The need for successful business operations and performance stability requires companies to leverage their expenditure in ways that add value to the entire organization as well as propel competitiveness in the marketplace. The objective of this report is to assess the business conditions of Amazon Inc. to establish a financial outlook of the expenses in managing investments for the future organizational value via research and development (R&D) and purchases. Financial constraints denote the frictions that hinder the enterprise from financing all required constraints. An assessment of the underlying business conditions is critical because companies tend to face various fiscal constraints that influence investment abilities.
Projected Financial Returns and Risks
Return on Equity (ROE)
DuPont Analysis determines the return on equity by multiplying the profit margin by the asset turnover and financial leverage (Lumen, nd); that is,
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ROE = profit margin*asset turnover*financial leverage
ROE = (Net incomes/sales)*(sales/total assets)*(total assets/average shareholders’ equity)
Amazon’s ROE for the financial year 2018 = (10,073/232,887)*(232,887/162,648)*(162,648/43,549)
2018 ROE = 0.043*1.432*3.735 = 0.22998636
For Amazon Inc., the profit margin can be increased if the operational costs are decreased or if the company increases its product prices. Increasing the profit margin would increase the ROE. Amazon’s asset turnover ratio and financial leverage ratio are high (143.2% and 373.5%, respectively) (Macrotrends, 2019). The high financial leverage ratio signifies that the company uses considerable debt quantities, which would reflect to disproportionate risks.
Constant Growth Stock Valuation (CGSV) and Current Stock Price
The formula for the CGSV is the projected or estimated dividends divided by the difference between the growth rate and the required rate of return. The Expected Rate of Return (r) for the company’s common stock is 17.70% (Macrotrends, 2019), the EBITDA 5-year growth rate is 0.2. With the projected dividends is 5.3%, the company’s Constant Growth Stock Valuation is:
CGSV = Div 1 /r-g = 0.053/0.18-0.2 = -2.65
Compared to the current stock price, the CGSV is considerably low. Amazon’s current stock is priced as $1,725.4 by the beginning of 09/28/2019.
Industry Assessment
Amazon is one of the major players in the e-commerce sector. By the end of the financial year 2017, the expenditure by e-commerce market increased to about $2.1 trillion. Projections indicate that the capital expenses will increase to around $5 trillion by the beginning of 2010. The rapid increase in e-commerce promises a bright future for Amazon because the sector typifies an increased consumer demand as well as robust market growth. Despite the identified growth patterns, Amazon should re-examine its capital issues targeting investments to achieve its business objectives.
Amazon’s capital constraints depict the need for financial leverage following the historically low levels of interest rates stipulated by the Federal Reserve as an accommodative financial policy. Several companies such as Amazon have been compelled to improve their leverage by issuing bonds and obtaining debts to fund its operations since the 2008 fiscal crisis. Since the beginning of the financial year 2009, the firm has underwritten bonds of about $8 billion, with the weighted average rate of interest of around 3.4%. The rise I debt issuance, however, has greatly transformed Amazon’s capital structure and ability to finance its future investments. Equity capital has remained significant to the company’s investment capacity as well as the need to pay shareholder dividends.
References
Lumen. (nd). The DuPont equation, ROE, ROA, and growth. Boundless Finance. Retrieved from https://courses.lumenlearning.com/boundless-finance/chapter/the-dupont-equation-roe-roa-and-growth/
Macrotrends. (2019). Amazon financial statements 2005-2019|AMZN. Retrieved from https://www.macrotrends.net/stocks/charts/AMZN/amazon/financial-statements
