Financial Analysis of Amazon

Mohamed Bader Al-Marzooqi

[email protected]

Supervised by:

Professor Haitham Nobanee

Abstract:

In this project; we will cover up many of Amazon's development. Their beginning, Jeff

Bezos purpose to transition Amazon into an online business. The successful business and

marketing strategy, how Amazon continues to evolve and innovate with new products and services.

We will look at Amazon's financial statement and the ratio analysis, how well Amazon is

performing year by year. This report will evaluate how much progress and recession Amazon made

from 2016 to 2019.

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Introduction

Amazon has been synonymous with. e-commerce from the get-go. The company originated

from Seattle Washington started as a bookseller but throughout the time it grew out to be the most

popular web-based service in the world. Amazon was created by Jeff Bezos, with the internet

becoming more accessible in the 90s, Bezos believed that there is a gigantic market to capitalize

on, even though he didn’t have any prior experience or knowledge about the internet.

(Krishnamurthy, 2002) But upon learning, Bezos had a vision that saw the world interacting,

shopping, and doing transactions virtually through E-Commerce. (Krishnamurthy, 2002) Bezos’s

Amazon went online in 1995, the company marches to focus on the online market turned out to be

a huge success. A consistent incline in revenue, going from $150 million in 1997 to $3.1 Billion

in 2001. (Krishnamurthy, 2002) The high percentage of revenue and growth is due to the company

innovation with their services, and their ever wide expansion of subsidiaries platforms. Amazon

continues to adapt and evolve till this day. Henceforward in this report, we will discuss in detail

how did Amazon tackled the e-commerce initially and what was their business strategy that led to

their success. Then we will look at Amazon's financial statement; their mergers and acquisitions,

and the ratio analysis. Ratio analysis is critical in determining company liquidity and profitability

(Al Ahbabi and Nobanee, 2020).

Literature Review

Amazon and E-commerce:

We have established that Amazon is one of the first organizations to start an online retail business.

But how does this online business function and operates? A study made by Sameer Kumar, Jessica

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Eidem, and Diana Noriega look out how Amazon.com works in terms of technicality.

Amazon.com provides a variety of services to customers from music to books to electronics. It

acts as an online supermarket and has been accredited as the most reliable services by customers

worldwide. Part of Amazon's success is due to its operating system. Amazon has a sorting system

where they divide their consumers into 3 categories. (Kumar, Eidem, & Noriega, 2012)

1) Customer: This group is attended by regular users who are there to shop online. This system

allows users to see the available prices, sales, and the expected delivery dates for the products.

This option also allows the users to subscribe to Amazon Prime. A prime member will have more

frequent discounts and will get the two-day shipping option for free. (Kumar, Eidem, & Noriega,

2012).

2) Seller Customers: This option allows the user to sell their product through the Amazon website.

There is a distribution service for users who are about to sell their products. This group gets

revenue for its product in the form of a fixed fee. (Kumar, Eidem, & Noriega, 2012).

3) Developer Customers: Developer customer is for the group who are actively developing and

creating products. Amazon provides a platform for these users through their technology

infrastructure and Amazon application software. (Amazon, 2008).

Amazon Innovations:

Bezos knows that people love Amazon service but realize that people won’t stay loyal to Amazon

if the service becomes stales. Bezos states that “Our customers are loyal to us right up until the

second somebody offers them a better service.” Bezos fully recognizes this and believes it

encourages the company to stay motivated and be creative in their services to keep the consumers

engage. Products and services like “Alexa” the voice control artificial intelligence. Audible the

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online bookstore where you can listen to the audio version rather than reading. Twitch the online

gaming streaming service. These are just a few of the many services that Amazon provides.

(Robischon, 2017). Amazon also innovates in different productions, as they also partake in

manufacture. One of the biggest Amazon manufactures is Amazon Prime Air. This massive

production is a drone delivery service, it is a work in progress; currently being tested in the United

States and the United Kingdom. However, once it's launched, the goal is to operate a GPS to fly

packages to the customers' location. No more than 30 minutes after the order has been placed. For

now, the product could only carry packages that weigh less than 5 pounds. Only packages that fit

in the cargo are applicable. Amazon Prime air includes 86% of products that are being sold on the

webpage. The delivery location should be around 10 miles close to Amazon Order Fulfillment

Center. (Pandit & Poojari, 2014)

Amazon Business and Marketing Strategy:

With the Amazon initiative of e-commerce, Amazon took on losses in the late ’90s. But

Jeff Bezos always knew that would be the case in the short term. Amazon played the long run, in

the beginning, they invested heavily on building the brand equity and branding the site. Stating

that “This is an investment phase for Amazon.com. We've been straightforward with everybody

from the beginning that that's our strategy” Bezos also doubled down on this strategy, suggesting

if people don’t agree with this approach, then they should not bother investing in Amazon stock.

