Financial Analysis of Amazon
Mohamed Bader Al-Marzooqi
[email protected] Supervised by:
Professor Haitham Nobanee
Abstract:
In this project; we will cover up many of Amazon's development. Their beginning, Jeff
Bezos purpose to transition Amazon into an online business. The successful business and
marketing strategy, how Amazon continues to evolve and innovate with new products and
services. We will look at Amazon's financial statement and the ratio analysis, how well Amazon
is performing year by year. This report will evaluate how much progress and recession Amazon
made from 2016 to 2019.
Introduction
Amazon has been synonymous with. e-commerce from the get-go. The company
originated from Seattle Washington started as a bookseller but throughout the time it grew out to
be the most popular web-based service in the world. Amazon was created by Jeff Bezos, with the
internet becoming more accessible in the 90s, Bezos believed that there is a gigantic market to
capitalize on, even though he didn’t have any prior experience or knowledge about the internet.
[ CITATION Kri02 \l 1033 ] But upon learning, Bezos had a vision that saw the world
interacting, shopping, and doing transactions virtually through E-Commerce.[ CITATION
Kri02 \l 1033 ] Bezos’s Amazon went online in 1995, the company marches to focus on the
online market turned out to be a huge success. A consistent incline in revenue, going from $150
million in 1997 to $3.1 Billion in 2001.[ CITATION Kri02 \l 1033 ] The high percentage of
revenue and growth is due to the company innovation with their services, and their ever wide
expansion of subsidiaries platforms. Amazon continues to adapt and evolve till this day.
Henceforward in this report, we will discuss in detail how did Amazon tackled the e-commerce
initially and what was their business strategy that led to their success. Then we will look at
Amazon's financial statement; their mergers and acquisitions, and the ratio analysis. Ratio
analysis is critical in determining company liquidity and profitability (Al Ahbabi and Nobanee,
2020).
Literature Review
Amazon and E-commerce:
We have established that Amazon is one of the first organizations to start an online retail
business. But how does this online business function and operates? A study made by Sameer
Kumar, Jessica Eidem, and Diana Noriega look out how Amazon.com works in terms of
technicality. Amazon.com provides a variety of services to customers from music to books to
electronics. It acts as an online supermarket and has been accredited as the most reliable services
by customers worldwide. Part of Amazon's success is due to its operating system. Amazon has a
sorting system where they divide their consumers into 3 categories.[ CITATION Kum12 \l
1033 ]
1) Customer: This group is attended by regular users who are there to shop online. This system
allows users to see the available prices, sales, and the expected delivery dates for the products.
This option also allows the users to subscribe to Amazon Prime. A prime member will have
more frequent discounts and will get the two-day shipping option for free. [ CITATION
Kum12 \l 1033 ].
2) Seller Customers: This option allows the user to sell their product through the Amazon
website. There is a distribution service for users who are about to sell their products. This group
gets revenue for its product in the form of a fixed fee. [ CITATION Kum12 \l 1033 ].
3) Developer Customers: Developer customer is for the group who are actively developing and
creating products. Amazon provides a platform for these users through their technology
infrastructure and Amazon application software. [CITATION Ama081 \l 1033 ].
Amazon Innovations:
Bezos knows that people love Amazon service but realize that people won’t stay loyal to
Amazon if the service becomes stales. Bezos states that “Our customers are loyal to us right up
until the second somebody offers them a better service.” Bezos fully recognizes this and believes
it encourages the company to stay motivated and be creative in their services to keep the
consumers engage. Products and services like “Alexa” the voice control artificial intelligence.
Audible the online bookstore where you can listen to the audio version rather than reading.
Twitch the online gaming streaming service. These are just a few of the many services that
Amazon provides. [ CITATION Rob17 \l 1033 ]. Amazon also innovates in different
productions, as they also partake in manufacture. One of the biggest Amazon manufactures is
Amazon Prime Air. This massive production is a drone delivery service, it is a work in progress;
currently being tested in the United States and the United Kingdom. However, once it's launched,
the goal is to operate a GPS to fly packages to the customers' location. No more than 30 minutes
after the order has been placed. For now, the product could only carry packages that weigh less
than 5 pounds. Only packages that fit in the cargo are applicable. Amazon Prime air includes
86% of products that are being sold on the webpage. The delivery location should be around 10
miles close to Amazon Order Fulfillment Center. [ CITATION Pan14 \l 1033 ]
Amazon Business and Marketing Strategy:
With the Amazon initiative of e-commerce, Amazon took on losses in the late ’90s. But
Jeff Bezos always knew that would be the case in the short term. Amazon played the long run, in
the beginning, they invested heavily on building the brand equity and branding the site. Stating
that “This is an investment phase for Amazon.com. We've been straightforward with everybody
from the beginning that that's our strategy” Bezos also doubled down on this strategy, suggesting
if people don’t agree with this approach, then they should not bother investing in Amazon stock.
