ScottSACC7035-2

docx

School

Southern New Hampshire University *

*We aren’t endorsed by this school

Course

1002

Subject

Accounting

Date

Nov 24, 2024

Type

docx

Pages

Uploaded by S.Scott

1 FINANCIAL ANALYSIS FOR PUBLICLY TRADED COMPANIES: AMAZON INC. AND WALMART. INC. Scott Scott NCU ACC 7035 11/14/2023 Background Summary

2 FINANCIAL ANALYSIS FOR PUBLICLY TRADED COMPANIES: AMAZON INC. AND WALMART. INC. Amazon (AMZN) and Walmart (WMT) are two of the largest retailers in the United States and the world. Both companies operate massive e-commerce and brick-and-mortar retail operations. Amazon was founded in 1994 and is headquartered in Seattle, Washington. The company started as an online bookstore but has grown to become the world's largest online retailer selling a wide variety of consumer products (McFadden, 2021). Amazon also manufactures consumer electronics like Kindle e-readers, Fire tablets, and Echo smart speakers and provides cloud-computing services through its Amazon Web Services (AWS) division. Walmart was founded in 1962 and is headquartered in Bentonville, Arkansas (O’Connell, 2019). The company operates over 10,500 stores under various banners in 24 countries. Walmart is the world’s largest company in terms of revenue and the largest private employer with over 2.2 million associates worldwide. The company is transitioning and growing its e-commerce business to better compete with Amazon. Conceptual Differences between Net Income, Comprehensive Income, and Accumulated Other Comprehensive Income Net income is a company's bottom line profit calculated under generally accepted accounting principles (GAAP). It represents revenues minus expenses and is the most widely followed indicator of a company's financial performance. Comprehensive income is a broader measure of total profitability that includes net income plus gains and losses that bypass the income statement and are recorded directly in shareholders' equity. This includes things like changes in the fair value of investments, foreign currency translation adjustments for international operations, and certain pension adjustments. Accumulated other comprehensive income is an equity account on the balance sheet that accumulates all these direct entries to shareholders’ equity that bypass net income. It essentially tracks the running balance of all

3 FINANCIAL ANALYSIS FOR PUBLICLY TRADED COMPANIES: AMAZON INC. AND WALMART. INC. comprehensive income items that did not flow through the income statement. Therefore, the key difference is that net income only reflects revenues and expenses included on the income statement while comprehensive income provides a more complete assessment of changes in shareholders' equity each period. Accumulated other comprehensive income accounts for items that affect equity outside of transactions with shareholders. Financial Performance Analysis Figure 1: Financial Income statement for AMAZON (AMZN) and Walmart (WMT) FOR 2021 AND 2022 Net Income From the existing financial information collected from Yahoo.com, Amazon saw a significant decline in net income between 2021 and 2022. In 2021, the company reported a robust net income of $33.4 billion (Yahoo Finance, 2021). However, in 2022, Amazon swung to

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

4 FINANCIAL ANALYSIS FOR PUBLICLY TRADED COMPANIES: AMAZON INC. AND WALMART. INC. a net loss of $2.7 billion. The $36.1 billion negative change in net income was primarily attributable to a substantial $12.7 billion non-cash pre-tax valuation loss stemming from Amazon's investment in Rivian Automotive. This write-down of the Rivian investment was the key driver that caused net income to drop into negative territory. Excluding the impact of the Rivian loss, Amazon's net income would have been approximately $10 billion in 2022, still representing a 70% decline from the prior year. In contrast to Amazon, Walmart experienced stable net income over the two-year period. In 2021, Walmart reported net income of $13.7 billion. The company maintained strong profitability in 2022, with a net income of $13.5 billion for the year. Walmart's net income declined slightly by 1.5% between 2021 and 2022. However, the company avoided any major swings or losses (Yahoo Finance, 2023). The consistent net income demonstrates Walmart maintained reliable profit margins over the past two years without any of the volatility influencing Amazon's earnings. While Amazon moved from a $33 billion profit to a multi-billion dollar loss, Walmart continued generating over $13 billion in net income in both periods. Earnings per Share Amazon experienced a sharp decline in earnings per share (EPS) from 2021 to 2022 driven by the net loss. In 2021, the company had robust EPS of $3.24 for basic and $3.30 for diluted. However, in 2022 EPS plummeted to ($0.27) for both basic and diluted, representing a negative swing of over $3.50 per share (Yahoo Finance, 2021). This drastic EPS contraction stemmed directly from the net loss in 2022 compared to strong net income in 2021. With the bottom line shifting from a $33 billion profit to a $2.7 billion loss, EPS correspondingly dropped significantly.

