Financial Analysis of Amazon Inc (Essay Sample)

Financial Analysis of Amazon Inc Student Name University Subject Professor Date Financial Analysis of Amazon Inc Effectiveness in Utilizing Assets Asset Turnover Ratio = Net Sales / Average Total Assets = 513,983/462,675 = 1.11 The asset turnover ratio denotes the ability of an organization to generate sales through the use of its assets (Zarei et al., 2020). From the ratio calculated, Amazon Inc is adequately utilizing its assets to generate sales. Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory = 288,831/(34,405+32,640)/2 =288/831/33,522.50 = 8.62 The inventory turnover ratio highlights the ability of an organization to use its assets to obtain inventory and consequently generate revenue (Zarei et al., 2020). The organization can aptly use its assets in hand to generate products and result in revenue. Return on Assets = Net Income/Total Assets = - 2.722/4.676 = -58% The ROA evaluates how efficiently an organization is utilizing its assets to generate profit (Zarei et al., 2020). 2022 was a good year for the organization which saw its dip in revenue for the first time in over five years. Effectiveness in Generating Returns to Shareholders Return on Equity Ratio = Net Income / Shareholders Equity = -2.722/1.462 =-1.86% The ROE reflects how an organization utilizes its equity to generate income (Zarei et al., 2020). With the devaluation of the shares, it was only natural that the ROE will equally dip in comparison to previous years. Main Driver of Returns to Shareholders Leverage Ratios They measure the amount of capital that is obtained from debt. Leverage ratios evaluate an entity's debt level (Zarei et al., 2020). Debt Ratio = Total Liabilities / Total Assets = 316,632/462,675 = 0.68 The organization does not use debt to run its operations (Amazon Inc, 2022). Amazon Inc does not have interest expenses in its income statement and as such, there is no debt being serviced by the entity (Amazon Inc, 2022). Amazon Inc is at a mature level in its organization cycle and as such, at this stage, companies rely more on their assets. Liquidity Ratios - Working Capital Management Current Ratio = Current Assets / Current Liabilities = 46,791/55,393 =0.845 The ratio measures the ability of an organization to use its current assets to run its business operations in the short run. It measures the effectiveness of an enterprise in its working capital management. Ideally, the current asset ratio of any entity should be 1 in that it can effectively use its current assets to get creditors and run its operations in the short run (Ehrhardt & Brigham, 2023). For Amazon Inc, its current asset ratio currently stands at 0.845 which denotes that the company has stretched its current assets to the maximum. Quick Acid Test Ratio = Current Assets - Inventories/ Current Liabilities = 46,791 - 34,405/55,393 =0.224 The quick acid test ratio is similar to the current ratio with the only aspect that differs is that it does not incorporate inventories. It purely looks at the current assets without inventories in comparison with the current liabilities. Amazon Inc holds a large amount of inventory that takes up a substantial portion of its working capital management. In this regard, Amazon Inc needs to work on its inventory management techniques reviewing its lead time to a shorter period that will result in lower levels of closing stock. Competitor Comparison: Walmart Inc Asset Turnover Ratio = Net Sales / Average Total Assets = 559,151/243,197 = 2.30 The asset turnover ratio shows that the organization can utilize its assets effectively to generate revenue for the organization (Ehrhardt & Brigham, 2023). It also shows that the enterprise can enhance the use of its assets. Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory = 429,000/(56,511+44,949)/2 =288/831/33,522.50 = 8.14 The organization effectively generates revenue through sales. It churns out products that consumers pay for and the same leads to revenue generation. Return on Assets = Net Income/Total Assets = 11,680/429,000 =-2.72% The ROA is dismal for the organization in that it is reeling from the effects of the pandemic experienced in the previous years. The organization also changed part of its operations and or activities which led to a rise in operating costs leading to lower incomes being reported. Effectiveness in Generating Returns to Shareholders Return on Equity Ratio = Net Income / Shareholders Equity =11,680 /837,541 =1.39% The ROE is positive but relatively low considering how long the organization has been in