190154_CHANDRAKANTH_GAJAGOUNI_ASSIGNMENT_1BUS7B47894688_741579017

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ASSIGNMENT FRONT SHEET Student Name: CHANDRAKANTH GOUD GAJAGOUNI Certification: I certify that the whole of this work is the result of my individual effort and that all quotations from books, periodicals etc. have been acknowledged . Student Signature: CHANDRAKANTH GOUD Date:10/11/2022 Student Registration Number:S22007890 Student email address:gchandu139@gmail.com Programme: MBA Year/Level: 1/7 Academic Year: 2022/23 Trimester: Module title: Financial Insights and Business Intelligence (15-credit) Assignment no.: 1 Module code: BUS7B47 Word guide: 2,000 Percentage Weighting of this assignment for the module: 50% Issue date:10/11/2022 Return date: 10/11/22 Lecturer: Robert Leigh Second marker: 1

Corporate financial ratios are quantitative tools used to assess the performance of a business. The users of financial ratios are financial analysists, investors, customers, equity research analysts, and asset managers to evaluate how the business is performing in order to make better investment decisions. With the use of ratio analysis, one is able to compare the performance of an organization over the years, or two companies different in terms of size operations and styles of management. The following are the classes of ratios; liquidity ratios, profitability, efficiency and operational risk ratios (Olson & Zoubi 2008). Profitability ratios These are financial ratios used by investors and analysis to assess the ability of a business to produce incomes and profit relative to revenue, operating costs, assets in the balance sheet, and equity within a specified time frame. These ratios show how a well an organization can utilize assets to generate value to shareholders. They are sub-divided into the following ratios; return on equity, return on assets, return on capital employed, gross profit margin, net profit margin, and operating profit margin. The following table calculates the relevant profitability ratios for Amazon for the years 2014 to 2016. RATIO FORMULA Return on Equity (ROE) Net income/Shareholder’s Equity Return on Assets (ROA) Net income/Total assets Return on capital employed (ROCE) EBIT/Totals assets-current liabilities Gross profit margin Gross profit/total revenue Operating profit margin Operating profit or EBIT/total revenue Net profit margin Net profit/total revenue (Welc 2022). RATIO 2016 2015 2014 ROE 2371/19285=12.29% 596/13384=4.45% -241/10741= (2.24) % ROA 2.84% 0.92% -0.44% ROCE 10.57% 7.24% 0.67% 2

Gross profit margin 35.1% 32.11% 29.49% Operating profit margin 3.08% 2.09% 0.20% Net profit margin 1.74% 0.56% -0.27% Discussion Looking at the trend in the profitability ratios calculated above, there is a positive growth in profits from year 2014 to 2016. However, the growth is not significant and recommendations to improve will be provided. The return on equity increase from a negative unfavorable figure in 2014 to 12.29% in 2016. ROE is used to evaluate returns, and a higher value means that there are better returns from what investors have invested in the form of shareholders’ equity. The positive trend is as a result of increased funding from shareholders, as well as increased revenues earned over the years. the same trend is seen in all other parameters. For example, return on assets has increased, albeit at a slow rate, from -0.44% in 2014 to 2.84% in 2016, indicating that Amazon invested its assets in more profitable ways in 2016 than in 2014. The profitability ratios can be improved through investing more in order to earn more revenues, and also working towards reducing costs and expenses significantly. For instance, if revenues increase while staff costs reduce, then it would mean that net income goes higher, and this will significantly improve all the ratios. Again, increased assets and reduced liabilities will improve Return on capital employed (ROCE) (Welc 2022). In the e-commerce industry, Amazon’s competitors are; Alibaba, eBay, Walmart etc. In 2016, Alibaba’s return on assets was 8.47%, which is higher than Walmart’s. Return on equity was 13.21% against 12.29% for Amazon in 2016. This shows that in terms of competitor analysis, 3

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Amazon was not at its best, considering the years 2014 to 2016. The industry performed better than Amazon. Liquidity Ratios These are ratios that financial analysis and other user of financial statements use to assess how sound a company is in terms of finances (Palepu et al. 2020). These ratios measure the capacity of a business to repay short-term and long-term obligations. For instance, a good ratio will mean that a company can meet its short-term liabilities from the available current assets, without having to go for an external financing. Common liquidity ratios are; current ratio, quick ratio, cash ratio. The current ratio, also known as working capital ratio is used to measure the capacity of a firm to meet obligations that fall due within a year. For instance, payment to creditors; a business that struggles to pay its creditors is a red flag even for new investors, holding other factors constant. The quick ratio, which can also be referred to as the acid-test ratio, is used to measure a company’s ability to pay short-term liabilities through the use of assets easily convertible into cash (Welc 2022). Examples are cash, accounts receivable and marketable securities. The cash ratio or cash asset ratio measures the capacity of a business to clear short-term debts from cash and cash equivalents. Cash and cash equivalents include savings accounts in banks, and treasury bills. RATIO FORMULA Current Ratio Current Assets/Current Liabilities Quick Ratio Cash+ accounts receivable +marketable securities/Current liabilities Cash ratio Cash and cash equivalents/current liabilities. 4