5 FINANCIAL ANALYSIS FOR PUBLICLY TRADED COMPANIES: AMAZON INC. AND WALMART. INC. In contrast, Walmart grew EPS year-over-year. In 2021, Walmart had a basic EPS of $4.77 and a diluted EPS of $4.75. The company improved on both metrics in 2022, with basic EPS increasing to $4.90 and diluted rising to $4.87. This growth represented a 2.7% bump in basic EPS and a 2.5% increase in diluted EPS between 2021 and 2022. The EPS gains can be attributed to Walmart having fewer shares outstanding in 2022 as the company repurchased stock. With fewer shares, the company's net income was distributed over a smaller share base, benefiting EPS. Comprehensive Income Amazon experienced a sharp drop in comprehensive income from 2021 to 2022. In 2021, Amazon had a robust comprehensive income of $33 billion. However, in 2022 the company swung to a comprehensive loss of $3.6 billion (Yahoo Finance, 2021). This massive $36.6 billion negative change was primarily driven by the $12.7 billion pre-tax loss relating to the Rivian investment write-down. This write-off flowed through to comprehensive income, causing it to decline over 100% year-over-year. Walmart trended to the contrary, with comprehensive income increasing between 2021 and 2022. In 2021, Walmart reported a comprehensive income of $13.5 billion. This rose to $14.6 billion in comprehensive income for 2022, representing an 8% increase. Walmart's higher comprehensive income was fueled by improved net income along with larger investment gains related to derivatives. While Amazon took a large comprehensive loss stemming from the Rivian investment issue, Walmart grew comprehensive income through strong core performance and investment gains. The companies experienced completely divergent comprehensive income results between 2021 and 2022, with Amazon dropping dramatically into the red and Walmart achieving steady growth. Accumulated Other Comprehensive Income

6 FINANCIAL ANALYSIS FOR PUBLICLY TRADED COMPANIES: AMAZON INC. AND WALMART. INC. Amazon saw a substantial decrease in accumulated other comprehensive income (AOCI) from 2021 to 2022 (Yahoo Finance, 2021). At the end of 2021, Amazon had an AOCI of $3.5 billion on its balance sheet. However, by the end of 2022, AOCI had dropped to just $187 million, representing a 95% year-over-year decline. This massive contraction was driven by losses on the company's marketable securities, particularly the Rivian investment. The unrealized losses on these securities flowed through and reduced AOCI significantly over the course of 2022. In contrast, Walmart grew its AOCI balance between 2021 and 2022. At the end of 2021, Walmart had an AOCI of $4.4 billion. By the end of 2022, this figure had increased to $4.7 billion, up 7% year-over-year. Walmart's AOCI benefitted from additional unrealized gains relating to derivatives and other investments during 2022. While market losses pummeled Amazon's AOCI balance, Walmart managed to further build up its AOCI through investment- related gains over the past year. The companies had completely opposite AOCI trajectories over the last two years. Horizontal and Trend Analysis

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

7 FINANCIAL ANALYSIS FOR PUBLICLY TRADED COMPANIES: AMAZON INC. AND WALMART. INC. Figure 2; Amazon vs Walmart Financial Statement Analysis Trend 2021 and 2022 Looking at comprehensive income results over the past two years highlights diverging trends between Amazon and Walmart. Both companies have seen revenue growth decelerate after huge pandemic-related gains. Amazon's revenues increased 9.4% in 2022, down from 21.7% growth in 2021 (Yahoo Finance, 2021). Similarly, Walmart's revenues grew just 2.4% in 2022 versus 4.7% in 2021. However, Walmart has controlled expenses much better recently. Walmart's operating expenses rose only 1.3% in 2022 compared to a 15.2% jump in 2021 (Yahoo Finance, 2023). Meanwhile, Amazon's operating expenses spiked 33.7% in 2022 after increasing just 6.2% in 2021, driven by heavy investment in fulfillment and logistics capabilities. This combination of slowing revenues and surging expenses led Amazon to report an operating loss in 2022 compared to a profit in 2021. Walmart realized the opposite, with operating income rising 15.1% in 2022 following a 2.9% decrease in 2021 thanks to cost discipline. Ultimately, these operating trends flowed through the comprehensive income statements. Amazon reported a massive $3.6 billion comprehensive loss in 2022 driven by the Rivian investment write-down after a comprehensive income of $33 billion in 2021. Walmart achieved 8% comprehensive income growth between 2021 and 2022 to $14.6 billion thanks to better operational performance and investment gains (Yahoo Finance, 2023). The trend analysis clearly shows the diverging comprehensive income results based on the different expense trajectories of these competitors. Ratio Analysis Gross Margin Ratio Analysis of the gross margin ratios over the past two years shows Walmart maintaining consistently stronger profitability versus compression at Amazon. In 2021, Amazon reported a gross margin ratio of 14.1% (Yahoo Finance, 2021). However, in 2022 the ratio declined to