operation and the magnitude of its activities in 2022. Main Driver of Returns to Shareholders Leverage Ratios They measure the amount of capital that is obtained from debt. Leverage ratios evaluate an entity's debt level (Zarei et al., 2020). Debt Ratio = Total Liabilities / Total Assets = 159,443/243,197 = 0.66 Walmart Inc can utilize debt effectively to generate revenue within the organization. However, it can do more to ensure that it effectively utilizes the assets that are in place to leverage the business through debt. Liquidity Ratios - Working Capital Management Current Ratio = Current Assets / Current Liabilities = 75,655/92,198 =0.82 Walmart Inc just like Amazon can use its current assets to undertake its business activities in the short run. Quick Acid Test Ratio = Current Assets - Inventories/ Current Liabilities = 75,655 - 56,576/92,198 = 0.207 The organization needs to focus more on its inventory management policies to ensure that it can leverage the business and add to its revenue portfolio. Expected Rate of Return and Weighted Average Cost of Capital Current Stock Price - $99.50 Current Dividend - 0 P/E Ratio = Share Price / Earnings Per Share = $99.50/0.03 = 3,316.67 The beauty of the P/E ratio is that it allows an investor to discern how expensive or cheap a share or stock is to buy (Kadim et al., 2020). In the case of Amazon Inc considering the drastic decline in revenue, the share price is high and would be an expensive share to purchase. Shareholder’s Expected Rate of Return is the profit or loss anticipated by an investor on an investment (Ozturk & Karabulut, 2020). It is generated by multiplying the likelihood of potential outcomes occurring and their respective chances and summing up the same. Expected return = risk-free premium + Beta (expected market return - risk-free) Expected return = 6% + 1(12% -5%) = 6% + 7% = 12% Weighted Average Cost of Capital is the average cost of capital for an organization from all its sources after tax. It is the average rate at which an entity expects to finance its assets. Market value of Equity = $1,000.12B Market value of Debt = $67.15B V = $1,000.12 + 67.15 V= $1,067.27B Cost of Equity = 9.5% Cost of Debt = 12% Corporate tax rate = 21% WACC = 8.9% + 0.59% = 9.49% Income Statement and Assets Projection for Five Years Amazon Inc 2022 2023 2024 2025 2026 Net sales 513,983.00 575,660.96 644,740.28 722,109.11 808,762.20 Cost of Goods Sold 288,831.00 323,490.72 372,014.33 438,976.91 531,162.06 % of Sales 56% 56% 58% 61% 66% Gross Profit 225,152.00 252,170.24 272,725.95 283,132.20 277,600.14 % of Sales 44% 44% 42% 39% 34% Admin. Costs 201,540.00 203,555.40 209,662.06 218,048.54 226,770.49 EBIT 23,612.00 48,614.84 63,063.89 65,083.66 50,829.66 Interest 989.00 1,944.59 2,522.56 2,603.35 2,033.19 Pretax 22,623.00 46,670.25 60,541.33 62,480.31 48,796.47 Taxes 4,750.83 9,800.75 12,713.68 13,120.87 10,247.26 Net 17,872.17 36,869.49 47,827.65 49,359.45 38,549.21 Preferred Dividends - - - - - Earn. Avail. To Common 17,872.17 36,869.49 47,827.65 49,359.45 38,549.21 Dividends - 11,060.85 14,348.30 14,807.83 11,564.76 Shares Outstanding 10.19 10.19 10.19 10.19 10.19 Dividends per Share - 1,085.46 1,408.08 1,453.17 1,134.91 Earnings per Share 0.03 3,618.20 4,693.59 4,843.91 3,783.04 Price per Share 99.50 129.35 168.16 218.60 284.18 Cash 53,888.00 54,965.76 56,065.08 57,186.38 58,330.10 Accounts Receivable 42,360.00 43,207.20 44,071.34 44,952.77 45,851.83 Inventory 34,405.00 35,093.10 35,794.96 36,510.86 37,241.08 Other Current 7,560.00 7,711.20 7,865.42 8,022.73 8,183.19 Current Assets 138,213.00 140,977.26 143,796.81 146,672.74 149,606.20 Net Fixed Assets 273,126.00 278,588.52 284,160.29 289,843.50 295,640.37 Other Assets 42,758.00 43,613.16 44,485.42 45,375.13 46,282.63 Total Assets 454,097.00 463,178.94 472,442.52 481,891.37 491,529.20 Accounts Payable 79,600.00 81,192.00 73,784.00 84,472.16 86,161.60 Notes 2,999.00 3,058.98 3,120.16 3,182.56 3,246.21 Other Curr. Liab. 50,863.17 42,221.45 45,147.14 39,202.88 54,302.02 Taxes Payable 4,750.83 9,800.75 12,713.68 13,120.87 10,247.26 Current Liabilities 138,213.00 136,273.19 134,764.97 139,978.47 153,957.09 Other L. T. Liab. 21,121.00 21,543.42 21,974.29 22,413.77 22,862.05 Long Term Debt 130,892.83 133,510.69 136,180.90 138,904.52 141,682.61 Preferred Stock - - - - - Capital Investment - Retained Earnings 17,827.17 25,808.65 33,479.36 34,551.61 26,984.45 Equity 146,043.00 146,043.00 146,043.00 146,043.00 146,043.00 Total Liab & Equity 454,097.00 463,178.94 472,442.52 481,891.37 491,529.20 Ratios Current 1.00 1.03 1.0...