Analysis of the financial statements of Amazon
Discuss about the Effective Financial Management In the Public.
The current report aims to evaluate the financial statements of Amazon for the years 1999 and 2000, which include the income statement, balance sheet statement and cash flow statement. From the provided case study, it has been observed that Amazon had enjoyed various years of massive growth characterized by global commerce. The organization had invested heavily for formulating best in-class retailing, customer service capabilities and fulfillments for supporting its rapidly increasing and complex business. It had incurred above $429 million for developing state-of-the-art digital business operations and infrastructure for linking six customer service centers and nine distribution centers located throughout Asia, US and Europe. Hence, the current report sheds light on the overall business performance of Amazon along with providing recommendations to the investors whether to invest in the shares of the organization.
The net revenue of Amazon, as could be identified from the case study, has increased from $1,639,839 in 1999 to $2,761,983 in 2000. The primary reason identified behind such increase in sales was the adoption of significant steps for redesigning the business model of the organization. With the rise in sales, increased trends could be observed in gross income as well, since it was $655,777 in 2000 (1999: $290,645). This denotes the stability of the organization in the operating market (Barth, 2015). However, the overhead costs of Amazon had increased massively in 2000 to $1,519,657 and as a result; it had experienced operating loss around $1,106,677. The operating loss suffered had lead to net loss of $1,411,273 in 2000, which was greater than the loss Amazon suffered in 1999. Thus, the operational costs had played a significant role in increased net loss of the organization.
A part of this analysis includes the liquidity analysis, which is extremely important for a business organization (Bushman, 2014). Although increase in current assets could be observed in 2000; the overall assets had fallen significantly and it denotes unhealthy position of Amazon. Along with this, it has been identified that the current liabilities had increased significantly in 2000. For dealing with the loss encountered in improving profit level, Amazon had obtained a number of bank loans, due to which the overall debt of the organization had risen significantly. In addition, such loss had adverse impact on the overall equity of the business, since it was represented in negative figures.
Key ratios and their implications for Amazon
After evaluating the cash flow statement of Amazon, it has been identified that the organization’s net cash flows from operations have been negative at $130,442 in 2000. However, improvements could be observed in net cash flows from investments and financing because of the long-term proceeds. As a result, increase could be identified in cash and cash equivalents at $822,435 in 2000, which is considerably greater in contrast to the figures of 1999. Amazon had obtained long-term loan due to which increase could be observed in cash and cash equivalents of the organization in 2000 (Amazon.com, 2018).
As remarked by Barr (2018), ratios are considered as financial indicators for analyzing the performance and position of a business organization and thus, they are highly beneficial both for the organizations and their associated shareholders. Often, the organizations include certain key financial ratios in their annual reports associated with their income statements and balance sheet statements. For Amazon, certain key ratios are computed and they are interpreted effectively for the years 1999 and 2000 to gain an understanding of its standing in the online retail market of US.
Table 1: Profitability ratios of Amazon for the years 1999 and 2000
(Source: As created by author)
Four different ratios that are computed to assess the profitability position of Amazon in the years 1999 and 2000 comprise of gross margin, net margin, return on equity and return on assets. The gross margin signifies the improvement in profit level of Amazon before incurring overhead expenses due to the significant rise in revenue base. However, after incurring the overhead expenses, the organization had encountered significant loss due to rise in operating expenses and thus, this denotes the struggling position of Amazon in the market. This is further supported by negative return on assets and return on equity and thus, it could be inferred that Amazon is not in a favorable position in terms of profitability.
Table 2: Liquidity ratios of Amazon for the years 1999 and 2000
(Source: As created by author)
Two different ratios that are computed to assess the liquidity position of Amazon in the years 1999 and 2000 comprise of current ratio and quick ratio. The above table clearly inherits that current ratio has increased from 1.37 in 1999 to 1.40 in 2000 due to rise in cash and cash equivalents. This is further supported by quick ratio, which excludes inventories and prepaid expenses (Finkler et al., 2016). The same trend could be observed as in the case of current ratio, which implies that the liquidity position of Amazon is favorable in the US online retailing sector.
