Financial Analysis of Amazon.com Inc.

This paper seeks to analyze the fiscal statements of Amazon. com Inc. for the geezerhood 2005, 2006 and 2007 by interpreting its advantageousness, liquidity, leverage and activity ratios and comparing the in truth(prenominal) with industriousness gists. This will also analyze the lodges exploitation rates, valuation ratios (price) and dividends and will employ horizontal and vertical analysis in process as needed. 2. Analysis and Discussion 2. 1 Profitability break on beauteousness of Amazon. com Inc. shows many things about the past performance of the family in the past five old age.The continued decrease from 2005 through 2007 appears observable but the rates atomic number 18 still really high. . From 145. 93% in 2005, it has hugely decreased to 44. 08% in 2006 and further to 39. 77% in 2007. such(prenominal) level of profitability is still very for purposes of determining a phoners profitability. Comp bed to industry come of 24. 9%, the alliances hard roe is stil l higher(prenominal). get a line Exhibit I in the Appendix. The cathode-ray oscilloscope of 39% to 145% bribe on equity encourages investors as it would mean that for either $100 investment, the investors expect returns of about $39 to $145. These rates could be viewed as something unprecedented for a keep company like Amazon.com Inc.. Its level of hard roe is something that mustiness be the envy of many other companies such as EBay Inc. , change Holdings and Friendly Auto Dealers, Inc (Yahoo Finance, 2008). It may be none that return on equity is solved under the formula where make profit is split up by the total stockholders equity. When compared to an average rate of 1. 5% US solution rate (Housepricecrash, 2008 ) if money was invested in a bank, the companys would depend to offer more than twenty fold and it is something very difficult to mention and would therefore make it very attractive to investors.The companys return on assets for the years 2006 through 2008 r anges from 4% to 9% and which appears to be apparently lower that its ROE. The same may be observed in affinity to the companys net profit allowance account for hold out troikasome years and has not even exceeded 5% in any design. However, ROE must be superior in declaring the profitability of Amazon as compared to all other profitability ratios. Operating margin which measures within the range of 3 to 5% for the three years, represents the margin after deducting cost of sales or services and operating expenses.Things to be added or deducted still are other income(s). The ratios mean that the management of Amazon. com Inc. is doing well that it must thank its employees participation of employees in delivering value to customers. The net margins of the company for the three years are lower than operating profit margin, collect to the additional deductions of enliven expenses. The profitability ratios such as return to equity, operating profit margin and net profit margin ha ve the capacity to show diachronic profitability but investors would base also their decision on estimates of the future.Since conditions change, sapiential users of fiscal information may just give more determine to estimated cash flow in the future for valuing their investments in term of dividends to be received from the company. This appears to be found in the case of Amazon as proved by high debt equity as would be discussed ulterior in relation to its profitability. 2. 2. 2 Liquidity Liquidity enables a company to meet its receivedly maturing obligations. It is measured using the current ratio and the ardent asset ratio.Current ratio calculation uses current assets to be divided to current liabilities while quick assets ratio is almost the same except that the document and prepaid expenses are being removed from the current assets to have a new numerator but the denominator is the same. Quick assets therefore normally include cash, vendible securities and accounts rec eivable and the use of quick asset ratio is very a proper deal relevant for one intending to have higher form of measuring liquidity. In such case, one would prefer quick asset ratio everywhere that of the current ratio.As applied now, the current ratios of Amazon. com Inc reflected 1. 39, 1. 33 and 1. 54 for the years 2007, 2006 and 2005 singly while the quick asset ratios for same years are 1. 02, 0. 95 and 1. 19 for the same years respectively. See Exhibit I in the Appendix. Both ratios showed fluctuating trend where decreased was first noted and indeed increase followed after. The companys liquidity may be considered to be still very high since current ratios average more than 1. 3 while quick asset ratio averages about more than 1.0 for the become three years. It current ratio for 2007 is very close to industry average of 1. 8 while its quick ratio of 1. 02 is not very further from industry average of 1. 6. Both its liquidity ratios are better when compared with S&P 5 00 index. See Exhibit I in the Appendix. The pricey liquidity appears to be a result also of good profitability of the company as observed earlier in name of very high return on equity. 2. 2. 3 Leverage ratios pecuniary leverage or solvency refers to the companys capacity to keep it constancy over the long term.Generally measured by the debt to equity ratio, with the formula of having the total debt of the company divided by its total equity a good financial leverage assures investors that the company is not to just to exist in the short term but it must also have a long life to recover long term investments which takes years to capture the needed returns. The debt to equity ratios of Amazon. com Inc. are 4. 42, 9. 12 and 14. 02 for the years 2007, 2006 and 2005 respectively. These ratios are except not as good as industry average of 0. 32. See Exhibit I in the Appendix .The ratios are indeed very high since the ratio of more than 4. 0 means that the value the company investme nts is not matched by what it borrows by about more than 400%. unparalleled Improvement were however recorded from 2005 through 2007. This must be due to its very high profitability. This could mean that the company is expanding business as noted its net fixed assets reflecting growth rates of 25. 06%, 22. 53% and 67. 91%, the years 2007, 2006 and 2005 respectively. See Exhibit I in the Appendix. In other words, expansions are getting financed hugely from operations which is a sigh of a hale company.Good solvency is a proof of good capital structure and for Amazon. com Inc. the same could be attainable as shown in the very remarkable return if its debt to equity ratio which cut more than half that on 2006 in 2007. give also its very good liquidity as analyzed earlier, the company must be declared to have clean bill of health in financial terms. 2. 2. 4 Efficiency ratios The companys profitability is being supported by its good efficiency ratios. Inventory turnovers for three ye ars are very much higher than industry average and such efficiency is indicative of its better performance than competitors.Even its collection period and receivable turnover are definitely above industry and S&P 500 index. No wonder the massive improvement in leverage ratio for two years is more than justified. 3. destruction Amazon. com is growing very remarkably in term of revenues, fixed assets, and net income. The increase in net income of more than 60% in 2007 is not easy to disregard and the fixed assets growth averaging more than 20% for the last three years could unless mean an expanding company under a very favorable condition in the industry.Its profitability ratios, liquidity ratios, leverage ratios and activity ratios are very favorable to the company. Its profitability is sustaining not only its liquidity by keep improving is highly leverage financial condition. Although, 2007 liquidity and leverage ratios are not as good as industry averages, the chance that they could be improved soon by companys profitability is very big given its higher than industry average ROE for the last three years. The activity ratios in terms of inventory turnover and receivable turnover in 2007 are higher than industry average which could only support for the companys very high profitability.