FINC 330 Reaseach project 1

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Research Project Part 1: Amazon Financial Analysis Brandy Poulard, Luis Rivera, Letticia Solomon University of Maryland Global Campus Finance 330 6381 September 22, 2020

2 Research Project Part 1: Amazon Ratio Analysis Introduction Amazon is a successful online retailer with a consistent growth period over their lifespan. In this report, the last five years of financial reports will be accessed from the Yahoo finance site ( www.finance.yahoo.com ) and the Marketwatch site ( www.marketwatch.com ). Calculations of the requested ratios from the official information of the company will conclude this report with recommendations based on an analysis of if Amazon will be financially sustainable over the next two to three years. Background and History Amazon.com, Inc (AMZN) was founded in 1994 by Jeffrey Bezos. The company’s headquarters is located in Seattle Washington (Amazon Mission & Vision Analysis). The company’s industry sector is eCommerce and Cloud Computing (Amazon Mission & Vision Analysis). Bezos started the company as an online bookstore and within two months Amazon was selling books all over world. Amazon is listed as number two on the Fortune 500 list (Murray & Meyer, 2020). Amazon’s mission statement states the company strives to offer customers the lowest prices, best selection, and convenience (Amazon Mission and Vision Statement Analysis). The company is distinguished by affordability and customer friendly elements. This paper analyzes the financial performance of Amazon over the last five years. Balance Sheet Analysis Fiscal year is January-December. All values USD billions 2015 2016 2017 2018 2019 Cash & Short-Term Investments $20.09 $26.58 $32.32 $41.68 $55.43 Increase (%) 32% 22% 29% 33% Ratio / Assets 30% 31% 25% 26% 25% Total Liabilities $53.63 $66.74 $103.60 $119.10 $163.19 Increase (%) 24% 55% 15% 37% Ratio / Assets 80% 78% 79% 73% 72% Common Equity * $13.38 $19.29 $27.21 $43.55 $62.06 44% 41% 60% 43% Ratio / Assets 20% 22% 21% 27% 28% * Common Equity and Total Shareholders' Equity are the same since the Company has no Minority Interests Total Assets $67.01 $86.02 $131.31 $162.65 $225.25 Increase (%) 28% 53% 24% 38%

3 Research Project Part 1: Amazon Ratio Analysis Balance Sheet Analysis Amazon’s assets increased by 236% during the last 5 years. In 2019, the assets increased by 38%. The Total Liabilities and Common Stock increase are in lines with the asset increases. The company maintained a good proportion of Liabilities to Assets of 72% in 2019. This ration has gone down for the last two years. What this means is that the company has a strong proportion of its Common Equity that has financed its assets. This is caused rom the increase in the Retained Earnings of the company. The company is profitable and reinvests a large sum of its profit in the growth of the corporation. Amazon is cautious of keeping a substantial portion of its assets in Cash & Short-term Investment. Liquid assets make up 25% of Amazons assets to date and it closely corresponds to that of its Common Equity. This gives flexibility to Amazon company to operate smoothly. Overall, the Balance Sheet of Amazon has been constant and healthy over the years despite the growth pressure the company has accomplished over the past 5 years. Trend Analysis Fiscal year is January-December. All values USD billions 2015 2016 2017 2018 2019 Sales $107.01 $135.99 $177.87 $232.89 $280.52 Increase (%) 27% 31% 31% 20% Cost of Goods Sold (including dep.) $71.65 $88.27 $111.93 $139.16 $165.54 Increase (%) 23% 27% 24% 19% % of Sales 67% 65% 63% 60% 59% Gross Income $35.36 $47.72 $65.93 $93.73 $114.99 Increase (%) 35% 38% 42% 23% % of Sales 33% 35% 37% 40% 41% Interest Expenses $0.46 $0.48 $0.85 $1.42 $1.60 Increase (%) 5% 75% 67% 13% 2015 2016 2017 2018 2019 $0.00 $50.00 $100.00 $150.00 $200.00 $250.00 Amazon Balance Sheet Cash & Short Term Investments Total Liabilities Common Equity * Total Assets in millions

