Amazon Financial Ratio Analysis
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The main purpose of research is to reduce the risk level of a decision. The research process involves six decision stages. The first stage of research process is to determine and clarify the research question. The task before us was – to identify a publicly-traded company that is a leader in its industry. The research questions formed were – what industry to choose? Is there a clear market leader in that industry? Are there enough publicly traded companies in that industry? Is the marker leader a publicly traded company for minimum 5 years? Are the last 5 years’ financial statements of the company available in public domain? The second stage of the research process is creating a research proposal. In this stage budget is allocated to the research project. Our research was allocated small amount of budget and time. So, research needed to be concluded fast. The third stage is designing the research project. In this stage, a blueprint for fulfilling research objectives and answering research questions within allocated resources is prepared. (Cooper & Schindler, 2011, p. 87).
In our research, the industries considered for research were: Automobile, Computer and accessories, Soft drink, Sports and apparels, e-commerce, retail, software, banking and finance. These industries were chosen because there are few very big global players in these industries for whom adequate amount of data is available in public domain. It makes the task of data collection easy. In this stage, a pilot test is used to detect weakness in design and data collection process (Cooper & Schindler, 2011, p. 89). The fourth stage is data collection and preparation. For each of the selected industries, top 5 companies were listed down for each of the last 5 years. Each company was marked as publicly listed/ not listed. If the company is listed, determine whether company is listed in USA or not.
The goal is to identify the market leader in each industry who has been listed for minimum 5 years in USA and has consistently dominated the market in respective industries. The fifth stage is data analysis and interpretation (Cooper & Schindler, 2011, p. 90). The data collected in stage four was analyzed and summarized in this stage. The final stage of research process is to report the result. The report also includes an executive summary of the problem, methodology used, findings, and recommendations. The recommended industry was “e-commerce”. In e-commerce industry, Amazon.com has been a market leader for several years. Amazon.com is a $57.26 billion company. Due to its larger size, competitive industry, undisputed market leadership, availability of data in public domain, and listing on NASDAQ, Amazon.com is recommended for further research. Ratio Analysis:
Amazon.com Inc is market leader in e-commerce industry. The ratio analysis helps in understanding financial health and financial performance of a company, compare the financial performance of a company with peers and industry average, as well as with past performance, and identify trends. The liquidity ratios tell about the liquidity position of a company. The current ratio and quick ratio are two important liquidity ratios. Current ratio of Amazon.com has come down from 1.39 in 2007 to 1.17 in 2011. Quick ratio has also declined from 1.07 in 2007 to 0.84 in 2011. The current ratio of Amazon.com is less than the industry average, but quick ratio is better than industry average. It shows that company has good cash position and company is able to manage current assets more efficiently. The debt management ratios give an insight in capital structure of the firm.
The total debt ratio has improved in last 5 years. The total debt ratio is much lower than the industry average. The debt to equity ratio of Amazon has come down drastically from 1.07 in 2007 to 0.18 in 2011. However, D/E ratio has increased slightly in 2011. The D/E ratio of Amazon is slightly higher than industry average of 0.12 (MSN Money, 2013). The cost of debt is lower than the cost of equity. So, adding some debt in capital structure has actually helped Amazon to lower its cost of capital. The asset management ratios tell about the efficiency of a firm. The inventory turnover of Amazon.com has declined from 12.36 in 2007 to 9.63 in 2011, which is a cause of concern. The inventory turnover ratio of Amazon has been on decline in last 5 years, but it is still higher than the industry average.
The asset turnover of Amazon has also declined consistently and now it is just slightly higher than the industry average. The decline in asset turnover indicates that the asset utilization of Amazon has come down, which is a cause for concern. The profitability ratios tell about profitability of a firm. The profit margin of Amazon has declined from 3.21% in 2007 to 1.31% in 2011 and it is much lower than the industry average of 10.48% (MSN Money, 2013). The return on asset and return on equity has also declined consistently in last five year and it is lower than the industry average. The declining trend in profitability ratios is a cause of concern for Amazon.com. The P/E ratio tells how much investors are willing to pay for a company. The P/E ratio of Amazon has improved in last 4 years, (though it is lower than what it was in 2007). The P/E ratio of Amazon is much higher than the industry average, which shows that investors put more confidence in Amazon than its peers.
Cooper, D. R., & Schindler, P. S. (2011). Business Research Methods. New York, NY: McGraw-Hill/Irwin. MSN Money (2013). Retrieved from: http://investing.money.msn.com/investments/stock-price?symbol=amzn&ocid=qbeb