Amazon.com – Financial Analysis Case StudyIntroduction
The bookselling industry is one of the steady growing industries which have estimated the sales of $27 billion in the year 2006. The sales of the books highly depend on different seasons. The industry has diverse customers who buy different categories of books which includes the trade books, college books, professional books, mass market paper-back books. With stiff competition across the market, the companies are strongly focusing on adopting different ways and means so as to attract more and more consumers and achieving high market share in the industry.
Company overview
Amazon.com is considered to be the market player in the e-commerce industry (bookselling). Amazon.com was founded by Jeff Bezos, who focused on enhancing the book shopping experience of consumers, with innovation and new ways to sell books online. One of the major players of Amazon.com is Barnes and Noble.
Amazon.com started as an online bookstore that has turned into one of the largest online retailers selling items from music and movies to artwork and furniture. As the company website states “it is by design that technological innovation drives the growth of Amazon.com to offer customers more types of products, more conveniently, and at even lower prices.” In this paper you will learn the financial health of the company Amazon.com. The 9-step process written about by Professor Piper will be followed to assess how financially sound Amazon.com is now and the outlook for its future.
Step 1 – Goals, Strategy and Operating Characteristics
Amazon.com aims to be the “most customer-centric company for four primary customer sets: customers, seller, enterprises, and content creators” (Amazon.com, n.d.). Amazon.com is highly focuses on providing value to its consumers, the company has a strong focus on providing value to its consumers with a strong focus on increased selection, product diversity, discounted prices, informative products, high convenience and high level of customization for the consumers. The company opts for innovative means and ways to attract more and more consumers and make themselves consumer friendly so as to provide consumers value which is one of the strongest aspect which helps in creating competitive advantage. With a focus on these strategies the company is able to achieve competitive edge in the market of its operations. Amazon.com has a strong focus on Convenience, Selection, Service and Price which are considered as the core value of the Amazon.com. With a strong focus on the innovation and technology, Amazon.com is able to enhance the shopping experience to the target consumers.
One-click shopping – Amazon.com focused on providing convenience to its consumers, to save the time and provide enhanced value the company focused on providing a single click shopping experience, it helped in reducing the transactional burden on the customers. The company was able to pioneer on this by collecting the information of customers and creating a database of the same.
Product Review Information – All products on Amazon can be reviewed which helped the customers to review about the product they want to purchase
Purchase Circles – Amazon.com focuses on providing information about the books one is interested in.
E-Mail Alerts – Amazon allows consumers to keep tabs on their favorite author.
Recommendations – The company uses collaborative and other personalization techniques to recommend books to users.
Wish List – The Company focuses on enabling the creation of wish list of the products or items one wants to purchase in the near future.
Amazon.com focuses on 7 c’s framework which helped in creating value proposition, these are convenience, content, customization, community, connectivity, customer care, and communication.
So as to have a competitive edge in the market, Amazon.com focused on diversification by selling different products online. The company also focused on collaborating with different virtual companies to showcase and sell their product through Amazon.com. It also signed the contract with different brick and mortar stores so as to increase its products to be sold. Despite of the diversification, the company was able to have a strong focus on customer value and satisfaction.
Step 2 – Revenue Outlook
The primary source of revenue for Amazon.com is the sale of products and services to customers. The company offers everything from books, electronics, sportswear, tennis rackets, food, children toys, and gold- silver-and diamond jewelry. It was one of-the-first major companies to sell goods over the internet, which its main source of revenue. The revenue generated by the company in 2012 was $42000 as compared to $30792 in 2011 and $22273 in 2010. Thus, we can say that the product revenue of the company is growing by more than 37% yearly. The revenue for services is recorded at $6077 for the year 2012.
Step 3 – Investment in Assets
Considering the investment in assets, we can say that the company has purchased fixed assets which includes the internal use software as well as web development software in 2012 of $1811 million, the company has also invested in acquisition of other companies with which the company has been able to expand on its market base as well as technologies. The investment done in year 2012 on acquisitions has been recorded at $705 million.
Amazon has been expanding its business operations and product offering through various acquisitions. In 2009, the company acquired Zappos.com, an online apparel, footwear and accessories retailer. This acquisition enabled Amazon to tap the internet sales of apparel, the largest online shopping category and one in which Amazon has had limited success in the past. Later, in February 2010, the company acquired Touchco, a touch screen technology company. Amazon merged Touchco’s technology and staff members into its Kindle hardware division. This acquisition expanded Amazon’s platform to encompass more functionality and more content on Kindle. It also helps Amazon to address some of the form-factor issues with the Kindle.
