Financial Statement Analysis Assignment

Part II

The purpose of this paper is to analyze the financial standings of Amazon.com, Inc by
gathering and reviewing information from the companys financial statements and notes. We will
be analyzing the companys ability to pay current liabilities, ability to sell merchandise inventory
and collect on receivables, ability to pay long term debt, profitability, and evaluating stock as an
investment. We will doing this by comparing current and prior years, while comparing the
companys ratio numbers to the current industry averages.
Ability to Pay Current Liabilities
We will begin with the companys ability to pay its current liabilities. In order for us to
determine this, we will need to look at a few ratios. We will need to calculate the companys
current ratio as well as use the acid-test ratio (also known as the quick ratio). The current ratio,
which is the companys ability to pay current liabilities from current assets, is 1.1 for the year
2012, which is slightly lower 1.2 in 2011. Comparing this to the industry average of 1.54:1, it
suggests that the company is in good standing and in line with the average. The acid-test ratio,
which is the companys ability to pay all its current liabilities if they came due immediately,
shows that the company was .82 in 2011 and .78 in 2012. This shows a decline from 2011 to
2012 and that the company is slightly lower than the industry average. In conclusion, the
information gathered shows that Amazon is able to pay its current liabilities from its current
assets and are within close range to the average of paying their current liabilities if they were to
become due immediately.
Ability to Sell Merchandise Inventory and Collect Receivables

The companys ability to sell its merchandise inventory and collect receivables is
measured by using a few different ratios. We will start with the companys ability to sell
merchandise inventory. The inventory turnover rate and days sales in inventory are used to
determine this. Inventory turnover rate or the number of times a company sells its average level
of or merchandise inventory during a period shows 9.1 in 2011 and 8.3 in 2012. Comparing this
to the industry average of 4.8 times, the companys numbers are higher, which shows they turn
over their inventory more times in the period than the average company. When looking at days
sales in inventory, which is the average number of days that inventory is held by a company, we
see that Amazon has a much lower rate of 44 days than the average amount of 75.42 days.
Therefore, they dont hold onto their inventory as long as the average company. To determine
Amazons ability to collect on their receivables we look at the accounts receivable turnover ratio,
which is the number of times the company collects the average receivables balance in a year.
Amazon collects on their average receivable every 10.3 days. This is at a much faster rate that
the average company does at 36.11 days. We can also look at days sales in receivables, which is
the number of days sales it takes to collect the average level of receivables. In 2011 this was
15.8 and 17.7 in 2012 compared to the industry average of 75.42 days. This shows that Amazon
has a very high rate of collecting on its average level of receivables. The information gathered
shows us that Amazon is able to sell its merchandise inventory and collect on its receivables on
an above average scale.
Ability to Pay Long Term Debt
The companys ability to pay long term debt is measured by debt ratio, debt to equity
ratio and the times-interest earned ratio. The debt ratio, which is the proportion of assets
financed with debt, shows a rate of 74.8 percent in 2012, which was up 5.41 percent from 2011.

The industry average for the debt to total assets ratio is 34%. This tells us that Amazon has a
higher financial risk and more than half its assets are financed with debt. The times-interestearned ratio can also help us determine the companys ability to pay long term debt. It evaluates
a businesss ability to pay its interest expense. In 2011 they had a rate of 15.8 and a rate of 5.23
in 2012. The industry average is 5.33 times.
Considering Amazons debt ratio and its times-interest-earned ratio, Amazon is at higher risk and
has some difficulty paying its liabilities.
Profitability
The companys profitability is based on the profit margin ratio and the rate of return on
total assets, asset turnover ratio, rate of return on stockholder equity and earnings per share. We
will be looking at just a few of these ratios. The profit margin ratio shows the percentage of each
net sales dollar earned as net income. The profit margin for 2011 was 1.3, while it declined quite
a bit in 2012 to -0.06. The industry average sits at 2.87%, which tells us that Amazon has a fairly
lower rate than the average. The rate of return on stockholder equity is the relationship between
net income available to common stockholders and their average common equity invested in the
company. In 2011 it was 8.63, but declined in 2012 to -0.49. The industry average for this is
11.39%. In 2011 it was somewhat lower than average, but in 2012 it was significantly lower than
the average. This information shows that Amazon is significantly lower than the industry
average, especially in 2012. They arent as strong in profitability as in other areas.
Evaluating Stock as an Investment
To evaluate sock as an investment, we use the price/earnings ratio, dividend yield and
dividend payout. We will be looking only at the price/earnings ratio which is the ratio of market
price of a share of common stock to the companys earnings per share. In 2011 Amazon had

131.37 and in 2012 it declined to -285.47. The industry average for price/earnings is 47.17. This
tells us that they had a great year in 2011, but 2012 declined and is significantly lower than the
industry average.
Conclusion
In conclusion, Amazon has very strong areas, but also has some weak areas that could use
improvement. From the information gathered, 2011 seemed like a stronger year in certain areas,
where 2012 numbers have declined quickly. This, however, is only comparing two years. A more
accurate perspective may require the evaluation and analysis of a few more years. Overall I think
Amazon.com, Inc. is a very successful and financially stable company.