Amazon

Project Reflection

The purpose of this paper is to analyze the productivity of Amazon from one year to

another using ratios and other information from their financial statements. I will be analyzing

them based on five areas which will be 1) the ability to pay current liabilities 2) the ability to sell

merchandise inventory and collect receivables 3) the ability to pay long term debt 4)

profitability and 5) evaluating stock as an investment.

1. Ability to Pay Current Liabilities

Amazons ability to pay their current liabilities decreased from 2011 to 2012. In 2011, their acid-

test ratio was at 0.82 and went down to 0.78 in 2012. Even though this isnt a drastic change, it

is something to be careful of because you do not want a negative trend to be happening. From

this ratio, we can see that if all of Amazons liabilities came due immediately, they would not

have enough cash or cash equivalents to pay everything. They have 0.78 in cash and cash

equivalents to every liability they have.

2. Ability to Sell Merchandise Inventory and Collect Receivables

The ability to sell merchandise for Amazon over these two years has decreased. One obvious

way of knowing this is with the inventory turnover that can be calculated. In 2011, this was at

9.1. This went down to 8.3 in 2012. The industry average is around 4.8 which means that

Amazon is still above the average for its competitors. Their drop was actually not too much. As

for collecting on receivables, the days sales in receivables that can be calculated shows a

decline in this area as well. In 2011, this was at 16 days and went up to 18 in 2012. This

difference of two days is not too bad.

3. Ability to Pay Long Term Debt

This area can be analyzed using the times interest earned ratio. This allows us to see how well a

business can pay interest expenses. In 2011, they could pay their interest expense 15.18 times,

but in 2012 it dropped down to 5.23 times. This is a very significant drop but still puts them at

about where the industry average is. You do not want this to get much lower as this could mean

that it is harder to pay interest on assets that are financed with debt.

4. Profitability

Comparing the two years for Amazon, we can see a significant drop in their profitability. In

2011, their profit margin was 1.31% which means that a little over 1% of every dollar of net

sales they make goes towards their net income. In 2012, this changed drastically for Amazon as

their profit margin went down to (0.06) % which means that they were actually losing the

tiniest bit of money on every sale. They must work out a way to get back to where they were or

they will not be a profitable company.

5. Evaluating Stock as an Investment

Investing in Amazons stock in 2012 would have been a very poor choice. Using the

price/earnings ratio, it becomes very apparent that this was not good stock to invest in. Going

from 2011 to 2012, this ratio went from 131.37 all the way down to (2854.70). The value of

their stock dropped extremely quickly and drastically. This is why anyone who had invested in

Amazons stock during this time would have been very disappointed.

In conclusion, during this two year span Amazon decreased in every category. Even

though some areas looked better than others, looking at the overall picture, it is easy to see

how much they declined from one year to the next. This gives them a lot of room to improve

and learn from their mistakes.