Jesse Dudley

Accounting 1020
Shauna Hatfield
Analysis of Amazon.com
Introduction
Amazon.com is one of the biggest online retailers. They sell, ship, and house their own
merchandise. They also sell, ship, and house smaller business's merchandise. The data gathered
for this report comes from Amazon.coms' 2011 and 2012 financial statements. I will be
comparing these two statements to each other and to industry standards. The goal of this report is
to determine Amazon's financial standing and evaluate it as an investment. Five main area's will
be analyzed; ability to pay current liabilities, ability to sell merchandise and collect receivables,
ability to pay long term debt, profitability, and desirability as a investment.

Ability to pay liabilities.

A company's ability to pay off their current liabilities(debts) within a one year period is a
measurement of how liquid they are, their liquidity. Comparing a company's current assets to
their current liabilities is the best way to tell whether a company will be able to pay off their
liabilities using their assets. This is called the current ratio(current assets/ current liablities).
Throughout this paper anything that is current refers to anything that can be converted to cash or
paid off in one year. The quick ratio is a more stringent measure of a company's ability to pay
their current liabilities. The quick ratio(acid test) tells us whether a company could pay off all of
their liabilities if they came due immediately.

The online retail sales industry current ratio average is 1.54:1. This is a normal ratio for
most industries. Amazon's current ratio for 2012 was 1.12:1 and 1.17:1 for 2011. $1.12 cash for
every $1.00 of liabilities. A current ratio that is dropping year after year can be dangerous. If the
ratio dropped below one Amazon would have trouble paying off its creditors. The drop is not
drastic enough to be startling but Amazon's ratio is lower than the industry standard. If Amazon
were to increase its sales and returns on investments, or cut its liabilities, they could raise their
ratio.
The industry's average quick ratio is 82:1. Amazon's quick ratio for 2011 was 82:1 but
their ratio for 2012 was 72:1. This is not surprising after looking at their current ratio in 2012.
Even though both these ratios are lower than average I don't think it is too worrisome. Amazon is
one of the biggest online retailers and therefore can have a little bit of leniency.

Ability to Sell Merchandise Inventory and Collect receivables.

Is Amazon actually selling its merchandise in a timely manner or do they have a lot of
product sitting in warehouses? Are they getting paid for their merchandise? Using three ratio's
we will be able to accurately answer these questions
The inventory turnover ratio measures the number of times a company sells its average
level of merchandise inventory during a year. Higher rates of turnover show that a company can
sell its merchandise at ease. The cost of goods sold account shows the amount, in dollars, of
inventory sold at cost(before profit). Cost of goods sold over average merchandise
inventory(inventory waiting to be sold) gives us the inventory turnover ratio. The industry
average is 4.8 times. This means that the average online retailer is selling its entire inventory a
little more often than every 3 months. In 2011 Amazon's ratio was 9.1. Its ratio in 2012 was 8.3.

This is good news for Amazon, it means people are actively buying their merchandise. As long as
Amazon can keep up with the orders, a ratio of 8.3 is good.
The days' sales in inventory ratio shows the average number of days merchandise
inventory is held by Amazon. 365 days divided by the number from our inventory turnover will
give us the ratio. Amazon held onto its inventory for a little over a month in 2012 at 43.97 days.
In 2011 the number of days was 40.12. The industry average is 75.42. With Amazon being such a
massive company it is not surprising they are selling their products faster than others in the
industry. This is a good sign.
A company that collects the money owed to them too fast can put-off buyers that pay on
credit. Especially big customers. A company that is too slow at collecting payments puts off
investors. The accounts receivable turnover ratio is a good way to measure this. The accounts
receivable account is an account that tells you how much money people owe amazon, money
waiting to be collected. Net credit sales/ Average net accounts receivable, gives a ratio to
determine how many times a year Amazon collects the average accounts receivable amount. The
industry average is 10.11 times a year. In 2012 Amazon's ratio was 10.3 times a year. This is
good. It shows Amazon is collecting payments at a rate equal to the industry therefore Amazon's
collecting policies shouldn't startle consumers or investors.

Ability to Pay Long-Term Debt

Long term debt is debt that can be paid off in a longer time period than one year. Three
ratio's will tell us whether Amazon has the ability to pay off its long term debts: The Debt Ratio,
debt to equity ratio, and the Times-Interest-Earned Ratio.