Critical success or failure factors for Amazon
Table 3: Efficiency of Amazon for the years 1999 and 2000
(Source: As created by author)
Two different ratios that are computed to assess the efficiency position of Amazon in the years 1999 and 2000 comprise of inventory turnover and payables turnover. According to inventory turnover, decline could be observed in terms of days, which is a favorable indicator for Amazon (Gassen, 2014). The payables turnover has remained nearly identical, which is favorable and thus, it could be stated Amazon is enjoying a stable efficiency position in the US online retailing industry.
Table 4: Solvency ratios of Amazon for the years 1999 and 2000
(Source: As created by author)
Four different ratios that are computed to assess the solvency position of Amazon in the years 1999 and 2000 comprise of debt-to-equity ratio, debt ratio, equity ratio and interest cover ratio. The debt-to-equity ratio of the organization was negative in 2017 because of the negative value of equity, which is further validated by debt ratio and equity ratio. The interest cover ratio denotes that Amazon was highly incapable of covering its interest expense with the help of its operating income.
Based on the provided case study, it has been observed that the main business line of Amazon is on online retail selling of various kinds of industrial products. However, there had been significant decline in share prices of the online retailers in 1990 and Amazon was included in the list as well. The case study states that the share price of Amazon decline to $15 in 2000, which was $113 in December 1999 (Titman, Keown & Martin, 2017). Significant decline could be observed in the market valuation of the organization to below $5 million from $35 million in 2000. Due to the then prevailing market conditions, the management of Amazon looked to adopt alternate business model for combating with such unforeseen event. In its first move, Amazon had shut down the online toy store operated independently and partnership was formed with a retail store for merging the expertise of both organizations (Carlon et al., 2015).
Based on the evaluated financial performance and position of Amazon, it had become necessary for the management of the organization to formulate corrective actions in order to assure business survival. Thus, need for a new business model had aroused in order to fulfill the requirements of Amazon. However, there are other influential dynamics as well that need to be taken into consideration. One such factor is the rising competition from the new rivals making their presence strongly felt in the US retail market and hence, this had significantly increased competition in the industry (Dutta &Patatoukas, 2016). Hence, a need for developing an effective strategy had taken place for Amazon so that it could continue to maintain its competitive edge in the market. Based on the prevailing market conditions, it was necessary for Amazon to expand its product lines in order to attract new customers for achieving additional revenue. On the other hand, strategies need to be developed for combating with the changing norms and industrial rules in the US online retail market to ensure good corporate governance.
According to the case study, it has been identified that Amazon has encountered huge competition from the conventional retailers and newly online retail business sites. In addition, the management of the organization was worried about the competition level prevailing in the market, which could have direct impact on the business operations (Scott,2015). Furthermore, the changing nature of the market, as indicated by the declining share price of Amazon and the joint pressure of the rivals, had made the survival of Amazon difficult. Thus, with the rise in market competition and poor market conditions, there was adverse effect on the organization and the shareholders had compelled the management in increasing the overall business profit level (Henderson et al., 2015). Hence, based on the above discussion, it could be stated that the rising competition level has negative impact on the business operations of Amazon in the US retail market.
Insolvency is deemed to be a condition in which an organization dissolves the company’s business or discontinues its operation. In a situation of insolvency, companies are anticipated to follow some ethical considerations that are explained under:
- At the time the companies are considered to be dissolved, it is the responsibility of the management of the organization to make sure of all the important book of accounts and records are maintained focused on economical transactions along with payoff (Lau, 2016). This takes place after an organization is observed to be dissolved. An additional consideration is that it is the responsibility of the management to safeguard the interests of the creditors and other stakeholders of the business.
