Amazon Inc. Financial and Non-Financial Performance Analysis

Executive Summary

Amazon is a leading global online retailer headquartered in Seattle, Washington, USA. It was founded in 1994 by Jeff Bezos and has grown to become a leading multinational company. It specializes in retail business and also offers subscription services, as well as web services (Warrier et al., 2021). Amazon is considered the online equivalent of Wal-Mart due to its wide market share coupled with a competitive pricing strategy. As of 2021, the company generated revenues of $469.82 Billion US dollars, compared to $386.06billion dollars in 2020 and $280 billion dollars in 2019 (Amazon, 2021). The company’s sales growth over the three-year period stood at 20.45% in 2019, 37.62% in 2020, and 20.70%. The sales growth over the 3-year period can be attributed to the shift from offline buying to online purchasing during the Covid-19 period. Similarly, Amazon’s net income grew from 11.59 billion dollars in 2019 to 21.33billion dollars in 2020, and finally to 33.36 billion dollars in 2021. Amazon faces stiff competition from other retailers such as Wal-Mart, Target, and Best Buy. Its main competitors in the subscription services include Apple, Google, and Netflix. In the provision of web services, Amazon competes with Microsoft Corporation, IBM, and oracle. Besides the shift in purchasing behavior, the growth in cloud business accounts for the accelerated growth over the last three years (Berg & Knights, 2021). This report analyzes the financial ratios of Amazon to assess the company’s financial performance and overall financial health. The report further outlines other factors or limitations that the investor can consider prior to investing at Amazon.

Financial Performance

Liquidity Ratios

Liquidity Ratios are important performance metrics that assess a firm’s capacity to meet its short-term debts. The current ratio and the quick ratio are the widely known liquidity ratios that investors consider when assessing a company’s short-term solvency (Breuer et al., 2012). Specifically, the current ratio measures a firm’s ability to meet its short-term debts when they become due using the current assets. A current ratio of between 1.5 and 3.0 is considered ideal in the retail industry. Based on the calculations, it can be observed that Amazon’s current ratio over the three-year period stood at 1.10, 1.05 and 1.14 in 2019, 2020 and 2021, respectively. The liquid ratio shows a firm’s capacity to pay off short-term debts without having to dispose of its inventory. A liquid ratio of between 1.2 and 2.0 is often recommended in the retail industry. Based on the calculations, it can be seen that Amazon’s quick ratios stood at 0.86, 0.86 and 0.91 in 2019, 2020 and 2021, respectively (Amazon, 2021).

Profitability Ratios

Profitability ratios are other critical financial performance metrics that show a firm’s ability to generate sufficient earnings relative to its sales revenue, costs, assets, and equity. The net profit margin, gross profit margin, return on assets, and return on equity are the most widely used profitability ratios (Husain and Sunardi, 2020). The net profit margin shows the amount of profit that a company generates as a proportion of its revenue. A higher net profit margin is preferred because it indicates greater profitability. Amazon’s computed net profit margin stood at 4.13%, 5.53, and 7.10% in 2019, 2020, and 2021. Respectively, showing slight growth in net profits over the period. The gross profit margin shows the proportion of a firm’s operating income relative to its revenue. The computed gross profit margin also showed the same trend and stood at 13.84%, 13.34, and 14.11% in 2019, 2020, and 2021, respectively. The return on assets measures how efficient a company utilizes its assets to generate profit, while the return on equity assesses how efficiently a firm generates profit from the equity funds. Amazon’s return on equity is higher than the return on assets over the three-year period, showing that it is more effective in terms of using equity to make a profit than assets (Amazon, 2020).

