Throughout this paper, I will be comparing the 2011 and 2012 financial statements for

Amazon. I will be analyzing their ability to pay current liabilities, ability to sell merchandise
inventory and collect receivables, ability to pay long term debt, probability and evaluating their
stock as an investment.
Ability to pay current liabilities:
Amazons ability to pay its current liabilities is calculated with a formula called the
current ratio. The formula for this ratio is total current assets/total current liabilities, and you
want this number to be low, the lower the better. This ratio determines the rate in which a
company can pay off their liabilities with its current assets. Amazons current ratio for 2012 is
1.12 and 1.17 for 2011, which gives an industry average of 1.15 which is normal and a strong
average, seeing as the industry average is 1.54.
Ability to sell merchandise inventory and collect receivables:
There are three main ratios that determine a companys ability to sell merchandise
inventory and collect receivables. The first ratio is inventory turnover, the formula is cost of
goods sold/average merchandise inventory, which measures the number of times a company sells
it average level of merchandise during the year. Amazons inventory turnover was 8.3 in 2012
and 9.1 in 2011, which is an average number. The second ratio is the gross profit margin
percentage, the formula is gross profit/net sales revenue, this ratio measures the profitability of
each net sales dollar above the cost of goods sold. It reflects a business ability to earn a profit on
the merchandise inventory. Amazons gross profit margin percentage in 2012 was 24 % and 22%
on 2011, the industry average was 33.55%. The third ratio is days sales in receivables which
measures how many days it takes to collect the average level of receivables. The formula for the
ratio is net 365/accounts receivable turnover ratio. Amazons days in receivables in 2012 was
17.7 and 15.8 in 2011.
Ability to pay long term debt:
Calculating the ability to pay your long-term debt is calculated with a few ratios. The first
is called the debt to equity ratio, which shows the financial leverage the company has. The
formula is total liabilities/total equity, the higher the debt to equity ratio, the greater companys
financial risk. Next ratio is the times-interest earned ration, which evaluates a business ability to
pay interest expense. The formula for this ratio is (Net Income + Income Tax Expense + Interest
Expense)/Interest Expense. Amazons number is 2012 was 5.23 and 15.18 in 2011. Obviously that
is quite the jump in just a years time, you want your number to be higher, 2011s ratio was a
perfect spot for the company to be in. You want your ratio to be higher, if it does fall in the range
from 2.0 to 3.0 you are reported by the Risk Management Association.
Profitability Ratios:
Obviously, businesses are in business to make money, there are a few ratios that can help
you determine the profitability of a company. The first ratio is called the profit margin ratio, it
shows how much net income a business earns on every $1.00 of sales. The formula is net
income/net sales, and the goal for companies is the have a high profit margin ratio. Amazons
ratio in 2012 was -0.06% and 1.31 in 2011 and the industry average was 2.87%. The next ratio is
return on stockholders equity, it shows much income is earned for each $1.00 invested by the
common shareholders. The ratio formula is net income preferred dividends/average common
stockholders equity, investors want this to be a high number. Amazons return on stockholders
equity in 2012 was -0.49% and 8.63% in 2011 and the industry average was 11.39%, Amazon
had lower that ideal numbers in 2012 and 2011.
Evaluating Investment:
Investors purchase stock to make a profit, and that is why is such an important and
crucial thing to keep your stock price up. The price/earnings ratio show the market price of $1.00
of earnings. The formula is market price per share of common stock/earnings per share, you want
to have a fairly high number on this ratio. Amazons price/earnings ratio in 2012 was -2,854.7
and was 131.37 in 2011, and the industry average was 47.7. Seeing a pattern, Amazon
exceptional one year, and the next was downright horrible, but it just goes to show how
unpredictable the market can be.
Amazon was an extremely interesting company to study and watch the numbers change
from year to year. I thought it was so interesting that in 2011 they In my opinion they did pretty
well in the department of paying their liabilities and taking care of their debt, but when it came to
investments they did horrible, from an outsiders perspective that is something that they can
work on. Another thing I noticed, they were collecting their receivables as fast as other
companies, they took a deep dive in 2012 of almost 10 days, that raises some concern in the
company and should be addressed.