Analysis of Amazon's Financial Performance and Business Model

ACCOUNTING
AMAZON
STUDENT ID:
[Pick the date]

1) Executive Summary
Amazon is the largest e-retailer in the world which has a subsidiary AWS which is into
providing cloud computing services and related infrastructure. Even though there has been
constant criticism about the wafer thin margins of the company but the company pays more
importance to the free cash flow generation. Also, it is expected to continue with the same
strategy and hence it would invest more in technology to enhance efficiency and lower
variable costs. The performance of the company in 2017 has been lacklustre when compared
to 2016. There has been a drop in profitability, leverage has increased and equity base
continue to remain small. However, there are exciting opportunities to be pursued going
ahead which company needs to exploit using its core competencies.
2) The company selected for this task is Amazon Inc. This company was founded by Jeff
Bezos in the year 1994 and over the last two decades has grown into the largest e –retailer in
the world both by revenue and also by market capitalization. The primary business of the
company is of online retailer which besides acting as a platform for third party vendors also
hosts various products and services launched for amazon including Fire TV, Kindle, Amazon
Prime, Alexa and several other products and services. The company also has significant
presence in the cloud computing business and is the largest provider of cloud computing
infrastructure globally by market share in this regards. The concerned subsidiary in this
regards is AWS (Amazon, 2018).
3) The primary source of revenue for the company is the sale of various products and services
including the cloud computing infrastructure. Unlike other companies which seek to focus on
the profits, the company’s aim is to bring about sustainable growth in the free cash flows
which is considered to be the primary financial performance benchmark. In order to achieve
the same, the company intends to lower the variable costs by leveraging the fixed costs and
driving the business volumes along with operational efficiency. While in the present, the
company enjoys a very high inventory turnover, the same may be adversely impacted owing
to changes in the product mix, choice of suppliers and the spending trends. Further, going
forward the company expects that capital spending towards technology would increase as the
company seeks to expand product portfolio along with the geographical spread. Also, the

management believes that these investments would result in lower operational costs. Further,
it is also apparent that company is focusing on international expansion in a big way owing to
the rapid increase in revenues and associated losses. More than 50% of the profits for the
company are derived from AWS even though it accounts for less than 15% of the overall
revenues (Amazon, 2018).
4) a) It is apparent from the income statement that there is an increasing trend in the sales in
the three years period. This is also indicated from the following table which summarises the
absolute value of sales in the last three years i.e. 2015, 2016 & 2017 (Amazon, 2018).
b) The receivables have increased from 2016 ($ 8,339 million) to 2017 ($ 13,164 million).
The formula for AR turnover indicated below.
AR Turnover = Credit Sales/ Trade Receivables
AR Turnover (2016) = (135987/8339) = 16.31
AR Turnover (2017) = (177866/13164) = 13.51
Days in AR = 365/AR Turnover
Days in AR (2016) = (365/16.31) = 22.38 days
Days in AR (2017) = (365/13.51) = 27.01 days
The collection period seems reasonable for the given business considering that in case of
online sales, various flexible payment options are provided to the clients including EMI.
Also, there is the time taken for the delivery of the product.
c) Inventory Turnover = Cost of Goods Sold/ Inventory
Inventory Turnover (2016) = 88265/11461 = 7.70
Inventory Turnover (2017) = 111934/16047 = 6.98
Inventory days = 365/Inventory Turnover
Inventory days (2016) = 365/7.70 = 47.4 days