Ratio Analysis of Amazon Co., Inc.
Subject : Management Accounting
Lecturer : Sir Anton
Compiled by:
Carlos Wijaya (220030005)
STUDY PROGRAM ENTREPRENEURSHIP
INSTITUT BISNIS IT&B
2024
1
AMAZON CO., INC
INRODUCTION…………………………………………………………………………........3
FINANCIAL STATEMENT………………………………………………………………….5
CONCLUSION………………………………………………………………………………13
REFERENCES……………………………………………………………………………….16
2
I.INTRODUCTION
On July 5, 1994, Amazon was officially founded under the name “Cadabra” (as in
abracadabra) by young Princeton graduate Jeff Bezos within a garage space in his rental
home in Bellevue, Washington. However, after just a few months, Bezos switched the name
to Amazon Inc because of Cadabra’s unappealing similarity to the word “cadaver” (A&E
Television Networks, 2015). Roughly a year later, the Amazon website was officially
published as an online bookseller delivering to all 50 US states and 45 countries from that
same garage space.
Like many other companies in their first couple of years of production, Amazon saw
losses. However, one of the most significant signs that the company was on the path to
success came in the transition of quarter three (July 1 st – September 30th) to quarter four
(October 1st – December 31st) in 1996. Within that time span, Amazon’s revenues rose from
$4.2 million to $8.5 million while seeing a $100,000 decrease in losses from each quarter
(Wilhelm, 2019). Although they were still seeing roughly $2.2 million in total losses during
this quarter, this was a positive sign as they were able to more than double their revenue
while decreasing those Losses.
According to data provided by Search Logistics, Amazon has seen an increase of roughly
$29 billion in net sales from 2013 to 2021, with 2021 seeing a total of $31.77 billion in net
sales of Amazon Prime. Additionally, “Amazon subscription value has more than doubled
since 2017” (Search Logistics, 2022). This was in large part due to an increase of
approximately 28 million subscribers from the years 2019-2021, as COVID-19 was at its
worst.
As we can see a great use of financial statements can help companies make decisions
regarding the situation to adapt and take opportunities regarding the situation. The premise of
this paper is to assess the financial health of the company through the use of ratio analysis,
3
and based on the results, recommendations can be made whether investors are encouraged to
invest or not, and managerial decisions can be effectively made through what the outcomes
depict Amazon’s current financial state is.
Financial statements are designed to aid the decision-making of investors, creditors and
other stakeholders as it supplements their understanding of the business with the use of its
historical data, and this can help in creating predictions of any company’s cash flow and
profitability. A company’s financial performance can be assessed through the evaluation of
the company’s liquidity, profitability, efficiency, and structure of its capital (Mautz, Jr., &
Angell, 2006). To consider a company to be financially stable, they would have good
liquidity, profitability, and structure of capital, and these can be assessed with the use of ratio
analysis on their Income Statements and Balance Sheets. For example, most investors
perform financial analysis to make decisions based on whether a company’s liquidity state is
good enough to invest in since it is identified that those who have good liquidity is normally
linked to bringing business to have good profitability, which is the desired factor for investors
to see in a business (Rashid, 2018).
Moreover, ratio analysis is also a useful tool for companies to use in predicting their future
financial performance where effective decisions can be made to assure that the objectives of
the business will still be met, and overall ensures the stability of the business (Myšková &
Hájek, 2017). SEC can find this helpful as the assessments of their current situation and
predictions of their future performances can improve their financial management. Effective
management of finance is crucial, as any potential corporate failure would be prevented if
effective strategies and financial management would be developed earlier to counter these
failures from rising (Muhairi & Nobanee, 2019). Therefore, effective financial management
supplements the reduction in risks of failing to reach the achievement of their objectives, and
4
can ultimately promote more opportunities for both the growth of the business and its
financial performance (Al Ahbabi & Nobanee, 2019).
II.FINANCIAL STATEMENT
Yahoo Finance was used to collect data from Amazon’s Income Statement and Balance
Sheet. Data were selected based on the requirements needed for the calculations of liquidity,
activity, debt, and profitability ratios. The values entered are from the years 2020 to 2023 and
is in the currency of United State Dollars (USD).