Because that is how Amazon will always approach things, by willing to take risks in their business

decision. (Parry, 2008)

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 Amazon's strategy to become the top service didn’t rely only on innovation. A key success

to Amazon was its multiple affiliations with different brands. Amazon throughout the years has

been known for its Merger and Acquisition activities. IMDB, Souq, Joyo, and Double Helix Games

just to name a few. These acquisitions added positively to the company's worth. As Merger and

Acquisition adds a level of synergy and diversification to the products, it breaks a wider audience.

Such as the gaming community, Amazon not only bought a gaming company Double Helix

Games, but they also acquired Twitch in 2014, the most popular gaming streaming service in the

world. (Hong, Bhattacharyya, & Geis, 2012).

Charles Edward and Andrew Lincoln from Texas A and. M university created a research

that focuses on Amazon's competitive advantage through the Michael Porter Five Analysis. Below

is the figure that identifies the forces. (Edward & Lincoln, 2008) figure (E.Porter, 1980)

This figure explains all factors Amazon considers a primary force to target and focuses on.

The buyers, suppliers, expected entrants, and substitutes that people consider a threat for Amazon

products and services.

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Sustainable practice in the Company:

Some scholars believe that there is a positive correlation between sustainable business

practices with sustainable development and financial management. Financial management plays a

role in developing a great deal for the financial growth of a company. (Ahbabi & Nobanee, 2019)

. Another study from Abu Dhabi University examined by (Al Nuaimi and Nobanee, 2019)

reaffirms the idea of how corporate disclosure of their sustainable business practices improves the

financial growth of a company. The research explains how an organization can have a sustainable

approach in their operations, and how sustainability can add value to the organization. (AlNuaimi

& Nobanee, 2019) Further study by Fatima Al Marar shows how sustainability helps avoid any

risks in the company. How risk management is vital in maintaining company success. (AlMarar &

Nobanee, 2020) In this case, Amazon is already abiding with sustainability. Amazon is committed

to their sustainable operations. As they are taking precautions in reducing carbon emissions when

it comes to their operations be it in its transportation while delivering products or in its facilities.

They are committed to focusing on renewable energy. They are redesigning their packages in a

unique way that can prevent waste. Furthermore, Amazon Web Servers (AWS) are energy

efficient. 3.6 times more energy-efficient than any other US center. (Amazon.Inc). These signs of

actions prove that Amazon is willing to invest in its sustainability to create a better place for the

company and the environment.

Amazon Financial Statement and Analysis

From this point on, the report will focus on Amazon's financial statement. How well the company

is performing year by year. The report will analyze Amazon's ups and downs from 2016 to 2019.

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Data Methodology

Table 1: Financial Data (Amazon)

Item/Year 2019 2018 2017 2016

Current Assets 96,334,000 75,101,000 60,197,000 45,781,000

Current 87,812,000 68,391,000 57,883,000 43,816,000

Liabilities
Inventories 20,497,000 17,174,000 16,047,000 11,461,000
Cash 55,021,000 41,250,000 30,986,000 25,981,000
Receivables 20,816,000 16,677,000 13,164,000 8,339,000
Total Assets 225,248,000 162,648,000 131,310,000 83,402,000
Total Liabilities 163,188,000 119,099,000 103,601,000 64,117,000
Total Equity 62,060,000 43,549,000 27,709,000 19,285,000
Sales 280,522,000 232,887,000 177,866,000 135,987,000
Cost of Goods 205,768,000 173,183,000 137,183,000 105,884,000
Sold
EBIT 14,541,000 12,421,000 4,106,000 4,186,000
Interest 1,600,000 1,417,000 848,000 484,000
Net Income 11,588,000 10,073,000 3,033,000 2,371,000

We collected the data here from Yahoo Finance from 2016 till 2019. All items in Table 1 were

available in the Income statement and the balance sheet. As you can see every factor and item

shows an increase from one year to another. The figure illustrates the growth Amazon displayed

from year to year. However, one can’t help but notice even though the asset in every year is high,

the net income is shockingly low. Amazon has a low net income because they have a lot of debt

and liability collected. They also spent a lot of their money on acquiring companies and

manufacturing big productions. This made a lot of people debate whether or not Amazon is

profitable.

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Results and Discussion

The table below provides the ratios of current, quick, and cash. The current ratio reveals if

companies can pay their debts. Any current ratio value that is less than 1 indicates the company

might struggle to pay off its debts. Amazon from 2016 to 2019 has a current ratio above 1. While

the quick ratio shows company capabilities to pay for its current liabilities without worrying about

selling its inventory. The higher the ratio better for the company. The cash ratio shows if the

company can look out and deliver their short-term requirement like paying for the salary. 0.5 to 1

is the preferred cash ratio. Amazon has shown in the table is between those number in every year.

