Financial Statement of Amazon - Research Paper Example

?Financial ment Analysis Project Firm Choice-Amazon.com Amazon .com is an online shopping site which provided items starting from lunch boxes tovarious electronic gadgets and is the world’s largest online retailer. Amazon mainly deals in books, electronics, software, DVD’s, video games, etc. Since there is no shipping charges on the cost of the items to be delivered it is highly preferred by its customers because after browsing through the items from home the product gets delivered at doorstep in few days. The major success of Amazon.com took place in the year 1997 when the inventories rose to 200000 titles at the year-end. In 2011 the cash and investment balances of the company rose to $125 million due to the initial public offering made in the year 1997. Financial Information of Company The company’s performance in case of the operating activities has been good enough but the same cannot be said as far as Amazon’s financial and investing activities are concerned because the company is showing a negative return of $482 million (financing activities) and $1930 million (investing activities) in 2011. This decrease was mainly the affect of the capital expenditures and the changes in the working capital over the year. Rising net sales of the company which by approximately 41% than the last year due to the effect of the exchange rates. But the effect of the rising sales were diluted due to the increase in the operating expenses of the company which resulted in the net income of Amazon to dip from $1152 million (2010) to $631 million (2011). Summary of the Firm Markets Market of operation for Amazon is mainly in North America, US and Canada. The common stock of Amazon.com, Inc. (AMZN) is dealt in Nasdaq Global Select Market. In 2010 amazon.com has witnessed a high of $185.65 in the fourth quarter and a low of $105.80 in the third quarter whereas in 2011 Amazon witnessed a high of $246.71 in the fourth quarter and a low of $160.59 in the first quarter. In both the cases the company’s value is more in 2011. Products Amazon.com primarily deals in products like retail goods, consumer electronics and digital content. Even various form of auctions are set online for buying second hand products at subsidised rates. Location The prime location where the Amazon.com makes most of its business is North America, US, Canada, UK, France Germany, Italy, Spain, Japan, China and soon is going to launch websites in Poland, Sweden and Netherlands. Amazon.com has its services stations in prime areas of North America, Latin America, Europe and Asia. The global headquarters of Amason.com is situated in Seattle in Washington. Partners The main strategic partners of Amazon.com were America Online, Yahoo, Netscape, GeoCities, AltaVista, @Home and Prodigy maintaining a long-term relationship since the year 2007. Competitors The main competitors in the field of online trading in comparison to Amazon.com, Inc. are Apple Inc., Barnes & Noble, Inc. As the gross profit of Amazon is 22.76% whereas in case of Apple Inc. is 43.95% and Barnes & Noble’s, Inc. is 26.52%. Comparative Analysis The company chosen for the comparative analysis with the Amazon.com, Inc. are EBay, Inc. and Google, Inc. because both the companies of comparison belong to the same industry (Catalogue and Mail Order Houses) dealing in the Nasdaq market. Net Income of Amazon.com, Inc. is $560 million whereas that of EBay, Inc. is $3.32 billion and Google, Inc. is $10.83 million. Thus being a giant in the field of online trading Amazon.com is a clear winner. The higher the price earnings ratio of the company higher is its growth rate. Price earnings ratio of Amazon.com, Inc. is 180.41, in comparison to EBay, Inc. which has a P/E ratio of 16.15 and Google, Inc. with a P/E ratio of 17.59. This proved that the stocks of Amazon.com, Inc. are much more preferable in comparison to EBay, Inc. and Google, Inc. The price to sales ratio of a company projects that lower the P/S ratio of the company the better it is as the investor has to pay less. Price to sales ratio of Amazon.com, Inc. is 1.91 while that of EBay, Inc. is 4.28 and Google, Inc. is 4.73. Again putting in a ranking format Amazon.com is best in the business followed by EBay and Google. Profitability and Cash generating ability of the Firm After maintaining the current ratio at 1.33:1 for 2010 and 2009 a decrease in the same can be witnessed in 2011 which is due to the comparative increase in the current liability of Amaron.com is more than the current assets of the firm (Figure: 1). The debt-equity ratio of the company shows a comparative burden of the company in terms of debt financing and equity financing adopted by the company. The debt equity ratio of the firm has increased from 1.74 (2010) to 2.26 (2011). Thus the company should adopt measures of reducing the burden of debt (Figure: 2). A decrease in the P/B ratio of the company is a favourable sign for