Item/Year 2023 2022 2021 2020
Current Assets 172,351,000 146,791,000 161,580,000 132,733,000
Current 164,917,000 155,393,000 142,266,000 126,385,000
Liabilities
Inventories 33,318,000 34,405,000 32,640,000 23,795,000
Cash 86,780,000 70,026,000 96,049,000 84,396,000
Receiveables 52,253,000 42,360,000 32,891,000 24,542,000
Total Assets 527,854,000 462,675,000 420,549,000 321,195,000
Total Liabilities 325,979,000 316,632,000 282,304,000 227,791,000
Total Equity 201,875,000 146,043,000 138,245,000 93,404,000
Sales 574,785,000 513,983,000 469,822,000 386,064,000
COGS 480,980,000 446,343,000 403,507,000 334,564,000
EBIT 40,739,000 -3,569,000 39,960,000 25,825,000
Interest -233,000 -1,378,000 -1,361,000 -1,092,000
Net income 30,425,000 -2,722,000 33,364,000 21,331,000
All numbers are in thousands, Source: Yahoo Finance
5
The ratios that would be used in the financial analysis of Amazon are the Liquidity, Activity,
Debt, and Profitability Ratios.
Liquidity ratios measure the liquidity of a company, which is their capability of
transforming their assets into cash. Through this measurement, it is possible to determine
how well a company can meet its short-term debts without needing to raise further capital
(Hayes, 2019). Although many investors consider the profitability of a company to be an
important factor for their decision-making, liquidity is mentioned to be an equally significant
evaluator of a firm’s financial position as well, since it shows whether the company has
chances of entering bankruptcy, which most investors would consider the company as a risky
choice (Rashid, 2018). Finally, this paper will explore the liquidity position of the Amazon
through the use of current, quick, and cash ratios.
Activity ratios, on the other hand, are used to measure the firm’s efficiency in utilizing
their assets in producing sales or cash and how efficient they are in collecting their
receivables. Measuring a company’s efficiency can involve assessing their asset and
inventory management, as well as operational efficiency since it can monitor how well the
company can distribute or produce their outputs in a manner that generates profits efficiently
(Kenton, 2020a). In the case of Amazon, this paper will be using the Inventory, Receivable,
and Total Asset Turnover as a measurement to determine their efficiency.
Debt ratios will also be used to identify how reliant Amazon is in funding their assets
through liabilities. This measurement will be helpful for investors and creditors to know, as
the degree of risk will be identified. If the company is found to have debt ratios at a high
6
number, it indicates that they are greatly dependent on debts to fund their operations, which
can be risky if it is found that the company is troubled with repayments, and it can result to
discouraging creditors from lending to the company. Moreover, with the use of ratios, it is
also plausible to measure how a company is capable of repayments and the duration it would
take them to do so (Zutter & Smart, 2019). Debt ratios will be useful for creditors and
investors in determining the level of risk in selecting Amazon as a choice for investing or
lending, as the factors of the company’s capabilities on repayments and the duration it
normally takes for them to pay them back will be assessed. Hence, to measure these factors,
the ratios used will be Debt ratio and Times Interest Earned Ratio.
Lastly, profitability ratios can depict a firm’s ability to produce profits through their sales,
costs, assets, and the equity of its shareholders as well (Kenton, 2020b). This is what most
investors would seek to know as it is shown how capable the company is in producing high
returns from their shareholder’s investments. Moreover, it is also used as a tool to assess how
successful the company has been, as most businesses have the primary goal of maximizing
profits. Monitoring their performance will allow effective decision-making if it is noticed that
Amazon have been continously generating a lot of earnings in 2023, thus having more
monetary resources to allocate for investments and other activities. Therefore, to examine the
profitability of Amazon, the financial ratios of Return on equity, return on assets, and Profit
margins will be used.
Overall, the usefulness of the results from the ratio analysis of SEC’s financial statements
can be gained with comparisons of its ratios from previous years and its competitors.
However, in this paper, the analysis will only consider its financial performance across the
years 2020 to 2023.
