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Financial Research Report Vanessa Carter Strayer University FIN534 September 5, 2011 Financial Research Report: Amazon. com Inc. Amazon.
com is an electronic commerce business which provides an online marketplace for individuals to shop from the comfort of their own home computer, laptop, tablet, phone, etc. The organization proudly boasts its highly diversified product line-up, offering goods in virtually every category that one might imagine, including books, household goods, electronics, media, grocery and industrial.Their ultimate goal as an organization is to offer Earth’s biggest selection of products while being the most customer-centric company for consumers, sellers and enterprises (“Annual report,” 2008). The company has continued to grow increasing their product offerings and services for consumers. Given the online nature of their business and the significant growth they have experienced within the United States they have expanded into other countries as well including Canada, China, France, Germany, Italy, Japan and the United Kingdom.While expanding into international markets is challenging, the challenge is somewhat lessened by the fact that Amazon.
com operates on an online platform. The organization has had success in moving into international markets as evidenced by the multiple countries in which they operate. Amazon. com is looking to continue expanding into international markets; however, they are cautious about moving into markets which they are not familiar. By moving into markets with which they are unfamiliar the organization runs the risk of taking a significant loss by not understanding how business operates in the foreign country.
Therefore, the organization continues to move cautiously into foreign markets to protect the work that they have done so far. In addition to the benefits of the online market place and their expansion into foreign markets, the philosophy of Amazon. com has also contributed to its success. Their focus is heavily upon their customers, sellers and enterprises—ensuring that they have the best experience working with the organization as possible so that they will continue to work with the organization in the future. This not only helps build and retain their brand image, but also helps set them apart from their competitors.
Given the fact that the organization is built upon the structure of the online marketplace, it is virtually in competition with every other website that sells merchandise or goods on the web. Not only does the organization face competition from other online retailers, but they also face competition from brick-and-mortar stores as well. This is due to the fact that these stores have a competitive advantage of the consumer being able to actually see and interact with the product before purchasing, which unfortunately is not something that is possible when selling merchandise online.Ratio Analysis While Amazon. com continues to look towards the future by developing new technologies to improve user experience, the current state of the organization is also important to examine.
The primary means of determining whether an organization is healthy and doing well is by looking at the financial documents that must be publicly disclosed every year. Looking at the numbers on these documents tells investors the financial health of the organization—if it’s making money, what kind of debt it maintains and the growth or decline of the organization.Once the financial health of the organization is determined investors can make an informed decision about whether or not they wish to invest in Amazon. com. All of the financial documents that are needed to determine the financial health of an organization can be found on the annual report that is disclosed by any incorporation every year.
It is federally mandated that corporations disclose this information for investors. These documents show investors the assets and liabilities of the organization, their sales, and information pertaining to their share holder’s equity.Looking at the numbers that have been reported over the last three years, Amazon. com has been experiencing growth despite the economic recession that rocked the U. S. in 2008. Revenues have been steadily increasing, increasing by 27.
88% in 2009 and another 39. 56% in 2010. While their revenues have been increasing so has their net income. In 2009 net income increased 39. 84%, increasing from $645million to $902million (“Annual report,” 2009). The organization also experienced growth in 2010, although at a slower rate.
In 2010 net income only increased 27. 72% from $902million to $1,152million. This growth was also evidenced in Amazon’s EBIT—earnings before income taxes—as the organization experienced approximately 29% growth both in 2009 and 2010. To see that the organization is growing despite an economic recession is encouraging to say the least, especially when considering whether or not to invest in the organization. While growth in revenues and net income are important, it is also important to look at the ratio between the organization’s assets and liabilities.Examining these ratios assists investor in determining whether or not the organization is being managed properly and is financially sound. Ideally the organization will have a significant number of assets over the number of liabilities that they hold (both current and long-term).
Essentially, any ratio over one is ideal as it means that the organization’s assets are higher than their liabilities. Amazon experienced a slight increase (2. 3%) in their current ratio in 2009, increasing from 1. 3 to 1. 3(“Annual report,” 2010).