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4 Research Project Part 1: Amazon Ratio Analysis Net Income $0.60 $2.37 $3.03 $10.07 $11.59 Increase (%) 298% 28% 232% 15% % of Sales 1% 2% 2% 4% 4% Cash & Short-Term Investments 32% 22% 29% 33% Assets 28% 53% 24% 38% Trend Analysis Amazon’s sales growth was constant at 30% for the past years and went down slightly at 20% in 2019. The company is acquiring many new businesses to complete its portfolio. The main business model of the company is changing the way people purchase. Amazon’s online shopping model and shipping standards has placed them in a competitive position and has become a preferred site for online shoppers. The Cost of Goods Sold followed the trend of Sales and started to decrease. Sales have seen a decrease from 67% in 2015 to 59% in 2019. This has a positive impact on the Gross Income that has increased to 41% in 2019 from 33% of the Sales in 2015. The increase in Sales created scale economies and the new acquisitions came with good Gross margins. Amazon used financial leverage for its new acquisitions to support its growth during 2017 and 2018. This is having an impact on the Interest Expenses that increased by 75% and 67% during these years. The increase is less in 2019 with only 20%. The Net Income of the company increased by 1,845% from 2015 to 2019. The company acquisitions influenced this and the consolidation of new businesses into the operations of Amazon brought its profitability from 1% of the Sales in 2015 to 4% in 2019. The Assets and Short-Term Assets increased the strategy of Amazon from 30% to 35% per year as well as support from the Sales and Income growths. The execution of the company growth plans is well followed by the employees of the organization. Financial Ratio analysis Fiscal year is January-December. All values USD billions

5 Research Project Part 1: Amazon Ratio Analysis 2015 2016 2017 2018 2019 Liquidity Ratios Current Assets $35.71 $45.78 $60.20 $75.10 $96.33 Current Liabilities $53.62 $66.74 $103.60 $119.10 $163.19 Inventory $10.24 $11.46 $16.05 $17.17 $20.50 Current Ratio 0.7 0.7 0.6 0.6 0.6 Quick Ratio 0.5 0.5 0.4 0.5 0.5 Operating Performance Ratios Days of Sales in Inventory 52.2 47.4 52.3 45.0 45.2 Days of Sales Outstanding 18.3 20.8 24.3 25.5 26.7 Days of Payable Outstanding 103.9 104.7 112.9 100.2 104.0 Receivable Turnover 19.9 17.6 15.0 14.3 13.7 Inventory Turnover 7.0 7.7 7.0 8.1 8.1 Fixed Assets Turnover 4.9 4.7 3.6 3.8 2.9 Total Assets Turnover 1.6 1.6 1.4 1.4 1.2 Account Receivable $5.37 $7.74 $11.83 $16.25 $20.50 Account Payable $20.40 $25.31 $34.62 $38.19 $47.18 Fixed Assets (Net) $21.84 $29.11 $48.87 $61.80 $97.85 Profitability Ratios 2015 2016 2017 2018 2019 Gross Profit Margin 33% 35% 37% 40% 41% Operation Profit Margin 2% 3% 2% 5% 5% Net Profit Margin 1% 2% 2% 4% 4% Return on Investment Ratios Return on Assets 0.9% 2.8% 2.3% 6.2% 5.1% Return on Equity 4.5% 12.3% 11.1% 23.1% 18.7%

6 Research Project Part 1: Amazon Ratio Analysis 2015 2016 2017 2018 2019 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Return on Assets Return on Equity Liquidity Ratios The Current Ratio and the Quick Ratios of Amazon are under 1.0. This means that the Current Liabilities of the company are greater than its current Assets. The company could have difficulty to pay for its Current Liabilities with the amount of Current Assets obtained. It is a concern to have a Current Ratio of 0.6 in 2019. The company has had this level of ratio for the past years. Operating Performance Ratios Amazon has had a Day of Sales in Inventory Ratio of 45 days during the last two years. Prior to, it was 52 days. It is good for this type of company that highly relies on high inventory volumes. The Inventory turnover is around 8 for 2019 and 2018. It is high but is respective to the business model of Amazon. The company manages its Account Receivable with a ratio of days of sales outstanding of less than 30 days. The ratio has climbed during the last 5 years. This negative impact with the receivable turnover ratio is going down over the years. The company has strong relationship with its suppliers. The days of payable outstanding is high and facilitate the weak liquidity ratios of the company. Operating Performance Ratios Both Fixed Assets and Total Assets ratios are going down during the last 5 years showing a good use of assets by the company to recognize higher sales. Profitability Ratios The Profitability Ratios of the company have all increased over the last 5 years. The company’s acquisition

