazon’s use of third-party seller
 data and its e-book distribution practices. These regulatory challenges can lead to
fines, restrictions, and damaged to Amazon’s reputation, which can affect its
financial performance (CNBC, 2020).

FINANCIAL ANALYSIS

In 2019, Amazon reported net sales of $ 280.5 billion, while Watmart reported revenue of $514.4 billion.
Amazon’s sales grew by 20% from the previous year, while Walmart’s sales increased by 1.9%. This shows
that Amazon had a higher growth rate in sales revenue than Walmart.

This increase was due to the following reasons:

1. E-commerce vs. Brick and Mortar: Amazon operates primarily as an online retailer, while
Walmart has both physical stores and e-commerce. The growing trend of online shopping has
benefited Amazon greatly, while Walmart has had to adapt to changing consumer preferences
(Jansen, 2019).
2. Product Mix: Amazon offers a vast selection of products, including books, electronics, clothing,
and more, while Walmart is known for its discounted prices on groceries and household
essentials. The differences in their product offerings have contributed to the difference in their
sales performance (Jansen, 2019)
3. Marketing and advertising: Amazon has invested heavily in advertising and marketing, which has
helped it gain market share in several product categories. Walmart has traditionally relied on its
physical stores to attract consumers and have been slow to adapt to online advertising and
marketing (Stewart, 2019).

In 2020, Amazon reported net sales of $386 billion, while Walmart reported revenue of $559 billion.
Amazon sales grew by 38% from the previous year, while Walmart’s sales increased by 6%. This shows
that Amazon had a significantly higher growth rate in sales revenue than Walmart.

This increase was due to the following reasons:

1. Investments in technology: Amazon has invested heavily in technology, which has enabled the
company to expand its product offerings and improve the customer experience. For example,
Amazon’s voice activated assistant, Alexa, has helped the company gain market share in the smart
speaker market. Walmart has also made investments in technology, but it has not been as successful
in developing innovative products like Amazon (McCarthy, 2021).
2. COVID-19 Pandemic: The COVID-19 pandemic had a significant impact on both companies, but it
affected them in different ways. Amazon was able to capitalize on the trend of online shopping as
more consumers avoided physical stores. Walmart has experienced a boost in e-commerce sales, but
it was not enough to offset the decline foot traffic to its physical stores (McCarthy, 2021).
3. Geographic Expansion: Amazon has expended its presence in international markets, while Walmart
has focused on expanding its footprint in the United States. Amazon’s international sales grew by
40% in 2020, while Walmart’s international sales only grew by 2.9% (Investor’s Business Daily, 2021).
Amazon reported an asset turnover ratio of 1.32, while Walmart had a ratio of 2.43. This is likely due to
Walmart’s focus on optimizing its supply chain and inventory management to improve efficiency
(Investopedia, 2021).

Amazon and Walmart have continued to see strong sales growth in recent years, with both companies
benefiting from the ongoing trend of e-commerce. Amazon reported net sales of $386 billion in 2020,
while Walmart reported revenue of $559 billion. In the first quarter of 2021, Amazon’s net sales
increased by 44% to $108.5 billion, while Walmart’s revenue increased by 2.7% to $138.3 billion
(Reuters, 2021).

This increase was due to the following reasons:

1. E-commerce Dominance: Amazon’s dominance in the e-commerce space has allowed it to

capture a significant share of the online shopping market, especially during the pandemic.
Walmart has been expanding its e-commerce offerings in recent years, but it still lags behind
Amazon in terms of online market share.
2. Product Mix: Both Amazon and Walmart have a wide range of offerings, but Amazon’s focus on
high-margin products like electronics and home goods has allowed it to generate more revenue
per customer than Walmart (Forbes, 2021).

In 2020, Amazon had an asset turnover ratio of 1.32, while Walmart had a ratio of 2.43
(Investopedia, 2021).

Reasons for Increase in Asset Turnover:

1. Inventory Management: Walmart’s focus on efficient inventory management and supply

chain optimization has allowed it to generate higher revenue with fewer assets. This is
reflected in the company’s higher asset turnover ratio.
2. Capital Investments: Amazon has been investing heavily in new technologies and expanding
into new markets, which requires significant capital expenditures. These investments may
 impact the company’s asset turnover ratio, as assets are tied up in long-term projects rather
than generating revenue in the short-term

In 2019, Amazon reported a total operating expense of $277.5 billion, while Walmart reported a total
operating expense of $ 505.2 billion (Statista, 2021). Despite Walmart’s higher operating expenses, the
company was able to achieve a higher operating profit margin than Amazon in 2019.

