Analysis of Amazon's Financial Performance and Business Model

This report provides an analysis of Amazon's financial performance and business model. It covers the company's revenue sources, profitability, efficiency ratios, liquidity, and solvency. The report also highlights the strengths, weaknesses, opportunities, and threats of the company.

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AMAZON
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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

Inventory days (2017) = 365/6.98 = 52.3 days
Considering the business model of the company where inventory held is minimised, the
inventory days seems to be on the higher side but may be on account of expansion that the
company is witnessing especially in international markets where initially the turnover is
lower.
d) The breakup of company’s liability is captured below (Amazon, 2018).
It is evident from the above that in 2017 there has been significant change in the breakup of
liabilities. This is particularly evident with regards to increase in share of long term debt
which has almost doubled. Additionally, the current liabilities have shown significant decline.
Within the current liabilities also, there was a decrease in both account payables as a% of

total assets and also accrued expenses. As a result, as one moves from 2016 top 2017, the
shift to long term liabilities from short term is visible.
5) The various ratios of the company are summarised below (Amazon, 2018).
It is apparent from the above that there has been an increase in the gross profit margin of the
company but the same has not extended to the operating level where the profit margins have
dipped by more than 75 bps. However, the net profit margins of thee company have not
altered much and continue to remain abysmally low despite the contribution from high profit
margin subsidiary AWS.
With regards to liquidity ratios, there does not seem to be any significant change as only
marginal dip is seen with regards to quick ratio. However, the liquidity ratios do not pose any
challenge for the company in regards to short term liquidity and availability of cash.
The solvency ratios barring the interest coverage ratio has not shown much change. The debt
ratio along with debt to equity ratio has worsened as the leverage on the balance sheet has
increased with the rising long term debt level in 2017 as compared to 2016. The interest
coverage ratio has declined owing to higher interest costs and lower operating profits in 2017.
The company never the less has a high leverage considering a very small equity base.

6) Strengths
 It has a superior logistics and distribution system which helps in minimising related
costs and enhancing consumer satisfaction.
 Underlying three pronged strategy of the company where it practices cost leadership,
differentiation and also focus.
 It has a global brand with high recall.
Weaknesses
 The margins tend to be quite thin owing to the free shipping that the company offers.
 The product launches by the company over the years have had mixed success and
failed to leverage the brand.
 There are questions on the business model of the company owing to the wafer thin
margins along with the diversification of the company into multiple product lines and
geographies.
Opportunities
 The company can enhance the revenue generated from private labels which would
also enhance profitability of operations.
 The company is vastly expanding into new geographies and going forward, it is
expected that these would be growth engine going forward.
Threats
 There are potential issues of hacking, privacy and security which can dampen the
growth of online shopping going ahead.
 It faces intense competition from the local domestic retailors especially in the various
international markets that it is making attempts to foray.
 The company faces potential lawsuits from various suppliers and other competitors
owing to the relentless focus towards cost leadership.
7) Based on the above, it is apparent that the company is in the business of online retailing
along with offering cloud computing infrastructure. The company pays importance to free
cash flow generation and lowering the variable costs using technology as a key enabler. The

various efficiency ratios of the company have not shown much change but the inventory days
are higher for the underlying business model. With regards to profitability, the business
continues to have wafer thin margins which are a concern for the business. Liquidity does not
seem an issue although solvency concerns may arise in case of faulty execution owing to
highly leveraged balance sheet. However, going forward the company has opportunity to
grow both in scale and size through the foreign markets provided it can manage the various
threats posed.

Reference
Amazon (2018) Form 10-K, Retrieved from
https://www.sec.gov/Archives/edgar/data/1018724/000101872418000005/amzn-
20171231x10k.htm#sF2423AEEA7FB5EE886EF78CF9324C2CE