Financial Performance Analysis of Amazon

Financial Performance compendium of viragoExecutive Summary amazon.com, Inc ( amazon) registered strong harvesting of 36% in 2008 in the main due to change magnitude unit sales and expanded sales institute in several categories. meanwhile during the tertiary quarter of 2009, virago managed to bill a steady addition despite the recession period. This report reviews and die amazon financial performance as well as compar expertness with its competitors. All analysis and ratios argon derived from data collected from respective companies annual reports and www.reuters.com.Brief Description of the Company amazon is one of the leading on border retailers in the world based in Seattle, Washington, United States of America. The federation started its operation in 1995 and has regional involvement in the Asia Pacific, North America and Western Europe. ab initio the core caper of the association is selling online books however has diversified to products such as apparel, elec tronic and home improvement products.The company is involved in the inter scratch retail sedulousness with 7.5% grocery store share in 2008. The e-commerce industry has gone through major phases of growth and decline however, amazon persevered and impress everyone. Amazon achieved its first annual returns in 2003 and has continuously performed come apart each year.Amazons main competitors are the book retailer, Barnes and Nobles (BN) and third party retailing non-book related good, Ebay.com (Ebay). BN and Ebay are engaged in the equivalent industry as Amazon, which is online business and catalogue retailing of single and diversified product linesIn basis of market capitalisation, Amazon has the highest at $59.57 billion and fol imprinted by Ebay and BN at $30.59 billion and $1.21 billion respectively. This indicates that Amazon has greater stability and low take chances compared to the competitors.Financial AnalysisProfitabilityThe companys performance has improved wherein it has performed in a higher place the projections do throughout the four whatsoever years period. Net sales get good deal increase by 29.2% from $14,835 one jillion jillion in 2007 to $19,166 million in 2008 with net income of $476 million and $645 million respectively. The Cost of gross revenue ( cosine) has increase throughout the years part contri excepted from the submit merchant vessels cost and has affected the net income range of a function. There was a drop in the net income in 2006 due to increase expenditure on technology and content and in income tax expenses. However, the said figure has increased thereafter.In terms of sales, Amazon has performed double from the competitors throughout the four-year period. sales increased tremendously primarily due to low worths, vast survival of products and free shipping offers.However, in terms of Gross Profit edge (GPM), Ebay operated at 74% has outperformed Amazon at 23% in 2008. The suit behind this is due to Amazons high expenditure on Cost of Sales (cos), which is about 70% of its sales value. The high COS was mainly contributed from the free shipping cost incurred. In comparing to Ebay, the company applies different business model from Amazon and pose managed to minimise its expenditure on COS at about 20% of its sales value and therefore reflected to a high GPM. GPM proves that eBay is generating a very large percent of net income from each dollar of sales and this contributes greatly to the growing of eBays overall financial strength. Meanwhile, BN showed a burst margin because of its smaller size and the retailer aspect.Amazon and BN have a st up to(p) Operating Profit Margin (OPM) of 4% compared to Ebay, which fluctuates deep down the same period. Its constant operating expenses of 20% from its sales value endure the st adequate to(p) growth for Amazons OPM. Ebays fluctuation figures are resulted from high expenses incurred from selling, general and administrative.establish o n the industry standard, Amazon and its competitors have performed ahead from the standard, which are 14.1% and 0.53% for GPM and OPM respectively. The low OPM standard can be ascribed to the effect of the recent financial crisis.As of the 3rd quarter of 2009, Amazons sales were $14,989 million with net income of $518 million. For the original year, it is project a gain increase of 21% and 19.5% in sales and COS respectively from 2008 primarily to the low prices, vast selection and free shipping offers. With the said sales projection, the net simoleons is projected at $743 million in 2009. The basis for the projection takes into consideration on the global scotch downturn and changes in customer purchasing preferences.Based on the true quarter performance, the same trend was observed wherein Amazon is still having the highest net sales while Ebay still dominating the net income figure. BN was badly urinate from the result of stinting crisis.In comparison with the competitors, Amazons Return on candour ( roe) was high in 2005 at 135% but drastically dropped throughout the years to 40% and 20% in 2007 and 2008 respectively. The main condition for the shine was due to the yearly increase in the businesss equity. As at 2008, Amazons ROE is equivalent to the competitors and is expected to be in line with the competitors in the future. In comparison on the ROE and Return on Assets (ROA), Amazon has the highest growth among its competitors as it has a smaller capital base than Ebay and a higher(prenominal) profit level than BN. The high ROE