Reasons for Trend in Operation Profit Margin:

1. Cost of Sales: Walmart has historically been known for its focus on cost control, with a particular
emphasis on reducing its cost of sales. The company has been able to achieve this through
economies of scale, as well as through careful management of its supply chain and inventory
(Nelson, 2019).
2. Advertising Expenses: Amazon has invested heavily in advertising in recent years, with the
company’s advertising expense increasing by over 50% in 2019 (Amazon, 2020). These
investments may have impacted the company’s operating profit margin, as advertising expenses
are generally considered a variable cost.
3. Investments in New Business Lines: Amazon has been expanding into new business lines such as
healthcare and groceries, which require significant investment in order to establish a foothold in
these markets (Reuters, 2019). These investments may have impacted the company’s operating
profit margin in the short term, as expenses associated with new business lines may take some
time to generate revenue.
4. Fulfillment Costs: Amazon’s rapid expansion and push for same-day and next-day delivery has led
to significant investments in fulfillment centers and logistic infrastructure (Soper, 2019). These
investments may have increased the company’s fulfillment costs, which could have impacted its
operating profit margin.
5. International Expansion: Both Amazon and Walmart have been expanding their international
presence in recent years, but Amazon has been more aggressive in its international expansion
efforts (Cox, 2019). Entering new markets can be expensive, and may require significant
investments in logistics, marketing, and regulatory compliance.
6. Technology Investments: Both companies have made significant investments in technology to
improve their operations, but Amazon has arguably been more aggressive in this area
(Bloomberg, 2019). Investments in are such as cloud computing, artificial intelligence, and
robotics can be expensive, but may yield long term benefits in terms of efficiency and cost
savings.
Walmart’s operating profit margin increased to 5.5% in 2020, up from 4.9% in 2019 (Walmart, 2020).

Amazon’s cost performance in 2020:

 Cost of Sales: In 2020, Amazon’s cost of sales increased by 34.5% from the previous year, driven
by higher product and shipping costs (Amazon, 2020).
 Advertising Expenses: Amazon’s advertising expenses increased by 66% in 2020, as the company
ramped up its advertising efforts to capture more online shopping traffic (Kolodny, 2021).
 Technology and Content Expenses: Amazon’s technology and content expenses increased by
19.5% in 2020, reflecting investment in areas such as cloud computing and video streaming
(Amazon, 2020).
 Operating Profit Margin: Amazon’s operating profit margin increased to 5.8% in 2020, up from
4.5% in 2019 (Amazon, 2020).

Walmart’s cost performance in 2020:

 Cost of Sales: In 2020, Walmart’s cost of sales increased by 7.6% from the previous year, driven
by higher product and transportation costs (Walmart, 2020).
 Advertising Expenses: Walmart’s advertising expenses decreased by 14% in 2020, as the
company shifted its advertising strategy away from traditional media to digital channels (Helft &
Horowitz, 2020).
 Technology and Content Expenses: Walmart’s technology and content expenses increased by
3.3% in 2020, reflecting investment in areas such as e-commerce and automation (Walmart,
2020).

Reasons for the trend in operating profit margin:

1. Shift to Online Sales: Both Amazon and Walmart experienced significant growth in their online
sales in 2020 due to the COVID-19 pandemic and related lockdowns (Kolodny, 2021). Online
sales typically have higher profit margins than in-store sales, which may have contributed to the
increase in operating profit margins for both companies.
 2. Cost Management: Both Amazon and Walmart have a history of aggressive cost management
and may have been able to leverage their scale to negotiate better pricing with the suppliers and
logistics partners (Kolodny, 2021).
3. Higher Gross Margins: Both companies have been expanding their private label offerings and
third-party seller marketplaces, which typically have higher gross margins than first-party sales
(Helft & Horowitz, 2020). This may have contributed to the increase in operating profit margins.

ROCE of Amazon and Walmart for 2019, 2020, and 2021:

Company 2019 2020 2021

Amazon 17.7% 13.1% 15.1%
Walmart 9.9% 10.1% 11.6%

Source:

Amazon: Annual Reports for 2019, 2020, and 2021 (Amazon, 2019, 2020, 2021)

Walmart: Annual Reports for 2019, 2020, and 2021 (Walmart, 2019, 2020, 2021)

Reasons for the trend in ROCE:

1. Amazon has continued to invest heavily in expanding its business in areas such as cloud
computing, advertising, and logistics (Kolodny, 2021). These investments require significant
capital expenditure, which can temporarily depress ROCE. However, if successful, they can drive
long term growth and higher ROCE.
2. Both Amazon and Walmart have focused on improving their operational efficiency in recent
years, through initiatives such as automation, supply chain optimization and data analytics
(Kolodny, 2021; Walmart, 2020). These efforts can lead to higher productivity and profitability,
which can boost ROCE.
3. Both companies have been focused on improving their financial management, through initiatives
such as reducing debts, optimizing working capital, and returning cash to shareholders (Amazon,
2020; Walmart, 2021). These efforts can improve the efficiency of capital employed, which can
increase ROCE.

