Amazon.com is a company that was established in 1994 by Jeff Bezos. The company has its headquarters in Seattle, Washington and it operates electronic ecommerce and cloud computing as its principal business. Amazon initially started out as an online bookstore but later diversified its services where it offered a wide range of products and services through its Website. The goods sold by the company are made of products sold by third-party sellers. Amazon also has one of the largest cloud infrastructures (Laudon & Traver, 2016). The financial analysis of Amazon shows that Amazon is a healthy company and has had a tremendous growth in is assets and revenue. The analysis of various key ratios and the horizontal and vertical analysis will show that Amazon is financially healthy.
Liquidity Ratio
The liquidity ratio is a ratio that shows whether a firm can meet its current debt obligations. The liquidity ratio can be identified by considering the current assets and current liabilities so as to know the management of short-term debt. The current ratio is primarily used to measure the liquidity ratio. The current ratio of Amazon reduced between the year 2017 and 2018 and the company that Amazon was being compared to Etsy also decreased. The decrease in the current ratio shows that the company was performing quite poorly. A current ratio of less than one shows that a company cannot meet its short-term obligations but a current ratio above 1 means that a company can meet its short-term obligations (Taurista, et al., 2018).). Amazon was still doing better by managing its current ratio at above the level 1 indicating that it was financially healthy.
Delegate your assignment to our experts and they will do the rest.
Solvency Ratio
The solvency ratio is used to measure finances involving creditors and investors by providing a comparison and analysis of the total debts and the total equity. The ratio compares the debt levels with the assets, earnings, and the equity. It provides an analysis of whether a company can be able to pay bills in the long-term. The solvency ratio is used to provide a focus on the long-term sustainability of a company when compared liquidity ratios that measure short-term liability payments (Robinson et al., 2015). The solvency ratio is a critical tool to creditors, banks, and long-term obligators.
The ratios that were used to analyze the solvency ratio for Amazon included the debt-ratio, debt-to-equity ratio, and long-term debt ratio. The debt ratio of Amazon decreased between 2017 and 2018 while that of Etsy the comparison increased consistently. The debt ratio was measured by taking the ratio of the total debt to the total assets. A high ratio could be an indication that a company is at risk of defaulting its loans in case interest rates suddenly rise (Aymanns, 2016). The decrease in the debt ratio for Amazon was good for the company.
The debt-to-equity ratio of Amazon also decreased between 2017 and 2018 showing that the company debt of the company had reduced. The debt-to-equity ratio is usually calculated by taking the total liabilities divided by the total shareholder’s equity. The debt-to-equity ratio shows how much a company is financing its business through debt or through equity (Campbell et al., 2016). Amazon had reduced its financing on debt indicating a financial healthy company. Additionally, the long-term debt ratio for Amazon had reduced between 2017 and 2018. This indicated that the company was able to meet its long-term financial obligations.
Profitability Ratio
The profitability ratio is used to provide information about the ability of a firm to generate earnings and profits. The profitability ratio of Amazon was analyzed by considering the considering the net profit margin. The net profit margin of Amazon was considered to be more stable. However, the company’s profitability ratio was quite low. This could have been caused by the nature of the online retail industry. Online retailers experience small net profit margins that could vary between 0.5 and 3.5%. The online retail industry has been marked as one of the least profitable industries where companies are reducing the prices of its products in order to retain customers.
DuPont Analysis
The DuPont Analysis is used to measure the different ways to increase returns to stockholders. The DuPont Analysis for Amazon as carried out by analyzing the return on investment (ROI) for the company. The ROI provides a measure of the efficiency of an investment and can be compared to several other investments. The ROI of Amazon increased between 2017 and 2018 and was higher than that of the comparison company Etsy. A high ROI of Amazon indicates should be good for the company and would be useful to attract investors to the company.
Activity Ratio
Activity ratios are used to measure the ability of a company to be able to convert different accounts in its balance sheets into cash and sales. The long-term activity ratio was measured for Amazon by considering the fixed asset turnover ratio and the asset turnover ratio. The fixed asset turnover ratio shows how a company generates sales using fixed assets. The fixed asset turnover ratio for Amazon increased between 2017 and 2018 and was better than the competing company Etsy. This shows that Amazon is using its fixed assets better than competitors to generate sales. The asset turnover ratio of Amazon was also better than its competitors showing that Amazon made use of its total assets to generate better sales than the comparison company Etsy.
Horizontal Analysis
The horizontal analysis of Amazon’s income statement showed that the company’s revenue had increased consistently by 19.5% and by 20.2% in the past three years. The gross profit of the company was also growing consistently by 29.4% between 2016 and 2017 and by 34.8% between 2017 and 2018. The generation of profits could have been as a result of cost of goods sold increase. However, the operating expenses for Amazon was on the rise and the operating income had increased by a staggering 1154.5%, a value that was somewhat surprising. The horizontal analysis of the balance sheet showed that the total assets had experienced consistent growth. The shareholder’s equity had experienced a more significant growth of 24.6% and 20.6% compared to the liabilities between the year 2017 and 2018 indicating that the company was attracting more investors. This could be a signal and indicator of a stable business operation.
Vertical Analysis
The vertical analysis was used to show whether performance metrics in the financial statements were increasing or decreasing. The company had a significantly huge profit that was growing consistently throughout the years from 27.23%, 29.48%, to 33.04%. This was an indicator that the company was experiencing growth. Additionally, its operating expenses had decreased consistently. The vertical analysis showed that the company had experienced an increase in long-term assets and a decrease in current assets indicating a stable financial structure. A certain percentage of the assets were financed by the increase in the shareholder’s equity which was a good indicator for the company. The vertical analysis showed a stable financial structure and a healthy company.
Conclusion
Amazon has experienced consistent growth between the year 2016 and 2018. The company is continually increasing its profits indicating a stable financial performance. However, the net product sales for the company is decreasing operating expenses and more savings. For the coming years, the strategy adopted by Amazon should be to strive to increase its net sales through the expansion to new customers. However, as long as Amazon continually generates profits the company should remain relatively successful.
References
Aymanns, C. (2016). Bank solvency and funding cost . International Monetary Fund.
Campbell, T. C., Galpin, N., & Johnson, S. A. (2016). Optimal inside debt compensation and the value of equity and debt. Journal of Financial Economics , 119 (2), 336-352.
Laudon, K. C., & Traver, C. G. (2016). E-commerce: business, technology, society .
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis . John Wiley & Sons.
Taurista, D., Fatimah, M. P., Sukoco, A., Damayanti, E., & Sin, L. G. (2018, June). ANALYSIS OF DOMINANT FACTORS INFLUENCING THE COMPANY’S LIQUIDITY DECLINE. In Journal of International Conference Proceedings (Vol. 1, No. 1).
