Company Profile
Revered as the biggest e-commerce website around the globe, Amazon Inc. is an American multinational entity engaged in e-commerce selling and cloud computing. Founded in the year 1994 by Jeff Bezos, the company is headquartered in Seattle, Washington DC. Amazon is the biggest e-retailer in terms of revenue and market capitalization. Beginning with the modest background of selling books and Blu-Ray DVD’s, Amazon today offers more than billion products and is now operating globally with presence in 19 countries. The company is listed on NASDAQ under the ticker symbol of AMZN and is also the constituent of NASDAQ 100.
Financial Statement Review
Referring to the income statement of the company, we witness an astounding progress registered by the company during 2015. During the year, the company reported 20.25% growth in the revenue figures, which, along with the controlled proportion of costs of goods sold and operating expense, resulted in significant growth in the profitability figures. As we can see from the income statement attached in the appendix section of this report, during 2015, operating income surged from $178 million to $2233 million, recording a 1154.49% growth in one fiscal year. An overall positive impact of the operational efficiency was also witnessed on the bottom line figures, which increased by 347.30% during the year.
As for the balance sheet, the same does project an optimistic approach and sound financial health of the company. During 2015, the current assets increased by 16.43%, with cash and inventory increasing by 13.73% and 23.42%, respectively. However, the noteworthy developments were in the non-current section of the assets, where we noticed that during the year, the company made a significant investment in property, plant and equipment, fixture and other non-current assets. Overall, the non-current asset base increased by 24.99%.
On the other hand, the current liabilities position of the company increased by 20.68%. This compared with 16.43% increase in the current assets, signals toward marginal blow to the liquidity position of the company. As for the non-current liabilities, while the company did reduce its reliance on long-term debt and retired 0.36% of the existing amount, however, at the same time, capital leases increased by 40.81%. Lastly, for the stockholder equity, the amount increased by 24.61% with retained earnings increasing by 30.58% during the year.
Proforma Income Statement
Below we have projected the income statement of the company for the upcoming financial year, assuming 10% growth in revenue and cost of sales, while all the other operating expenses are assumed to remain in proportion:
Ratio Analysis
Raw financial figures might misguide the analysis process and for this reason, running these figures through the microscope of financial ratios is extremely useful. Below discussed are the financial ratios of Amazon Inc for the period 2014 and 2015:
a) Liquidity Ratios:
-Current Ratio: Current Assets/ Current Liabilities
-Quick Ratio: (Current Assets- Inventory)/ Current Liabilities
Referring to the above figures, we can see that over the year, Amazon has witnessed a decline in its liquidity position amidst higher proportionate increase in the current liabilities relative to the current assets. While the current ratio decreased from 1.12 to 1.08, quick ratio, which is a more arduous measure of the liquidity position of the company, also warranted our assertions relating to the deteriorated liquidity position of the company.
b)Profitability Ratios:-Operating Margin: Operating Profit/ Revenue
-Return on Equity: Net Income/ Total Equity
Stakeholders of Amazon Inc. will be ecstatic to see the company operating with profits yet again. Referring to the figures above, we can see that during 2015, Amazon generated higher operating margin courtesy 20.25% growth in the revenue figures and apt cost infrastructure. Even the equity shareholders will be happy to see the improved profitability and higher ROE multiple, which during the year, increased from -2.24% to 4.45%. These trends confirm that the year 2015 was indeed ebullient for the company and its stakeholders.
c) Asset Management
-Asset Turnover: Revenue/ Total Assets
-Inventory Turnover: COGS/ Inventory
These ratios confirm the efficiency of the management in relation to the asset base of the company. Referring to the figures above, we can see that there was no improvement in asset turnover and inventory turnover multiple of Amazon Inc. Stated otherwise, these figures confirms that management continued to earn same proportion of revenue from the given asset base and also sold the inventory in a same time period as in 2014.
d) Leverage Ratios:
-Debt to Asset Ratio: Total Debt/ Total Assets
-Interest Coverage Ratio: Operating Income/ Interest Expense
Leverage ratios allow us to de-code the composition of the capital structure of the company and learn about the risk embedded within it . As noted from the above figures, during the year, the debt-to-asset ratio decreased from 15.16% to 12.58%. This confirms that during 2015, Amazon relied less on debt funding to procure assets. On the other hand, the interest coverage ratio increased from 0.85 to 4.86, which confirms that while the company is relying low on debt, its ability to repay interest expense has improved significantly. Therefore, we assert that now the company is operating with sustainable leverage position.
