Financial Analysis and Strategic Recommendations for Amazon.com

This report offers a comprehensive financial analysis of Amazon.com, examining its financial statements from the provided case study. It delves into key financial ratios, including profitability, solvency, and efficiency ratios, to assess the company's performance. The analysis highlights the company's revenue growth, but also its operating losses and negative shareholder's equity. The report further explores the success factors of the business, the impact of the political and competitive environment, and ethical considerations in the event of insolvency. It also discusses external factors influencing potential mergers and acquisitions and concludes with strategic recommendations for Amazon.com's financial management and future growth. The analysis covers the company's performance, liquidity, and financial health, providing insights into its challenges and opportunities.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

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Executive Summary
The main purpose of this assignment is to analyze the financial statement of Amazon.com and
also comment on the performance of the company. The assignment will also be including ratio
analysis of key financial ratios of the business. The assignment will also be including impact of
the political environment on the business. In addition to this, the assignment will be considering
the possibility of any merger or acquisitions which can be expected.

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Table of Contents
Financial Statement Analysis..........................................................................................................3
Identification and Analysis of Key Financial Ratios.......................................................................4
Success Factors of the Business......................................................................................................7
Impact of Political Competitive Environment.................................................................................8
Ethical Consideration in case of Insolvency....................................................................................9
External Factors which affect Merger and Acquisition.................................................................10
Recommendations..........................................................................................................................12
Reference.......................................................................................................................................14

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Financial Statement Analysis
As per the case study which is provided for Amazon.com, the net sales of the company
has increased from the figures of 1999. The net sales of the business in the year 2000 is shown as
$ 2,761,983 which is much more than previous years figure $ 1,639,839. The sales has increased
for the company as the company has taken necessary steps to re-design the business model of the
business. The gross profit of the company is shown as $ 655,777 which in comparison to
previous year was $ 290,645. There has been sufficient increase in the gross profit margin of the
company which is a positive sign for the business. The operating expenses of the company which
is shown in the financial statements of the company for the year 2000 reveals that the company
has incurred lot of expenses during the year. The operating expenses of the company is shown in
the profit and loss statement as $ 1,519,657 for the year 2000. This is one of the major causes
due to which the company has earned an operating loss of $ 1,106,677. The company has
incurred a loss of $ 1,411,273 for the year 2000 which is more than the loss which was incurred
during the previous year (Palepu, Healy and Peek 2013). The main reason for the increase in the
level of losses of the company is due to the increased cost of operations of the business.
The current assets of the company which shows the liquidity position of the business and
is considered to very important for the business (Mathuva 2015). Even though the current assets
of the business have increased from previous year’s comparison, however the value of the total
assets have fallen from the previous year which is not a good sign for the business. In addition to
this, the financial statements of the company for the year 2000 shows that the level of total
current liabilities have also increased. In order to overcome the losses of the business and to also
improve the profitability of the business the company had to take a series of loans from banks.
This has resulted in increase in the overall borrowings of the company as per the annual reports

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of the company. The annual reports of the business also show that the losses which are incurred
by the business have also affected the shareholder’s equity of the company which is shown in
negative. The cash flow from operating activities shows that the company has negative cash flow
for the year 2000 is $ 130,442. The cash from financing activities and investing activities show
favorable results and moreover the financing activities of the business shows favorable results
due to the long-term proceeds which the business has taken. The cash and cash equivalent
balance which is shown in the cash flow statement of the business is $ 822, 435 which is
significantly more than the previous year’s figure. The main reason for such an increase in the
cash and cash equivalent figure is due to the long-term loan which is taken by the business
(Martínez-Sola, García-Teruel and Martínez-Solano 2013).
Identification and Analysis of Key Financial Ratios
The key financial ratios are used as financial indicators as to the performance of the
business and are important for the business. In many cases companies provide certain ratios
which are significant for the business in the financial statements of the company (Attig et al.
2013). In the case of Amazon.com, the case study has shown certain ratio which are related to
sales margin and different turnover ratio. The computation of some significant ratio for two years
is shown below:

