Professional Documents
Culture Documents
Paige Paulsen
Accounting 1120-002
7 April 2017
Whether you own the business or are looking to invest in a business, you should
know the financial status of the company before pursuing with big decisions. The purpose
of this paper is to show Amazons financial state at the end of the year 2012. I will be
showing Amazons ability to pay current liabilities and long term debts, how long they
usually keep their inventory in the business, ability to sell inventory and collect
receivables, their profitability, and evaluate their stock as an investment. I will also be
comparing Amazons calculated totals in each of these areas to the Online Retail Sales
Industry average. By doing this it will show what position Amazon is in compared to
Current Ratio:
When determining a companys financial status, you should always look at their
ability to pay their current liabilities. The first ratio we are going to compare is the
Current Ratio; this ratio shows companies ability to pay current liabilities (this includes
all debts, expenses, and all other things the business owns from other people or
businesss) from current assets (this includes cash, inventory, and all other things the
company owns that could be sold for a profit). The Current Ratio is calculated by
dividing Total Current Assets by Total Current Liabilities (Current Ratio = Total Current
Assets / Total Current Liabilities). For the Current Ratio typically the higher the number
the better. If this number is higher it means that you are more likely to be able to pay your
debts. Having a high Current Ratio is helpful when you are trying to borrow money from
banks because it shows that you are more likely to be able to pay back the money that
you borrow. As shown below Amazons Current Ratio for 2012 was lower than it was in
2011; this happened because there was a big increase in liabilities from the two different
Amazon - 2012 1.12 0.78 less likely for a bank to lend them
Industry Average 1.54:1 1:82 money because of the difference
The second ratio we are going to compare is the Acid Test Ratio; this ratio
shows the companys ability to pay all its current liabilities (all things the company owes
others; debts, expenses, notes, etc.) if they became due immediately. The Acid Test
and Net current receivables, and diving that amount by Total current liabilities (Cash
current liabilities). If this number is higher it means the company is in a better state
financially because they are more likely to be able to pay their debts with the assets they
currently have. As shown above Amazons Acid Test Ratio for 2012 was lower than in
2011; this happened because there was an increase in the amount of liabilities between
the two years. There is quite a large difference from Amazons totals and the Industry
average; this difference shows that Amazon is in a poor state financially and they should
Inventory Turnover:
financial status is their ability to sell merchandise inventory and collect receivables. The
first ratio we are going to compare in determining this is the Inventory Turnover; this
ratio tells the number of times a company sells its average level of merchandise inventory
during a period. The Inventory Turnover is calculated by dividing Cost of Goods Sold
(also called Cost of Sales) by Average Merchandise Inventory (Cost of Goods Sold /
Average Merchandise Inventory). The higher the Inventory Turnover the better because it
tells that they sale their inventory on a regular basis and it doesnt sit on the shelf for a
long time before being sold. As shown below Amazons Inventory Turnover in 2011 was
higher than in 2012. Compared to the Industry average, Amazon is doing a great job in
this area by having double the average of others in the industry. This helps to show that
they dont have a problem selling their products and that they have a good amount of
buyers.
The second ratio we are going to compare in this area is the Gross Profit
Percentage; this ratio shows the profitability of the money from each sale from cost of
goods sold. The Gross Profit Percentage is calculated by dividing Gross Profit by Net
Sales Revenue (Gross Profit / Net Sales Revenue). The higher the Gross Profit
Percentage the better because that means that you a gaining a higher profit on your sales.
As shown above on the table, between the two years Amazons percentage has decreased.
Amazon also has a lower percentage than the Industry average, for us as customers this
shows that their prices are lower than their competitors; for the business this shows that
they are losing a profit where they could be gaining more money off sales.
Days Sales in Receivables:
Another ratio we should compare in this area is the Days Sales in Receivables;
this ratio shows the number of days sales it takes to collect the average level of
Accounts Receivable Turnover Ratio (365 / Accounts Receivable Turnover Ratio). The
lower number for the Days Sales in Receivables the better because that means you sell
your inventory on a more regular basis and it doesnt sit on the shelf for a long time
before it is sold. As shown above on the table Amazon had a larger Days Sales in
Receivables in 2012 than in 2011; this could be due to loss of customers or less
advertising. Amazon does have a lower amount than the Industry Average, which could
bring sales for them because it shows that the demand for their products is higher than
competitors.
TimesInterestEarned Ratio:
their ability to pay long-term debts. The ratio we are going to compare in this area is the
TimesInterestEarned Ratio; this ratio tells the businesss ability to pay interest expense.
expense, Interest expense, and dividing that amount by Interest expense (Net income +
Income tax expense + Interest Expense / Interest Expense). The higher this number the
better because it tells that you are more likely to pay your interest expenses. As shown
below on the table Amazon had a higher Times-Interest-Earned Ratio in 2011 than in
2012. The table also shows that Amazon had a higher rate in 2011 than the Industry
Times-Interest-Earned Ratio
The next area we should evaluate when analyzing financial statements is the
companys profitability. The first ratio we are going to talk about in this area is the Profit
Margin Ratio; this ratio tells how much net income is earned on every dollar of net sales.
The Profit Margin Ratio is calculated as Net Income divided by Net Sales (Net Income /
Net Sales). To determine whether it is better to have this number higher or lower you
should be looking at the Industry Average. According to the table below, Amazons Profit
Margin is below the Industry Average for both years by a large amount.
Common Stockholders
Equity
Equity; this ratio tells the relationship between net income available to common
stockholders and their average common equity invested in the company. The Rate of
from Net Income then dividing that number by the Average Common Stockholders
The higher this number the better because this tells that there is more net income left over
for stockholders, which could help to gain more stockholders and you more money as a
result. According to the table above, Amazon is in a poor condition compared to the
Industry Average, especially in 2012 which it dropped a great amount from 2011.
Price/Earnings Ratio:
The next area you should look at when analyzing financial statements is
evaluating stock as an investment in the company. The ratio to use when determining this
is the Price/Earnings Ratio; this tells the value the stock market places on $1 of a
companys earnings. The Price/Earnings Ratio is calculated by dividing the Market price
per share of Common Stock by Earnings per share (Market price per share of Common
Stock / Earnings per share). It is better to have a higher number for this ratio because that
tells you that your stock is valued highly in the market. As shown in the table below,
Amazons Price/Earnings in 2011 is a lot higher than the Industry Average, but in 2012 is
was a lot lower than both the previous year and the Industry Average. From the amount
they received in 2012 they should seriously consider making some major changes
Price/Earnings Ratio
Overall, Amazon was in a poor state during the year 2012 compared to both the
Industry Averages and Amazons previous year amounts (2011). The totals for each of the
ratios were lower in 2012 than they were 2011. They werent just a few numbers lower
but most were very drastic changes. After analyzing these reports and comparing them to
the previous year, Im curious to see what happened in 2012 to cause the change. In 2011,
Amazon seemed to be doing fairly well but every single total changed to be the opposite.
There had to be something big change to have that big of an impact in the amounts.