The following table shows the liquidity ratios of Amazon for the years 2014 to 2016. RATIO 2016 2015 2014 Current ratio 1.04 1.05 1.12 Quick ratio 0.78 0.75 0.82 Cash ratio 0.44 0.47 0.52 From the calculations, it is clear that Amazon has a favorable current ratio, with values that are greater than 1. 2014 was a better year than 2016, as far as current ratio is concerned. In 2016, the current ratio was 1.04, indicating that Amazon can pay off its current liabilities 1.04 times with its current assets. The ratio, should, however not be allowed too high as this means that a firm is leaving too much unused cash, which could go into other projects. For the quick ratio, the calculated figures are less than 1, indicating that Amazon does not have enough cash, accounts receivable and marketable securities to meet current liabilities such as accounts payables and accrued expenses. A similar trend is seen in the calculations for the cash ratio, indicating that the company is unable to meet its current liabilities from its cash and cash equivalents. In terms of competition, e-Bay’s current ratio in 2016 was 2.13, which is way better than Amazon’s. This shows that Amazon performed dismally when compared to industry average. Efficiency ratios Efficiency ratios measure the ability of company to utilize assets and other resources well. For example, how long it takes for an asset to earn income, defines efficiency. The shorter the time, the more efficient that asset or resource is. The common ratios under this category are; Accounts Receivable Turnover Ratio, Asset Turnover Ratio, Accounts Receivable Days and Inventory Turnover Days. 5

The relevant ratios that Amazon can use to measure efficiency are as tabulated below; RATIO FORMULA Asset turnover Net sales/average total assets Inventory turnover Cost of goods sold/average inventory The valuation of each of the two ratios is as follows; RATIO 2016 2015 2014 Asset turnover 1.63 1.65 1.63 Inventory turnover 7.70 7.09 7.56 Discussion The asset turnover ratio measures the rate at which a company generates sales from its assets. In 2014, Amazon’s asset turnover was 1.63, indicating that for ever dollar of assets, Amazon generated $1.63 in sales. For all the three years studied, Amazon reported favorable ratios. A higher ratio is favorable and indicates that the company efficiently uses assets. Conversely, a lower ratio means that assets are left underutilized, poor collection and poor management of inventories. Inventory turnover measures the number of times a company sells and replenishes stock within a given time frame (Qu & Zhao 2016). A higher ratio is preferred. In 2014, Amazon sold its entire inventory 7.65 times in the fiscal year. In 2016, it sold it in 7.70 times in the year. There was a growth from 7.56 in 2014 to 7.70 in 2016, albeit a non-significant one, but this shows that the company was moving in the right direction. 6

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In 2020, Walmart’s asset turnover was 0.62, which is significantly lower than Amazon’s. this translates to a better performance for Amazon than industry average. Leverage ratios Leverage ratios measure how a company’s assets and operations are financed, whether using equity or debt. A favorable leverage ratio is one where the company uses more of equity rather than debt. Common ratios are as per below table; RATIO FORMULA Debt-to-equity Debt+ other fixed payments/equity Equity ratio Equity/total assets Debt ratio Short term debt+ long term debt/total assets. Amazon’s leverage ratios for the three years are as follows; RATIO 2016 2015 2014 Debt-to- equity 1.05 1.31 1.46 Equity ratio 23.12% 20.67% 19.71 Debt ratio 0.24 1.37 1.46 Discussion The debt to equity ratio is used to do a comparison to know whether s business uses more debt or equity for financing. In 2014, Amazon had 1 dollar and 46 cents in debt for every dollar or equity. A higher debt ratio is not preferred. Equity ratio measures that percentage of business that shareholders can claim in the event of a liquidation. 2016’s equity ratio was 23.12%, indicating that the business was in the right direction, as shareholders would earn more if the business ceased to exist. 7

