Introduction
Amazon is an organization that started in 1994, as the earth’s biggest bookstore. The company in 1997, via IPO, raised $50 million. In 1999, the business explored new business models, marketplaces, and auctions. In 2000, after the fall in GP, the business shifted towards traditional retailers.
The objective of this paper is to analyze the case “Amazon.Com the Brink of Bankruptcy” presented by Lynda M. Applegate in 2013.
For the attainment of the purpose, the paper has been divided into seven segments. Each segment presents worthwhile information.
Financial statement analysis refers to the evaluation of the profitability, stability, and viability of the business. The financial analysis allows companies to determine their costs, payback ratios, and other factors. Through the financial analysis, it becomes easy for management to understand the points that are required to be improved (White 441). In the case of amazon.com, it has been determined that despite the decline in stock prices (Applegate 5), the number of customers was constantly raising. More specifically due to these customers and the introduction of new products, the revenue of the company was increasing as well, as in 1998 the revenue was $610 million that increased up to $2.8 billion in 2000. However, despite all these improvements, the company was facing the tremendous pressure of generating profits that proved that only retaining customers and growing revenue is not enough for the long-term sustainability of the business (Applegate 5). For increased profitability, it is essential to keep the fulfillment costs low (Davis & Davis 169). The financial analysis disclosed that the business failed in keeping control on its fulfillment costs, as in 1998 the cost was 11 percent of the sales that increased in 1999 to 14 percent of the sales of the organization. This issue should have been addressed by the management quickly (Applegate 5). The analysis revealed that the only book, videos, and music segment of the business is profitable, and other segments were continuing to burn the cash of the company. The company should have addressed this situation because for being profitable; it is essential that all the segments generate sufficient profit that can support these segments while delivering the returns to investors. On the other hand, stock market crash of dot.com made the company situation more worst and by the half of 2000, multiple online retail partners of the business were heading to the bankruptcy.
Analysis disclosed that the management of the company on one side was not paying attention towards the business segments that were in the loss and on other hand; the operational cost of the company was increasing each year that was turning the profitability into a loss. For example, in 1998, the operational cost was 39.80 percent of sales of the company, in 1999, it was 54.66 percent, and in 2000, it reached up to 55.02 percent of the sales (Applegate 5). In addition, the non-operating expenses of the company were increasing rapidly as well that were associated with debt (Applegate 5). Based on the analysis, it is recommended to the organization that it must improve the profitability of the other segments or close those segments that are not making a profit. The business should focus on reducing its operational cost that will contribute in decreasing losses or turn the losses into profitability, and must reduce its debt based financing.
Key Ratios and Application of Key Ratios
Ratios are also used to determine the financial position of the business. These key ratios can be used in two ways such as the ratios can be used to determine the control of the management of the corporation and for the purpose of commenting on the performance of the organization (Select Knowledge Ltd 85). These ratios include current ratio, inventory turnover ratio, asset turnover ratio, debt ratio, operating profit ratio, earning per share, and return on assets (Select Knowledge Ltd 85 -105).
Current ratio: Current assets/Current liabilities
It tells that how liquid the company is, current ratio determined the short-term strength of the company. The higher the ratio will be the more the company will be able to meet its short-term obligations. Less than 1 ratio is not acceptable. The ratio of the company in 1999 was 1.373 and in 2000 was1.396, which means the company was able to meet its short term obligations (Applegate 6).
Inventory turnover ratio: Cost of goods sold/ Inventory
Inventory turnover ratio measures the liquidity of inventory of the business. It tells the number of times the inventory of the company sold. In other words, the higher the inventory ratio, the more the company is efficient in inventory management. In 1999, the inventory turnover ratio of the firm was 6.114744885 that increased in 2000 up to 12.06559236, which means the company is managing its inventory efficiently (Applegate 5).
Asset turnover ratio: Sales/total assets
The ratio determines that how efficiently the company is utilizing its assets. In 1999, the ratio was 0.66501977 that increased up to1.293566458 in 2000. This means that the efficiency of the business to utilize its assets improved. The ratio tells that the sales of the company are higher than the average total assets in 2000 (Applegate 5-6).