Table 2: Liquidity Ratios of (Amazon)

Ratio/Year 2019 2018 2017 2016

Current Ratio 1.10 1.10 1.04 1.04
Quick Ratio 0.86 0.85 0.76 0.78
Cash Ratio 0.63 0.60 0.54 0.59

Figure 1: Current Ratio of Amazon

Current Ratio
1.12

1.1 1.1 1.1

1.08

1.06

1.04 1.04 1.04

1.02

1
2019 2018 2017 2016

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Figure 2: Quick Ratio of Amazon

Quick Ratio
0.88
0.86 0.86
0.85
0.84
0.82
0.8
0.78 0.78
0.76 0.76
0.74
0.72
0.7
2019 2018 2017 2016

Figure 3: Cash Ratio of Amazon

Cash Ratio
0.64
0.63
0.62

0.6 0.6
0.59
0.58

0.56

0.54 0.54

0.52

0.5

0.48
2019 2018 2017 2016

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As discussed above, these graphs are associated with the ratios. All current ratios above 1 indicate

the company is in good condition to pay out its debts. The ideal quick ratio should be 1:1,

unfortunately, Amazon in every year is less than 1. Indicating Amazon couldn’t be able to pay out

its full liabilities in the short term. Whereas they are in good condition in Cash ratio, placed

between 0.5 and. 0.6.

Table 3: Activity Ratios of Amazon

Ratio/Year 2019 2018 2017 2016
Inventory Turnover 10.0 10.1 8.55 9.23
Receivable Turnover 13.5 14.0 13.5 16.3
Total Asset Turnover 1.25 1.43 1.35 1.63

Figure 4: Inventory Turnover of Amazon

Inventory Turnover
10.5

10.1
10 10

9.5
9.23
9

8.5 8.55

7.5
2019 2018 2017 2016

Figure 5: Receivable Turnover of Amazon

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 Recievable Turnover
18
16 16.3

14 14
13.5 13.5
12
10
8
Figure 6: Total
Asset of Amazon
6 Total Asset Turnover
4
1.8
2 1.63
1.6
0 1.43
1.4
2019 2018 1.35
2017 2016
1.2 1.25

1
0.8
0.6
0.4
0.2
0
2019 2018 2017 2016

Inventory turnover between 4 to 6 is considered the ideal ratio of turnover. Below 4 indicate a

company might be overstocking. In Amazon cases, they have a high inventory level, meaning that

they have good management skills. (Wilkinson, 2013). Receivable turnover shows how well the

company is collecting their debts. A higher ratio means companies are collecting their debt faster.

Interestingly, Amazon has a ratio decrease; from 16.3 in 2016 to 13.5 in 2019. Total asset turnover

is the company's integration of its assets to generate sales. The ratio for total asset turnover for

Amazon in the 4 years.

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Table 4: Debt Ratios of Amazon

Ratio/Year 2019 2018 2017 2016

Debt Ratio 0.72 0.73 0.79 0.77

Times Interest Earned 9.09 8.77 4.84 8.65

Ratio

Figure 7: Debt Ratio of Amazon

Debt Ratio
0.8
0.79
0.78
0.77
0.76

0.74
0.73
0.72 0.72

0.7

0.68
2019 2018 2017 2016

Figure 8: Times Interest Earned Ratio of Amazon

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 Times Interest Earned Ratio
10
9 9.09
8.77 8.65
8
7
6
5 4.84
4
3
2
1
0
2019 2018 2017 2016

Table 5: Profitability Ratios of Amazon

Ratio/Year 2019 2018 2017 2016

Return on Equity 0.19 0.23 0.11 0.12
Return on 0.05 0.06 0.02 0.03
Assets
Profit Margin 0.04 0.04 0.02 0.02

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Figure 9: Return on Equity of Amazon

Return on Equity
0.25
0.23
0.2
0.19

0.15

0.12
0.11
0.1

0.05

0
2019 2018 2017 2016

Figure 10: Return on Total Assets of Amazon

Return on Assets
0.07

0.06 0.06

0.05 0.05

0.04

0.03 0.03

0.02 0.02

0.01

0
2019 2018 2017 2016

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Figure 11: Profit Margin of Amazon

Profit Margin
0.045
0.04 0.04 0.04
0.035
0.03
0.025
0.02 0.02 0.02
0.015
0.01
0.005
0
2019 2018 2017 2016

The return on equity is the company's ability to generate income from their equity. A ratio from

0.15 to 0.20 is considered to be good. Amazon has managed to get that in both 2018 and 2019.

Return on Assets is related to how much success the company is having based on assets. The year

2018 has the highest return on assets with 6%. The profit margin is when sales revenue is greater

than the cost of production. With Amazon's growth, we can see 2018 and 2019 has a higher ratio

than in 2016 and 2017.

Conclusion

To sum up, Amazon has been the top online retailer due to how they operate their strategy

efficiently. Ever since the move to online, Amazon has seen consistent increases year by year.

However, the low net income and the increased liability is alarming to many. But I believe that is

due to Amazon's commitment to investing in long-term projects and acquiring big enterprises.

More expenses come when there are more obligations and responsibilities, but in the long term,

Amazon can make up for the expected losses. There is no denying the progress Amazon has made,

with the new project plans ahead and new manufacture production they are creating, Amazon has

shown no sign of slowing down.

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Electronic copy available at: https://ssrn.com/abstract=3647442