The Debt Ratio is total liabilities over total assets. This shows us the proportion of assets
financed with debt. The industry is standard is 34%, 34% of the average company's assets are
financed with debt. Amazon reported 75% for 2012 and 69% for 2011. This is much higher, more
than double the industry standard. This could be a major red flag. I think it is not, from the looks
of things Amazon is taking an extremely aggressive approach to expanding. I will go over this
more in my final conclusions.
Financial leverage is a term to describe how much debt a company is taking on to finance
itself. The debt to equity ratio (total liabilities/ total equity) accurately describes the proportion of
total liabilities to total equity, or Amazon's financial leverage. If the ratio is greater than 1 the
company is financing more assets with debt than with equity. In 2012 Amazon reported 75% and
in 2011 69%. The industry standard sits at 52%. Not surprisingly Amazon is once again above
the industry I believe this again has to do with their aggressive approach to expand. Being the
size that Amazon is, as a corporation, I imagine they have lower interest rates than most online
retailers, this has to be taken into account when judging their high numbers.
The Times-Interest-Earned Ratio will give us a good measure of Amazon's ability to pay
their interest. This ratio is calculated before interest and taxes. Net income plus income tax
expense plus interest expense all over interest expense gives us this number. Amazon in 2012
could pay their interest with their earnings 5.23 times and 15.18 in 2011. The industry standard is
5.33. Amazon made invested 143 million dollars in 2012 compared to 2011. The drop in the
times interest earned ratio is most likely because of these investments seeing that they brought in
13 billion dollars more in sales in 2012 than in 2011.

Profitability
The goal of a business is to make a profit. These next equations are going to tell us
whether or not Amazon is good at making a profit.
The profit margin ratio shows the percentage of each sales dollar earned as net income. It
shows how much net income Amazon earns for every one dollar. The industry average is 2.87%.
Amazon in 2012 reported -.06% and 1.31 in 2011. Amazon didn't even turn a profit in 2012.
Their net income was negative 39 million. This is a red flag. Their sales went up compared to
2011 but they lost money. Amazon's aggressive approach is working they are taking over the
online retailer sales market but if they fail to raise their profit margin big investors could pull out.
The rate of return on equity( rate of return on common stockholders' equity) ratio show
the relationship between net income available to common stockholders and their average
common equity invested. Net income over average common stockholders' equity gives us this
number. The industry standard is 11.39%. For 2012 Amazon reported -.49% and 8.63% for 2011.
Amazon's failure to bring in positive net income is the reason for this negative number. Their
aggressive 2012 investing campaign in the long run could pay off but sure does seem risky. If
they kept the ratio slight above 0% I don't think it would push away as many investors. If
amazon continues to pull in negative numbers in profitability in the following years reports it
would be a bad investment. Despite amazon's low numbers, they had an incredible amount of
sales in 2012 and the amount has increased every year. As long as their investments weren't
horrible I think amazon's financial standing looks worse on paper than it actually is.
Earnings per share is a very important ratio. Financial advisors, stock brokers, and
investors put a lot value in earnings per share. Net income over weighted average number of

common shares will give us amazon's earnings per share. In 2012 amazon reported -$.09 per
share. Not good. In 2011 they reported $1.39 per share. This is a big no-no. Nobody wants to
invest in a company if there is going to be a negative return. The industry standard is at $47.17
per share. These numbers make other companies more attractive then Amazon.com.

Investment in Stock Evaluation

The price/earnings ratio tells us how much value Amazon places on $1 of stock. The
industry average is 47.17. Amazon reported -2854.7 in 2012 and 131.47 in 2011. Yikes that looks
bad, that number could turn away investors very quickly. If investors and creditors are aware of
amazons aggressive campaign they might continue to gain new investors but at the moment it
looks like one bad market fluctuation could push away investors from amazon.

Final Thoughts
With a negative price earnings ratio and a negative earnings per share ratio why do I still
think Amazon is a good investment? They continue to increase sells! They hold a massive share
of the online retail sales industry. Amazon as a long term investment is very risky but could pay
out. I think they are quickly taking over the market with their low prices. Now that it is 2014
almost 2015 I would wait until their 2014 financial statements came out then decide. I believe
you will most likely see that they increased their sales once again but this time were much more
profitable. It looks like they took a big leap in 2012 with a ton of investments.
It is easy to judge a company off of its profitability and the attractiveness of its stock.
The ratio's show in 2012 Amazon is hurting in those areas. Yet the ratios describing their ability

to pay off debt show that they are not hurting that bad. They were higher than the industry
averages in their ability to sell merchandise and collect payments. Its 2014 and Amazon is still
around going strong.