Activity Ratios

Activity ratios are essential performance metrics that generally assess how efficiently a firm utilizes assets on its financial position to generate earnings. Activity ratios include the inventory turnover, assets turnover, fixed assets turnover, inventory days, average collection period, and average payable days (Rashid, 2018). The inventory turnover measures the number of times replaces its inventory over a particular period. Based on Amazon’s inventory turnover rose from 11.79 in 2019 to 14.06 in 2020 and then dropped to 12.36 in 2021. The asset turnover shows how effective a firm is utilizing its assets to generate more sales. Amazon’s assets turnover reduced from 1.25 in 2019 to 1.20 in 2020 and then to 1.12 in 2021. The fixed assets turnover shows how efficiently a firm utilizes its fixed assets to make more revenue. Amazon’s fixed assets turnover declined from 2.18 in 2019 to 2.05 in 2020 and finally to 1.81 in 2021. The average collection period measures the number of days it takes for credit sales to be converted into cash (Rashid, 2018). Amazon’s average collection period declined from 27.08 in 2019 to 23.20 in 2020 and then increased slightly to 25.55 in 2021. Inventory days show the number of days it takes for a firm to convert its inventory into sales. Amazon’s inventory days decreased from 30.95 in 2019 to 25.96 in 2020 and then increased to 29.53 in 2021. The average payables days show the number of days that a company takes to pay its suppliers. Amazon’s average payables days increased from 71.25 in 2019 to 79.14 in 2020 and then reduced to 71.16 in 2021.

Leverage Ratios

The leverage ratios measure a company’s level of gearing. The debt-to-equity and debt-to-assets are the most common leverage ratios. The debt-to-assets ratio indicates the degree to which a firm has used debt to finance the purchase of assets (Dothan, 2006). Amazon’s debt-to-assets ratio decreased from 10.39% in 2019 to 9.91% in 2020 and then increased to 11.59% in 2021. The trend shows that Amazon is not stable in terms of using debt to finance the purchase of assets. The debt-to-equity ratio indicates the contribution of shareholders’ equity to the equity capital of a firm. According to Amazon’s annual report (2019), the debt-to-equity ratio decreased from 37.73% in 2019 to 34.06% in 2020 and then increased slightly to 35.26% in 2021 (Amazon, 2021). Overall, Amazon’s leverage ratios indicate that the company has managed to control the level of debt in its capital structure. The company’s equity and total assets are significantly higher than its existing debt over the three-year period under review.

Investor Ratios

Investor ratios indicate a company’s ability to generate returns from the invested funds. Investors are interested in knowing the company’s potential for growth before investing in a firm. Thus, investor ratios provide key information about a company’s financial health and ability to pay attractive returns. The common investor ratios include earnings per share, price/earnings ratio, dividend payout ratio, dividend cover, dividend yield, and dividend per share (Arsal, 2021). Amazon’s computed earnings per share show that the company’s earnings have been on an upward trend over the last three years. Amazon’s EPS rose from 23.46 in 2019 to 42.64 in 2020 and 65.96 in 2021. The increasing EPS shows that Amazon’s earnings are increasing, which is a benefit to the investors as they stand to earn more for every outstanding share. It should be understood that Amazon has never paid out dividends. The company reinvests its earnings to new markets with a view to generate meaningful profits. The high demand for Amazon stocks pushes the prices up, thus benefiting the existing shareholders.

Working Capital Cycle

From Amazon’s cash flow, it can be observed that the company operate on a negative cash conversion cycle. It collects payments from customers but pays the suppliers after several days. This creates sufficient cash flow for the business each year. A significant amount of Amazon’s operating cash flow is derived from deferred revenue, changes in working capital, and stock-based compensation (Amazon, 2021). Whereas the additional cash flow is good for the business, it is not sustainable in the long-run. It only exists as far as the business keeps expending. As soon as Amazon stops growing, the additional cash flow arising from changes in working capital disappears. A truly positive cash flow ought to be the cash flow left after investments in growth opportunities of the business. For instance, Amazon takes an average of 25 days to pay its suppliers based on the computed accounts receivable days (27.08, 23.02, and 25.55 days in 20219, 2020, and 2020, respectively). Thus, Amazon’s additional cash flow is a result of timing in payments. Thus, if the additional cash flow is pulled out, the business cannot stand.