Debt ratio: total liabilities/ total assets
Debt ratio communicated the financial leverage situation of the company the more the ratio will be higher the more the company will be at risk of bankruptcy. If the ratio is higher than 100 percent, it means the company has more debt as compared to assets and vice versa. In 1999, the company debt ratio was 89.20137072% that increased in 2000 up to 145.3009106%. It indicated that the company should reduce its debt (Applegate 6).
Operating profit margin: Operating profit/sales
Operating profit margin communicates the operational efficiency of the business. The more the ratio will be higher it will communicate that the business is running its operation smoothly. In 1999, the ratio was -0.392233018 and in 2000, it was -0.400682046, which mean the company is not efficient in running its operations (Applegate 5).
Earnings per share: Earnings available for common stockholders/# of shares of common stock outstanding
Earnings per share is an important indicator of the success of the company. However, in 1999, EPS was negative 4.02 and in 2000, it was 2.2. It indicates that the company is not successful and communicates its poor performance (Applegate 5).
Return on assets: net income/sales
Return on assets is a profitability indicator; it tells that how profitable the company is. However, negative ratio demonstrates that the company is not profitable, as the ration in 1999 was -29.19755865 and in 2000 was -66.09654786. The ratio tells that inefficiency of management in the deployment of assets (Applegate 5).
Reasons of Organization Performance and the Initiatives That Business Should Take To Succeed
The case clearly depicts that the business is showing constant losses on a yearly basis due to which it has pressure to generate profitability (Applegate 5). Multiple segments of the business were failing in making a profit and the company neither is reacting quickly to the rapid economic change (p. 6). With increased expanding product line, the company is facing difficulties in fulfillment, distribution, inventory management, and warehousing (Applegate. 1). This means the revenue of the company is increasing continuously, and infrastructure is lacking in handling the distribution needs of meeting customer’s expectations and handling the sales volume. In addition, the chief financial officer of the business is unable to articulate the solution for mitigating financial problems (Applegate 2). These factors will not allow the company to succeed.
For being successful, the company must enhance its profitability through reducing its operational cost. Instead of focusing on enhancing the sales volume, the company should reduce its operational cost through deploying information technology solution. The business should enhance its ability to utilize assets efficiently and reduce its debt based financing. Moreover, the company should improve its inventory management ability, and enhance distribution capacity. The company should either try to increase the sales of its segments that are showing losses or should close the unprofitable segments; it will not create expenses at least.
Impact of Political Competitive Environment on the Business
There are several examples of the competitive environment such as economic competitive environment, social competitive environment, technological competitive environment, and the legal competitive environment. However, the impact of the political competitive environment has been considered on the business case, because it includes numerous aspects of government policy that can affect the business. Political competitive environment counts as an external factor that is out of control of the business. The political competitive environment can affect business in multiple ways. For example, the increase in interest rate of lending can increase the cost of the company’s operation. Similarly, increase in tax rate can affect the business and can decrease its profitability by increasing the cost of operations (Moore 76).
Political decisions can affect the economic situation, due to which the purchasing power of customers is influenced that ultimately leads to sale decline. The global segments through creating the opportunities for expansion can sever the business with the model of expanding operation in emerging countries. These political changes provide ease of entering business in countries that create a completive environment for the company that immensely affected the profitability (Applegate 9).
Amazon should keep the eye on the political competitive environment for making sustainable strategies and mitigating potential risks. Changes in government policies can affect the cost of running business and product and service marketing efforts of the business.
Ethical Considerations When an Organization Becomes Insolvent
Insolvency refers to the situation when businesses fail to pay the money back they acquired. Those in the state of insolvency are recognized as insolvent. Insolvency can be of two types of cash-flow insolvency and balance sheet insolvency. Cash flow insolvency refers to the state when businesses have assets to pay back their debts, but they do not have enough liquid assets for paying their debt back when required. However, balance sheet liquidity refers to the situation when companies do not have enough assets to pay their debts back (Lutolf-Carroll & Pimes 93). Currently, the ratio analysis clearly revealed that Amazon is suffering from balance sheet insolvency.