8 FINANCIAL ANALYSIS FOR PUBLICLY TRADED COMPANIES: AMAZON INC. AND WALMART. INC. 13.2% due to fulfillment cost inflation exceeding revenue growth. Rising logistics and transportation expenses have steadily eaten into Amazon's gross margins. In contrast, Walmart held gross margins steady between 2021 and 2022. Walmart's gross margin ratio was 24.9% in 2021 and ticked up slightly to 25.1% in 2022 (Yahoo Finance, 2023). Walmart's scale provides more protection against cost increases, allowing the company to defend margins. Amazon experienced 120 basis points of gross margin compression over the two-year period while Walmart maintained ratios above 25%. Walmart has significantly higher gross profitability, and Amazon's margins are trending in the wrong direction. The ratio analysis confirms Walmart's structural gross margin advantage versus Amazon's challenges with fulfillment cost inflation. Operating Margin Ratio Analysis of the operating margin ratios shows a reversal of fortunes between the two companies over the past two years. In 2021, Amazon reported an operating margin of 5.3% compared to just 4.0% for Walmart. However, in 2022 the situation flipped entirely. Amazon's operating margin plunged to -2.4% in 2022 due to the sizable Rivian investment loss. This represented nearly an 800 basis point decline in just one year. Meanwhile, Walmart increased its operating margin to 4.5% in 2022 through diligent cost control efforts (Yahoo Finance, 2023). Walmart cut expenses and drove efficiency gains to expand margins by 50 basis points. The ratio analysis displays how the Rivian-related loss decimated Amazon's profitability, while Walmart made operational improvements to strengthen margins. Walmart has completely overtaken Amazon in terms of operating margin performance based on the drastic reversal of trends over the past two years. Comprehensive Income Margin

9 FINANCIAL ANALYSIS FOR PUBLICLY TRADED COMPANIES: AMAZON INC. AND WALMART. INC. Further ratio analysis of the comprehensive income margins underscores the divergence between the two companies. In 2021, Amazon held an advantage with a comprehensive income margin of 7.0% compared to just 2.4% for Walmart. However, in 2022, Amazon's comprehensive income margin plummeted to -0.7% due to the massive Rivian-related loss. This represented a 770 basis point swing in the wrong direction. Meanwhile, Walmart increased its comprehensive income margin to 2.5% in 2022, up 10 basis points through improved operational execution (Yahoo Finance, 2023). The ratios display how Walmart continued improving profitability over the past two years while Amazon experienced severe margin compression and shifted to a comprehensive loss in 2022. The Rivian investment write-down was the primary driver that caused Amazon's profitability ratios to decline across the board compared to Walmart's gains. This ratio analysis confirms that Walmart extended its lead in terms of comprehensive income margins versus Amazon's faltering. Comprehensive Income per Share The comprehensive income per share figures further showcase the diverging profitability trends between the two retail rivals. Amazon reported a robust comprehensive income per share of $31.02 in 2021 (Yahoo Finance, 2021). However, in 2022 this swung to a comprehensive loss per share of ($0.35) due to the Rivian investment loss. In contrast, Walmart grew its comprehensive income per share from $4.74 in 2021 to $5.28 in 2022 thanks to higher net income and investment gains. The per-share amounts reflect the same trends seen in the overall comprehensive income results for both companies. Requiring comprehensive income per share could provide incremental information to allow investors to better assess total performance. However, it may also cause confusion for those accustomed to traditional EPS if the figures

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

10 FINANCIAL ANALYSIS FOR PUBLICLY TRADED COMPANIES: AMAZON INC. AND WALMART. INC. diverge significantly. There would likely need to be additional education on interpreting comprehensive income metrics if per-share amounts were reported. Informational Content of Comprehensive Income Comprehensive income does provide incremental informational value over net income by capturing important changes in shareholders’ equity that bypass the income statement. For Amazon in 2022, this included over $12 billion in unrealized losses on its Rivian investment that are very relevant in assessing overall performance but are not reflected in net income. However, comprehensive income also introduces some volatility from market-driven factors like investment fluctuations that may distort the assessment of core operating results. Companies often prefer to separate out these non-operating items through other comprehensive income disclosures rather than having them directly impact comprehensive income. Reporting both metrics clearly delineated between operating and non-operating is likely optimal. Net income remains useful for evaluating core business performance. Comprehensive income gives a more complete picture of total changes in shareholders’ equity each period.

11 FINANCIAL ANALYSIS FOR PUBLICLY TRADED COMPANIES: AMAZON INC. AND WALMART. INC. References McFadden, C. (2021, February 17). The Rise and Rise of Amazon: A Brief History of the Everything Store . Interestingengineering.com. https://interestingengineering.com/culture/a-very-brief-history-of-amazon-the- everything-store O’Connell, B. (2019, September 17). History of Walmart: Timeline and Facts . TheStreet. https://www.thestreet.com/markets/history-of-walmart-15092339 Yahoo Finance. (2021). Amazon.com, Inc. (AMZN) Income Statement . @YahooFinance. https://finance.yahoo.com/quote/AMZN/financials?p=AMZN Yahoo Finance. (2023). Walmart Inc. (WMT) Income Statement - Yahoo Finance . @YahooFinance. https://finance.yahoo.com/quote/WMT/financials?p=WMT