Amazon

Ratio Analysis
SUBMITTED TO: AKHIL MP

D O N E B Y:

•2 0 2 1 B B A H 0 7 A S B 1 0 4 - A R P I TA M
H AT T I

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REDDY

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MADHUKAR

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Introduction to Amazon
and Ratio Analysis
Amazon.com, Inc., commonly known as Amazon, is one of the world's
largest and most well-known e-commerce and technology
companies. Founded by Jeff Bezos in 1994 as an online bookstore,
Amazon has evolved into a global conglomerate that offers a wide
range of products and services, including e-commerce, cloud
computing, digital streaming, artificial intelligence, and more. As of
my last knowledge update in January 2022, Amazon had a significant
global presence and was considered a major player in the tech and
retail industries.

Ratio analysis is a crucial tool for understanding Amazon's financial

performance and health. It involves evaluating various financial ratios
calculated from the company's financial statements. These ratios
provide insights into different aspects of Amazon's operations, such as
profitability, liquidity, solvency, and efficiency.
 Performance Assessment: Ratio analysis allows investors, analysts,
and stakeholders to assess Amazon's financial performance over
time. It helps in understanding how effectively the company
generates profit, manages expenses, and utilizes its resources.

Why Ratio
Investment Decision Making: Investors use ratio analysis to make
informed investment decisions. By examining profitability ratios like
net profit margin and return on equity, they can gauge the
Analysis is company's ability to generate returns.

Important for Risk Evaluation: Lenders and creditors use solvency ratios to
evaluate Amazon's financial stability and creditworthiness. A strong
Amazon: solvency position can lead to favorable borrowing terms.
Operational Efficiency: Efficiency ratios, such as inventory turnover
and accounts receivable turnover, help measure how efficiently
Amazon manages its operations. A higher inventory turnover, for
example, suggests efficient inventory management.
Strategic Insights: Ratio analysis can provide Amazon with insights
into the effectiveness of its business strategies. For instance, a low
operating margin might indicate the need for cost management
Challenges and Considerations:

 Amazon is known for reinvesting heavily in its

business, which can affect profitability ratios. High
operating expenses, due to investments in technology
and logistics, can result in lower profit margins.
 Amazon's diverse business segments, including
Amazon Web Services (AWS), retail, and media, each
have unique financial characteristics. Analysts must
consider these differences when interpreting ratios.
 The retail industry is highly competitive, and Amazon's
performance may be influenced by factors such as
pricing, consumer behavior, and global economic
conditions.
 Financial Data Amount (in billions or millions)

Total Revenue $514 billion

Gross Profit $225.152 billion

Net Profit $2.7 billion

Operating Expenses $501.735 billion

Capital Employed $292.8 billion

$0 (common and preferred stock dividends paid for

Preferred Dividends 2022)

Average Number of Outstanding Shares 10,189

Current Assets $146.791 billion
Current Liabilities $155.393 billion

Inventory $34.405 billion

Total Debt $169.9 billion

Shareholder's Equity $146.043 billion

Earnings Before Interest and Taxes (EBIT) $12.248 billion

Interest Expense $806 million

Profitability Ratios:
• Gross Profit Ratio:
• Formula: Gross Profit / Total Revenue
• Calculation: $225.152 billion / $514 billion = 0.4374 or 43.74%
• Interpretation: The gross profit ratio measures how much profit a company retains after
direct production costs. Amazon's gross profit ratio of 43.74% indicates that for every dollar
in revenue, the company retains approximately 43.74 cents after covering its cost of goods
sold. A higher ratio suggests efficient cost management.
• Net Profit Ratio:
• Formula: Net Profit / Total Revenue
• Calculation: $2.7 billion / $514 billion = 0.0052 or 0.52%
• Interpretation: The net profit ratio assesses how much of the total revenue turns into profit
after all expenses, including operating expenses and taxes. Amazon's net profit ratio of 0.52%
implies that for every dollar in revenue, the company generates a net profit of approximately
0.52 cents. While this is relatively low, it's common for e-commerce companies to have
thinner profit margins due to high operational expenses and investments.

