Preferably Amazon,com Inc - Report Example

Company Analysis, "Preferably Amazon.com Inc" Table of Contents Table of Contents 2 Introduction 3 Liquidity ratios 3 Profitability Ratios 4 Efficiency ratio 6 Solvency ratio 7 Conclusion 8 Reference 10 Bibliography 11 Annexure- 12 Introduction Amazon.com Inc is a US based online retailer. The financial position of the company for the last three years has been analysed to assess its performance. Ratios have been computed using the financial data available from the annual reports and financial websites like Morningstar. An analysis of these ratios has been done to determine the trend in the company’s operations. The important ratios relating to solvency, efficiency, liquidity and profitability have been calculated for the three recent financial years. Based on this the financial health of the company has been assessed. Liquidity ratios The liquidity ratio helps in assessing the liquidity strength of the company. Important liquidity ratios include current ratio and Quick ratio. The current ratio of a company is measured as Current Assets/ Current Liabilities (McConnon, n.d.). Amazon reported a current ratio of 2.64 in 2009. The liquidity position of the company has strengthened over the last three years as evident from the steady rise in its current ratio. In 2007 this ratio was 1.39 and it increased to 2.43 in the following year (Amazon.com, 2009; Amazon.com, 2007). From the above bar chart it is clear that the liquidity position of the company has become stronger. This implies that the company has sufficient amount of current assets to back up its short term obligations. The Quick ratio of a company measures the extent to which the company is able to meet its short term liabilities out of its most liquid assets. The Quick ratio of Amazon has also improved over the last three years. In 2009 this ratio was 2.05 indicating that the company has sufficient liquid resources to meet its obligations. Profitability Ratios The profitability ratios include Net Profit Margin, Gross profit margin, Return on equity (ROE) etc. These ratios measure the profitability of the business operations. The net profit margin of Amazon.com was 3.68% in 2009, 3.37% in 2008 and 3.21% in 2007. From this it is clear that the company management is exercising a good control over the administrative expenses. A strict control in the costs has enabled the company to improve its profitability margin over the years. The gross profit margin assesses the ability of the company management in controlling the operating costs of the business. Amazon.com reported a gross profit margin of 22.57% in 2009. This ratio was 22.28% in 2008 and 22.60% in 2007. This shows that the company management has successfully maintained stability in this ratio for the last three years. It is a good sign as it shows that the management has a fair control on the operating costs. This helps in improving the amount of earnings. Return on equity (ROE) is an important indicator of the returns that the company is able to generate for its shareholders. Amazon.com reported a ROE of 17.16% in 2009. This was much higher in the previous years. In 2008 the ROE was 24.14% and 2007 it was 39.77%. This shows that the returns generated by the company have dropped over the years. It is on account of the higher equity base in 2009. The net income of the company increased from $476 million in 2007 to $902 million in 2009. This is a rise of roughly 90 percent. Despite the rise in the net income the ROE of the company has dropped on account of the high equity base. The Earnings per share (EPS) of the company is measured as Net Income/ Outstanding shares. EPS of Amazon.com has increased from $1.12 in 2007 to $2.04 i.e. nearly twice. During these years the net income of the company has also almost doubled which explains the rise in the EPS despite the rise in the number of outstanding shares of the company. This is a positive sign as it means that the company has issued new equity and has successfully managed the additional capital as reflected from the rise in the earnings per share of the company (Morningstar, 2010). Despite a steady EPS position the company has not declared any dividend in all these years. The company is ploughing back all its earnings into the business instead of distributing it among the company shareholders. Efficiency ratio The efficiency ratio helps in evaluating the management efficiency. Common efficiency ratios are Inventory turnover ratio and Asset turnover ratio. The inventory turnover ratio is measured as Cost of Sales / Inventory. Higher the inventory turnover ratio better is the management’s ability in inventory management. For 2009 Amazon.com reported an inventory turnover ratio of 8.74. This is less as compared to the last couple of years. In 2008 this ratio was 10.65 and 2007 it was 9.57. Despite the drop this ratio is fairly good as it means that the company is able to convert its inventory into sales resulting in little unsold stock. This is a good sign as it means that the funds of the company do not remain blocked in the inventories. The asset turnover ratio of Amazon.com for 2009 is 1.37. This was high in 2008 and 2007 at 1.79 and 1.77 respectively. The company management must try to improve its asset utilization as this ratio is just a little more than one. There is scope for further improvement. Solvency ratio The solvency ratio gives information about the gearing of the company i.e. the amount of debt and equity employed by the company in the capital structure. The debt-equity ratio of the company is measured as Total Debt/Total equity. The debt-equity ratio of Amazon.com was fairly high in the initial years as suggested by the high debt equity ratios of 2.11 and 4.42 in 2008 and 2007 respectively. But the company has managed to reduce this ratio over the years as evident from the fall in the debt-equity ratio to 1.63 in 2009. It has not been on account of debt reduction but on account of equity addition. The interest coverage ratio measures the ability of the company to honour its interest obligations out of the earnings. This is measured as EBIT/ Interest expense. For Amazon.com this ratio has increased nearly four times over the last three years. In 2007 this ratio was 9.57 and it increased to 35.15 in 2009. This has been on account of higher earnings and lower interest burden. Thus it can be inferred that the earnings generated by the company are enough to pay nearly 35 times the interest obligations. Conclusion An analysis of the company ratios shows that the financial position of the company is quite satisfactory. The solvency position of the company is also quite favourable as indicated by the high interest coverage ratio. The high returns generated by the company for its equity investors make it attractive in the eyes of the investors. Even though it has dropped over the years but this fall has been on account of an increased equity base as the earnings of the company have doubled during the period. The liquidity position of the company is also quite good as evident from the current ratio which has been more than two for the last three years. A current ratio of more than two is considered to be ideal. In short the financial variables of the company are convincing and the company has good prospects for the future. Reference Amazon.com. 2009. Annual Report. Available at: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Mzc2NjQyfENoaWxkSUQ9Mzc1Mjc3fFR5cGU9MQ==&t=1 [Accessed on December 11, 2010]. Amazon.com. 2007. Annual Report. Available at: http://media.corporate-ir.net/media_files/irol/97/97664/2007AR.pdf [Accessed on December 11, 2010]. McConnon, C.J. No Date. Ratio Analysis. University of Maine. Available at: http://www.umext.maine.edu/onlinepubs/PDFpubs/3002.pdf [Accessed on December 11, 2010]. Morningstar. 2010. Key Ratios. Amazon.com Inc. Available at: http://financials.morningstar.com/ratios/r.html?t=AMZN®ion=USA&culture=en-US [Accessed on December 11, 2010]. Bibliography Ross, A.S. Westerfield, R. Jordan, D.B. 2008. Fundamentals of corporate finance. Tata McGraw-Hill. Annexure- (in $m)   2009 2008 2007 Liquidity       Current assets 9,797 6,157 5164 Current liabilities 3,714 2,532 3714 Current ratio 2.64 2.43 1.39         Inventories 2,171 1,399 1200 Quick Ratio 2.05 1.88 1.07         Profitability       Net Income 902 645 476 Net Sales 24,509 19,166 14,835 Net Profit margin 3.68% 3.37% 3.21%         Gross Profit 5,531 4,270 3,353 Net Sales 24,509 19,166 14,835 Gross profit margin 22.57% 22.28% 22.60%         Net Income 902 645 476 Equity 5,257 2,672 1,197 ROE 17.16% 24.14% 39.77%         Net Income 902 645 476 Shares outstanding (million) 442 432 424 EPS 2.04 1.49 1.12         Efficiency       Inventories 2,171 1,399 1200 Cost of Sales 18,978 14,896 11,482 Inventory turnover ratio 8.74 10.65 9.57         Assets 13,813 8,314 6,485 Cost of Sales 18,978 14,896 11,482 Asset turnover ratio 1.37 1.79 1.77         Solvency       Total Debt 8,556 5,642 5,288 Total equity 5,257 2,672 1,197 Debt-equity ratio 1.63 2.11 4.42         EBIT 1,195 972 737 Interest 34 71 77 Interest coverage ratio 35.15 13.69 9.57 Read More