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Particulars 2000 1999
Cost of good sold 2106206 1349194
Total Revenue 2761983 1639839
Gross Profit 655777 290645
Net Profit -1411273 -719968
Total Assets 2135169 2465850
Total equity -970251 -266278
Gross Profit Margin 0.237 0.177
Net Profit Margin -0.511 -0.439
Return on Assets -0.661 -0.292
Return on Equity 1.455 2.704
Profitability Ratios
Figure 1: (Figure showing profitability ratio)
Source: (Created by Author)
The profitability ratio of the company as shown in figure 1 comprises of gross profit
margin, net profit margin, return on assets and return on equity (Agha 2014). The gross profit
margin of the business shows that the ratio has improved from previous year which may be due
to the increase in the sales of the business. The net profit margin of the company shows that the
ratio is in negative which is not a favorable sign and it can be attributed to the increased amount
of operating costs of the business (Mathuva 2015). The return on assets and return on equity of
the company also display negative results which is not favorable for the business.

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Particulars 2000 1999
Total Assets 2135169 2465850
Total equity -970251 -266278
Total Liabilities 3105420 2732128
Current Assets 1361129 1006477
Current Liabilities 974956 733234
Finance Costs 16122 35151
Operating Profit -1106677 -643199
Current Ratio 1.396 1.373
Time Interest Earned Ratio -68.644 -18.298
Debt-to-Equity Ratio -3.201 -10.260
Debt Ratio 1.454 1.108
Equity Ratio -0.454 -0.108
Solvency Ratio
Figure 2: (Figure showing Solvency ratio)
Source: (Created by Author)
The solvency ratio of the company reveals the liquidity position and situation of the
business. The solvency ratio of the business comprises of current ratio, quick ratio, debt to equity
ratio, debt ratio and equity ratio (Jiménez, Lopez and Saurina 2013). As shown in the table above
the current ratio of the business has increased slightly improved from the previous year which is
mainly due to the favorable cash and cash equivalent balance. The debt equity ratio is shown in
negative which is not a favorable sign as the equity value of the company has become negative
due to the losses which Amazon.com has suffered. The equity ratio of the company is shown to
unfavorable which is due the losses which is faced by the business.

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Particulars 2000 1999
Inventory 174563 220646
Trade Receivables 0 0
Trade Payables 485383 463026
Cost of Goods Sold 2106206 1349194
Sales Revenue 2761983 1639839
Inventory Turnover Ratio 12.066 6.115
Payables Turnover Ratio 4.339 2.914
Receivables Turnover Ratio NA NA
Efficiency Ratio
Figure 3: (Figure showing Efficiency ratio)
Source: (Created by Author)
The efficiency ratio of Amazon.com shows significant ratios such as inventory turnover
ratio, payables turnover ratio. The inventory turnover ratio shows that the estimate has increased
from the previous year which is favorable sign for the business. The account payable turnover
ratio also has shown an increase from the previous year’s estimate which is also a favorable
result (Gautam, Petander and Noel 2013). The efficiency ratio of the company shows that the
company.
Success Factors of the Business
As per the case study on Amazon.com, the business was engaged in retailing business is
based on the internet selling. In 1990 the prices of internets stocks prices started to fall which
resulted in the fall of the stock prices of Amazon.com. The stock prices of Amazon.com fell
from $113 in December 1999 to about $ 15 in the beginning of the year 2000. The market
valuation of the company also fell from $ 35 million to less than $ 5 million within a year time

