Amazon financial statement analysis

Financial Health

Company Overview

Amazon is the world’s leading online retailer. The Seattle-based company started in 1994, selling mainly things like books and music, but it has expanded its products steadily since then. Today, Amazon is not only a retailer but also a media company, as they produce and market streaming content. They have long been an innovator in digital merchandising, and their techniques are widely-copied by competitors today. Amazon today is one of the world’s largest companies, with a vat product line. They compete against all other retailers – a consumer is often faced with a decision to go to a store to buy something, or buy it from Amazon, and this owes to their position as the default online retailer.

The following is a review of the past three years of Amazon’s financial statements. During this period, the company has extended its lead as the number one online retailer (BI Intelligence, 2017), and started to grow into other businesses, including building out its streaming content business. It has continued to build out its international presence, most recently adding Australia to its list of countries (Westbrook & Kaye, 2017).

Horizontal Analysis

Income Statement

2014

2015

%

2016

%

Revenue

88988

107006

120%

135987

153%

COGS

62572

71651

115%

88265

141%

Gross Income

26416

35355

134%

47722

181%

Other Expenses

26238

33122

126%

43536

166%

Operating Income

178

2233

1254%

4186

2352%

Non-Operating Expense

289

665

230%

294

102%

Net Income (loss)

-241

596

-247%

2371

-984%

Amazon’s horizontal income statement highlights the company’s growth over the past few years. It has seen revenues grow 53% in two years, but it’s costs have grown slower, helping the company to be more profitable from the gross income level on down. The result is that where in 2014 Amazon lost money, it made $2.3 billion in net income in 2016, mainly on the strength of having a lower cost of goods sold on its revenues in recent years than it had before.

Balance Sheet

2014

2015

%

2016

%

Cash

14557

15890

109%

19334

133%

Securities

2859

3918

137%

6647

232%

Inventories

8299

10243

123%

11461

138%

Accounts Receivable

5612

5654

101%

8339

149%

Current Assets

31327

35705

114%

45781

146%

Property & Equipment

16967

21838

129%

29114

172%

Total Long-Term Assets

23178

29042

125%

37621

162%

Total Assets

54505

64747

119%

83402

153%

Accounts Payable

16459

20397

124%

25309

154%

Total Current Liabilities

28089

33887

121%

43816

156%

Long-Term Debt

8265

8227

100%

7694

93%

Other LT liabilities

7410

9249

125%

12607

170%

Total Liabilities

43764

51363

117%

64117

147%

Shareholders\' Equity

10741

13384

125%

19285

180%

Total Liabilities & Equity

54505

64747

119%

83402

153%

A horizontal analysis of the company’s balance sheet highlights this growth. The company’s current assets have grown 46% in two years, and its total assets have grown 53% in that time – the same rate at which the revenues have grown. Worth noting is that the securities have grown, where inventories grew at a slower rate than the income in either sales or cost of goods sold. This indicates that Amazon is becoming more efficient in terms of its inventory turnover and cash conversion cycle, something that is probably a factor in it earning higher profits. Also worth noting from the balance sheet is that Amaonz’s long-term debt has actually declined. It is paying debt off, and not simply replacing it with more debt. In an environment where there was at least the threat of rising rates, this is a shrewd financial management policy. As a result, shareholders’ equity has grown more quickly than revenues, and more quickly than liabilities. This indicates that Amazon is improving its financial health.

Ratio Analyiss

Another form of financial statement analyais is the ratio analysis. One form of this is the liquidity ratios, which are the current ratio, quick ratio and cash ratio. These measure how well positioned the company is with respect to its coming liabilities in the next year – does it have the liquid assets on hand to pay those liabilities? For the past two years, where are Amazon’s liquidity ratios:

2015

2016

Current Ratio

1.05

1.04

Quick Ratio

0.75

0.78

Cash Ratio

0.47

0.44

The liquidity ratios for Amazon are quite healthy. First, the current ratio is above 1.0, which is sort of a benchmark level that indicates the liquid assets are greater than the current liabilities. It is worth noting that the other liquidity ratios break down this number further. First, the quick ratio takes out inventories. This matters because for a retailer, inventories sitting on the books may be things that are difficult to sell. In the case of a struggling retailer, the ability to sell goods in inventory is maybe not great, so it cannot be taken for granted that inventories can be sold to cover liabilities. Or, if nothing else, it might take longer to sell inventories – the quick ratio reflects the current assets that can be liquidated quickly, therefore excluding inventories. For Amazon, the quick ratio is healthy, and growing, as other categories of current assets are growing faster than inventories. The cash ratio is the measure of immediate financial health – Amazon’s cash ratio is quite healthy. Sometimes a downward trend in the cash ratio would be a red flag, but in the case of Amazon, its cash ratio is weaker because it has put some of its cash into short-term marketable securities. If the cash ratio is calculated using both cash and securities, it improved in 2016 from 0.58 to 0.59.

Recommendations

The decision of whether or not to invest in a company is quite a bit more complex than simply estimating whether the company has good financial health or not. For example, the multiple tells you how much growth is already priced into the company’s stock. So it is not fair to say whether Amazon is a good buy at this point in time, because that requires further analysis of the business, the current stock price, and that sort of thing.