A proper code of ethics has been designed for the organizations and their members in the case of insolvency. Ethics say that at the time of insolvency each member of the organization should respect the confidentiality of the organization’s information. Organizations should maintain appropriate transparency because it has particular relevance for office holders. It is essential for insolvent companies that they deal, act, and make decisions transparently and ion understandable manners (Insolvency Practitioners Association). If organizations are not clear about their financial condition, they must not hide from shareholders. If the organization uses the invested money to overcome the cash flow or balance sheet crisis, it must inform investors rather using their assets in settling crisis without informing them or not investing them at the place they were expected to (Mattocks 117).
Yes, the insolvent organization can be saved through making an urgent appeal to fundraisers or investors, fundraisers with their extraordinary talent can save the organization and can convince investors to redirect their invested amount for solving the immediate financial crisis. In such case through redirecting, the given amount by investors can be used to address the urgent financial crisis (Mattocks 117).
External Factors and Likelihood Mergers and Acquisition Required To Be Considered
The organization should consider all external factors such as economic, political, technological, and social and competition. All these external factors have a significant impact on the activities and processes of the business. The most important external factor that affected the business and visible in the case is the competition. The competition was lined up for exploiting each market (Applegate 2). It has been determined that the cost of goods that were sold by Amazon was higher as compared to all of its competitors such as Wal-Mart, Toys “R” Us, Barnes & Noble, Sears, Barnes & Noble.com, and eBays.com. The general and sales administrative expenses were also higher as compared to rivals. The working capital of the company was far lower compared to Wal-Mart, Toys “R” Us, and Barnes & Noble (Applegate 9).
However, for enhancing the profitability and enhancing the customer base and market share the possible acquisition of the company was Toys “R” Us. The company made a partnership with Toys “R” Us in 2000 the revenue of Toys “R” Us was $130 million and the total revenue of Amazon was $32.4 million. In 2001, the revenue of Toys “R” Us was $280 million and the revenue of Amazon was $75 million. Moreover, the operating cost and cost of goods sold of Toys “R” Us is also lower as compared to Amazon. If Amazon had acquired Toys “R” Us, it would have been able to make greater profitability, and it might not have to face bankruptcy situation (Applegate 10).
Recommendations
After having analysis, it has been extracted that the company is involved in making serious errors. By considering this situation of the company, no investor would prefer to take the risk of investing in the corporation that is reporting a loss on a constant basis. The company is not paying anything to its investors. The earnings per share declared the worst situation of the business for investors; the business is unable to utilize its assets efficiently and effectively. Operating expenses are higher to the extent that cost of operating business is exceeding the profitability rather leading to profitability. The company’s revenue is increasing not because the firm is doing well, but it is just because the business is expanding the product line with the aim of enhancing sale volume. In such a worst condition, no one would prefer to invest in the organization.
However, if the business reduces its operational cost through the deployment of modern technology and adapting effective and efficient strategies, then investment can be considered. The business should focus on enhancing its dividend; it should increase its distribution centers for increasing sales rather expanding a product line that is not paying its own expenses. The business should focus on offering good customers service rather investing more money in advertising. If the company reduce its debts and focus on financing its business through shareholders equity, it will be good for the company and investors as well. These initiatives will help the company in gaining profitability and only in this case in would like to save the company.
Conclusion
The paper presents the analysis of the case of Amazon called “Amazon.Com the Brink of Bankruptcy”. The paper presents an in-depth analysis of the situation of the business through financial statement analysis and ratio analysis. It has been determined that the company is making several errors that have been mentioned during analysis and possible solutions to the problems have been proposed accordingly.
Works Cited
Applegate, Lynda. M. Amazon.Com the Brink of Bankruptcy. Harvard Business Review. 2013.
Davis, Charles E., and Elizabeth Davis. Managerial Accounting. USA: John Wiley & Sons, 2011.
Insolvency Practitioners Association. Ethics Code. 2013. Online. 6 May. 2016. <http://www.insolvency-practitioners.org.uk/regulation-and-guidance/ethics-code>
Lutolf-Carroll, Constance and Antti Pimes,. From Innovation to Cash Flows: Value Creation by Structuring High Technology USA: John Wiley & Sons, 2009.
Mattocks, Ron. The Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities & Build USA: John Wiley & Sons, 2008.
Moore, Carlos W. Managing Small Business: An Entrepreneurial Emphasis. China: Cengage Learning EMEA, 2008.
White, Curt. Data Communications and Computer Networks: A Business User's Approach. USA: Cengage Learning, 2008.
