Running head: FINANCIAL ANALYSIS CASE STUDY-AMAZON.

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Amazon.Com - Financial Analysis Case Study

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Amazon.Com - Financial Analysis Case Study

Introduction

The bookselling business is one of the stable developing industries which have an

estimated a total sale of $27 billion in 2006. The vending of the books mainly relies upon

distinctive seasons. The business has different clients who purchase various types of books

which also incorporates the professional books, trade books, college books, and mass business

paper-back books. With solid competition from the corporate sector, the organizations are

strongly concentrating on adopting distinctive ways and means to win more customers and

getting a high market share in the company.

Company Overview

Amazon.com is thought to be the market player in the e-trade industry; that is,

bookselling. The company was established by Jeff Bezos, who concentrated on upgrading the

book shopping experience of buyers, with the development and better approaches to selling

books via the web. One of the key players of the company is Noble and Barnes.

Initially, the company began as an online bookshop that has transformed into one of the

biggest online retailers offering items ranging from movies and music to furniture and artwork.

As its website states, "it is by configuration that technological development drives the growth of

Amazon.com to offer clients more different products, at lower prices, and even more

conveniently." In this paper, we will review the financial status of the organization

Amazon.com. The 9-stage procedures discussed by Professor Piper will be considered in this

case study to evaluate how fiscally sound Amazon.com is at the moment and the prediction of its

future status.

Step 1 – Goals, Strategy and Operating Characteristics

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Amazon.com plans to be the "most client-driven organization for four essential client

sets: customers, vendors, enterprises, and content developers" (Amazon.com, n.d.).

Amazon.com exceedingly concentrates on giving value to its clients; the organization has a

strong focus on delivering quality to its clients. It has a strong emphasis on expanded selection,

product differences, reduced costs, enlightening products, high convenience, and level of

customization for its customers.

The company opts for inventive means and approaches to drawing more customers

therefore making themselves client friendly. This way, it gives the client’s value which is one of

the strongest features which gives the company an upper hand, as compared to its competitors.

With an emphasis on these strategies, Amazon.com can attain a competitive superiority in the

market. This company has an in number concentrate on Selection, Service, Convenience, and

Price which are believed to be the central value of the organization. By focusing on development

and innovation, Amazon.com can improve the shopping understanding to the target customers.

One click shopping: Amazon.com concentrated on giving comfort to its customers, to spare the

time and give a boost to the organization’s concentration on providing a solitary click shopping

experience. It helped in the reduction of the transactional loads on the clients. The organization

was able to pioneer on this by gathering the data of its customers and making a record of the

same.

Product Review Information: all the goods from the company could be viewed online, and this

helped clients evaluate the products they were planning to buy.

Purchase Circles: Amazon.com concentrates on giving the details about the books that the

customers are interested.

E-Mail Alerts: The Company allows its customers to get notifications on their preferred authors.
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Recommendations: Amazon utilizes the collaborative technique together with other

personalization methods to suggest books to users.

Wish list: Amazon concentrates on enabling the designing of a wish list of the products, that is,

books, songs, and movies that a client might need to buy them in the near future.

The company focuses on the seven C’s framework that has helped in the creation of value

proposition; that is, content, community, convenience, customization, customer care,

communication, and connectivity. In order to have an upper hand in the market, the company

focused mainly on diversification by selling various products online. The organization also

centered on collaborating with diverse virtual organizations to sell and showcase their items

through Amazon.com. It also signed a contract with different block and mortar stores in order to

increase its items for sale or to be sold. Regardless of the expansion, the organization was able to

have more focus on client quality and fulfillment.

Step 2 – Revenue Outlook

The primary source of income for Amazon.com is the sale of its items and services to

clients. The organization offers everything from books, sportswear, electronics, tennis rackets,

kid’s toys, food, gold- silver, and jewel gems. Amazon was among the first organizations to sell

its merchandise over the web, which remains to be its primary source of income. The income

generated by the organization in 2012 was $42000 relative to the $30792 in 2011 and $22273 in

2010. Therefore, it can be concluded that product income of the company is growing by more

than 37%annually. The income generated from services is recorded at $6077 in 2012.

Step 3 – Investment in Assets

Considering the interest in assets, we can say that the organization has bought a fixed

asset that includes the in-company use of software and web development program for the year
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2012 estimated at $1811 million. The company has also put its resources into securing of other

agencies with which the company has been expanded on its market base as and its technologies

as well. The analysis carried out in year 2012 on acquisitions only has been recorded at

approximately $705 million.

Amazon has been increasing its operations and products sale through different purchases.

For instance, in the year 2009, the organization obtained Zappos.com, an online attire, footwear,

and accessories dealer. It empowered Amazon to tap the web sales of clothing, the largest online

shopping group and one in which Amazon has had constrained achievement in the recent past.

Later, in 2010, the organization procured Touchco, a touch screen innovation company. Amazon

combined Touchco's expertise and staff into its Kindle equipment division. It expanded the

company’s platform to incorporate more functionality and more substance on Kindle. Similarly,

it also helps Amazon to address a percentage of the structure component issues with the Kindle.