the company. As lower the P/B ratio of the company better is the financial growth of the company (Figure: 3) The net income generated by the company with the existing assets of the company has decreased from 6.13% (2010) to 2.50% (2011). This is a rising problem for the company that has aroused due to the debacle in the financial and investing activities of the company (Figure: 4). An increase in the gross profit margin from 22.35% (2010) to 22.44% (2011) is due to the cost of sales of the company being less which lead to the rise in the gross profit of the company in comparison to the sales of the company (Figure: 5). Even the net profit of the company has taken a dip due the effects of the decreasing profit margin along with the increasing operating expenses of the company (Figure: 7). Due to the rising operating expenses of the company the operating income reduced drastically pulling down the operating profit margin of the company from 4.11% (2010) to 1.79% (2011). Thus the profitability of the company is reducing because of the increasing expenses undertaken by the company (Figure: 5). The amount of sales that can be generated by the cash or cash equivalents of the company in a given year shows the efficiency of the company. In 2011 the cash turnover of Amazon.com is 7.08 in comparison to EBay at 0.74 and Google at 1.32. Thus it can be clearly said that Amazon.com is very efficient in generating sales for the company in comparison to EBay and Google (Figure: 8, 9 & 10). The accounts receivable turnover of the company is much better off in the case of Amazon.com when compared to EBay and Google. As the accounts receivable turnover of Amazon.com is 16.07 whereas for EBay it is 1.89 and Google is 3.87; which proves that Amazon.com’s operational performance is giving breakthrough results than EBay and Google (Figure: 11, 12 & 13). Inventory management efficiency of a company is detected by the inventory turnover of a company. When the inventory turnover is high better is the inventory management of the company and vice-versa. The inventory turnover of Amazon.com declined from 8.30 (2010) to 7.47 (2011). This fall in the inventory turnover rate may be due to the increased stock resulted due to the mismanagement of the company (Figure: 14). The amount of sales that can be generated from the employment of the working capital of the company shows the long-term efficiency of the company. The working capital turnover of Amazon.com is 14.37 in comparison to EBay at 0.58 and Google at 0.30. Thus Amazon.com is more efficient a company than EBay and Google (Figure: 15, 16 & 17). The revenue that can be generated by a company from the fixed assets of the company is the PPE Turnover of the company. Higher the PPE turnover of the company more prominent is the level of performance of the company. The PPE turnover for Amazon.com is 10.88 and hence the clear winner in relation to EBay (5.87) and Google (2.57) (Figure: 18, 19 & 20). Total assets turnover of a company indicated the revenue earned by the company with the possessed assets of the company. Generally the company with low profit margins tend to have higher total asset turnover which is the case with Amazon.com with a higher total asset turnover at 1.90 while EBay at 0.43 and Google at 0.34 (Figure: 21, 22 & 23). Thus from the above analysis we can interpret that though the profitability of Amazon.com is falling by the year a breakthrough performance in the cash generation along with the operating efficiency of the company can be observed. This is because inverse relation exists between the efficiency and the profitability of a company (Amazon.com, Inc. 1-70). Overall condition of the Balance sheet and Risk Level of the firm The overall condition of the balance sheet is seems in a moderate condition. As the short-term investments of the company has declined from $4.99 billion to $4.31 billion. But the risk level of the firm has increased with the rise in the bad and doubtful debts of the company from $72 million to a whooping $82 million. With the rise in the bad debts the company should be aware of the debtors its dealing with and cross check the creditability of those partners or customers from their past records and take necessary action for the same. Inventories related to the finished goods as Amazon.com is an online trading company it does not have any inventories under the work in progress. Thus a rising inventories though showed as an asset of the company, a mere storing of the stock can result in the asset turning into liability. Hence, necessary inventory management measures needs to be taken for selling the inventories. An increase in the net PPE is beneficial for the company as the PPE accounts for the fixed assets of the company results in the generation of the total revenue of the company. Thus the probability to earn more rises with the increase in the fixed assets or the PPE of the company. Even from the analysis of the balance sheet