is indicates that Amazon is continuing to grow. Meanwhile the ROA showed that Amazon is efficient in generating income from its assets compared to its competitors. The industry standard for the ROE and ROA are 3.8% and 1.6% respectively. The lower industry standard might be driven by the economic condition, which has a great impact to the performance and profitability of nearly companies.There was an increase of 1% for each year from 2006 to 2008 for the Return on Investment (ROI), whereas the Return on Capital Employed (ROCE) was at the highest in 2008 at 29%. These have indicated that Amazon is efficientat using its assets to generate requital compared to the competitors.Liquidity and leverage analysisThe companys current ratios are more or less similar to BN during the four-year period. The companys current ratio was amid the ranges of 1.3 to 1.5 for the past four years. This indicates that Amazon is adapted to lay its hands on $1.30-$1.50 for every $1.00 they owe.In comparison between current and acid ladder ratio, acid test ratio is lower at fair of 1.0 within the years. It will alter the company to cover its short-term liabilities adequately with its liquid assets. This is within just about of the industry standards of 11, showing that the company will be sufficient to cover its short-term liabilities adequately with its liquid assets.In comparison with the industry, Ebay performed b etter than Amazon for both the current ratio and acid test ratio. Amazon fell below the standard in the sign years but almost meeting the standard in 2008 at 1.51. Although not do better than the industry average, Amazon has good and st equal ratios, which indicates that the company is able to cover its current liabilities.Amazons cogwheel ratio was high in 2005 at 86% and subsequently narrows within the years to 13% in 2008. delinquent to the operational efficiency, increased sales and improved liquidity, Amazon was able to reduce its debt and currently the business is funded with internal generated funds. Meanwhile, Ebay has no borrowings and BN has an average of 30% for the gearing ratio.The high borrowing in 2005 has a huge impact on the debt-to-equity ratio, which was 601. However as the borrowings is paid, the debt equity ratio when down to 0.21 in 2008. This indicates that Amazon has 20 cent debt for every $1 equity the company have. As for BN, its debt/equity ratio was at average of 0.51 during the four years. Therefore, in comparison, Amazon is less risky than BN. As Ebay has no borrowing, the interest cover for the said company is high compared to Amazon and Ebay.In comparison with the debt-to-equity ratio set by the industry, Amazon has a very low ratio of 0.2 compared to 40.98. As mentioned earlier, the industry ratio is on the high side due to the economic condition.Investment analysisAmazons vulgar shares outstanding plus shares underlying stock-based awards outstanding totalled 446 million on declination 31, 2008, compared with 435 million a year ago. As of to date, the said shares amounted to 451 million.Based on Amazons Earning per Share (EPS) trend, it indicated that the markets willingness to collapse for the companys earnings has increased. This indicates that the market foresees Amazons long-term prospects over and above its current position. As at 3rd quarter 2009, the EPS was $1.20 and to grow further based on the companys projec tion on higher earnings in quaternate quarter. psychoanalyst predicts that strong online holiday sales will supercharge the shares of retailers, including Amazon and has recommended that the said shares will outperform in the market (Reuters.com, 2009).In terms of market performance, Amazons share price fluctuates throughout the years and increased tremendously in 2007 at $92.64 due to the launch of its e-book reader, kick up. However, during the economy downturn in 2008, the share price dropped to $51.28 due to low operating profit as Amazon begins its price reduction for the goods and services. In 2009, the share price gradually increased and after the 3rd quarter results, it continuously went up and as at 11 December 2009, the share price was $134.15. The current Price/Earning Ratio has increased to 80.70 times from 33.80 times in 2008. Analyst predicted that with a strong revenue growth Amazon would be able to gain significant market share from other competitors (Stahl, 2009 ). overdue to the economic downturn, all companies are affected which was reflected in its performance. Similar to Amazon, Ebays and BNs share prices had an initial stable growth but in 2008 it dropped by about 50%. While others are still struggling to recover from the economic situation, Amazon has showed a growth in 2009 and the share price has currently increased by 168% compared to Ebay and BN at 70% and 62% respectively.Cash coalesce AnalysisAs at 3rd quarter 2009, the gold and immediate payment equivalents was $2,514, which a reduction from the opening balances at the beginning of the year of $2,769. During the period, the cash utilize in financing activities was $229 million compared to $1,199 million in 2008 of which the cash outflows results from repurchases of parkland stock, repayments of long-term debt. Repayments on long-term debt and payments on capital lease obligations were $379 million for the 3rd quarter 2009 and $335 million in 2008. Meanwhile, free cash floww as $446 million for the quarter.Throughout the years, Amazon has managed to have a commanding cash flow from its operating activities. This indicates a