Amazon Ratio Analysis: Submitted To: Akhil MP Done by
Amazon Ratio Analysis: Submitted To: Akhil MP Done by
Amazon Ratio Analysis: Submitted To: Akhil MP Done by
Ratio Analysis
SUBMITTED TO: AKHIL MP
D O N E B Y:
•2 0 2 1 B B A H 0 7 A S B 1 0 4 - A R P I TA M
H AT T I
•2 0 2 1 B B A H 0 7 A S B 0 9 3 - L A K S H A S
REDDY
•2 0 2 1 B B A H 0 7 A S B 2 4 5 - R I S H I K A
MADHUKAR
•2 0 2 1 B B A H 0 7 A S B 0 8 5 - L I S A S A R K A R
•2 0 2 1 B B A H 0 7 A S B 2 2 6 - S H R I S T I S I N G H
•2 0 2 1 B B A H 0 7 A S B 0 2 5 - R I S H AV J H A
Introduction to Amazon
and Ratio Analysis
Amazon.com, Inc., commonly known as Amazon, is one of the world's
largest and most well-known e-commerce and technology
companies. Founded by Jeff Bezos in 1994 as an online bookstore,
Amazon has evolved into a global conglomerate that offers a wide
range of products and services, including e-commerce, cloud
computing, digital streaming, artificial intelligence, and more. As of
my last knowledge update in January 2022, Amazon had a significant
global presence and was considered a major player in the tech and
retail industries.
Why Ratio
Investment Decision Making: Investors use ratio analysis to make
informed investment decisions. By examining profitability ratios like
net profit margin and return on equity, they can gauge the
Analysis is company's ability to generate returns.
Important for Risk Evaluation: Lenders and creditors use solvency ratios to
evaluate Amazon's financial stability and creditworthiness. A strong
Amazon: solvency position can lead to favorable borrowing terms.
Operational Efficiency: Efficiency ratios, such as inventory turnover
and accounts receivable turnover, help measure how efficiently
Amazon manages its operations. A higher inventory turnover, for
example, suggests efficient inventory management.
Strategic Insights: Ratio analysis can provide Amazon with insights
into the effectiveness of its business strategies. For instance, a low
operating margin might indicate the need for cost management
Challenges and Considerations:
Operating Ratio:
• Formula: Operating Expenses / Total Revenue
• Calculation: $501.735 billion / $514 billion = 0.9751 or 97.51%
• Interpretation: The operating ratio indicates that Amazon spends approximately 97.51% of its
total revenue on operating expenses. This high ratio suggests that a significant portion of its
revenue goes into covering the costs of doing business, which is typical for a company that
continually invests in growth and innovation.
Return on Capital Employed (ROCE):
Formula: (EBIT / Capital Employed) * 100
Calculation: ($12.248 billion / $292.8 billion) * 100 ≈ 4.18%
Interpretation: ROCE measures how efficiently a company utilizes its
capital. Amazon's ROCE of 4.18% implies that for every dollar of capital
employed, the company generates a return of about 4.18 cents. While this
may seem relatively low, it's important to consider that Amazon frequently
invests in new ventures, which can impact the return on capital.
Earnings Per Share (EPS):
Formula: (Net Profit - Preferred Dividends) / Average Number of
Outstanding Shares
Calculation: ($2.7 billion - $0) / 10,189 = $0.265 per share
Interpretation: Amazon's earnings per share of $0.265 indicates the portion
of profit attributed to each common shareholder. In this case, the company's
profitability translates to approximately $0.265 per share.
. Liquidity Ratios:
Current Ratio:
Formula: Current Assets / Current Liabilities
Calculation: $146.791 billion / $155.393 billion ≈ 0.945
Interpretation: Amazon's current ratio of 0.945 suggests that it has slightly less current assets than current liabilities.
While this ratio is less than 1, indicating a potential liquidity concern, it's essential to remember that Amazon's business
model relies on efficient inventory management.
. Quick Ratio (Acid-Test Ratio):
Formula: (Current Assets - Inventory) / Current Liabilities
Calculation: ($146.791 billion - $34.405 billion) / $155.393 billion ≈ 0.754
Interpretation: The quick ratio, at 0.754, further highlights Amazon's liquidity situation. This ratio excludes inventory,
which may not be as readily convertible to cash. It indicates that Amazon may need to rely on other sources to meet
short-term obligations.
. Solvency Ratios:
Debt Equity Ratio:
Formula: Total Debt / Shareholder's Equity
Calculation: $169.9 billion / $146.043 billion ≈ 1.16
Interpretation: The debt equity ratio of 1.16 implies that Amazon has slightly
more debt than equity. While not alarming, it suggests a moderate level of
financial leverage.
Total Assets to Debt Ratio:
Formula: Total Assets / Total Debt
Calculation: $462.7 billion / $169.9 billion ≈ 2.72
Interpretation: This ratio indicates that Amazon's total assets are
approximately 2.72 times the total debt. It suggests that the company has a
good capacity to cover its debt obligations with its assets.
Proprietary Ratio:
Formula: Shareholder's Equity / Total Assets
Calculation: $146.043 billion / $462.7 billion ≈ 31.54%
Interpretation: The proprietary ratio shows that 31.54% of Amazon's assets
are financed by shareholders' equity. This indicates a relatively healthy
balance between equity and assets.
Interest Coverage Ratio:
Formula: Earnings Before Interest and Taxes (EBIT) /
Interest Expense
Calculation: $12.248 billion / $806 million ≈ 15.20
Interpretation: Amazon's interest coverage ratio of 15.20
suggests that the company easily covers its interest
expenses with its earnings. This indicates financial
stability.
Debt to Capital Employed Ratio:
Formula: Total Debt / (Shareholder's Equity + Total Debt)
Calculation: $169.9 billion / ($146.043 billion + $169.9
billion) ≈ 53.75%
Interpretation: The debt to capital employed ratio shows
that approximately 53.75% of Amazon's capital comes
from debt. This suggests a moderate level of leverage,
but it's not excessively high.
Conclusion:
/
Return on Capital Employed: The ROCE ratio (4.18%) shows that Amazon generates a return of about 4.18%
for every dollar of capital employed, reflecting its ongoing investment in growth initiatives.
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