This change in current ratio was due to the significant increase in marketable securities and inventories between 2008 and 2009. However, their current ratio was stable in 2010 with 0% change, remaining at the 1. 33 that was reported in 2009. Just as there was increase in the current ratio, Amazon also experienced significant increases in their owner equity. In 2009 Amazon’s owner equity increased by an astonishing 96. 74% and in 2010 owner equity increased by an additional 30.
57%.These increases took owner equity from $2,672million in 2008 to $6,864million in 2010. Another important number for investors to look at is the organization’s earnings per share. As with all other figures, Amazon’s earnings per share increased both in 2009 and 2010. In 2009 earnings per share came in at 2.
08, a 36. 84% increase from 2008, while in 2010 they came in at 2. 58 at 24. 04% increase from 2009. Stock Price Analysis All of these figures and calculations are important to individuals looking to invest in the organization.
Each figure tells a different story about the organization, which leads investors to determine whether or not it is sound for them to invest in the organization. Based on the findings, Amazon. com has had a couple of great years, as all of their ratios have increased or continued to remain stable. This is a strong indicator that the management team of Amazon is doing well—making strong strategic decisions for the organization as well as running the organization efficiently. As an investor one of the most important ratios to look at is the current ratio.This ratio reveals the balance between assets and liabilities (Brigham, & Ehrhardt, 2011).
As we have seen with Amazon. com the organization maintains more assets than they do liabilities. In other words, the company focuses on building up its portfolio of product offerings and services through their own sources of capital, rather than depending upon loans, notes and other forms of liability—both current and long-run. Furthering this idea is owner equity, which looks at the organizations total assets versus their total liabilities (while current ratio only examines current assets and liabilities).
Amazon experienced phenomenal growth in 2009 in their owner equity, almost doubling it within a year, as well as in 2010 (despite the rate of growth being lower than in 2009). It can be assumed that the organization will use their assets to their advantage to continue growing the organization, which is always good news for investors. Another important factor to look at is the organization’s earnings per share. Earnings per share, distributes the organization’s profits over the number of shares that the organization has issued.Like their other ratios, Amazon’s earnings per share increased in both 2009 and 2010.
While this information cannot stand alone in the decision making process, it does become a key factor in comparing two potential investments. This means that if an organization has lower revenues but high earnings per share, it may be more profitable for investors to invest in this organization rather than one that has high revenues and low earnings per share. This is because high earnings per share mean there is a higher probability that investors will see dividends from the organization.Amazon. com, like many other publicly traded companies, took a significant hit during the recession in 2008, as evidenced in the dramatic drop in their common share prices (dropping from $93. 15 in 2007 to $72.
76 in 2008) (Kotz, 2009). However, the organization’s stock has rapidly been gaining strength, showing growth in the price of their common stock as well as in all of their other ratios. The price of their shares is parallel to the S&P market, showing increases in price when the market is up and vice versa (see Figure 1. 1).However, the percent change from one year to the next is significantly higher in the price of Amazon shares than in the closing total of the market for the related period. Conclusion Overall, Amazon. com seems to be in excellent financial health and is growing at a rapid pace despite all of the challenges they have over come in recent years with the economic recession.
Based on the significant increases and growth experienced in all ratios and the increasing earnings per share, I would recommend that investors take advantage of available Amazon stock.The organization is strategically focused on growing—increasing product offering, improving user experience and moving into new foreign markets. As the company continues to grow their ratios will continue to experience significant increases from year to year. Additionally, the price of their common stock will continue to increase as the organization grows.
Investors should take the opportunity to invest now so that their investment can grow and the maximum amount of profit can be made from their investment. Figure 1. 1 References Annual Report. ” (2008) Retrieved from http://www.
phx. corporate-ir. net/ “Annual Report.
” (2009) Retrieved from http://www. phx. corporate-ir. net/ “Annual Report.
” (2010) Retrieved from http://www. phx. corporate-ir.
net/ Brigham, E. F. , & Ehrhardt, M. C. (2011) Financial management theory and practice.
Mason, OH: South-Western Cengage Learning. Kotz, D. M. (2009) “The financial and economic crisis of 2008: a systemic crisis of neoliberal capitalism Electronic version.
” Review of Radical Political Economics. 41 (3)