In conclusion, both Amazon and Walmart have seen an improvement in their ROCE over the past few
years, driven by factors such as investment in growth, operational efficiency, and financial
management.

LIQUIDITY RATIO

In 2019, Walmart had a higher current ratio compared to Amazon. Walmart’s current ratio was 0.93
while Amazon’s current ratio was 1.04 (MarketWatch, 2019).

One of the reasons for Amazon's higher current ratio was its faster inventory turnover, which
resulted in lower inventory levels. This is because Amazon operates a highly efficient inventory
management system that allows it to quickly move products through its warehouses and deliver
them to customers (Investopedia, 2019).

On the other hand, Walmart had lower current ratio due to its larger inventory levels. Walmart has
more traditional inventory management system, where it maintains higher inventory levels to ensure
product availability for customers (Investopedia, 2019).

In 2020, Amazon had a higher current ratio compared to Walmart. Amazon’s current ratio was 1.08
while Walmart’s current ratio was 0.81 (MarketWatch, 2020).

One of the reasons for Amazon’s higher current ratio was its strong cash position due to increased
demand for its e-commerce services during the pandemic. This allowed Amazon to increase its
liquidity and maintain higher cash balances (Investopedia, 2021).
On the other hand, Walmart’s lower current ratio was due to its increased inventory levels. Walmart
had to increase its inventory levels to meet the increased demand for essential goods during the
pandemic. (Investopedia, 2021).

In 2021, Amazon had a higher current ratio compared to Walmart. Amazon’s current ratio was 1.19
while Walmart’s current ratio was 0.81 (MarketWatch, 2021).

One of the reasons for Amazon’s higher current ratio was strong cash position, which continued to
be bolstered by increased demand for e-commerce services during the pandemic. This allowed
Amazon to maintain high levels of liquidity (Investopedia, 2021).

Walmart’s lower current ratio was due to its increased inventory levels, which it continued to
maintain in order to meet the sustained demand for essential goods during the pandemic. However,
Walmart has also made efforts to reduce its inventory levels and improve its working capital
efficiency (Nasdaq, 2021).

WORKING CAPITAL MANAGEMENT:

In 2019, Walmart has a more robust working capital cycle compared to Amazon, as Walmart’s
operating cycle was shorter than Amazon’s. Walmart’s inventory days were 45 days, receivable days
were 4 days, and payable days were 38 days, resulting in an operating cycle of 11 days (Yahoo
Finance, 2019).

On the other hand, Amazon’s inventory days were 48 days, receivable days were 18 days, and
payable days were 64 days, resulting in an operating cycle of 2 days (Yahoo Finance, 2019).
One of the reasons for Walmart’s more robust working capital cycle was its efforts to optimize
inventory levels and improve supply chain management. Walmart’s investments in supply chain
automation and other technologies helped it to better manage inventory levels, reducing stockouts
and improving inventory turnover (Logistics Management, 2019).

In contrast, Amazon’s longer operating cycle was due to its business model of holding inventory to
fulfill orders quickly and efficiently, as well as its growing third-party seller business. The longer
receivable days were also partly due to Amazon’s payment terms with vendors (Investopedia, 2021).

Walmart’s receivable days were 4 days, while Amazon’s were 18 days. This suggests that Walmart
was able to collect payments from its customers more quickly than Amazon.

Regarding payables, Walmart’s payable days were 38 days, while Amazon’s were 64 days. This
suggests that Walmart had a better ability to negotiate payment terms with its suppliers, allowing it
to hold onto cash for a longer period of time.

One reason for Walmart’s more efficient receivable and payable management may be its strong
relationship with customers and suppliers, which has allowed the company to negotiate favorable
payment terms (Forbes, 2019). Additionally, Walmart’s extensive physical store network may have
enabled it to collect payments more quickly from customers who prefer for shop in-store and pay
with cash or debit cards.