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period. The management of the company analyzing the current market condition started looking
for alternatives business models so as to ensure the survival of the business in difficult times.
The management of the company in order to combat the situation management decided to close
the online toy store which the company operated and instead of it entered into a partnership
agreement with a retail toy store so as ensure that the expertise of Amazon.com can be
effectively used.
With the current situation of the company’s net profit and shareholder’s equity, it is
difficult for the business to survive any further if the management of Amazon does not take any
necessary steps. The business needs to incorporate a new business model which can suit the
needs of the company. Another factor which has impact on the business of Amazon.com is that
new and emergent competitors are entering the retailing market and thereby creating intense
competition among the companies in the industry. The business needs to formulate a strategy
which can give Amazon.com a distinctive advantage so that the business can effectively face the
competitors of the company. In order to survive the market condition, the management of the
company needs to further diversify the products which the online retail store has to offer. The
management of the business in order to survive the current market condition needs to formulate
strategies which combat the market condition.
Impact of Political Competitive Environment
Political competitive environment refers to the competitive environment of the business
where the business operates. The level of competition in an environment also has an impact on
the overall business of the company (McNair 2017). In the case study it is mentioned that
Amzon.com started to face tough competition from the traditional retailers and also the newly

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online retail business sites. In addition to this, as per the case study the management of
Amazon.com is concerned with the level of competition in the market can affect the business.
Besides this, the market is changing as shown the stock prices of the company has significantly
fallen and with the combined pressure of the competitors the survival of the business might be at
stake. As shown in the case study as the competitive pressure in the market increased and the
market condition worsen, the profitability of the company was affected and there was continued
pressure from the shareholders of the company on the management to generate profits for the
business (Hendrischke 2013). Thus, from the above discussions it is quite clear that the business
Amazon.com is also affected by the level of competition in the retailed market.
Ethical Consideration in case of Insolvency
Insolvency is a situation where the company dissolves the business of company or ceases
to continue its operation (Duffy 2017). In case insolvency, businesses are expected to follow
certain ethical considerations which are discussed below:
 When a business is being or deemed to be dissolved, it is the duty of the management of
the company to ensure that all necessary books of accounts and records are maintained
about the economical transactions and payoff which takes place after a company is
deemed to be dissolved (Friedman 2013). Another consideration is that it is the
responsibility of the management to protect the interests of the creditors of the business
including the other stakeholders of the business.
 It is essential that the management of the company ensures that the company does not
involve itself in kind of trading or business transactions. This is due to the fact that the

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business already owes debt to other stakeholders and it is unethical for the business to
involve itself in any further trading activities.
 Compensation proceedings for the business is essential so as to proceed with the
dissolution plan of the business. An external Liquidator is appointed to supervise that the
proceedings of the dissolution is smoothly undertaken. The liquidator of the business is
responsible for monitoring the amounts which are paid to different class of creditors and
also the shareholders (Rainey 2015). It is also an ethical consideration that the
management of the business ensures that the fees of the liquidator are paid first and then
the rest of the creditors in preferential sequence.
 The management also must ensure that no secret profit is kept by the directors of the
business and all the debts of the company are paid off in preference order.
 The management must also ensure that the all the legal requirements which are set out by
the government are followed. This also falls under the purview of ethical consideration of
the business.
External Factors which affect Merger and Acquisition
Merger and acquisition is a strategy which business often follow where two or more
companies combine together for achieving better performance in the market. In other words,
business combine together to gain certain competitive advantage, some specific business
features, cost advantage and other such advantage (Fäh 2016). The external factors which affect
the merger and acquisition decisions of the business are explained below:
1. Strategic Fit: The most important consideration which business need to consider while
opting for merger and acquisition is whether the company which is selected for merger

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and acquisition is whether it is a strategic fit. This means that the company which is
selected for the merger and acquisition must be similar to the host company in respect of
organizational culture, competitive situation, leadership style, complementary products.
The main purpose of merger and acquisition is to ensure that the newly formed company
has some competitive advantage which can help the business in further development
(Holburn and Vanden Bergh 2014).
2. Level of Competition: Merger and Acquisition decisions of a company is also affected by
the level of competition in the market. If the competition level in the market is fierce then
it is often the strategy of the management of companies to merger with a similar company
so that they can face the competition in a better way and also further develop the
business. In addition to this, business also often merger so as to overcome severe market
conditions and survive in the same. In the case study given in the question, Amazon.com
is also facing similar market condition.
3. Opportunities: Another condition which affects the decisions of merger and acquisition is
the availability of opportunities in the market for further growth and development. In
order to take advantages of an opportunity business considers merger and acquisition
decisions. For example, if a business has the opportunity to further diversify or penetrate
aa new market then business is likely to consider merger decisions (Krishnan and Masulis
2013). Similarly, when a business faces a threat which can affect the survival of business,
merger is the clear option in order to further strengthen the business and survive the
threat which the business faces.

