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8 April 2015
Paige Paulson
Andrea Chambers
Amazon Analysis Part 2

Resources Horngrens Accounting, The Financial Chapters. Tenth Edition

:
Overview
The purpose of this paper is to determine if Amazon is a good investment opportunity for other
companies. I will do this by analyzing their ability to pay current liabilities, to sell merchandise
inventory, collect receivables, pay long term debt, produce a profit, and by evaluating their stock
as an investment.
I will be comparing each of these analyzed numbers to the industry averages to determine how
they are doing compared to other similar industries.
Ability to Pay Current Liabilities
To determine if Amazon can pay its current liabilities, we have to look at their ability to
pay off any debts or obligations that are due within the current year using assets that can
quickly be turned into cash. We measure this using their working capital, their current
ratio, and their acid-test (quick) ratio. These ratios takes the amount of assets that can
easily be turned to cash and divides it by the amount of money they owe (debt).
(#s in millions)

2012

2011

Industry Avg.

Working Capital

2294

2594

None

Current Ratio

1.12

1.17

1.54:1

Acid-Test (Quick) Ratio

.78

.82

1:82

Based on the ratios in the chart, we can see that for the years of 2012 and 2011, Amazon
wasnt doing very well on paying off its current debts with its easily available assets. The
industry average is between 1.54 and 1 for the current ratio, and 1 to .82 for the quick
ratio, so this means Amazon wasnt doing too badly, but they were still struggling.
Ability to Sell Merchandise Inventory & Collect Receivables
Their ability to sell merchandise inventory, or in other words, how quickly they are able to
empty their shelves and their ability in collecting receivables, is measured by several
things:

Amazon Analysis - Part 2, Paige Paulson

The Inventory Turnover the number of times they can sell an average
amount of merchandise in a period.

The Days Sales in Inventory the average amount of time their inventory is

sitting on their shelves.

The Gross Profit Percentage (Gross Margin) the profitability of each sales
dollar about their cost of their products.

Days Sales Receivables (Collection Period) how many days it takes to

collect the average amount of receivables.

Accounts Receivables Turnover the number of times a company collects
average receivables in a year.

(#s in millions)

2012

2011

Industry Avg.

Inventory Turnover

8.3

9.1

4.8 times

Days Sales in Inv.

44 Days

40 Days

75.42 Days

Gross Profit Percentage

24%

22%

33.55 %

Avg. Accounts Receivable

17.7

15.8

36.11

20.59

23.13

10.11

Collection Period
Accounts Receivable Turnover

The numbers in inventory turnover, days sales in inv., and accounts receivable turnover,
indicates that Amazon is doing well. They are well above the industry average in the
number of times they can sell their merchandise in a period, the amount of time their
merchandise is sitting on their shelves, and the amount of receivables they collect in a
year. Also, the number of days it takes to collect receivables is very low compared to the
industry average. Receivables are the money or debt they are owed by other companies.
Their gross margin increased between 2011 and 2012.This makes me think that it will
continue to rise in future years. This percentage is unfortunately below the industry
average, and shows an area Amazon can improve. This low percentage will greatly affect
the businesses ability to pay any expenses they may have.
Ability to Pay Long Term Debt
There are several ratios involved in analyzing a companys ability to pay long-term debt.
Such as: the debt ratio, the debt to equity ratio, and the times-interest earned ratio. The
debt ratios are used to determine the proportion of assets and owners part in the business
to their debts and obligations. The higher the ratio, the riskier the business.
Debt Ratio

2012

2011

Industry Avg.

75%

69%

34%

Amazon Analysis - Part 2, Paige Paulson

(.45%)

2011
Industry Avg.
.52
1.31% 2.87%
5.33 4.76%
2.57%

Asset Turnover Ratio

2.11

2.18

1.66 times

Rate of Return on Common Stockholders. Equity

.49%

8.63%

11.69%

Debt
to Equity
Ratio
2.97
Profit
Margin
Time-Interest
Earned
5.23
Rate of Return
on Total
Assets

2012

2.26

.06%

15.18

Amazons high ratios makes their company a bad investment opportunity for other
companies because of their massive amount of debt they may be unable to pay off. Their
ratios are a lot higher than the industry average, which means that Amazon is struggling
in the market.
Evaluating Profitability
It is very important to know how well a company does in creating a profit. Being able to
make a profit will help the company pay off any debts or obligations it holds, which will
encourage other companies to invest in it. Then the company will have the money and
resources it needs to grow, expand, and produce and even greater profit.
These are Amazons ratios that will help determine if they are making a good profit on
their investments and services.

The profit margin determines how much net income they earn on every $1.00 of sales. The rate of
return on total assets and common stockholders equity, determines how well the company is
using their assets and equity to bring in more money.
Amazon needs significant improvement in this area. You can see from the table that they
are way below the industry average in many areas, because they cannot make a profit. In
2011 Amazon wasnt doing too badly, but they had a huge drop in profit in 2012. Their
asset turnover ratio is higher than the average though, and this means they are doing well
in using their assets to generate sales.
Evaluating Stock as an Investment
We evaluate Amazons stock, or a piece of a company, by determining how valuable their
stock is in the market. We do this by evaluating their price/earnings ratio. This ratio
measures the value the stock market places on your $1.00 of your companys earnings.
(Horngrens Accounting, The Financial Chapters.)
2012

2011
3

Industry Avg.

Amazon Analysis - Part 2, Paige Paulson

Price/Earnings Ratio

-2,854.7

131.37

41.17

Amazons stock must have been a very bad investment opportunity for businesses in 2012,
their stock was valued for less than 0. In 2011 it was very high, and this causes e to
wonder why it dropped so low so quickly. Because I didnt have the market price for
dividends and Amazon doesnt declare dividends I was unable to compute the dividend
yield, and the dividend payout, which also would have helped evaluate Amazons stock.
Conclusion
In conclusion, it seems to me that Amazon had a lot of debt, obligations and expenses to fill.
Which is why, despite the fact that they were selling their inventory very well, they never could
make a profit. Amazon is either doing very good or very bad, because in some things they are way
above industry average, and in others they are way below. Im sure that if I had evaluated more
recent financial statements, Amazon would be doing a lot better. Because of my own experience
with them, I find them a very good business and have been satisfied with most of my purchases.