Financial Statement Analysis of Amazon

Financial Statement Analysis of Amazon

Abstract

Amazon is a multinational company that deals with a variety of products. Amazon, through technology, has become a multi-billion dollar company. In this article, we will assess its well-being financially. To do so, we have to analyze its short term liquidity ratio, which indicates if the company can afford to pay its bills. The operating efficiency is also a reliable indicator of whether the company can pay its short term loans. Even the capital structure is analyzed, indicating if the equity and debt ratio are at the optimum levels. Also, the profitability which shows whether th company has enough returns to sustain its growth. Finally, there is suggesting the way forward and measures that would assist in the future analysis of the company.

Financial Statement Analysis of Amazon

Introduction

Amazon is an e-commerce industry that deals with a variety of products globally. The company focuses on marketing, selling its products and also ships them globally. Over the last two decades, the company has grown and outdone most of its competitors. With an increase in technology, the company has become a forefront implementer of modern technology in running the business. This measure has placed the company at the forefront in terms of finances globally. The value of its shares is high in the stock market, and this keeps getting better. With the high competition, the company aims at retaining its position by maintaining its customers and ensuring they are satisfied by Amazon’s products and services. Amazon operates with big data and thus requires a financial analysis to compare its market value and abilities and also come up with measures that would avert significant issues that would result in commercial flops.

Background and overview of Amazon.

Amazon is a multinational company that deals with e-commerce, artificial intelligence, cloud computing, and streaming using digital means. The company is considered among the biggest in the world in terms of the online market. Jeff Bezos founded Amazon in 1994. The online market place has since grown and surpassed many companies that were in existence before its formation. Apart from marketing and selling products online, Amazon allows music streaming audiobooks, publish books, films and TV and offers needs from all walks of life. Amazon is a public company and has very many products under its brand. It became public in 1997 and has made partnerships with many and different companies worldwide. The main aim of the company was to come up with a secure website that would give people to sell materials to clients in many areas. The company grew, and with time it had global access.

Amazon has branches in a few countries but ships its products worldwide. The company connects with its clients through its website ‘Amazon.com’ which has millions of active visitors. As a result, the company has invested a lot on the website due to traffic management. Amazon is a popular site that is accessible worldwide, and the number of clients increases by the day. The company has a policy which guides its operations ‘putting the customer first’. In this approach, the company has to ensure the client is satisfied, gain their trust, and develop a long-term relationship.

Understanding the needs of the client and ensuring their needs are attended to and observe secure, time-saving and accuracy deliveries (Al-Marzooqi & Nobanee, 2020). This measure keeps the clients coming for more. Also ensuring the company has everything the client needs ensures they trust and develop a relationship with the company. To make the experience more client-friendly, there is the use of one-click shopping on the website, which saves on time and lowers transaction loads. Also, the company operates under heavy encryption which makes it very hard for outsiders to access clients’ data.

Another measure used is employing technology in the process where clients can order, and their order is matched to the exact item with no chance of an error. Since there is a massive number of orders, the company has employed the use of a unique algorithm to carry out the procedure. Amazon also follows up on the order, and delivery to ensure the client’s needs are attended to. The company has also personalized ads to clients. The system automatically assesses clients’ interest in using their search history and previous purchases. The clients are then sent advertisements through their emails which are included in their details.

As the sales and the investments involved are massive, so is the value of the company. Like any other company, Amazon Inc. has to prepare its financial statements that include the income statement, which shows the results of Amazon operations. Another one is the statement of comprehensive incomes which shows changes in net assets from transaction to other events. There is the balance sheet which shows Amazon’s equity and its liabilities. Finally, there is a cash flow which accounts for cash payments and receipts. Analyzing the company’s performance over the last decade, it is clear that it has had massive growth. Amazon is feared and respected by other companies both in technology industries and others. In terms of competition, Amazon is among the best overall.

The reputation of Amazon has gone beyond the limit and is still growing. The multi-billion dollar company has made most of its money from the sale of products and deliveries. Amazon has won clients trust, and even with the continual expansions in the business world, the company ensures its clients are well catered for. The company is always on the top-notch when it comes to technology and invests in future. This is clearly shown by the company’s investment in different industries which result in success. The company keeps trying out new ideas and experimenting on them, learning from their failures.