ratios done above we can conclude that the company is doing well in terms of the solvency factor of the company but due to its expenditure and the increase in the liability over the year the company is showing decline profitability. Another reason for the same may be due to the fact that too much money has been invested in the investment activities which resulted in generating negative returns thus increasing the liability of the company. Assessment of the operating leases of the Firm. The investors risk perception related to the accounting procedure before and after the implementation of the risk will be valued differently. The total office lease has been valued at $4253000 with $3416000 for the North America property and the rest for the international business. After taking the discount rate of 9% into account the total cost of leasing will amount to $3870230 for the Amazon.com. This will result in bringing the off balance sheet accounting of operating leasing in the main balance sheet of the company. This will impact the assets and the liability accounting of the company in the sense that a 100% financing will be projected which is nothing but the inflated value of the company. Hence the accounting portrayed through the balance sheet will misguide the analyst in making the correct estimation of the financial condition of the company. Though no changes in the cash flow can be witnessed yet deviation in the cash flow statement can occur. All the lease payments related to the company will be shown under the financial activities of the company thus disrupting the proper accounting procedures. Thus in my opinion the operating lease accounting though at a discounted value should not be implanted in the main financial statements of the company as it is a mirror view for the analysts to assess the present financial health of the company along with the deviations undertaken, so much so, that the company can take corrective measures based on the same. Analytical Synopsis The analysis of the given project gives us the idea that the company of Amazon.com needs to focus more on the profitability of the company as the trend witness for the three consecutive years id that of a diminishing one. Through the ratio analysis of all the financial statements of the company adopted from form 10-K we have conducted the financial analysis of the company which says that the profitability of the company is falling at a fast pace. Ratios related to the profitability of the company are all shows a declining trend, namely the operating profit margin of the company decreased from 4.11% in 2010 to 1.79% in 2011. Again the net profit margin of the company declined from a whopping 3.37% in 2010 to mere 1.31% in 2011. But the company’s cash position being stable, the solvency of the company is a good position. The relation between the profitability and the efficiency of the company are inversely related which reflects in the result of the company’s financial ratio analysis. The low profitability has resulted in the increase in the efficiency level of the company. Thus a balance between the two needs to be achieved by the reduction of the operating expenses. Along with the above condition the company should also make intelligent investment in the market, so much so, that the losses incurred by the company does not hamper the profitability of the company. However, as we know that the main motive behind any business undertaken is to earn maximum wealth with the available resources. If that purpose is not achieved then investors will avoid investing in Amazon.com which will further bring down the profit level of the company thus hampering the essence of business. If only solvency is maintained without the profitability of the company the very existence of the same will become meaningless. Thus along with the efficiency the company should also note the reasons which are responsible for the fall in the profitability of the company and take necessary steps for the same. So it would be advisable to the shareholders of the company to hold on to the share because the company has a sound solvency position which will support profitability of the company in the years to come. If the stocks of Amazon.com are sold off immediately then the price obtained for the same will be lower that the price at which it was bought. Appendices Figure 1: Amazon.com Figure 2: Amazon.com Figure 3: Amazon.com Figure 4: Amazon.com Figure 5: Amazon.com Figure 6: Amazon.com Figure 7: Amazon.com Figure 8: Amazon.com Figure 9: EBay Figure 10: Google Figure 4: Amazon.com Figure 12: EBay Figure13: Google Figure 14: Amazon.com Figure 15: Amazon.com Figure 16: EBay Figure 17: Google Figure 18: Amazon.com Figure 19: EBay Figure 20: Google Figure 21: Amazon.com Figure 22: EBay Figure 23: Google Work Cited Amazon.com, Inc. “Annual Report (Form 10-K)”. 31 Dec 2011. Web: http://www.sec.gov/Archives/edgar/data/1018724/000119312512032846/d269317d10k.htm. 12 June 2012. Read More