Further in October 2010, the company acquired BuyVIP.com, a fashion and lifestyle online buying community. This acquisition strengthened Amazon’s position in the retail of fashion apparel. BuyVIP.com has more than six million members in countries such as Spain, Germany, and Italy. It offers members top fashion and lifestyle products at lower price points. In November 2010, Amazon acquired Quidsi, which operates Diapers.com and Soap.com. Diapers.com is an online baby care specialty site, and Soap.com is an online site for everyday essentials. The acquisition of Quidsi also brought the ownership of BeautyBar.com under Amazon. BeautyBar.com is a prestige beauty boutique. Later in January 2011, Amazon acquired the remaining shares in LOVEFiLM International, one of the leading European subscription entertainment service providers. It offers online DVD and games rental-by-post, and streams films and TV shows over the internet to personal computers, internet enabled TVs, and Playstation3. LOVEFiLM operates in the UK, Germany, Sweden, Norway and Denmark.
These acquisitions have added new customer base and complement Amazon’s existing product portfolio which has affected the prices of the company in a positive way.
The focus on Kindle has also improved on the share prices of the company tremendously. Amazon has dominated the fast-growing electronic book market for the past few years through its e-reader device, Kindle. In 2007, the company launched its e-reader, Kindle, in the US market. Kindle is Amazon’s portable reader that wirelessly downloads books, blogs, magazines and newspapers to a high-resolution electronic paper display that looks like real paper.
Thus we can say that the company is making investment on its assets with which the company is expanding its market base as well as improving its services.
Step 4 – Economic Performance
Considering the prices of the company i.e. Amazon.com we can say that the prices of the shares has increased tremendously over last 5 years, On 1st January’ 2010, the prices of the shares was $133.9 whereas in 2011 it increased to 184.22 and in 2012 it decreased to 179.03 whereas it is currently being sold at $256.41, which shows that the shares of the company has increased by about 67% in last 3 years.
Ratio Analysis:
Liquidity ratios: Considering the liquidity, we will be able to analyze the ability of the companies to meet their short term obligations, considering the current ratio of amazon.com we can say the current ratio of the company has decreased over last three years the current ratio of the company in 2010 was 1.35 and in 2011 it was 1.75, which states that the ability of the firm to meet short term obligations has decreased over the period.
Solvency ratio: Solvency and leverage ratio helps in analyzing the leverage of the company in respect to the proportion of the assets or resources of the company which are financed through debt and owner’s equity.
Considering the debt ratio of Amazon, we can say that the company has high proportion of short term obligations and debt as compared to the long term. The debt ratio of the company in 2011 has increased as compared to 2010. The debt equity ratio of Amazon in 2010 was 2.0 whereas in 2011 it increased to 2.25, the total debt ratio of the company is 63% and 69% consecutively, which depicts that the assets of the companies are highly financed by debt.
Profitability: Considering the profitability of the firms, we can say that the profitability of the company has decreased over the period, in 2009 the profit margin of the company is 3.68% which decreased to 3.39% in 2010 and further decreased to 1.33%
Operating efficiency: Return on equity and return on assets helps in analyzing the return which the investors are getting from the company, Amazon’s return on equity in 2011 was 8% as compared to 12% in 2010.
Overall, we can say that the financial performance of the company is good.
Step 5 – External Financing Need
With a focus on expansion, the company needs to have a strong focus on external financing need, as per the annual reports of the company we can see that the company has taken external financing through long term loan which is about $177 million, wherein the company has done the repayment of the capital lease obligation of $444 million. The total external financing of the company has amounted to $482 million in 2012 along with the common stock repurchase that has been done by the consumers.
Step 6 – Target Sources of Finance
The major sources of finance for the company is banks and other financial institutes with which the company will be able to take long term debts and loans. Thus the sources of financing of the company include the banks and the financial institutes, the company can also raise funds through equity or through debt financing.
Equity Financing:
This is one form of financing which people usually do when they think that they can contribute themselves or get it done from their family and friends. This is usually called equity financing in case of an individual. But, in case of a corporation the scenario is a bit different. Corporation issue shares in order to raise capital from the market and hence raise money by making shareholders the owners of the company.
Advantages of Equity Financing:
You can use the equity raised from the market without any burden of paying back the money. It is not mandatory to pay dividends every year. However, if there is a discontinuity in the process, then it sends a wrong signal to the market regarding the financial health of the company.