Amazon’s Liquidity Ratio Analysis.

In the second quarter of 2020, Amazon’s liquidity ratio is increasing from last year, indicating an increase in cash flow. This is an indication that the company can handle any financial difficulties that could face the company in the future. By December 2019, the company had a 1.10 current ratio, a quick ratio of 0.63, and a cash ratio of 0.63. As of Jun 2020, Amazon had a current ratio of 1.18, a quick ratio of 0.76, and a cash ration of 0.76. As the liquidity ratios stated, show a massive increase in Amazon’s liquidity ratio (Stock Analysis on Net, 2020). It is important to note that in the first quarter of this year, the liquidity ratio had gone down but then increased in the second quarter. When it comes to future investments, Amazon plays a huge role. With the increased liquidity ratio, the company can clear some of its debts, invest in the future of the company, and reinvest the extra cash in its business to generate more income.

Thus, the liquidity ratio will enhance Amazon Inc. to make an important decision on its next move. That is, whether to invest, clear debts or even share it out to shareholders. So far, the company focuses mostly on reinvesting in the company or investing in its plans. This measure does not only ensure the company expand buy also saves on taxes. The company can pay its dues, and thus this means Amazon is financially healthy. As the ratio keeps increasing, it indicates the company continues to be safer from financial hardships. The liquidity ratio shows the credibility of the business to its lenders and partners. Thus, they can trust that the company is less likely to fall into financial debts or become bankrupt. This also means the company can pay off its short term debts in its current state. This also attracts investors since the business is financially stable.

Amazon’s Operation Efficiency.

For the past few years, Amazon’s working capital has been increasing for almost four years, but there were some minor dips. As a result, the working capital is well managed. Currently, Amazon’s working capital is 1.82 billion dollars. Amazon has found a way to buy their products at lower prices. As a result, Amazon tends to gain a lot when they sell their products in the market at standardized rates.

The company gains a lot from this, and thus its output becomes very high compared to the input. This is one of the strategies used by Amazon to outdo its competitors. Also compared to most of its competitors, Amazon does not focus on creating outlets all over but instead uses their website as their primary sales point. Also, when there are discounts given many people visit the site and orders increase massively. In the end, the company ends up making than it invested. So far, this strategy seems to be working correctly.

Amazon has a return on Assets of 4.65% per annum. This value is an indication Amazon is doing well financially and can manage its operating cost-effectively. A 4.65% return is an indication that the company investments generate profit. As a result, the company makes returns from its investments at a lower cost. The 4.65 % ROA means that the company has a gain of 4.65 for every 100 dollars invested, which according to the company’s input is a considerable amount.

Amazon has managed to convince its suppliers and minimize its spending on physical locations. These two approaches have helped the company achieve the cost incurred values for greater efficiency. Also, offering discounts for some time increases sales drastically, which helps manage the transaction costs and gain more on returns to its initial investment. In conclusion, Amazon’s financial performance is excellent since as shown by the profits obtained in the second quarter of the year.

Amazon’s capital structure.

The capital structure comprises of debt to capital, debt to equity, debt to assets, long-term debt to equity and long term debt to capital. These comparisons help in assessing the liability to investment to know its levels of debt. A high debt puts the company and the shareholders at a greater financial risk since the company could quickly become bankrupt. A balanced debt to equity ratio is the best mix in the market. Debts and external borrowing is an indication the company has good creditworthiness, and its good for the business but too much debt can harm the business (MarketWatch,2020). Currently, in the second quarter, the values are as follows:

As noted, Amazon finances are favourable and comparing the above financial capital structure to the size of the company, and they are relatively optimal. In the sense that Amazon has a favourable ratio when it comes to debts and equity comparison. Linking these values to the operational structure of Amazon, they exhibit flexibility and solvency in that the debts can be taken care of without affecting the company’s operations. Amazon has control over these debts, and hence it is less likely to be affected by them (Cho, 2019). These debts are essential to the company since they are used to invest in the future of the company and turn to enhance more profit generation.

Profitability Analysis.

Profitability aims at determining the value or degree of profit gained by Amazon in its operations. Values used to analyze Amazon’s profitability include the gross margin, which currently stands at the cost of 40.99, which is relatively good. The operating margin stands at 5.26, which is an improvement from last year’s operational margin showing that the profit is rising slowly. There is also the pretax margin which stands at 4.98 currently and shows the value of tax margin before taxation.

