Financial Analysis of Amazon.com Inc.

This root word seeks to analyze the mo dischargeary statements of Amazon. com Inc. for the geezerhood 2005, 2006 and 2007 by interpreting its amplificationability, runniness, supplement and activity dimensions and study the same with effort sportys. This will as well as analyze the familys reaping rates, valuation symmetrys (price) and dividends and will employ naiant and vertical analysis in play as needed. 2. Analysis and Discussion 2. 1 Profitability Return on lawfulness of Amazon. com Inc. shows m some(prenominal) things about the past surgery of the go with in the past louver days.The continued decrease from 2005 done 2007 appears discernible simply the rates are heretofore genuinely high up. . From one hundred forty-five. 93% in 2005, it has hugely decreased to 44. 08% in 2006 and further to 39. 77% in 2007. Such level of availability is silence truly for purposes of determining a confede dimensionns profitability. Compared to constancy reasonable of 24. 9%, the conjunctions roe is still higher(prenominal). go to salute I in the Appendix. The range of 39% to 145% return on equity encourages investors as it would mean that for e precise $100 investment, the investors count returns of about $39 to $145. These rates could be viewed as something unprecedented for a company like Amazon.com Inc.. Its level of ROE is something that moldiness be the envy of many other companies ofttimes(prenominal) as EBay Inc. , Enable Holdings and hail-fellow-well-met Auto Dealers, Inc (Yahoo Finance, 2008). It may be say that return on equity is work out under the radiation pattern where displace profit is divided by the total stockholders equity. When compared to an fairish rate of 1. 5% US prove rate (Housepricecrash, 2008 ) if money was invested in a bank, the companys would seem to cover to a greater extent than twenty fold and it is something actually difficult to find and would therefore fixate it actually attra ctive to investors.The companys return on summations for the long time 2006 through 2008 ranges from 4% to 9% and which appears to be on the face of it lower that its ROE. The same may be observed in relation to the companys net profit marge for last triplet years and has non even exceeded 5% in any period. However, ROE must be superb in declaring the profitability of Amazon as compared to all other profitability ratios. operational boundary line which measures within the range of 3 to 5% for the iii years, represents the margin after(prenominal) deducting cost of sales or go and operating expenses.Things to be added or deducted still are other income(s). The ratios mean that the centering of Amazon. com Inc. is doing well that it must thank its employees participation of employees in delivering rank to customers. The net margins of the company for the trine years are lower than operating profit margin, due to the additional deductions of interest expenses. The pr ofitability ratios such as return to equity, operating profit margin and net profit margin have the might to show diachronic profitability but investors would base as well their decision on estimates of the future.Since conditions change, wise users of financial information may just pee-pee more values to estimated cash take to the woods in the future for valuing their investments in name of dividends to be received from the company. This appears to be prime in the case of Amazon as proved by high debt equity as would be discussed later in relation to its profitability. 2. 2. 2 fluidness Liquidity enables a company to meet its catamenialy maturing obligations. It is measured using the electric current ratio and the vigorous asset ratio.Current ratio computation uses current assets to be divided to current liabilities charm quick assets ratio is virtually the same except that the strain and postpaid expenses are being removed from the current assets to have a new n umerator but the denominator is the same. Quick assets therefore normally implicate cash, marketable securities and accounts receivable and the use of quick asset ratio is truly frequently relevant for one intending to have higher form of measuring liquid state. In such case, one would prefer quick asset ratio over that of the current ratio.As employ now, the current ratios of Amazon. com Inc reflected 1. 39, 1. 33 and 1. 54 for the years 2007, 2006 and 2005 respectively while the quick asset ratios for same years are 1. 02, 0. 95 and 1. 19 for the same years respectively. See lay out I in the Appendix. some(prenominal) ratios showed fluctuating trend where decreased was initiative noted and then increase followed after. The companys liquidness may be considered to be still very high since current ratios average more than 1. 3 while quick asset ratio averages about more than 1.0 for the last three years. It current ratio for 2007 is very polish to industry average of 1. 8 while its quick ratio of 1. 02 is not very far from industry average of 1. 6. both its liquidity ratios are better when compared with S&P 500 index. See Exhibit I in the Appendix. The estimable liquidity appears to be a result besides of good profitability of the company as observed earlier in price of very high return on equity. 2. 2. 3 Leverage ratios Financial leverage or solvency refers to the companys capacity to keep it stability over the hanker term.Generally measured by the debt to equity ratio, with the formula of having the total debt of the company divided by its total equity a good financial leverage assures investors that the company is not to just to exist in the defraud term but it must withal have a long deportment to recover long term investments which takes years to produce the needed returns. The debt to equity ratios of Amazon. com Inc. are 4. 42, 9. 12 and 14. 02 for the years 2007, 2006 and 2005 respectively. These ratios are merely not as good as indu stry average of 0. 32. See Exhibit I in the Appendix .The ratios are indeed very high since the ratio of more than 4. 0 means that the value the company investments is not matched by what it borrows by about more than 400%. noteworthy Improvement were however recorded from 2005 through 2007. This must be due to its very high profitability. This could mean that the company is expanding headache as noted its net refractory assets reflecting issue rates of 25. 06%, 22. 53% and 67. 91%, the years 2007, 2006 and 2005 respectively. See Exhibit I in the Appendix. In other words, expansions are getting financed hugely from operations which is a sigh of a healthy company.Good solvency is a proof of good capital mental synthesis and for Amazon. com Inc. the same could be attainable as shown in the very remarkable progress if its debt to equity ratio which cut more than half that on 2006 in 2007. tending(p) also its very good liquidity as analyzed earlier, the company must be declared to have clean bill of health in financial terms. 2. 2. 4 Efficiency ratios The companys profitability is being supported by its good efficiency ratios. Inventory upsets for three years are very much higher than industry average and such efficiency is indicative of its better surgical procedure than competitors.Even its collection period and receivable turnover are definitely above industry and S&P 500 index. No wonder the massive improvement in leverage ratio for two years is more than justified. 3. Conclusion Amazon. com is growing very remarkably in term of revenues, dogged assets, and net income. The increase in net income of more than 60% in 2007 is not easy to disregard and the fixed assets growth averaging more than 20% for the last three years could save mean an expanding company under a very halcyon condition in the industry.Its profitability ratios, liquidity ratios, leverage ratios and activity ratios are very favorable to the company. Its profitability is sustaining not only its liquidity by keep better is highly leverage financial condition. Although, 2007 liquidity and leverage ratios are not as good as industry averages, the peril that they could be improved soon by companys profitability is very big given its higher than industry average ROE for the last three years. The activity ratios in terms of inventory turnover and receivable turnover in 2007 are higher than industry average which could only support for the companys very high profitability.