To:

From:
Date:
RE:

Paige Paulsen
Parisa Abdoly
November 28, 2015
Amazon.com Analyzes

Purpose:
For my Accounting 1120 course, I analyzed Amzon.com for the year 2011 and
2012. The purpose of this paper is to evaluate Amazon with outside investors in the
business area. Amazon is one the biggest online retailers with a variety of populations
demands. Throughout this paper I will provide information about Amazons ability to pay
current liabilities, ability to sell merchandise inventory and collect receivables, ability to
pay long term debt, profitability and evaluating stock as an investment.
Ability to pay current liabilities:
In order to evaluate Amazons ability to pay its current liabilities, I chose the
current ratio. This ratio shows the companys ability to pay current liabilities from its
current assets. The table below shows that Amazon is able to pay its current liabilities
within these two years.
Year

Current Ratio

2011

1.17

2012

1.12

Online Retail Sales Industry Averages

1.54.1

The acid test ratio is the other ratio that I used for this part. This ratio shows the
companys ability to pay its own current liability in a short period of time.

Year
2011

Acid-Test Ratio
0.78

2012
Online Retail Sales Industry Averages

0.82
1.82

Comparing Amazon with the industry average using current ratio, we see that both are in
quite the same range. However Amazons acid-test ratio is more than the industry
averages which indicates Amazon is capable to pay its current liabilities by its due dates.
Ability to sell merchandise inventory and collect receivables:
I continued my evaluation on Amazon by using inventory turnover ratio. This
ratio shows the number of times a company sells its average level of merchandise
inventory during a period.
Year
2011
2012
Online Retail Sales Industry Averages

Inventory Turnover
9.1
8.3
4.8

This table shows that Amazons inventory for the years 2011 and 2012 is high compared
to the industry averages. Having high inventory turnover maybe is the result of successful
sales, which means Amazon had good profitable sales for these two years. That made this
company to be in a good shape. Gross Profit Margin is the next ratio that I used. This
ratio shows the profitability of each sales dollar above the cost of goods sold.

Year
2011
2012
Online Retail Sales Industry Averages

Gross Profit Margin

22%
24%
33.55%

Comparing Amazons gross profit margin to the industry, we can easily recognize that
Amazons ratio is low, and financially the company is not in an acceptable range with

gross profit margin. Days sale in receivables was the last ratio that I used for this part.
This ratio shows the number of days sales it takes to collect the average level of
receivables.
Year
2011
2012
Online Retail Sales Industry Averages

Days Sales in receivables

15.8
17.7
36.11

Looking closely at the table above, we see that Amazon is doing very well in collecting
its receivables compared to industry averages. This is a good sign of Amazons situation
when it comes to collecting receivables.
Ability to pay long-term debt:
I continued analyzing Amazon by focusing on its ability to pay its long-term debt.
In the beginning of this part, I used the debt ratio. This ratio shows the proportion of
assets financed with debt. Unlike other ratios, the higher this ratio is the more likely the
company is at financially risked.

Year
2011
2012
Online Retail Sales Industry Averages

Debt Ratio
69%
75%
34%

Comparing Amazons ratio in 2011 and 2012 to the industry average, it is clear that
Amazon is not in a good state. Having higher percentage ratios in these two years
compared to industry results in Amazon being in higher risk financially. Debt to equity
ratio is the proportion of total liabilities relative to total equity. Like debt ratio the higher
the ratio is the more financially at risk the company is.

Times interest earned ratio was another ratio that has been used for this part. This ratio
focuses on a businesss ability to pay its interest expenses.
Year
2011
2012
Online Retail Sales Industry Averages

Times- interest-earned ratio

15.18
5.23
5.33

The table above shows that in 2011 the times interest earned ratio is higher than both
2012 and industry averages. This is a good sign because it shows that the company is able
to pay its obligations. However since moving from 2011 to 2012 ratios shows decreasing,
we can say that Amazon is in good financial shape.
Profitability:
Continuing this evaluation, I used the profit margin ratio. This ratio indicates how
much net income is earned on every dollar of net sales.
Year
2011
2012
Online Retail Sales Industry Averages

Profit Margin Ratio

1.31%
-0.06%
2.87%

The table above shows that in 2011 Amazon was doing good, but in 2012 we have a
negative ratio balance, which is not a good sign. Comparing both years with the industry
average we see that Amazon has a low profitability in this area.
Rate of return on common stockholders equity was the next used ratio in this part. The
table below displays that in 2011 Amazon was doing well, but in 2012 it got worse
because it got a negative ratio. Also, comparing these two years to the industry average
we see that Amazon is not in good condition at all.

Year

Rate of return on common stockholders

equity

2011
2012
Online Retail Sales Industry Averages

8.63%
-0.49%
11.39%

Evaluating stock as an investment:

I ended my Amazon assessment by evaluating stock as an investment. For this
part, I used price/earning ratio. This ratio values the stock market places on $1 of the
companys earning.
Year
2011
2012
-Online Retail Sales Industry Averages

Price/Earning Ratio
131.37
-2854.7
47.17

The table above shows that Amazon was doing well in 2011. On the other hand, it got
worse in 2012 because the ratio got negative. Comparing 2012 to the industry average we
see that Amazon is not in good shape.
Conclusion:
In conclusion, Amazon is not a good investment. For finding the reason of this
statement, lets briefly look at different ratios that I used throughout this evaluation.
Amazon is doing well in the ability to pay its current liabilities whenever the due dates
arose. Also, it is doing really good in collecting its receivables. However it is in financial
risk when it comes to paying its long-term debt. Also, its profitability is not good due to

the net loss that it had during 2012. Finally toward evaluating stock as an investment,
Amazon is not doing well. In the future it may be a successful investment.