e) Per Share Ratios
-Earnings per share: (Net Income- preferred dividend)/ Weighted shareholders outstanding
-Cash Flow per share: Operating Cash Flow(CFO)/ Weighted shareholders outstanding
Strong profitability and improvement in the cash position is also confirmed with significant increase in the EPS figure and Cash Flow per share, respectively.
f) Cash Flow Ratios
- Operating Cash Flow to Net Income: CFO/ Net Income
-Operating Cash Flow to Revenue: CFO/ Revenue
Positive operating cash flow and increase in proportion of operating cash flow to the revenue figures confirms quality of earnings of the company and a sustainable cash generation from the sales activity.
g)Market based ratio
PE Ratio: Market Price/ EPS
Price/ Book Ratio: Market Price/ Book Value per share
DuPont Identity
Return on equity(ROE) is one of the most meticulously analyzed profitability ratio by the equity investors as it reveals the return earned by the company using the equity funds. However, at the same time, the ratio is prone to manipulation as the management can easily fabricate the net income figures. Therefore, to protect the investors from these phony figures, Dupont identity comes handy as it allows the analysts to decode the ROE multiple and learn about the real drivers of the profitability position of the company. Below we have analyzed the ROE of Amazon Inc using the Dupont identity:
ROE: Net Profit Margin * Asset Turnover* Equity Multiplier
ROE: (Net Income/ Revenue)* (Revenue/ Total Assets)* (Total Assets/ Revenue)
Referring to the above figures, we can see that the ROE figure surged from -2.24% to 4.45% and this growth was primarily driven by leverage only.However, the overall performance is ebullient as this year, the company generated positive ROE because of higher net margins, improved asset turnover and decrease in equity multiplier.
Economic Value Added
Also known as economic profit, economic value added indicates the company’s performance based on residual wealth it creates. Below we have calculated the EVA multiple for Amazon, assuming a tax rate of 35% and cost of capital of 8%:
EVA: Net Operating Profit after Tax- (WACC* Invested Capital)
= 2233(1-0.35)- (0.08*(8235+13384))
= 1452.75-1729.52
= -$276.77 million
EVA allows us to access the management performance and here, we notice that under the assumed circumstances, Amazon fails to generate returns over its cost of capital and even though in accounting terms it is earning profits, however, it is still not generating economic profits. This might turn away some wary investors because Amazon already has a large base of intangible assets in the form of goodwill and thus, it may not be able to generate positive economic profits anytime soon.
Financial risk associated with international operations
Beginning with the modest background in Seattle, Amazon is now a global player and operates in more than 19 countries. This exposes the company to a significant foreign exchange risk and because of this reason, it is common for the company to face losses if it doesn’t hedge its exchange risk. At the same time, even though the company hedge its currency exchange risk, the risk can only be controlled but not eliminated. At present, Amazon have significant exposure in currency derivatives, and still, it has reported foreign exchange translation losses at -$310 million in 2014 and -$374 million in 2015.
Recommendation
On the basis of the above analysis, we recommend Amazon’s stock for a buy position. As we delineated in the report, the company has rebounded well with strong profitability and improved leverage position. This, along with optimistic projections for the e-commerce industry, warrants our recommendation. Moreover, our recommendation is also in alignment with the industry analyst following the stock:
References
Amazon Inc. (2016). SEC 10K. Amazon Inc.
Barstow, S. (2017). Financial Risk Associated With International Business. Retrieved February 3, 2017, from http://smallbusiness.chron.com/financial-risk-associated-international-business-76951.html
Gunther Friedl, a. L. (2008). A Note on Economic Value Added (EVA) . TUM Business School.
Pinset, W. (2016). Decoding Dupont Identity. Retrieved February 3, 2017, from Investopedia: http://www.investopedia.com/articles/fundamental-analysis/08/dupont-analysis.asp
Yahoo Finance. (2017). Analyst Opinon: Yahoo Finance. Retrieved February 3, 2017, from Yahoo Finance: https://in.finance.yahoo.com/q/ao?s=AMZN