Additionally in October 2010, Amazon.com procured BuyVIP.com, a design, and a

lifestyle online buying society. This procurement strengthened Amazon's position in the sale of

design clothing. BuyVIP.com has more than six million customers in states such as Italy, Spain,

and Germany. It offers its customers top design and lifestyle items at lower value prices. In late

2010, Amazon got Quidsi, which works Soap.com and Diapers.com. Diapers.com is an online

child care specialty website while Soap.com is online website that offers the daily today

essentials. The acquiring of Quidsi brought the possession of BeautyBar.com under

Amazon.com. BeautyBar.com is a prestigious boutique. In January 2011, Amazon.com also

obtained the remaining shares of LOVEFiLM International, one of the principal European

membership entertainment service suppliers.

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The company sales online games and DVD rental-by-post and TV shows, and streams

movies over the web to PCs, Play stations, and Internet Empowered TVs. LOVEFiLM has its

operation in the Germany, UK, Sweden, Denmark, and Norway. All these activities have

included new client base and supplement Amazon's existing item portfolio which has influenced

the costs of the organization in a positive way.

The attention on Kindle also enhanced the share prices of the organization immensely.

Amazon.com has dominated the fast developing electronic book market in the recent years

through its e-reader gadget, Kindle. Back in 2007, the firm dispatched its E-reader, Kindle, in the

US. Kindle is Amazon's transferable reader that remotely downloads books, online journals,

magazines, newspapers, and blogs to a high-definition E- paper display that looks like genuine

paper. Therefore, we can say that the organization is making investments on its property with

which the company is growing its market base and increasingly improving its services.

Step-Economic Performance

Considering the reduced prices of the company products, (Amazon), it is evident that the

prices of the company’s shares have increased significantly over the last seven years. For

instance, on January 2010, the price of its shares was approximately $133.9b which increased to

$184.22 in the year 2011. However in 2012, it should be noted that the price reduced to $179.03.

Latest studies show that the current market price for Amazon’s shares is trading at $256.41

which translates to a 67% increase in the last three years.

Ratio Analysis

Liquidity ratios: considering cash, we can examine the capacity of the organizations to meet

their transient obligations. From the current proportion of Amazon; we can say the current

degree of the company has diminished over the previous three years. For instance, the current
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ratio of the organization back in 2010 was 1.35 and by 2011, it had risen to 1.75. It portrays the

ability of the company to meet fleeting obligations has diminished over the years.

Solvency ratio: Leverage and solvency ratio helps in evaluating the ability of the organizations

in respect to the degree of the resources or assets of the organization which is financed through

obligation and owner’s equity.

Considering the burden or debt ratio of the company, we can conclude that the

organization has a high proportion of short-lived debts and duties relative to the long-term

requirements. The debt percentage of the company in 2011 has grown when compared to 2010.

The debt ratio of Amazon in 2010 was 2.0 though in 2011 it rose to 2.25; the aggregate debt ratio

of the organization is 63 percent and 69 percent successively. It shows that the assets of the

organizations are mainly financed by the obligation.

Profitability: while considering the profitability of the companies, it is evident that the income

generation capacity of the company has deteriorated in the recent years. For instance, the profit

margin of the organization in 2009 was 3.68 percent, decreased to 3.39 percent in 2010 and

decreased further to 1.33% in the year 2011.

Operating efficiency: Return on Investment (ROI), and Return on Assets will help us analyze

the income which investors are generating from the company. The company’s return on assets

was 8 percent in 2011 as compared to 12 percent in 2010. In this basis, we can conclude that the

overall financial performance of Amazon.com is good.

Step 5 – External Financing Need

With attention to the development, the organization needs to concentrate mainly on

external financing need. According to the yearly reports of the organization we can see that the

organization has taken outside financing through long-term credit which is estimated to be $177
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million. Notably, the organization has done the reimbursement of the capital lease debt of $444

million. The aggregate external financing of the organization has totaled to $482 million in 2012

alongside the regular stock repurchase that has been carried out by the customer.

Step 6 – Target Sources of Finance

The key sources of fund for the organization are banks and other monetary institutions

with which the organization can consider taking long-term debts or loans. Subsequently, the

source of finance of the organization includes banks and financial organizations, the company

can also raise funds through debt financing or equity.

Equity Financing:

It is one type of financing which individuals usually do when they feel that they can contribute

themselves or accomplish it from their family and companions. It is referred to as a value

investment; that is, in case of an entity. In the event of an organization, the situation is quite

different. Enterprise issues shares to raise capital for the business and consequently raise cash by

making shareholders the owner of the firm.

The advantages and disadvantages of Equity Financing:

Advantages

You can utilize the equity raised from the business with no weight of repaying the cash.

It is not required that you pay profits annually. However, in case there is an irregularity in the

process, then it sends a wrong flag to the business in regard to the financial health of the

organization.