Debt ratio indicates the portion of assets that is being funded by debt. Potential shareholders and creditors apply this ratio to determine the future and viability of business through assessing the company’s ability to pay debts, and whether the company is able to secure more loans (Hovakimian, Opler & Titman 2001). Part B With historical data provided, forecasting can be possible. For the case of Amazon, three years historical data has been provided, i.e. 2014, 205, and 2016. One key assumption in my model would be that to forecast, one needs to know the model that the company uses, key customers, market, sales strategy and competitive position. In this case, revenues forecast is the most important forecast, and the assumption I make is that Amazon expects to have a definite growth moving from year to year. Thus, my model will be based on inputting future revenues based on aggregate growth rate. Growth rate is calculated as; Growth Rate = (Ending Value ÷ Beginning Value) – 1(Chan, Karceski & Lakonishok 2003) From the historical figures given, growth rate is as follows Net product sales Year 2015= (79,268/70,080)-1=13.11% Year 2016= (94,665/79,268)-1=19.42 Average=16.27% Net service sales Year 2015=46.7% Year 2016=48.97% 8

Average= 47.835% Thus, for net product sales, we can forecast that there will be an increment from year to year of 16.27% while for net service sales, this increase will be at 47.835%. The forecasted income statement would be; Exhibit 1. Amazon Income statement 2014-2016 ($ Millions) 2014 2015 2016 2017 2018 2019 Net product Sales 70,08 0 79,268 94,665 110,067 127,975 148,797 Net service Sales 18,90 8 27,738 41,322 61,088 90,309 133,508 Total net sales 88,98 8 107,00 6 135,98 7 171,155 218,284 282,305 Operating expenses Cost of sales 62,75 2 72,651 88,265 114196.5 51 147746.5 7 191153.3 11 Fulfillment 10,76 6 13,410 17,619 23,149 .08 30,41 4.89 39,961 .22 Marketing 4,332 5,254 7,233 8,145 .00 9,35 6.00 10,590 .00 Technolog y and content 9,275 12,540 16,085 21,345 .00 27,69 8.00 35,871 .00 General 1,552 1,747 2,432 3245 4289 5794 9

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and admin Other operating expense 133 171 167 189 220 356 Total operating expense 88,81 0 104,77 3 131,80 1 170,270 219724 283726 Operating income 178 2,233 4,186 6543 9842 13023 Interest income 39 50 100 160 235 350 Interest expense -210 -459 -484 -568 -675 -850 Other income (expense) -118 -256 90 60 34 28 Total non operating income -289 -665 -294 -289 -665 -294 Income (loss) before income taxes -111 1,568 3,892 -111 1,568 3,892 Provision for Income taxes -167 -950 -1,425 -167 -950 -1,425 Equity 37 -22 -96 37 -22 -96 10

method investmen t activity Net income (loss) -241 596 2,371 3578 4698 8,967 2014 2015 2016 2017 2018 2019 0 50,000 100,000 150,000 200,000 250,000 300,000 Net product Sales Net service Sales Total net sales For cost of sales, Growth Rate = (Ending Value ÷ Beginning Value) – 1 = 0.292=29.2% after doing average Another assumption made is that Amazon is a going concern, and that the possible options are that it will continue operating into the foreseeable future. Without this assumption, then it would be impossible to predict since it would mean that the business will start to undergo a diminishing return. The other assumption is the money measurement concept whereby we assumed that value of money remains constant for the forecasted years. There was no factoring in of time value of money, i.e. no discounting of whatever nature. The model could be improved through 11

factoring in time value of money, simply because the value of money changes overtime in reality. 12

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Bibliography Chan, LK, Karceski, J & Lakonishok, J 2003, 'The level and persistence of growth rates', The Journal of Finance , vol. 58, no. 2, pp. 643-84. Hovakimian, A, Opler, T & Titman, S 2001, 'The debt-equity choice', Journal of Financial and Quantitative analysis , vol. 36, no. 1, pp. 1-24. Olson, D & Zoubi, TA 2008, 'Using accounting ratios to distinguish between Islamic and conventional banks in the GCC region', The International Journal of Accounting , vol. 43, no. 1, pp. 45-65. Palepu, KG, Healy, PM, Wright, S, Bradbury, M & Coulton, J 2020, Business analysis and valuation: Using financial statements , Cengage AU. Qu, Z & Zhao, B 2016, 'The calculating model of inventory turnover based on time value', in 2016 International Seminar on Education Innovation and Economic Management (SEIEM 2016) , pp. 51-4. Welc, J 2022, 'Financial statement analysis', in Evaluating Corporate Financial Performance , Springer, pp. 131-212. 13