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4. Governmental Policies: The merger and acquisition of the business is also depended on
the regulation of the governments. The general rules which are established in case of
merger and acquisition of the business also needs to be considered.
In the case of Amazon.com, the business can withstand the tough competition and severe
market condition if the company can merger or acquire similar business in order to combat the
severe market condition.
Recommendations
The recommendations which can be suggested to Amazon.com for further improving the
business conditions and improve the profitability of the business are given below:
 The management of Amazon.com needs to formulate a proper strategy which can help
the business to survive the market conditions and at the same time identify a business
model which the company can implement in order to improve the profitability of the
business and meet the expectation of the shareholders of the company.
 The management of the company can improve the business of the company by further
diversifying the products of the business. This will help the business to reduce the market
risks which the company faces. As per the case study, Amazon.com is able to generate
some profits due to the diversification of products such as toys, books and other similar
products. This will increase the chances of the business to improve the profitability of the
business.
 The management of the company can also consider merging or acquiring other businesses
so as to ensure that the business can survive the current market condition.

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 The management of the company can also consider reducing the operating costs which
the business incurs so as to improve the profitability of the business. The business also
needs to reduce the loans which are used by the business to finance the activities of the
business.
 The management of Amazon.com needs to identify a business area which is profit so as
to further expand that area and the area which is least profitable which can be sold off so
as to ensure the business does not faces any losses.

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Reference
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Journal, ESJ, 10(1).
Attig, N., El Ghoul, S., Guedhami, O. and Suh, J., 2013. Corporate social responsibility and
credit ratings. Journal of business ethics, 117(4), pp.679-694.
Duffy, I.P., 2017. Bankruptcy and insolvency in London during the industrial revolution (Vol. 1).
Routledge.
Fäh, S., 2016. Merger and acquisition (Doctoral dissertation, Haute Ecole de Gestion &
Tourisme).
Friedman, M., 2013. To bail out or not to bail out: Moral hazard and other ethical
considerations. Geo. JL & Pub. Pol'y, 11, p.411.
Gautam, N., Petander, H. and Noel, J., 2013, February. A comparison of the cost and energy
efficiency of prefetching and streaming of mobile video. In Proceedings of the 5th Workshop on
Mobile Video (pp. 7-12). ACM.
Hendrischke, H., 2013. The Political Economy of China's Provinces: Competitive and
Comparative Advantage. Routledge.

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Holburn, G.L. and Vanden Bergh, R.G., 2014. Integrated market and nonmarket strategies:
Political campaign contributions around merger and acquisition events in the energy
sector. Strategic Management Journal, 35(3), pp.450-460.
Jiménez, G., Lopez, J.A. and Saurina, J., 2013. How does competition affect bank risk-
taking?. Journal of Financial stability, 9(2), pp.185-195.
Krishnan, C.N.V. and Masulis, R.W., 2013. Law firm expertise and merger and acquisition
outcomes. The Journal of Law and Economics, 56(1), pp.189-226.
Martínez-Sola, C., García-Teruel, P.J. and Martínez-Solano, P., 2013. Corporate cash holding
and firm value. Applied Economics, 45(2), pp.161-170.
Mathuva, D., 2015. The Influence of working capital management components on corporate
profitability.
Mathuva, D., 2015. The Influence of working capital management components on corporate
profitability.
McNair, B., 2017. An introduction to political communication. Taylor & Francis.
Palepu, K.G., Healy, P.M. and Peek, E., 2013. Business analysis and valuation: IFRS edition.
Cengage Learning.
Rainey, C., 2015. Finding a Forum for Insolvency: Using Digital Forums to Improve Due
Process in Insolvency Proceedings While Preserving Speed, Certainty, Discretion, and Cost
Considerations.

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