Chris Dallof

ACCT 2410 500

Anderson

10.15.17

Amazon Financial Statement Analysis

This paper is going to analyze and explain key ratios and information from the 2016

financial statements for Amazon.com. The purpose behind this research is to determine if it

Amazon is a business is worth investing in. There are five key points that will be discussed in

further detail that will aid in the final analysis. Liquidity, efficiency, solvency, profitability, and

investment potential are the primary focuses for this essay. Together, these areas will touch on

various financial factors that are used to calculate ratios and other useful data. Amazons

financial statements are the primary reference used in this research, along with comparison to

industry averages provided by First Research, a D&B company.

Liquidity is an important factor to look at when investing because it helps determine how

quickly a company can pay off debt. If we were to invest into a companys debt rather than its

equity, we would want to make sure that they are able to pay us back. We would also want to

know how quickly they are able to pay us back. The current ratio for Amazon was found to be

1.06, which is about half of the industry average of 2.13 for large companies. This indicates that

the ability to pay off debt with current assets is not as high as the average. Normally a higher

current ratio is better because it shows that a company is more than capable of paying off debt.

Any current ratio below zero is a red flag that a company will not be able to pay off debt with

current assets if it immediately become due. The respective current ratios for Amazon in 2015
and 2014 were 1.05 and 1.12 which indicates that there hasnt been recent fluctuation of

Amazons ability to pay off its debt. Cash ratio is the ability of a company to repay debt using

only cash and cash equivalents. This was calculated at .59 or 59% of the debt could be paid off

with cash. The rest would have to be paid off from selling other assets.

On the opposite end of debt, the ability to collect receivables and sell merchandise

inventory is called efficiency. Collecting receivables is important as it indicates how quickly a

company is being paid for credit sales. The ability to sell merchandise is key because it shows a

companys inventory is not sitting in a warehouse. Sales revenue should be higher than cost of

goods sold in order to make a profit. Inventory that is not being pushed out will cause cost of

goods sold to be greater than sales revenue if a company is struggling, and could potentially lead

to a loss. This would not be good for stockholders as the value of the equity will fall as well. For

Amazon, the inventory turnover ratio was found to be 8.14 which is severely below the industry

average of 34.41 for large companies. This indicates that merchandise inventory is not being sold

as fast. When compared to all companies in its industry, Amazon still trails in inventory turnover

8.14 to 12.95. This could be a concern to an investor with lower ratios in this category typically

meaning a company is not able to sell, or is struggling to sell inventory. This is something we

will keep in mind as we move forward.

Next, we will look at the ability of Amazon to pay long-term debt. If we decide we want

to invest in Amazons debt, we need to make sure they can pay off the long-term money they

owe as well. The first ratio we will look at is the debt ratio. Many lenders use debt ratio to

determine if a consumer or business is eligible to receive a loan. We will be doing something

similar with Amazon to determine how many of their assets are financed with debt. The debt

ratio for Amazon is 78%. This is a relatively high debt ratio for a company. Debt to equity for
Amazon is 3.46 or 346% which means it is funded by mostly debt, and not as much with equity.

There is higher risk involved with this, and Amazon management seems to be find doing just

that. They are excellent at paying interest expense with a times-interest-earned ratio of 7.85,

which means that they can pay 7.85 times the normal interest expense. This lets lenders know

that they should be receiving interest payments more times than not, as this is a good ratio for

times-interest-earned.

Profitability is a term that is often discussed when it comes to investing in a business. It

provides a snapshot of the general financial health of a company. If a company is profitable,

people are willing to invest into it. Otherwise, the inability to generate profit could lead to the

demise of an organization. To analyze the profitability of Amazon, we will look at a few ratios

once again. Amazon had a profit margin ratio of 1.74% meaning that much is earned for each

dollar of net sales, which is just slightly below industry averages. To find this number, net

income is divided by net sales. The next ratio we will look at is the rate of return on total assets.

This number tells us how effectively a company uses its assets to generate profit. 3.37% is the

ratio calculated which indicates that Amazons assets are effectively being used to create a profit.