The net margin, after taxation, stands at 4.13 value. The ROA (Return on Assets) value stands at 5.97. This value shows that the company assets are generating a lot of income which can be attributed to the company’s publishing films and TV and other services the company provides. Return on equity is income generated from the value of the company, which could be on the sale of shares, investments, among others. The cost is currently at 21.95. Return on total capital is income generated and includes even borrowed money, and its value is 12.68. Return on invested capital is limited to capital which is investments only and stands at 11.11.

For the last several years, Amazon’s debt to equity ratio has been on the rise. This is an indication that the company has been borrowing more (Al-Marzooqi & Nobanee, 2020). However, this is an indication that the company could be investing more and acquiring more for its upcoming projects. In so doing, the company acquires that which it can afford to pay back and uses the borrowed capital to generate more income and payback its stakeholders, and creditors. This year, the company has total equity of about 73 billion dollars and has borrowed over 33 billion dollars. The ratio between the two is standard, and as a result, one can say the debt to equity ratio is relatively okay. The extra amount borrowed from outside has helped generate a lot of cash for the company.

Recommendations for future analysis.

After a detailed analysis of Amazon financial statement, it is clear that the company is financially stable. However, there are a few adjustments needed for the future. To acquire financial stability, there is a lot of work to be done considering random flops due to external factors. In the recent past, the company had experienced significant flops in its financial state, but currently, the company seems to be improving slowly (Price III, 2013). Thus, the new methods implemented seem to be working out successfully. However, the company’s growth rate appears to be slowing down over time. As a result, the company needs to find a new idea and invest in it. This way, the company will embrace the latest technology in its projects and stay relevant in the competition.

The new projects ventured in need to be those that can help the company gain and generate more income to uplift financially (Cho, 2019). Through this, the company can lower its chances of becoming bankrupt and lowering its levels of debt even further. Also, as seen in the second quarter of the year, the company seems to be going up financially. To maintain this, the company needs to ensure its aim of putting the customer first is maintained in its dealings. This measure will ensure they earn their clients trust, and they will be able to maintain them long-term (Rosemanoso, 2020). Another way is closing the gap between marketing and selling of goods. Amazon has put so many efforts in advertising its products to possible clients than in selling the product. Since the company makes a strong brand, they need to push their products even further and ensure clients purchase their products and not only visiting the site by being persuasive enough.

Conclusion

Amazon is a company that has embraced diversity in terms of the products they deal with. This has given the company a large pool of clients which has enhanced its growth and financial stability. To ensure it keeps gaining, the company should ensure they incorporate favourable and competitive prices and invest in new products in the market. Amazon enhances simplicity and trust in clients by tending to their needs. Financially, Amazon is currently improving after a flop in the first quarter of the year. The value of Amazon is the stock market is high due to the low risks involved and higher chances of even going higher. Amazon spends most of its returns on investing back into the business. Amazon is financially stable and the financial statements analyzed have helped in coming up with the following recommendations; venturing in new projects, increasing growth rate by introducing new products in the market, and lowering debts to a standard level.

References

Al-Marzooqi, M. B., & Nobanee, H. (2020). Financial analysis of Amazon. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3647442

Cho, J. (2019). Amazon. Com, Inc. MIT Sloan. https://mitsloan.mit.edu/LearningEdge/CaseDocs/17-183.Amazon.com.pdf

MarketWatch. (2020). Amazon.com Inc. MarketWatch: Stock Market News – Financial News – MarketWatch. https://www.marketwatch.com/investing/stock/amzn/profile

Price III, R. A. (2013). Cash flows at Amazon.com | Issues in accounting education teaching notes | Allen press. Allen Press. https://meridian.allenpress.com/iaetn/article-abstract/28/2/23/212453

Rosemanoso. (2020, May 17). ** Amazon trend analysis ** for NASDAQ. TradingView. https://www.tradingview.com/chart/AMZN/MuE5AiSY-Amazon-Trend-Analysis/

Stock Analysis on Net. (2020). Amazon.com Inc. (NASDAQ: AMZN). https://www.stock-analysis-on.net/NASDAQ/Company/Amazoncom-Inc/Ratios/Liquidity#Ratios-Summary