In contrast, Amazon’s larger and more complex business model may have contributed to its longer
receivable and payable days. The company’s third-part seller marketplace, for example, involves a
large number of individual sellers with varying payment terms, which can make managing
receivables more challenging. Additionally, Amazon’s growing logistics network and investment in
fulfillment centers may have contributed to longer payment terms with suppliers (Investopedia,
2021).
In 2020 and 2021, Amazon had a more robust working capital cycle compared to Walmart. Amazon
had lower inventory days and higher payable days, while Walmart had higher inventory days and
lower payable days.

In 2020, Amazon had a inventory turnover of 10.3 times, while Walmart had an inventory turnover
of 8.2 times (Nasdaq, 2021). Amazon’s shorter inventory holding period was likely due to its
sophisticated inventory management system and investments in fulfillment centers and logistics.

In terms of receivables and payables, Amazon had a receivable days of 17 days and a payable days of
67 days in 2020, while Walmart had a receivable days of 3 days and a payable days of 38 days
(MarketWatch, 2021). This indicates that Amazon was taking longer to collect payments from
customers but was also able to hold onto cash for a longer period of time compared to Walmart.
One reason for Amazon’s longer receivables days may be due to its large third-party seller
marketplace, which can result in more complex payment terms and longer collection periods.
Amazon’s longer payable days may be due to its size and bargaining power with suppliers, allowing it
to negotiate longer payment terms.

In 2021, Amazon continued to have a more robust working capital cycle than Walmart. Amazon had
an inventory turnover of 10.6 times, while Walmart had an inventory turnover of 8.7 times (Nasdaq,
2022). Amazon’s inventory turnover rate remained high due to continued investments in its
fulfillment network and a shift towards more online shopping during the COVID-19 pandemic.

Regarding receivables and payables, Amazon had a receivable days of 17 days and a payable days of
75 days in 2021, while Walmart had a receivable days of 3 days and a payable days of 37 days
(MarketWatch, 2022). Amazon’s longer payable days may be due to its size and bargaining power
with suppliers, allowing it to negotiate longer payment terms. Amazon’s longer receivable days may
be due to its large third-party seller marketplace and increased competition in the e-commerce
industry.

FINANCIAL RISK

In 2019, Amazon had a higher debt-to-capital ratio of 0.62, while Walmart had a debt-to-capital ratio
of 0.5 (Yahoo Finance, 2021). This indicates that Amazon has a higher level of financial risk due to its
higher debt burden.
One of the main reasons for Amazon’s high debt levels is its significant investments in new
technologies and infrastructure, such as its Amazon Web Services (AWS) cloud computing platform
and its fulfillment centers (Jurevicius, 2020). Amazon has also acquired several companies, such as
Whole Foods Market, which has added to its debt burden (Jurevicius, 2020). However, Amazon has
been able to manage its debt effectively by generating strong cash flows from operations, which has
allowed it to pay down its debt over time.

In terms of loans, Amazon has taken several debt offering in recent years, including a $16 billion
bond offering in June 2019 and a $10 billion bond offering in August 2020 (Reuters, 2020). These
funds were used to finance investments in new technology and infrastructure, as well as for general
corporate purposes (Reuters, 2020).

The impact of Amazon’s high debt levels on its interest coverage can be seen in its interest coverage
ratio, which measures the company’s ability to meet interest payments on its debt. In 2019, Amazon
had an interest coverage ratio of 11.35, which indicates that it as able to cover its interest payments
11 times over with its earnings before interest and taxes (EBIT) (Yahoo Finance, 2021). This suggests
that Amazon had sufficient earnings to cover its interest expenses, despite its high debt levels.

In conclusion, Amazon faced more financial risks in terms of debt -to-capital ratio in 2019 compared
to Walmart. However, Amazon has been able to manage its debt effectively through strong cash
flows from operations and strategic debt offerings. While its high debt levels may increase its
financial risk, Amazon has maintained a strong interest coverage ratio, indicating that it has been
able to meet its interest payments.

Amazon had a higher debt-to-capital ratio than Walmart in 2020. Amazon’s debt-to-capital ratio was
0.62, while Walmart’s was 0.43. This suggests that Amazon has a higher level of financial risk due to
its greater reliance on debt financing.

One of the main reasons for Amazon's higher debt level is its aggressive investments strategy, which
includes acquiring new businesses and expanding its operations in new markets. In 2020, Amazon
invested heavily in its logistics and fulfillment infrastructure to keep up with the surge in demand for
e-commerce during the COVID-19 pandemic. This required significant capital expenditure, which
were financed through debt.

Amazon also issued several large bond offerings in 2020 to raise additional capital. For example, in
June 2020, Amazon issued $10 billion in bonds with maturities ranging from 3 to 40 years for general
corporate purposes, which may have included debt refinancing and additional investments in the
business.