7
Results and Discussion
Ratio/Year 2020 2021 2022 2023
Current ratio 2.5 2.67 2.8 2.9
Current Ratio reveals how a company’s current assets can pay for its current liabilities,
otherwise known as a measure of how well it can meet its short-term debts. The optimal ratio
must be between 1.5 and 2.0, and anything below 1.0 indicates that they are insufficient in
meeting their current liabilities, while above 2.0 shows that they have enough to be solvent in
the short-run. Amazon shows consistent ratios over 4 but seems to be declining.
Ratio/Year 2020 2021 2022 2023
Quick Ratio 2.7 1.8 2.1 2.5
Quick Ratio shows a clearer insight into how liquid a company is when meeting its current
liabilities as only its trade receivables and cash are considered, as it excludes inventory.
Amazon seems to struggle in meeting its short-term debts within 4 years from 2020 to 2023,
as the ratio has fallen below 1 ever since.
Ratio/Year 2020 2021 2022 2023
Cash Ratio 1.71 1.5 1.6 1.8
The cash ratio measures the liquidity of a company through how its cash and cash equivalents
can meet its current liabilities. It considers a company’s most liquid assets on how it can meet
Its short-term debts. Although the ratio had dropped from 1.71 in 2020 to 1.5 in 2021, it
quickly recovered as it had risen to 1.8 in 2023.
8
The Liquidity ratios of Amazon shows that they have managed their working capital
effectively as it has suggested that their current assets always exceed their current liabilities.
Moreover, the ratios had not fallen under 1 since 2023, which indicates that they have
effective liquidity management. Through their management, the chances of being bankrupt
are extremely low for the company, which can be attractive for investors to know. Finally,
Amazon appeared to be at its best liquidity position in 2023, with the ratios of 2.9, 2.5, and
18 in their current, quick, and cash ratios respectively, which are the highest as compared to
the previous 3 years of the company.
Ratio/Year 2020 2021 2022 2023
Inventory 7 5.21 5.98 6
Turnover
Inventory turnover indicates the frequency of a company selling and replacing their inventory
at a certain time. It would be more favorable to the company if the number of times of
turnover is revealed to be higher, as a low turnover can indicate poor inventory management.
During 2020, SEC shows that they replace their inventory 7 times but it has fallen to 5.21
times in 2021. However, it appeared to slightly recover as it had risen to 6 times in 2023,
suggesting the inventory was more efficiently managed in 2023 than the previous 2 years.
Ratio/Year 2020 2021 2022 2023
Receiveable 8.25 8.8 7.35 6.72
Turnover
Receivable Turnover shows the efficiency or how quickly a company receives the amount
owed to them from their customers. If the ratio is mentioned to be higher, it would mean that
9
the company has been receiving payments from their debtors more quickly, which is
desirable as there are higher chances where cash flow will be improved. There was a slight
increase in efficiency from 2020 to 2021, as it increased from 8.25 times to 8.8 times.
However, it began to drop from 2021 to 2023, as it fell from 8.8 times to 6.72 times. The year
2023, revealed to be the lowest point of their Receivable Turnover compared to the previous
3 years. This suggests that they are experiencing some difficulties in receiving payments from
their debtors.
Ratio/Year 2020 2021 2022 2023
Total Asset 0.85 0.92 0.80 0.67
Turnover
Total Asset turnover indicates how well a company utilizes its assets to produce revenue.
Efficiency in utilizing their assets to generate revenue was shown from the years 2020 to
2021, as there was a slight increase from 0.85 to 0.92. Moreover, it has begun to decrease
from 2021 to 2023, as it fell from 0.92 to 0.67, indicating its lowest point as compared to the
previous three years. This suggests that the company is facing an issue to increase their sales,
or they have too much inventory or assets left unused and are ineffective in generating
revenue.
Activity Ratios of Amazon have shown that they are beginning to be less effective in
collecting payments from debtors within 2023, as well as their utilization of assets to produce
revenue had dropped at its lowest when compared to the previous 3 years. However, Amazon
has shown an improvement in its inventory efficiency in 2023 as compared to the drop they
experienced from 2020 to 2022.
