FIRE 371-03 EDUARDO CARDOSO MUNIZ – GROUP 5

AMAZON.COM INC

1. Overview

Amazon.com, Inc. (Amazon.com), incorporated on May 28, 1996, is an e-commerce company and the

largest Internet company in the US. The Company offers a range of products and services through its Websites.

The Company’s products, offered through consumer-facing Websites, include merchandise and content that the

Company purchases for resale from vendors and those offered by third-party sellers. The Company offers its own

products as well as third-party products across various categories, through its retail Websites and through its

mobile Websites and applications. It also manufactures and sells electronic devices, including Kindle e-readers,

Fire tablets, Fire TVs, Echo and Fire phones.

Amazon.com operates in two segments: North America and International. The North America segment

of the Company focuses on retail sales earned through North America-focused Websites. The International

segment focuses on the Company’s operations done through its international Websites.

In the media segment, Amazon competes with eBay, Netflix, Time Warner Cable, Apple (iTunes),

Google (Play Store) and Liberty Interactive. Amazon has several competitors in the electronics and general

merchandise segment, including Best Buy, Family Dollar, RadioShack, Staples, Target, Walmart, Sears, Big Lots,

Delia and Systemacs. In the electronics and general merchandise segment online competition includes Alibaba

Group, LightInTheBox Holding Co., Overshock.com, PCM, Vipshop Holdings, JD.com, Wayfair Inc. and Zulily.

In the other operating segment, Amazon competes with several world’s largest companies including CDW, PC

Connection, Insight Enterprise, Google, Oracle, Accenture and Citrix Systems.

2. Analysis

Firstly, the evaluation of the asset turnover ratios, such as accounts receivable turnover and inventory

turnover, to determinate how efficiently assets are being utilized by the business. During the period from 2012 to

2014, the Receivables turnover ratios were 23.50, 24.82 and 26.97 and the Days’ sales outstanding in A/R ratios

were 15.53, 14.71 and 13.54. The decrease in this last ratio means that the company is taking less days to collect

revenue from credit sales. The total assets turnover ratio were 1.88, 1.85 and 1.63, it has decreased, but it is higher

than 1, which indicates that the company is using its assets more efficiently. The Days’ sales inventory ratios

were 49.72, 52.34 and 51.21, which indicates ups and downs, but with lower amplitude. The inventory remains

in the warehouse for a stable period.

The Profit margin on sales ratio has been stable (-.06%, .37% and -.27%) with narrow margins, for

2014 period every $1 sale contributed -0.06 cents towards the net profits of the business. The profitability ratios,

ROA, ROE and BEP, have decreased, which means that profitability is deteriorating. In the other hand, Amazon

has a lower capital intensity, it generates more revenue using less assets.

FIRE 371-03 EDUARDO CARDOSO MUNIZ – GROUP 5

Amazon.com has been having a low debt ratio (.75, .76 and .80) since 2012, the company’s assets are

sufficient to meet its obligation, while it is not very low, which is good because it doesn’t indicate underutilization

of resources and restricted growth. The Equity Multiplier has increased (3.97, 4.12 and 5.07), the higher the ration

the lower the financial leverage. The TIE ratio in 2014 was .62, which is unfavorable. Amazon has debt-to-equity

ratio higher than 1.00, more assets are financed by debt that those financed by money of shareholders’, indicating

higher risk.

The current ratio has been stable through these years (1.12, 1.07 and 1.12) and greater than 1.00,

indicating that the company’s current assets are more than current liabilities and the company should not face any

liquidity problem. The quick ratio has been stable too (.80, .75 and .82), but less than 1.00, which indicates that

the company would not be able to repay all its debts by using its most liquid assets. The cash ratio has stayed

below 1.00, which is appropriate for a business.

The market-to-book ratio indicates that the stock is undervalued because it is above 1.00. Moving in

the same direction, price-to-cash-flow ratio has decreased which means that stock is in a process of

undervaluation.

3. Stock Price

• December 31, 2012 – Stock price closed in 250.87;

• December 31, 2013 – Stock price closed in 398.79;

• December 31, 2014 – Stock price closed in 310.35.

Chart 1. Stock price movement.

Source: Yahoo Finance.

FIRE 371-03 EDUARDO CARDOSO MUNIZ – GROUP 5

According to Chart 1, the stock price increased from 2012 to the beginning of 2014. During 2014 year,

the stock price decreased. In the beginning of this year the stock price has started to increase again, the closed

price was 512.89 on August 31st.

4. Conclusion

Amazon.com, Inc. has been investing a lot of money in many things, such as, Amazon’s tablet line, the

TV show “Transparent”, Fire TV, the grocery delivery service expanded to Brooklyn and Amazon bought Twitch,

a popular streaming site. These expenses have resulted in negative net income, it translates a loss on paper but

actually strengthens the enterprise for the long term. And the market value ratios indicate undervalue stocks. With

these facts on hands, the recommendation is to buy Amazon’s stocks.

5. References

[1] Research Inside;

[2] Yahoo Finance;

[3] Reuters;

[4] NY Times;

[5] Investopedia.