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7 Research Project Part 1: Amazon Ratio Analysis strategy and consolidation of its profitable operations are positive. This is reflected well on the good Return on Assets and Equity for the Shareholders of the company. There is a decrease in 2019. A decrease that is not in line with the profitability of the company but due to the large increase in Assets and Equity. The company should consolidate these increases and continue to increase its profitability. Return on Equity The Amazon Return on Equity analysis using the DuPont analysis is presented below and compared to a major peer competitor Alibaba. Return on Equity Dupont Analysis Return on Equity Profit Margin * Total Assets Turnover * Financial Leverage Formula 2017 2018 2019 Profit Margin Net Income / Sales 2% 4% 4% Total Assets Turnover Sales / Total Assets 1.4 1.4 1.2 Financial Leverage Total Asset / Total Equity 4.8 3.7 3.6 Return on Equity 11.1% 23.1% 18.7% Alibaba https://www.macrotrends.net/stocks/charts/BABA/alibaba/financial-statements in Millions $ 2018 2019 2020 Net Income $10,201 $13,053 $21,080 Sales $39,898 $56,152 $71,985 Total Assets $114,326 $143,801 $185,429 Total Equity $69,578 $90,681 $122,945 Alibaba Formula 2018 2019 2020 Profit Margin Net Income / Sales 26% 23% 29% Total Assets Turnover Sales / Total Assets 0.3 0.4 0.4 Financial Leverage Total Asset / Total Equity 1.6 1.6 1.5

8 Research Project Part 1: Amazon Ratio Analysis Return on Equity 14.7% 14.4% 17.1% Return on Equity The Return on Equity of Amazon has decreased in 2019. The Profit Margin was the same in 2018 and 2019. Amazon has used more Assets and more Equity to realize its profits. In 2019, Amazon’s ROE was 14.4%, meaning for every dollar of equity, Amazon earned $.14. Amazon is able to obtain a higher ROE without added debt due to its sustainability. Surely, Amazon utilizes their Amazon is certainly trusted to return investments to their lenders in their current standings. (Simply Wall St., 2020). Alibaba has a similar return on Equity than Amazon during the last year. Amazon is having smaller Profit Margins and is using more Financial leverage than Alibaba for the benefits of its Shareholders. Recommendation The company should continue its successful path. Shareholders have a good return on equity, the company continues to grow, there is a good balance sheet, and overall Amazon is a powerful brand. Amazon possesses all of the traits to continue a powerful success of growth with profitability. Moving forward, Amazon should continue to redefine the power of online shopping through innovative measures while continuing to be a trusted company for both shareholder and stockholders. Reflection This exercise gave us the chance to work with ratios and master their applications in the context of a successful company. It was interesting to use different Web sites to get easily the information. Information that was reliable. Amazon and other important partners are using Internet for the information benefits of the investors. Conclusion In conclusion, Amazon learned how to deliver products to customers without customers leaving their house. Amazon has a successful strategy of growth. Small profit margins support the growth of the company. The company is building an empire and is improving it results with the successful integration of new elements to the company. The company is using financial leverage correctly and the powers that its size is giving it. Amazon experienced financial difficulties in 2015 but managed to turn their losses into growth in 2017. Amazon’s financial ratios show that the company has assets available and they can repay debt. This assignment has showed how Bezos turned his vision into a global powerhouse. The company is continuing to grow and acquire new companies along the way. Amazon has created a global presence and continues to influence the market globally.

9 Research Project Part 1: Amazon Ratio Analysis References Amazon Mission & Vision Analysis. (n.d.). Retrieved from https://mission-statement.com/amazon/ Murray, A., & Meyer, D. (2020, May 18). Guess who's Number Two on this year's Fortune 500 list. Retrieved from https://fortune.com/2020/05/18/amazon-number-two-fortune-500-ceo- daily/ Simply Wall St. (2020, March 09). Should You Be Impressed By Amazon.com, Inc.'s (NASDAQ:AMZN) ROE? Retrieved September 20, 2020, from https://finance.yahoo.com/news/impressed-amazon-com-inc-nasdaq-100119851.html

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