Ratio/Year 2020 2021 2022 2023
Debt Ratio 30% 28% 25% 22%
10
The debt ratio shows the proportion of a company’s assets that are financed by debt. SEC
shows a debt ratio of less than 100%, which is desirable for investors and creditors to see. It
also indicates that they have more assets than debts, which suggests that they are financially
healthy. 2017 was the year that SEC had experienced its highest debt ratio of 29% within the
4 years. However, it has fallen from 29% to 25% in 2019. This is a good indication of SEC’s
financial health as they do not appear to be heavily reliant on debts to fund their assets,
especially since it had decreased from 2017 to 2019.
Ratio/Year 2020 2021 2022 2023
Time Interest 52.48 87.33 91.27 55.21
ratio
Times Interest ratio measures how a company is capable of meeting their interest payments
with their present EBIT. It presents the number of times a company can cover its interest
payments with its EBIT. Amazon shows that they are very capable of meeting their interest
payments obligations since their ratio in 2020 shows that they are 52 times capable of
covering their interests, while 2022 serves as the highest, with 91 times. This signifies that
the company would not face any difficulty in paying their long-term obligations due to the
high number of times that indicates its capabilities in paying interests. However, the ratio
significantly dropped to 55.21 times in 2023. This could be suggested by the decline in sales,
resulting in a drop in their EBIT, and with the added challenge of increased interest payments
within 2023, it is assumed that it had led to difficulties the company is facing in meeting their
obligations.
The debt ratios of SEC show that the company is in a good financial position as they appear
to be less reliant on debts to fund their assets, and it has improved further in 2019. However,
11
its Time Interest Earned Ratio showed that SEC was in a better condition from 2016 to 2018,
as it had dropped by half in 2019. Although, SEC still presents a low risk for investors and
creditors to select the company as the choice of investing in or lending to, as the ratios depict
the company to be solvent, based on their low debt ratios and high number of times in paying
interests.
Ratio/Year 2020 2021 2022 2023
Return On 15% 22% 17% 12%
Equity
Return on equity shows a company’s ability to effectively utilize their shareholder’s equity
into profits. If the percentage is high, it indicates that the company is effectively using their
investor’s funds to produce profit, which is what most shareholder’s desire to see as it
indicates higher returns from their investments. With an increase from 15% to 22% in 2020 to
2021, Amazon has been utilizing their shareholder’s equity effectively to generate profits.
However, from 2021 to 2023, it has fallen from 22% to 12%. This can suggest that Samsung
may have slowed down in seeking to generate returns for their investors as they have been
ineffectively used their investor’s finance from 2021. Moreover, it is suggested that this drop
could be due to the decline in their profits. This can be risky factor as it could discourage
potential investors in selecting Amazon to invest in.
Ratio/Year 2020 2021 2022 2023
Return On 11% 16% 14% 8%
Assets
Return on Total Assets indicates how a company can effectively generate profit from
utilizing their assets. Within 2020 to 2021, it has shown an increase from 11% to 16%,
12
signifying that they have been utilizing their assets effectively to generate profit. However, it
has dropped from 2021 to 2023, with 16% to 8% respectively. This suggests that Amazon has
inefficiently used their assets to increase profits, as it is also shown that their net income had
declined in 2023. The drop in their ROA is also linked to the drop in their ROE, as it
indicates that they have not been using their investor’s finance efficiently in generating
profits as well. The fall in this ratio can be discouraging for investors, as they are seeking for
a company that can promise high returns from their Investments.
Ratio/Year 2020 2021 2022 2023
Profit Margin 15% 20% 25% 13%
Profit margin shows how a company effectively generates profits from the sales that they
have made. Amazon shows that they have been successful in the growth of sales from 2020
to 2021, resulting to an increase in profit margins from 15% to 20%. They continued to
secure their leadership in the year 2022, which improved their profit margin to 25%.
However, there is a decline in their profits due to fall in sales during 2023. Overall, this can
be predicted on the basis of their ROA and ROE, as the previous ratios had depicted an
inefficient usage of assets to generate profits.
Overall, the profitability ratios show that the company had experienced difficulties in
generating profits over the years from 2020 to 2023. This fall in profits can be explained
through the increases in operating costs and decline in sales, which had led to a significant
fall in their operating profit in 2023 as compared to 2022. Furthermore, their ROE and ROA
has shown that the company has been inefficient in utilizing their total assets in generating
sales, which had led to the fall in their profits. The drop in these ratios can be discouraging
for potential investors as low confidence is expected when these figures depict potential low
returns for Amazon’s shareholders.