Balance Sheets Ratios 2014 2013 2012

2014 2013 2012 Liquidity

Cash $17,416 $12,447 $11,448 Current Ratio 1.12 1.07 1.12

Accounts receivable $3,300 $3,000 $2,600 Quick Ratio 0.82 0.75 0.80

Inventories $8,299 $7,411 $6,031 Cash Ratio 0.62 0.54 0.60

Total current assets $31,327 $24,625 $21,296 Debt Management

Total assets $54,505 $40,159 $32,555 Debt/Equity Ratio 4.07 3.12 2.97

Accounts payable $16,459 $15,133 $13,318 Debt Ratio 0.80 0.76 0.75

Notes payable $0 $0 $0 Equity Multiplier 5.07 4.12 3.97

Total current liabilities $28,089 $22,980 $19,002 Time Interest Earned 0.62 4.90 7.30

Long-term debt $12,489 $5,181 $3,830 Asset Management

Total Liabilities $43,764 $30,413 $24,365 Total Assets Turnover 1.63 1.85 1.88

Common stock $5 $5 $5 Inventory Turnover 7.13 6.97 7.34

Retained earnings $1,438 $2,005 $1,677 Days’ sales in inventory 51.21 52.34 49.72

Total Equity $10,741 $9,746 $8,192 Receivables turnover 26.97 24.82 23.50

Total liabilities and equity $54,505 $40,159 $32,555 Days Sales Outstanding in A/R 13.54 14.71 15.53

Capital intensity 0.61 0.54 0.53

Number of shares outstanding 465.00 459.00 454.00 Profitability

Stock Price $310.35 $398.79 $250.87 Profit Margin on Sales -0.27% 0.37% -0.06%

Return on Assets -0.44% 0.68% -0.12%

Income Statements Return on Equity -2.24% 2.81% -0.48%

2014 2013 2012 Basic Earning Power 0.24% 1.72% 2.06%

Sales $88,988 $74,452 $61,093 Market Value

Cost of goods sold $59,152 $51,681 $44,271 P/E Ratio -598.81 668.05 -2920.38

Depreciation $4,746 $3,253 $2,159 Price/Cash Flow ratio 32.03 51.90 53.72

EBIT $130 $691 $672 Book Value per Share 23.10 21.23 18.04

Interest Expense $210 $141 $92 Market-to-Book Ratio 13.44 18.78 13.90

Net income -$241 $274 -$39

Cash dividends $0 $0 $0

Addition to Retained Earnings -$241 $274 -$39

AMAZON.COM, INC.

Balance Sheets Ratios =B3 =C3 =D3

2014 =B3-1 =C3-1 Liquidity

Cash 17416 12447 11448 Current Ratio =B7/B11 =C7/C11 =D7/D11

Accounts receivable 3300 3000 2600 Quick Ratio =(B7-B6)/B11 =(C7-C6)/C11 =(D7-D6)/D11

Inventories 8299 7411 6031 Cash Ratio =B4/B11 =C4/C11 =D4/D11

Total current assets 31327 24625 21296 Debt Management

Total assets 54505 40159 32555 Debt/Equity Ratio =B13/B16 =C13/C16 =D13/D16

Accounts payable 16459 15133 13318 Debt Ratio =B13/B8 =C13/C8 =D13/D8

Notes payable 0 0 0 Equity Multiplier =B8/B16 =C8/C16 =D8/D16

Total current liabilities 28089 22980 19002 Time Interest Earned =B27/B28 =C27/C28 =D27/D28

Long-term debt 12489 5181 3830 Asset Management

Total Liabilities 43764 30413 24365 Total Assets Turnover =B24/B8 =C24/C8 =D24/D8

Common stock 5 5 5 Inventory Turnover =B25/B6 =C25/C6 =D25/D6

Retained earnings 1438 2005 1677 Days’ sales in inventory =365/G14 =365/H14 =365/I14

Total Equity 10741 9746 8192 Receivables turnover =B24/B5 =C24/C5 =D24/D5

Total liabilities and equity 54505 40159 32555 Days Sales Outstanding in A/R =B5/(B24/365) =C5/(C24/365) =D5/(D24/365)

Capital intensity =B8/B24 =C8/C24 =D8/D24

Number of shares outstanding 465 459 454 Profitability

Stock Price 310.35 398.79 250.87 Profit Margin on Sales =B29/B24 =C29/C24 =D29/D24

Return on Assets =B29/B8 =C29/C8 =D29/D8

Income Statements Return on Equity =B29/B16 =C29/C16 =D29/D16

=B3 =C3 =D3 Basic Earning Power =B27/B8 =C27/C8 =D27/D8

Sales 88988 74452 61093 Market Value

Cost of goods sold 59152 51681 44271 P/E Ratio =B20/(B29/B19) =C20/(C29/C19) =D20/(D29/D19)

Depreciation 4746 3253 2159 Price/Cash Flow ratio =B20/((B29+B26)/B19) =C20/((C29+C26)/C19) =D20/((D29+D26)/D19)

EBIT 130 691 672 Book Value per Share =B16/B19 =C16/C19 =D16/D19

Interest Expense 210 141 92 Market-to-Book Ratio =B20/G27 =C20/H27 =D20/I27

Net income -241 274 -39

Cash dividends 0 0 0

Addition to Retained Earnings =B29-B31 =C29-C31 =D29-D31

AMAZON.COM, INC.