Hannah McKay

Paige Paulsen
Accounting 1120
4/8/2018

Amazon Paper
Introduction
The purpose of this paper is to analyze and review amazon’s ability to pay

current liabilities, the ability to sell merchandise inventory and collect receivables,

the ability to pay long term debt, profitability and to evaluate stock as an

investment. Amazon is one of the most well-known and profitable online business

retailers in the world today. We will be reviewing Amazon’s financial statement

from the years 2011 and 2012.

Evaluating the ability to pay current liabilities

There are four different types of ratios that are used to evaluate the current

liabilities. They are, Working capital, Cash ratio, Acid test ratio, and Current ratio.

The first one, Working capital is the business’s ability to meet its short term

obligations with its current assets. Amazons working capital for 2012 was $2,294.

And for 2011 is was $2,594.

Amazon
2011 2012 Industry Ave.
Working capital $ 2,594 $ 2,294
Cash ratio 0.35 0.43
Acid-test ratio 0.82 0.78 1:82
Current ratio 1.17 1.12 1.54:1
 The second one is Cash ratio, cash ratio is the company’s ability to pay

current liabilities from cash and cash equivalents. Amazons cash ratio measures the

company’s ability to pay current liabilities from cash and cash equivalents. Their

cash ratio for 2012 and 2011 was 0.43 and 0.35. For both years the ratio was below

1.0. The third one is the Acid test ratio, Amazons acid test ratio is a measure of the

company’s immediate short term liquidity. So the acid test ratio was 0.78 in 2012

and 0.82 in 2011. The online retail sales industry average acid test ratio was 1.82.

Amazons short term liquidity was better in 2011 than it was in 2012. The last on is

Current ratio, Amazons current ratio is used for evaluation the company’s liquidity

and the short term debt paying ability. So the currents ratio was 1.12 in 2012 and

1.17 in 2011. The online retail sales of the industry averaged around 1.54:1. Also

the 2011 current ratio was a little better than their 2012. After we used these ratios

we can now better understand amazon’s ability to pay current liabilities.

Evaluating the ability to sell merchandise inventory and collect

receivables

Amazon
2011 2012 Industry Ave.
Inventory turnover ratio 8.3 times 9.1 times 4.8 times
Day’s sales in inventory ratio 44 days 40 days 37 days
Gross Profit percentage ratio 24.8% 22.4% 33.55%
Accounts receivable turnover ratio 20.58 times 23.13 times 10.11 times
Day’s sales in receivables ratio 18 days 16 days 75.42 days

There are five different ratios that can help measure the company’s ability to

sell the merchandise inventory and collect receivables. They are inventory turnover,
day’s sales inventory, gross profit percentage, receivables turnover, and day’s sales

in receivables. The first one is inventory turnover, inventory turnover calculates the

number of times on average the inventory is sold during the period. So the

inventory turnover ratio was 8.3 times in 2012 and 9.1 times in 2011, so their

inventory turnover was better in 2011. Also the online retail sales industry average

for the inventory turnover was 4.8 times, meaning that amazon is doing better than

the online retail sales industry.

The second one is Day’s sales in inventory, day’s sales in inventory is the

average number of days that inventory is held by a company. The Daly’s sales

inventory was 44 days in 2012 and 40 days in 2011. So the industry average was 37

days. Because the numbers aren’t over the industry average, then that means they

are good numbers for the inventory.

The third one is the Gross profit percentage, the Gross profit percentage

measures the profitability of each sales dollar above the cost of goods sold. The

Gross profit percentage was 22.4% in 2012 and 24.8% in 2011. The industry average

was 33.55%. So the numbers for the past two years need to improve to meet or to be

above the industry average. Meaning that Amazon needs to lower the cost of their

merchandise or higher their revenue to improve this situation.

The fourth one is the accounts receivable turnover ratio, the receivable

turnover ratio is the number of times the company collects the average receivables

balance in a year. Amazon collected receivables 23.13 times in 2012 and in 2011 it
collected receivables 20.58 times. So the industry’s average was 10.11 times, and

they were a lot faster than their average.