good sign that the core operation of the company is generating income. In comparison of Amazons total liabilities to the cash flow generated from operations, the company has generous funds to cover level of investment and takes about 3.3 years to pay back all its financial commitments. With the current cash, cash equivalents, and marketable securities balances, the company is likely to be able to meet its anticipated operating cash needs for at least the next 12 months.In comparison between the cash flow from operating activities and net income, it indicated that Ebay has the higher ability compared to Amazon in managing its operating cash bike through dues, payables and memorial. The reason is that Ebay takes advantages of its payable days for as long as 361 days. out-of-pocket to the similar business model, both companies ha ve a negative cash cycle of which cash is generated from its payable and quick settlement payment from the customers.Management of working(a) CapitalIn terms of managing working capital, Amazon had maintained its positive cash flow being the highest at 2007 for an amount of $1,450. This indicates that the company is able to pay off its short-term liabilities and operating expenses accordingly. In comparison between the competitors, Ebay has the highest working capital of $4,023 million in 2007 while BN has the lowest at $841million in 2006. The high working capital for Ebay has enabled the company to be thriving in its expansion programme and improve their operations.For the 3rd quarter finishing 31st December, Amazons working capital is $1,832 million and is expected to increase further due to higher expectation of sales in the coming quarter. operative capital provides information on the companys underlying operational efficiency. In terms of efficiency, Amazon is efficient in using its assets in generating sales compared to its competitors, which are reflected in the asset turnover ratio. This indicates Amazons improved efficiency in inventory and asset management that is partly supported from the low set outline and low profit margin.In comparison to the competitors, BN has the lowest account receivable days due to its retail business model, which is based on the cash transaction. Based on the account payable days, Ebay has taken advantage on the free source of finance for the business at 361 days compared to Amazon at 62 days. In respect of the inventory days, Amazon is able to turn the inventory quickly as low as 12 days compared to BN at 140 days. BN has high stock inventory days due to the reason of its retailing business model and product which requires some time to be sold. Due to the same business application, both Amazon and Ebay have a negative cash operating cycle, which indicates efficiency in cash management. In term of the industry standa rd, the three companies are execute above the indicative ratios, which are supported by the significant growth in the industry.Based on the industry standard, Amazon and the competitors are performing ahead from the standard. For the assets turnover ratio, Amazon was the highest at 2 times compared to 0.7 times industry standard. This indicates the companys efficiency at using its assets in generating sales. The reason Amazon performed better than the competitors is relatively derive from the pricing strategy wherein low profit margin company tends to have high asset turnover.Amazon early ProspectsBased on Amazons current performance, it is projected that the company will have a strong growth supported by the low pricing strategy and free shipping. Moreover, the latest acquisition of Zappos.com and improvised version of Kindle are expected to increase Amazon sales which leads to higher profitability. Due to the growth of Amazon, its annual earning is expected to grow over the next devil to three years with sales reaching $2.38 million and $2.86 million respectively. Due to robust financial performance during the current economic condition, it has enhances investors confidence. Share prices are expected to increase with earnings of $2.57 and $2.38 per share in 2008 and 2009 respectively. In line with the said growth, Amazon will benefit in gaining additional market share despite tough competition from other online sites such as Ebay. ReferencesAmazon.com Annual Report 2008 ready(prenominal) from http//amazon.com (accessed on 11th November 2009)Amazon.com 3rd reap 2009 Report obtainable from http//amazon.com (accessed on 11th November 2009)Ebay.com Annual Report 2008 easy from http//ebay.com (accessed on 11th December 2009)Barnes and Noble Annual Report 2008 operational from barnesnobleinc.com ((accessed on 11th November 2009)BBC News (2008), Amazon Shares Fall Despite Growth. (Online) Available from http//news.bbc.co.uk (accessed on 5th December 2009)Ge orge Stahl (2009), Amazon Shares Hit All succession High. The Wall thoroughfare Journal (0nline), Available from http//online.wsj.com/article/SB125630854623203899.html (accessed on 4th December 2009)John Pacskowski (2009), Spare Change for Amazon Shares. The Wall Street Journal (Online), Available from http//online.wsj.com/article/SB125630854623203899.html (accessed on 4th December 2009)Richard wet and Jonathan Birchall (2009), Amazon Share Surge Recalls Tech Boom Days (Online) Available fromhttp//ft.com (accessed on 5th December 2009)Reuters.com (2009), Nasdaq rises with Online Retailers Dos Dips on Oil. (Online), http//ul.reuters.com (accessed on 3rd December 2009)www. reuters.com (accessed on 1st December 2009)