Comparative Analysis

Although Amazon does not generate sufficient earnings, it continues to lead in the online retail industry. Based on financial and non-financial performance metrics, Amazon is ranked at the top relative to its close competitors like eBay, Wal-Mart, and Target. From non-financial performance metrics perspective, Amazon enjoys a wider market share compared to its competitors. It also has a more competitive pricing strategy that attracts more customers to its e-commerce business (Alshmrani, 2021). Amazon also beats its close rivals in terms of growth potential and growth opportunities, given that it is an online retail company.

Recommendations

Based on the current ratio and quick ratio, Amazon is not liquid enough and may be struggling to pay off short-term debts. It should initiate a raft of measures, like controlling its overhead expenses or revisiting its short-term debt obligations. Although Amazon’s profitability ratios show slight growth, it does not generate sufficient profits relative to its revenues, operating costs, assets, and equity. Thus, Amazon requires to increase revenue, reduce costs, boost productivity, and increase efficiency in order to achieve greater profitability. Amazon’s activity ratios show that the company is not as effective as possible in terms of utilizing assets in its balance sheet to generate more revenue. As such, the management has to work towards achieving more efficiency in the utilization of company’s assets and shareholders’ equity to boost the company’s earnings. Furthermore, Amazon should consider paying out some dividends to shareholders in the future to attract more investors in the business. Investors are not only interested in growth in company’s stocks but also a share of company’s earnings yearly.

Other Considerations by Investors

Besides the financial performance metrics, investors also consider non-financial performance metrics prior to investing in a retail company like Amazon. Non-financial metrics are important indicators of future performance because they provide insights into a company’s potential for growth (Coram et al., 2011). They provide more information about the internal operations of a business and can point out what improvements are required to improve the financial performance. The common non-financial performance metrics that investors consider include innovation, competitiveness, company reputation, and customer value. The management remains in control of these non-financial performance metrics to create more opportunities for the business and attract potential investors. Businesses that balance financial and non-financial performance have a competitive advantage than those that focus on financial performance alone.

References

Alshmrani, H. M. (2021). An analytical view of amazon success in the worldwide. Life Science Journal, 18(6).

Amazon (2019). Annual report 2019. Retrieved from https://ir.aboutamazon.com/annual-reports-proxies-and-shareholder-letters/default.aspx

Amazon (2020). Annual report 2020. Retrieved from https://ir.aboutamazon.com/annual-reports-proxies-and-shareholder-letters/default.aspx

Amazon (2021). Annual report 2021. Retrieved from https://ir.aboutamazon.com/annual-reports-proxies-and-shareholder-letters/default.aspx

Arsal, M. (2021). Impact of earnings per share and dividend per share on firm value. ATESTASI: Journal of Ilmiah Akuntansi, 4(1), 11-18.

Berg, N., & Knights, M. (2021). Amazon: How the world’s most relentless retailer will continue to revolutionize commerce. Kogan Page Publishers.

Breuer, A., Frumusanu, M. L., Breuer, B. L., & Manciu, A. (2012). Cash and liquidity/liquidity and liquidity ratio. Annals-Economy Series, 4, 78-82.

Coram, P. J., Mock, T. J., & Monroe, G. S. (2011). Financial analysts’ evaluation of enhanced disclosure of non-financial performance indicators. The British Accounting Review, 43(2), 87-101.

Dothan, M., (2006). Costs of financial distress and interest coverage ratios. Journal of Financial Research, 29(2), 147-162.

Husain, T., and Sunardi, N., (2020). Firm’s Value Prediction Based on Profitability Ratios and Dividend Policy. Finance & Economics Review, 2(2), 13-26.

Rashid, C. A. (2018). Efficiency of financial ratios analysis for evaluating companies’ liquidity. International Journal of Social Sciences & Educational Studies, 4(4), 110.

Warrier, U., Singh, P., Jien, C. W., Kee, D. M. H., Yi, G. Z., Jiann, T. W., … & Ganatra, V. (2021). Factors that lead Amazon. com to a successful online shopping platform. International journal of Tourism and hospitality in Asia Pasific (IJTHAP), 4(1), 7-17.

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