13
III.CONCLUSION
Amazon appears to be stable in terms of liquidity and in their structure of capital, as they
their ratios deem themselves to be capable of paying their short-term debts effectively and
they are also shown to be less reliant on debt in funding their operations. However, their
activity and profitability ratios can differ in comparison.
Their liquidity position has grown to improve from 2020 to 2023 and this can benefit
them in the long run. Through effective management, they can develop further strategies with
the aim of improving their profitability, without the risks of being unable to pay their debts
that can arise from the planned activities they would do in the future (Alnuaimi & Nobanee,
2020). This is evident in Amazon through their liquidity results, since it defines the company
to have extremely low chances of bankruptcy, and this is attractive to investors and creditors
as it shows that there are high chances of earning repayments. Moreover, Amazon is seen to
be financially healthy in terms of their debt ratios as results shows that their assets is enough
to be capable of paying off their liabilities, which is another factor that investors and creditors
can desire at this current time, as it indicates that the company is able to pay them back
despite of the unstable economic environment caused by the ongoing pandemic. However,
the Time Interest Earned Ratio contrasts the improved results of the debt ratio as it had
declined over time, although, this ratio is not expected to be completely discouraging for
financially concerned stakeholders as results is depicted to still be very high, which indicates
that Amazon is able to pay their obligations effectively.
On the other hand, Amazon’s activity ratios depict the company to be less efficient in
2023. They appear to have difficulties in collecting payments from debtors and they are also
becoming less effective in utilizing their assets to produce revenues. Contrarily, an
improvement has been noticed in their Inventory Turnover in 2023 as compared to the fallen
14
results shown from 2021 to 2022. Furthermore, the fall in their sales could be a consequence
of the changes within the economic environment and from increasing competition in the
electronics market, and this had caused a fall in their profits. This can be further explained
from their ROE and ROA, as the ratio’s results has shown that the company has been
inefficient in utilizing their total assets in generating sales, which can be discouraging for
potential investors when they notice that the current Amazon’s shareholder’s equity is not
being utilized efficiently to generate profits.
Finally, in the year 2023, the economic environment is predicted to be more unstable due
to the current pandemic, and this may affect their financial performance even more. However,
the overall results of Amazon’s ratio’s analysis is not deeming the company to be at its worst
state over its entire lifespan as of now, but rather they are facing challenges that many can
expect for the business to overcome across time, as they can still be seen to be financially
healthy on the basis of their liquidity and their structure of capital. Hence, it is still advisable
for Amazon to be a choice for investors and creditors, however, it is still important for the
firm to execute effective managerial decisions that would solve the issues that is revealed
from their activity and profitability ratios.
15
IV.REFERENCES:
Colby Hopkins. (2023, May 1). The History of Amazon and its Rise to Success. Sourced from
Michigan Journal Of Economics: https://sites.lsa.umich.edu/mje/2023/05/01/the-history-of-
amazon-and-its-rise-to-success/
Al Ahbabi, Al Reem and Nobanee, Haitham, Conceptual Building of Sustainable Financial
Management & Sustainable Financial Growth (October 19, 2019). Available at SSRN:
https://ssrn.com/abstract=3472313
Myšková, R., & Hájek, P. (2017). Comprehensive assessment of firm financial performance
using financial ratios and linguistic analysis of annual reports. Journal of International
Studies. Sourced from: https://search-proquest-com.adu-lib-database.idm.oclc.org/central/
docview/2363730412/72A359F2E37744B7PQ/5?accountid=26149
16
Rashid, C. A. (2018). Efficiency of Financial Ratios Analysis for Evaluating Companies’
Liquidity. International Journal of Social Sciences & Educational Studies. Sourced from:
https://login.adu-lib-database.idm.oclc.org/login?qurl=https://search.proquest.com%2fcentral
%2fdocview%2f2394976285%2f30E1C9595F2E41AAPQ%2f5%3faccountid%3d26149
17