If the organization liquidates, then it is redundant for the organization to pay back the

shares of the common stockholders. One may try angel investors or venture capitalists if the

business is still green and you require both financial supports as well as intellectual backup.
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Disadvantages

The amount of control you provide for the investors depends on the organization? In the

event that more than half is claimed by one single company, then the organization may have a

full control over the firm and assume responsibility for every single decision made. In this way,

this must be in a continuous to ensure that no unfriendly takeover happens.

There also exists another disadvantage of equity financing. The administration of the

organization is sure to take authorization towards any significant change they wish to make like

going in for a great project; purchasing another organization. Thus, for this you require a great

deal of paperwork and shareholder's support. It takes substantial time and expands on the

opportunity expense of capital for the organization.

Obligation Financing

Numerous a times it happens that the organization is sufficiently sure to raise cash at a

predetermined interest rate, put that money into the project and produce profits out of it. It is an

ideal way out for any organization so as build itself in the market setting and achieves a

substantial percentage of the market share. Here, you are not in the commitment to take

authorization for each and every decision or choice.

Advantages and disadvantages of Debt Financing

Advantages

Debt financing just needs the investment and the principal to be reimbursed. Any organization

has full responsibility for and each coin of income that is generated through this obligation

financing. The greatest point of the interest of raising debt is that you don't have any

commitment to answer anyone about your activity and choices. It means that you are

autonomous to settle on the options for the organization.

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In the event that you fund the organization with debt, then the investment which you pay on the

obligation is in fact tax deductible. It brings down your tax liability annually. Additionally, the

investment rate that you pay based on the prime premium rate.

Disadvantages

The greatest disadvantage of raising cash through debt is that in the event that you

become ineffective in paying interest and the principal in an appropriate way. Then your

character and FICO assessment as a borrower in the business sector is ultimately hurt. It

explicitly deters you from raising further obligation. Hence, you eventually end up getting

bankrupt. It should also be noted that increasing a debt is not as simple as it sounds. One needs to

collateralize some security or gamble their assets for raising the same much amount of money.

It relies on upon the situation of the organization to decide whether to invest back in

equity or obligation. There are various elements to consider as potential investors, capital needs,

marketable strategy, credit rating, tax situation, and business plan. This proportion will give you

the total expense of capital for the company.

Step 7 – Viability of 3-5 Year Plan

Considering the stock costs and the financial execution of the organization, we can

conclude that the finances and the benefit of the organization are likely to rise in the near future.

The organization will also improve its productivity and more so the overall markets share.

Step 8 – Stress Test for Viability

Bearing in mind the debt ratio, with which the anxiety test of the organization can be

assessed, we can say that the organization has a high level of transient debts and obligation when

compared to the extended commitments. The debt degree of the organization in 2011 has

expanded comparing it with 2010. The debt equity proportion of Amazon back in 2010 was 2.0
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while in 2011 it rose to 2.25. The aggregate debt ratio of the organization is 63percent and

69percent consecutively, which means that the critical assets the organizations are mainly

financed by debts.

Step 9 –Financing and Operating Plan for Current Year

Despite the fact that the share prices of Amazon are relatively high, the financial state of

the organization has deteriorated enormously in recent years. Therefore, the organization needs

to enhance its budgetary position to have higher income generation and higher returns in the

business or market.

To ensure protection of its brand, Amazon.com should keep on offering items at

competitive prices. It is an assurance that customers will keep on visiting Amazon's website to

get the best deals on their favorite products. Additionally, Amazon must keep on doing the great

job; that is, their product selection and diversity. It should also continue to include new and

better products types and develop a greater range of its products, this way a wider market

population can be approached.

Conclusion

To ensure protection of its brand, Amazon.com should keep on offering items at

competitive prices. It is an assurance that customers will keep on visiting Amazon's website to

get the best deals on their favorite products. Additionally, Amazon must keep on doing the great

job; that is, their product selection and diversity. It should also continue to include new and

better products types and develop a greater range of its products, this way a wider market

population can be approached.

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References

Amazon.com. (n.d.). http://www.amazon.com/ir

Gitman, L. J., &Zutter, C. J. (2012).Principles of Managerial Finance (13th ed.). [Adobe Digital

Editions version]. Retrieved from http://gcumedic.com/digital-

resources/pearson/2012/principles-of-managerial-finance_13e.php

Piper, T. (2010).Assessing a Company’s Future Financial Health.[Adobe Digital Editions

version]. Retrieved March 30, 2015, from, http://gcumedia.com/digital-

resources/harvard-business-school-press/2010/harvard-business-school_-assessing-a-

companys-future-financial-health_ebook_1e.php

10-K report, (2012), Amazon.com from: <http://phx.corporate ir.net/phoenix.zhtml?

c=97664&p=irol-sec&control_selectgroup=Annual%20Filings>

Market analysis of Amazon.comData retrieved from:

< http://www.barchart.com/profile.php?sym=AMZN&view=key_statistics>