As stated earlier, AMAZON is primarily financed by debt and not equity. It is important to know

that Amazon is using the assets it is financing in a way that does not hurt the company. Next, we

will look at ratios more in line with the equity side of investments. The rate of return on

stockholders equity for Amazon in 2016 was 14.5% and is a measure of how effectively they

used stockholder equity to generate a profit. This information is important because investors

want to get something out of their investments. They will not want to put money into a company

that is not going to return a good profit on their dollar. On that same note, EPS (earnings per

share) is another critical number that is looked at by investors to determine how much they will
receive for each individual share of stock. The EPS for Amazon was calculated at $5. This is

important to look at yearly to make sure money is being put back into the pockets of investors

with every financial period that passes.

The final topic to be covered before concluding this analysis is Price/earnings ratio or,

P/E. This is a number that tells investors how much they should be willing to pay to receive a

dollar back from the company. The amount for AMAZON is $150.06. With the current share

price being $1,003.55, someone could estimate to receive about $6.68 back. That isnt the most

outstanding amount in the world, but the value of Amazon stock has been on a continual incline

for many years and many experts are still urging people to invest.

Chart on MarketWatch.com for Amazon 1

After analyzing the financial reports for Amazon in 2016, I think it is a company worth

investing in, if its in equity and not debt. Most of funding Amazon uses is from debt and that is
risky as a lender. If Amazon were to lower their debt ratio and rely more on equity funding, then

debt investment could be a consideration. With that being said, the risk is still high with

Amazon. With an EPS of $5, an investor could quickly lose money if the market price of shares

decreased. Amazon stocks have not shown signs of falling or even plateauing, but that is always

a risk with any investment. The steady climb in value has continued over the years and if the

financial ratios stay steady as well, this could be a solid investment.

Reflection:

This project was difficult and very time consuming, but I feel like it was effective. I had

to do a lot of research and use my knowledge of the financial statements and ratios to find a

conclusion for my client. This tied in very well with the curriculum and was a great real-world

example of something that I might get asked to do as an accountant. Over time and with practice

Im sure this will get a little easier, and less time-consuming. It was a good feeling to actually

know what I was looking at. Some people would look at the requirements and look at the

financial statements and stare like a deer in the headlights. I felt like I was well-prepared and

ready to do this assignment. Calculating the ratios was the least strenuous part. Actually digging

in and figuring out what they meant was the real struggle. Overall, I think I did well and Im just

really excited to be finished with this.

Appendix A

http://www.marketwatch.com/investing/stock/amzn/financials
Appendix B

Amazon Financial Report Ratios

1 Liquidity
Working Capital: 45.78B - 43.82B = 1.96B
Current Ratio: 45.78B / 43.82B = 1.04
Cash Ratio: 25.98B / 43.82B = .59
Acid-Test Ratio: (25.98B + 5.9B) / 43.82 = .73

2 Efficiency
Inventory Turnover: 88.27B / 10.85 = 8.14
Days sales in inventory: 365 / 8.14 = 44.84
Gross profit percentage: 47.72 / 135.99 = 35.09%
Accounts receivable turnover ratio: N/A
Days sales in receivables: N/A

3 Solvency
Debt ratio: 66.74 / 86.02 = .78
Debt to equity ratio: 66.74 / 19.29 = 3.46
Times-interest-earned ratio: (2.37B + 1.43B + 484M) / 484 M = 7.85

4 Profitability
Profit margin ratio: 2.37 / 135.99 = 1.74
Rate of return on total assets 2.37B + 484M / 76.52 = 3.73
Asset turnover ratio: 135.99 / 76.52 = 1.78
Rate of return on common stockholders equity: 2.37B 0 / 16.34 = 14.5%
Earnings per share: 2.37 0 / 474 M = 5

5 Investment potential
Price/earnings ratio: 150.08
Dividend yield: N/A
Dividend payout: N/A
Appendix C

http://www.mergentintellect.com.libprox1.slcc.edu/index.php/search/firstResearchReport/ICRE/i

nternetretailers20170828.pdf