- It is important that the management of the organization makes sure that it is not involved in any kind of business transactions or trading (Richardson, 2017). This is because of the fact that the company already owes debt to its stakeholders and it is unethical for the companies to get associated with any additional trading activities.
- Compensations proceedings associated with the busineses is vital in order to continue with the dissolution plan of the company (McKinney, 2015). An external liquidator is employed for making sure that the proceedings of the dissolution are undertaken in a better manner. The liquidator of the company is accountable for supervising the amounts that are paid to various creditor classes along with the stakeholders. It is also deemed as an ethical consideration that the business management makes sure that the liquidator fees are paid initially and then the rest of the creditors within preferential sequence (Schipper, Francis & Weil, 2017).
- The management must also make surethatany secret profit is not maintained by the directors of the company and all the debts related with the organization are paid off in a preference order (Richardson, 2017).
Merger andacquisition serves as an effective strategy that is followed by businesses in which more than two organizations combine together in order to attain better market performance (Zietlow et al., 2018). In addition, the companies merge together to attain competitive benefits, certain specific business aspects, cost advantage along with other advantages. Certain external factors that impacts the decisions of merger and acquisition of any company are explained under:
The most vital consideration that must be considered by businesses in the strategy of merger and acquisition is whether the organization that is chosen for merger and acquisition is whether the organization that is chosen for merger and acquisition is whether it serves as a strategic fit. This also indicates that the organization that is chosen for merger and acquisition needs to be identical to the host organizations in consideration to company culture, competitive condition, leadership style and complementary products (Warren & Jones, 2018).
Decisions on the merger and acquisitions of the organization are also impacted by the competition level within the market. In case the competition level within the market is high then it is the strategy of the company’s management to merger with an identical organization (Williams, 2014). This is for the reason that they can face the competition in an efficient way along with further developing the business. In addition, the business also considers the merger decision in order to deal with severe market situation along with surviving within such situation. Within the case study, Amazon.Com is also dealing with dealing with the identical market situation (Wagenhofer, 2015).
- The merger and acquisition of the organization is also relied on the government policies and regulations. The general rules that areestablished in the merger and acquisition decision of the company also requires being considered.
The recommendations that are offered to Amazom.Com in order to enhance its business situation and for enhancing the profitability of the company are explained under:
- The company’s management requires enhancing its business through further diversifying all its products related with the business. This can facilitate the company in decreasing the market uncertainties that is faced by the company observed from the case study.
- Management of Amazon.Com requires developing a suitable strategy that can facilitate the business in surviving the fierce market situation. This recommendation also includes recognizing a business model that can be implemented by organizations for enhancing the profitability of the business. This recommendation can be implemented in a way that Amazon.Com can attain increased profits because of its product diversification including books, toys and identical products. This can enhance the chance of the business to enhance the company’s profitability along with shareholder expectation on the company.
- The management of the organization also takes into consideration the merger and acquisition of other businesses in order to make sure that the businesses cansurvive within the current market situation.
- Com can also focus on decreasing the operating costs that is incurred by the businesses in order to enhance the profitability of the organization. The company must also focus on decreasing the amount of loan taken by the organizations for financing the activities of the company.
Conclusion:
The recent report focused on carrying out financial analysis with the help of certain ratios. Accordingly, the critical success or failure factors in the context of Amazon have been discussed in the report. It has been gathered from the paper that based on the evaluated financial performance and position of Amazon; it had become necessary for the management of the organization to formulate corrective actions in order to assure business survival. Thus, need for a new business model had aroused in order to fulfill the requirements of Amazon. However, there are other influential dynamics as well that need to be taken into consideration.Hence, based on the above discussion, it could be stated that the rising competition level has negative impact on the business operations of Amazon in the US retail market.
References:
Amazon.com: Online Shopping for Electronics, Apparel, Computers, Books, DVDs & more. (2018). Retrieved from https://www.amazon.com/
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