Financial Statement Analysis - Free Paper Sample

Introduction

Amazon is one of the multinational technology firms based in the United States offering computing, e-commerce, and digital streaming services. The company’s fiscal period ends on 30th December every year, and it has managed to capture a wide section of the market due to the provision of quality services at favorable process. In this paper, there will be an analysis of various ratios of this firm with a focus placed on determining the financial conditions of the company. The most recent year that will be used in this analysis will be the 2019. The determination of the company’s return on equity can help to calculate its profitability level and the return that is realized from the firm’s net assets. The business performance trend is a significant indication of the direction that a firm is headed, and in this case, the performance of the company’s share will offer an insight on where the business is headed in the future (Gahlot et al. 15).

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Short Term Solvency

Amazon Company has a current ratio of 1.1, which is an indication that it is in a position to meet its short expenses when they fall due. The quick ratio that is posted by the company is less than one, and this shows that the firm may struggle to pay its short-liabilities at the right time. Therefore, the ratio indicates that Amazon is not in a healthy position financially. In the financial year 2019, Amazon Company recorded a figure of less than 1, showing that the amount of current liabilities held by the company exceed the cash available to meet the payment of these liabilities. After analyzing the three short-term solvency ratios, it can be stated that the company was experiencing financial problems in the year 2019. When comparing the performance of Amazon with other entities, it is clear that Amazon is performing poorly for News Corporation (1.3), Consumer Discretionary (1.4), and eBay (1.6) managed to post higher figures of the current ratio in 2019.

Long-Term Solvency

In the case of the long-term solvency, a ratio of less than 0.5 of the total debt shows that the assets owned by a company are financed through equity, but when it is more than 0.5, it shows that a company is relying on debt to finance its assets. Amazon has a ratio of 0.72, and this is an indication that it is relying on debts to purchase assets. The debt to equity ratio is used to highlight the financial leverage in a firm, and a ratio that is above 1 is an indication that a business is using the funds obtained from creditors to finance its operations.

In this case, Amazon posted a figure of 1.02, showing that it has to rely on debts to run its operations. Compared to the other entities in the same industry, eBay posted a figure of 2.93, overstock.com (0.24), and Walmart (0.97). It is an indication that even though Amazon is using its debts to meets its obligations, competitors in the market are performing worse than Amazon.

Asset Utilization

Inventory turnover focused on the number of times that the commodities of a company are sold, highlighting the working capital efficiency. A low ratio shows that an organization is not working optimally. Amazon Company posted a figure of 8.8, and this shows that it is not working well regarding the sale of its products compared to the rival brands in the market. Walmart (9.4), News Corporation (14.2), and Microsoft (23.3) are posting higher figures showing that Amazon must improve its operational processes.

The receivables turnover highlights the effectiveness of a company regarding its ability to extend credit and collect the debts when they are due. A figure is 13.69 that was posted by the company in 2019 is way below what the rival brands posted with Walmart (92.65) and eBay (14.76), posting better ratings than Amazon. It is an indication that the company is not working effectively when it is advancing loans to its buyers. Additionally, the strategies of collecting debts are also not being optimally utilized by the firm. Capital intensity covers the amount of capital that is needed in the process of generating a single dollar.

Profitability

In the profit margin case, the organization manages to keep $0.014 in every $1 of sales that it makes. Therefore, it shows that the firm is making profits, and this is a good thing for the future of the business. A figure that is above 10% for the returns on equity and assets are acceptable or it shows that a business is managing to generate income from the equity and assets that it has invested. Companies like Walmart and eBay posted better results in 2019 in comparison to Amazon, and this shows that the firm was not performing well in this fiscal period. There is a great need for the management to institute the right measures that will enable it to maximize its usage of the assets and equity available to generate funds.

Market Value

When focusing on the market value ratios, it can be noted that the firm has posted high returns and this is encouraging to the different stakeholders that are interested in the affairs of the Amazon Company. The stocks of this company are performing well in the market and the shareholders can be satisfied that the shares that they hold will continue to grow in the market. The primary duty of a company to improve the wealth of its shareholders and the continued growth in the prices of shares in the market is showing that despite the tough economic environment, Amazon is managing to improve the prices of its stock in the market.

Overall, Amazon Company has been performing well even though there are companies in the same industry that are doing better than the Amazon firm. However, the organization has not posted negative returns in the five fields of analysis above. The company has managed to meet the short-term solvency situation when they arise in the business. The debts that are required to be paid within a period that does not exceed 12 months can be managed and enable the business to continue running its activities. The ratio of the debt and equity that are held by the business are favorable showing that much of the equity that is held by the company is not financed by debts. Therefore, Amazon Company can manage to settle the debts that it owes the creditors and still have adequate equity for investment purposes. The firm is effectively utilizing the assets under its possession. The inventory and receivables turnover are showing the values obtained are favorable and can help in leading the firm to higher returns.

Du-Pont Analysis

The return on equity is a platform that helps management and other interested stakeholders to understand how an organization gets to create value for its shareholders. The figure that is computed for a given organization gets vulnerable to the measures that seem to increase its value, and this can make a stock risker. Therefore, the personnel that relies on these details can make the right investment decisions. Potential investors have to find a deeper way of analyzing the returns on equity, for this is what will offer them better details on the ability of a stock to give returns.

An increase in return on equity is encouraging, for it shows that an organization is managing to get better returns on the equity amount it is investing. However, there is a problem since the number can rise even when a company manages to acquire additional debt, and this will lower the level of the shareholders’ equity. An organization’s leverage will rise, a move that will be good for an entity, but at the same time, it can make a stock risker to purchase (Watanabe et al. 9). Based on the Du-Pont analysis, the computed value of the return on equity is determined as 21.9%. In the case that the ROE value raises due to either an increase in the asset turnover or net profit margin values, then an organization is stated to be performing well financially. In the case that equity supplier is the factor triggering the rise in value, it can be argued that the Amazon is leveraged appropriately, and this is highly likely to make it riskier for the company to continue running its operations (Borges et al. 7).

Conclusion

Thus, the over-leveraging issue will call for the need to have a discount even though there is a rise in the ROE. If the business is underleveraged, this may show that Amazon is performing well. According to the earlier computations, the value of return on equity was recorded at 21.07%, and after undertaking the Du-Pont analysis, the value has declined to 21.9% and the difference is minimal.