Operating Ratio:
• Formula: Operating Expenses / Total Revenue
• Calculation: $501.735 billion / $514 billion = 0.9751 or 97.51%
• Interpretation: The operating ratio indicates that Amazon spends approximately 97.51% of its
total revenue on operating expenses. This high ratio suggests that a significant portion of its
revenue goes into covering the costs of doing business, which is typical for a company that
continually invests in growth and innovation.
Return on Capital Employed (ROCE):
Formula: (EBIT / Capital Employed) * 100
Calculation: ($12.248 billion / $292.8 billion) * 100 ≈ 4.18%
Interpretation: ROCE measures how efficiently a company utilizes its
capital. Amazon's ROCE of 4.18% implies that for every dollar of capital
employed, the company generates a return of about 4.18 cents. While this
may seem relatively low, it's important to consider that Amazon frequently
invests in new ventures, which can impact the return on capital.
Earnings Per Share (EPS):
Formula: (Net Profit - Preferred Dividends) / Average Number of
Outstanding Shares
Calculation: ($2.7 billion - $0) / 10,189 = $0.265 per share
Interpretation: Amazon's earnings per share of $0.265 indicates the portion
of profit attributed to each common shareholder. In this case, the company's
profitability translates to approximately $0.265 per share.
. Liquidity Ratios:
Current Ratio:
Formula: Current Assets / Current Liabilities
Calculation: $146.791 billion / $155.393 billion ≈ 0.945
Interpretation: Amazon's current ratio of 0.945 suggests that it has slightly less current assets than current liabilities.
While this ratio is less than 1, indicating a potential liquidity concern, it's essential to remember that Amazon's business
model relies on efficient inventory management.
. Quick Ratio (Acid-Test Ratio):
Formula: (Current Assets - Inventory) / Current Liabilities
Calculation: ($146.791 billion - $34.405 billion) / $155.393 billion ≈ 0.754
Interpretation: The quick ratio, at 0.754, further highlights Amazon's liquidity situation. This ratio excludes inventory,
which may not be as readily convertible to cash. It indicates that Amazon may need to rely on other sources to meet
short-term obligations.
. Solvency Ratios:
 Debt Equity Ratio:
 Formula: Total Debt / Shareholder's Equity
 Calculation: $169.9 billion / $146.043 billion ≈ 1.16
 Interpretation: The debt equity ratio of 1.16 implies that Amazon has slightly
more debt than equity. While not alarming, it suggests a moderate level of
financial leverage.
 Total Assets to Debt Ratio:
 Formula: Total Assets / Total Debt
 Calculation: $462.7 billion / $169.9 billion ≈ 2.72
 Interpretation: This ratio indicates that Amazon's total assets are
approximately 2.72 times the total debt. It suggests that the company has a
good capacity to cover its debt obligations with its assets.
 Proprietary Ratio:
 Formula: Shareholder's Equity / Total Assets
 Calculation: $146.043 billion / $462.7 billion ≈ 31.54%
 Interpretation: The proprietary ratio shows that 31.54% of Amazon's assets
are financed by shareholders' equity. This indicates a relatively healthy
balance between equity and assets.
 Interest Coverage Ratio:
 Formula: Earnings Before Interest and Taxes (EBIT) /
Interest Expense
 Calculation: $12.248 billion / $806 million ≈ 15.20
 Interpretation: Amazon's interest coverage ratio of 15.20
suggests that the company easily covers its interest
expenses with its earnings. This indicates financial
stability.
 Debt to Capital Employed Ratio:
 Formula: Total Debt / (Shareholder's Equity + Total Debt)
 Calculation: $169.9 billion / ($146.043 billion + $169.9
billion) ≈ 53.75%
 Interpretation: The debt to capital employed ratio shows
that approximately 53.75% of Amazon's capital comes
from debt. This suggests a moderate level of leverage,
but it's not excessively high.
Conclusion:

In analyzing Amazon's financial ratios,

we gain valuable insights into the
company's financial health,
performance, and strategic position.
Amazon, as a technology and e-
commerce giant, exhibits certain
financial characteristics that reflect its
business model, which prioritizes long-
term growth and innovation over short-
term profitability. Here are key
takeaways from the ratio analysis:
1. Profitability: Amazon's profitability ratios, such as the gross profit ratio
(43.74%) and net profit ratio (0.52%), demonstrate that while the company
generates significant revenue, it operates with relatively thin profit margins.
This is typical in the e-commerce industry, where heavy investments are
made in logistics, technology, and infrastructure.
2. Efficiency: The company's efficiency ratios, like inventory turnover and
accounts receivable turnover, are not provided but are important for
understanding operational efficiency. Amazon's well-known emphasis on
efficient logistics and inventory management contributes to its competitive
edge.
3. Liquidity: Amazon's liquidity ratios, such as the current ratio (0.945) and quick
ratio (0.754), indicate that the company's current assets may not fully cover
its current liabilities. This is partially due to its substantial investments and
working capital requirements.
Solvency: Solvency ratios, including the debt equity ratio (1.16), total assets to debt ratio (2.72), and
proprietary ratio (31.54%), suggest that Amazon maintains a moderate level of financial leverage and has a
substantial asset base relative to its debt. The interest coverage ratio (15.20) indicates a healthy ability to cover
interest expenses.

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Return on Capital Employed: The ROCE ratio (4.18%) shows that Amazon generates a return of about 4.18%
for every dollar of capital employed, reflecting its ongoing investment in growth initiatives.
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