Because that is how Amazon will always approach things, by willing to take risks in their
business decision.[ CITATION Par08 \l 1033 ]
Amazon's strategy to become the top service didn’t rely only on innovation. A key
success to Amazon was its multiple affiliations with different brands. Amazon throughout the
years has been known for its Merger and Acquisition activities. IMDB, Souq, Joyo, and Double
Helix Games just to name a few. These acquisitions added positively to the company's worth. As
Merger and Acquisition adds a level of synergy and diversification to the products, it breaks a
wider audience. Such as the gaming community, Amazon not only bought a gaming company
Double Helix Games, but they also acquired Twitch in 2014, the most popular gaming streaming
service in the world. [CITATION Hon \l 1033 ].
Charles Edward and Andrew Lincoln from Texas A and. M university created a research
that focuses on Amazon's competitive advantage through the Michael Porter Five Analysis.
Below is the figure that identifies the forces. [ CITATION Edw08 \l 1033 ] figure[ CITATION
EPo80 \l 1033 ]
This figure explains all factors Amazon considers a primary force to target and focuses
on. The buyers, suppliers, expected entrants, and substitutes that people consider a threat for
Amazon products and services.
Sustainable practice in the Company:
Some scholars believe that there is a positive correlation between sustainable business
practices with sustainable development and financial management. Financial management plays
a role in developing a great deal for the financial growth of a company.[ CITATION Ahb19 \l
1033 ] . Another study from Abu Dhabi University examined by (Al Nuaimi and Nobanee,
2019) reaffirms the idea of how corporate disclosure of their sustainable business practices
improves the financial growth of a company. The research explains how an organization can
have a sustainable approach in their operations, and how sustainability can add value to the
organization. [ CITATION AlN191 \l 1033 ] Further study by Fatima Al Marar shows how
sustainability helps avoid any risks in the company. How risk management is vital in maintaining
company success.[ CITATION AlM20 \l 1033 ] In this case, Amazon is already abiding with
sustainability. Amazon is committed to their sustainable operations. As they are taking
precautions in reducing carbon emissions when it comes to their operations be it in its
transportation while delivering products or in its facilities. They are committed to focusing on
renewable energy. They are redesigning their packages in a unique way that can prevent waste.
Furthermore, Amazon Web Servers (AWS) are energy efficient. 3.6 times more energy-efficient
than any other US center. [ CITATION Ama \l 1033 ]. These signs of actions prove that Amazon
is willing to invest in its sustainability to create a better place for the company and the
environment.
Amazon Financial Statement and Analysis
From this point on, the report will focus on Amazon's financial statement. How well the
company is performing year by year. The report will analyze Amazon's ups and downs from
2016 to 2019.
Data Methodology
Table 1: Financial Data (Amazon)
Item/Year 2019 2018 2017 2016
Current Assets 96,334,000 75,101,000 60,197,000 45,781,000
Current 87,812,000 68,391,000 57,883,000 43,816,000
Liabilities
Inventories 20,497,000 17,174,000 16,047,000 11,461,000
Cash 55,021,000 41,250,000 30,986,000 25,981,000
Receivables 20,816,000 16,677,000 13,164,000 8,339,000
Total Assets 225,248,000 162,648,000 131,310,000 83,402,000
Total Liabilities 163,188,000 119,099,000 103,601,000 64,117,000
Total Equity 62,060,000 43,549,000 27,709,000 19,285,000
Sales 280,522,000 232,887,000 177,866,000 135,987,000
Cost of Goods 205,768,000 173,183,000 137,183,000 105,884,000
Sold
EBIT 14,541,000 12,421,000 4,106,000 4,186,000
Interest 1,600,000 1,417,000 848,000 484,000
Net Income 11,588,000 10,073,000 3,033,000 2,371,000
We collected the data here from Yahoo Finance from 2016 till 2019. All items in Table 1 were
available in the Income statement and the balance sheet. As you can see every factor and item
shows an increase from one year to another. The figure illustrates the growth Amazon displayed
from year to year. However, one can’t help but notice even though the asset in every year is high,
the net income is shockingly low. Amazon has a low net income because they have a lot of debt
and liability collected. They also spent a lot of their money on acquiring companies and
manufacturing big productions. This made a lot of people debate whether or not Amazon is
profitable.
Results and Discussion
The table below provides the ratios of current, quick, and cash. The current ratio reveals if
companies can pay their debts. Any current ratio value that is less than 1 indicates the company
might struggle to pay off its debts. Amazon from 2016 to 2019 has a current ratio above 1. While
the quick ratio shows company capabilities to pay for its current liabilities without worrying
about selling its inventory. The higher the ratio better for the company. The cash ratio shows if
the company can look out and deliver their short-term requirement like paying for the salary. 0.5
to 1 is the preferred cash ratio. Amazon has shown in the table is between those number in every
year.