If the company liquidates, then it is not necessary for the company to pay back the share of the common stockholders.
One may go for venture capitalist or angel investors in case if the business is a new start-up and you need both intellectual support as well as financial support.
Disadvantages of Equity Financing:
How much control you give to the investors depends entirely on the company? If more than 50% is owned by one individual company then the company may have a total control over the company and take charge of each small and big decision. So, this has to be in a constant check so that no hostile takeover takes place.
There is another disadvantage of raising equity. The management of the company is bound to take permission towards any major change they wish to make like going in for a large project; buying another company. So, for all this you need a lot of paper work and shareholder’s approval. This takes heavy time and builds on the opportunity cost of capital for the company.
Debt Financing
Many a times it happens that the company is confident enough to raise money at a specified interest rate, put in that money into the project and generate positive returns out of it. This way is the best way out for any company in order to expand themselves in the market and gain significant market share. Here, you are not in obligation to take permission at each and every decision.
Advantages of Debt Financing
Debt financing only needs the interest and the principal to be repaid. Any company has full ownership of each and every penny of profit which they make through this debt-financing. The biggest advantage of raising debt is that you do not have any obligation to answer anybody about your action and decisions. You are independent to make the decision for the company.
If you finance the company with debt, then the interest which you pay on the debt is actually tax-deductible. This lowers your tax-liability every year. Moreover, the interest rate which you pay is based on the prime interest rate.
Disadvantages of Debt Financing
The biggest disadvantage of raising money through debt is that if you become unsuccessful in paying down the interest and principal in timely manner, then your reputation and credit rating as a borrower in the market is hurt really badly. This precisely keeps you away from raising further debt. Hence, ultimately you end up becoming bankrupt.
Also debt raising is not that easy as it sounds. One has to collateralize some security or pledge their assets for raising that much amount of money.
It depends on the situation of the company in order to make a decision of whether to finance through equity or through debt. A number of factors to consider like: capital needs, potential investors, credit rating, business plan, tax situation. The proportion will give you the cost of capital for the business.
Step 7 – Viability of 3-5 Year Plan
Considering the stock prices and the financial performance of the company, we can say that the financials and the profitability of the company is likely to increase in the coming years and the company will improve on its profitability as well as the market share.
Step 8 – Stress Test for Viability
Considering the debt ratio with which the stress test of the company can be evaluated, we can say that the company has high proportion of short term obligations and debt as compared to the long term. The debt ratio of the company in 2011 has increased as compared to 2010. The debt equity ratio of Amazon in 2010 was 2.0 whereas in 2011 it increased to 2.25, the total debt ratio of the company is 63% and 69% consecutively, which depicts that the assets of the companies are highly financed by debt.
Step 9 –Financing and Operating Plan for Current Year
Though the share prices of Amazon.com are quite high but the financial condition of the company has decreased tremendously in past few years for which the company needs to improve on its financial condition and position so as to have higher profitability and higher returns in the market.
In order to protect its brand, Amazon should continue to offer products at competitive pricing. This will ensure that people will continue to visit Amazon’s site to find deals on their favorite products. Further, Amazon should continue to do the good job in terms of product selection and variety. It should keep on adding new and unique product categories and expand range of offerings, so that a wider target market can be approached.
Conclusion
In order to protect its brand, Amazon should continue to offer products at competitive pricing. This will ensure that people will continue to visit Amazon’s site to find deals on their favorite products. Further, Amazon should continue to do the good job in terms of product selection and variety. It should keep on adding new and unique product categories and expand range of offerings, so that a wider target market can be approached.
References
Amazon.com. (n.d.). http://www.amazon.com/irGitman, 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.phpPiper, T. (2010). Assessing a Company’s Future Financial Health. [Adobe Digital Editions version]. Retrieved from http://gcumedia.com/digital-resources/harvard-business-school-press/2010/harvard-business-school_-assessing-a-companys-future-financial-health_ebook_1e.php10-K report, (2012), Amazon.com from: http://phx.corporate ir.net/phoenix.zhtml?c=97664&p=irol-sec&control_selectgroup=Annual%20FilingsMarket analysis of Amazon.con from: http://www.barchart.com/profile.php?sym=AMZN&view=key_statistics
Get FAST homework help. Place a similar order and get a 15% Discount for your first three orders. We have a team of professional tutors to help you with any assignment regardless of the deadline. Contact us for immediate Homework Help.