The impact of Amazon’s higher debt level on its interest cover is mixed. One the one hand, higher
debt levels increase the amount of interest expenses that Amazon must pay each year, which can
reduce its interest cover. On the other hand, Amazon’s strong operating performance has enabled it
to generate high levels of operating cash flow, which has helped to offset the impact of higher
interest expenses.

In 2020, Amazon’s interest cover was 14.7, which was slightly lower than Walmart’s interest cover of
15.6. However, both companies had very strong interest cover ratios, indicating that they were able
to easily meet their interest obligations.

In 2021, Walmart had a higher debt to capital employed ratio than Amazon. As of January 31, 2021,
Walmart’s debt to equity ratio was 89.19%, while Amazon’s was 55.83% (Walmart, 2021; Amazon,
2021).

Walmart’s higher debt to equity ratio was partly due to the company’s decision to take on more debt
in order to fund its acquisition of Flipkart, an Indian e-commerce company, in 2018. Walmart also
increased its investment in e-commerce capabilities, including a partnership with Shopify, in
response to the growth of online shopping during the COVID-19 pandemic (Walmart, 2021).

Amazon, on the other hand, has a more diversified revenue stream and strong cash flow from its e-
commerce, cloud computing, and advertising businesses. The company has also been investing
heavily in expanding its logistics and fulfillment network, as well as in areas such as healthcare and
grocery delivery (Amazon, 2021).
INVESTOR RATIOS:

In 2019, Amazon provided higher returns to its investors compared to Walmart. Amazon’s earnings
per share (EPS) for 2019 was $23.46, while Walmart’s EPS was $4.91 (Yahoo Finance, 2022).
Amazon’s EPS was higher than Walmart’s because of its growing e-commerce business, cloud
computing services, and advertising revenue. On the other hand, Walmart’s earnings were affected
by its investments in online sales, grocery delivery, and technology upgrades (McKinnon, 2020).

In terms of dividend per share (DPS), Walmart paid a higher dividend per share than Amazon.
Walmart’s DPS for 2019 was $2.14, while Amazon’s DPS was $0.00 (Yahoo Finance, 2022). Walmart
has a long-standing history of paying dividends to its shareholders, while Amazon has focused on
reinvesting its profits into growing its business.
 Amazon’s focus on innovation and expansion in various areas of its business, particularly e-
commerce, cloud computing, and advertising, has led to significant growth and higher earnings.
Walmart’s investments in online sales and grocery delivery have impacted its earnings in the short
term, but the company expects these investments to pay off in the long term (McKinnon, 2020).

CONCLUSIONS:

Both Amazon and Walmart have delivered strong financial performance over the past few years,
despite the challenges posed by the pandemic. Amazon’s revenue growth has been consistently
high, driven by the rapid expansion of its e-commerce business and the growth of high-margin
businesses such as AWS and advertising. Its operating profit margin has remained stable, indicating a
continued focus on cost optimization and efficient management of its operations. Additionally,
Amazon’s efficient working capital management has allowed the company to maintain strong cash
flows and profitability, even as it invests in growth initiatives.

On the other hand, Walmart has also shown resilience in its performance, driven by its strong brick-
and-mortar presence and rapid growth of its e-commerce business. The company’s revenue growth
has been strong, driven by a surge in online sales during the pandemic. Walmart has also been
investing heavily in expanding its digital capabilities and supply chain operations, which has helped
to drive its growth. Additionally, Walmart has been focusing on improving its profitability through
cost optimization and operational efficiency measures.

Overall, both Amazon and Walmart have been successful in navigating the challenges posed by the
pandemic and have continued to deliver strong financial performance through a combination of
revenue growth, cost optimization, and efficient management of their operations.

RECOMMENDATIONS

Some potential recommendations for the Amazon could include:

1. Investing in further expansion of its higher-margin businesses such as AWS and advertising,
which have contributed significantly to the company’s profitability and growth.
2. Continuously improving its delivery and logistics operations to enhance its customer
experience and maintain its competitive advantage.
3. Focusing on sustainable practices and initiatives to reduce the company’s environmental
impact, which could improve its reputation and appeal to socially responsible consumers.
4. Pursuing strategic acquisitions and partnerships to expand into new markets and drive
growth.
5. Ensuring effective management of its debt levels to maintain a healthy balance sheet and
financial stability.

Ultimately, any recommendations for Amazon would depend on the company’s strategic objectives and
priorities, as well as external factors such as market conditions and competition.