Table 2: Liquidity Ratios of (Amazon)
Ratio/Year 2019 2018 2017 2016
Current Ratio 1.10 1.10 1.04 1.04
Quick Ratio 0.86 0.85 0.76 0.78
Cash Ratio 0.63 0.60 0.54 0.59
Figure 1: Current Ratio of Amazon
Current Rati o
1.11
1.11.1 1.1
1.09
1.08
1.07
1.06
1.05
1.04 1.04 1.04
1.03
1.02
1.01
2019 2018 2017 2016
Figure 2: Quick Ratio of Amazon
Quick Ratio
0.88
0.86
0.86
0.85
0.84
0.82
0.8
0.78 0.78
0.76 0.76
0.74
0.72
0.7
2019 2018 2017 2016
Cash Ratio
0.64
0.63
0.62
0.6 0.6
0.59 Figure 3: Cash Ratio
0.58 of Amazon
0.56
0.54 0.54
0.52
0.5
0.48
2019 2018 2017 2016
As discussed above, these graphs are associated with the ratios. All current ratios above 1
indicate the company is in good condition to pay out its debts. The ideal quick ratio should be
1:1, unfortunately, Amazon in every year is less than 1. Indicating Amazon couldn’t be able to
pay out its full liabilities in the short term. Whereas they are in good condition in Cash ratio,
placed between 0.5 and. 0.6.
Table 3: Activity Ratios of Amazon
Ratio/Year 2019 2018 2017 2016
Inventory Turnover 10.0 10.1 8.55 9.23
Receivable Turnover 13.5 14.0 13.5 16.3
Total Asset Turnover 1.25 1.43 1.35 1.63
Figure 4: Inventory Turnover of Amazon
Inventory Turnover
10.5
10.1
1010
9.5
9.23
9
8.5 8.55
7.5
2019 2018 2017 2016
Figure 5: Receivable Turnover of Amazon
Recievable Turnover
18
16 16.3
14
13.5 14 13.5
12
10
8
6
4
2
0
2019 2018 2017 2016
Figure 6: Total
Total Asset Turnover Asset of Amazon
1.8
1.6 1.63
1.4 1.43
1.35
1.25
1.2
1
0.8
0.6
0.4
0.2
0
2019 2018 2017 2016
Inventory turnover between 4 to 6 is considered the ideal ratio of turnover. Below 4 indicate a
company might be overstocking. In Amazon cases, they have a high inventory level, meaning
that they have good management skills.[ CITATION Wil13 \l 1033 ]. Receivable turnover shows
how well the company is collecting their debts. A higher ratio means companies are collecting
their debt faster. Interestingly, Amazon has a ratio decrease; from 16.3 in 2016 to 13.5 in 2019.
Total asset turnover is the company's integration of its assets to generate sales. The ratio for total
asset turnover for Amazon in the 4 years.
Table 4: Debt Ratios of Amazon
Ratio/Year 2019 2018 2017 2016
Debt Ratio 0.72 0.73 0.79 0.77
Times Interest Earned 9.09 8.77 4.84 8.65
Ratio
Figure 7: Debt Ratio of Amazon
Debt Ratio
0.8
0.79
0.78
0.77
0.76
0.74
0.73
0.72
0.72
0.7
0.68
2019 2018 2017 2016
Figure 8: Times Interest Earned Ratio of Amazon
Times Interest Earned Rati o
10
9.09
9 8.77 8.65
8
7
6
5 4.84
4
3
2
1
0
2019 2018 2017 2016
Table 5: Profitability Ratios of Amazon
Ratio/Year 2019 2018 2017 2016
Return on 0.19 0.23 0.11 0.12
Equity
Return on 0.05 0.06 0.02 0.03
Assets
Profit Margin 0.04 0.04 0.02 0.02
Figure 9: Return on
Return on Equity
0.25
Equity of Amazon
0.23
0.2
0.19
0.15
0.12
0.11
0.1
0.05
0
2019 2018 2017 2016
Figure 10: Return on Total Assets of Amazon
Return on Assets
0.07
0.06 0.06
0.05
0.05
0.04
0.03 0.03
0.02 0.02
0.01
0
2019 2018 2017 2016
Figure 11: Profit
Profi t Margin
0.05 Margin of Amazon
0.04
0.04 0.04
0.04
0.03
0.03
0.02 0.02 0.02
0.02
0.01
0.01
0
2019 2018 2017 2016
The return on equity is the company's ability to generate income from their equity. A ratio from
0.15 to 0.20 is considered to be good. Amazon has managed to get that in both 2018 and 2019.
Return on Assets is related to how much success the company is having based on assets. The
year 2018 has the highest return on assets with 6%. The profit margin is when sales revenue is
greater than the cost of production. With Amazon's growth, we can see 2018 and 2019 has a
higher ratio than in 2016 and 2017.
Conclusion
To sum up, Amazon has been the top online retailer due to how they operate their strategy
efficiently. Ever since the move to online, Amazon has seen consistent increases year by year.
However, the low net income and the increased liability is alarming to many. But I believe that is
due to Amazon's commitment to investing in long-term projects and acquiring big enterprises.
More expenses come when there are more obligations and responsibilities, but in the long term,
Amazon can make up for the expected losses. There is no denying the progress Amazon has
made, with the new project plans ahead and new manufacture production they are creating,
Amazon has shown no sign of slowing down.
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