The last one is Day’s sales in receivables, Day’s sales in receivables is the

number of days it takes to collect the average level of receivable. For 2012, it was

about 16 days and for 2011 it was about 18 days. The average days of the industry

was about 75.42 days.

Evaluating the ability to pay long term debt

Amazon
2011 2012 Industry Ave.
Debts ratio 69% 75% 34%
Debts to equity ratio 2.26% 2.97% 52%
Times interest earned ratio 15.18 times 5.23 times 5.33 times

There are three different ways to evaluate the ability to pay long term debt.

They are Debts ratio, Debts to equity ratio, and Times interest earned ratio. The

first on is Debts ratio, the Debts ratio is the proportion of assets financed with debt.

For 2012 it was 75%, for 2011 it was 69%. The average for the debts ratio is

34%.The second one is Debts to equity ratio, the Debts to equity ratio is the

proportion of total liabilities relative to total equity. So for 2012 it was 2.97%, and in

2011 it was 2.26%. The average for the Debts equity ratio is about 52%.The last one

is the Times interest earned ratio, the times interest earned ratio is a business’s

ability to pay interest expense. For the times interest ratio in 2012 it was 5.23

times, and in 2011 it was 15.18 times. So the average of the times interest earned

ratio was 5.33 times.

Evaluating Profitability

Amazon
2011 2012 Industry Ave.
Profit margin ratio 1.31% -0.06% 2.87%
Rate of return on total assets ratio 2.57% -0.45% 4.76%
Assets turnover ratio 2.18 T 2.11 T 1.66 times
Rate of return on common stockholders’ equity 8.63% -0.49% 11.39%
Earnings per share ratio $1.39 $-0.09

There are five different ways you can find Profitability. They are Profit

margin ratio, Rate of return on total assets ratio, Assets turnover ratio, Rate of

return on common stockholders’ equity, and last, Earnings per share ratio. The first

one is Profit margin ratio, the Profit margin ratio calculates how much net income

is earned on every dollar of net sales revenue. For 2012 it was -0.06% and for 2011

it was 1.31%. So the average for the Profit margin ratio was 2.87%.

The second one is the Rate of return on total assets ratio, the rate of return

on total assets ratio is the success a company has in using its assets to earn income.

For 2012 it was -0.45%, and for 2011 it was 2.57%. The average for the total assets

ratio is 4.76%.

The third one is the Assets turnover ratio, the Assets turnover ratio

calculates how efficiently a business uses its average total assets to generate sales.

For 2012 the turnover was 2.11 times, and in 2011 it was 2.18 times. So the average

of the Assets turnover ratio was 1.66 times.

The fourth method we use to evaluate the profitability is the Rate of return

on common stockholders’ equity, and this method means that the relationship
between net income available to common stockholders and their average common

equity invested in the company. For 2012 it was -0.49%, and in 2011 it was 8.63%.

The average for this is 11.39%.

The last method we use is the Earnings per share ratio, the Earning per

share ratio is the amount of a company’s net income (loss) for each share of its

outstanding common stock. For 2012 it was $-0.09 and in 2011 it was $1.39.

Evaluating stock as an investment

Amazon
2011 2012 Industry Ave.
Price/earnings ratio 131.37 -2854.7 47.17
Dividend yield ratio N/A N/A N/A
Dividend payout ratio N/A N/A N/A

There are three different ratios we can use to evaluate stock as an

investment. They are, Price and earnings ratio, Dividend yield ratio, and Dividend

payout ratio. The first ratio we use is the Price/earnings ratio, this ratio means that

the value the stock market places on $1 of a company’s earnings. For 2012 the ratio

was -2854.7 and in 2011 it was 131.37. The average of the Price/earnings ratio is

47.17. For the second and third ratios they do not come out as a number to be

calculated for, so there in not a ratio for them.

Conclusion

In conclusion, amazon ability to pay current liabilities was better during 2011

because it’s not too high and it’ not too low. Also amazon’s overall liquidity was
lower in 2012 and higher in 2011. Overall amazon is a really good company but I

wouldn’t invest in it because if you look at the ratios you can see that the financial

health of the business is worse in 2012 than in 2011.