Analysis of Amazon's Financial Ratios, Strategic Planning & Challenges

This report provides a comprehensive financial analysis of Amazon, focusing on key financial ratios such as liquidity, activity, and solvency ratios for the years 2019 and 2020. It interprets these ratios to assess Amazon's working capital management, asset utilization, and debt-equity structure. Furthermore, the report delves into Amazon's strategic planning, emphasizing its customer-centric approach, relationship building, and continuous innovation. It also addresses management change issues, particularly those arising from the expansion into physical stores and inventory management challenges. The organizational structure of Amazon, characterized by a hierarchical corporate structure and flexibility, is also described. Finally, the report identifies market challenges and key global competitors like eBay and Flipkart, highlighting issues related to sales tax laws, product reviews, and customer return policies, concluding with insights into how Amazon can navigate these challenges to maintain its market position and profitability.

Financial management

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1.Calculation of financial ratios Of Amazon..........................................................................1
2. Strategic planning of the Amazon......................................................................................3
3.Management change issues of the Amazon........................................................................4
4. Describing organisational structure of Amazon.................................................................4
5. Elaborating market challenges and global competitors of Amazon...................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7
APPENDIX......................................................................................................................................8

INTRODUCTION
Financial management is the planning, organising and controlling the financial activities
of the organisation such as acquisition and utilisation of the funds for running the operations of
the organisation. This report includes computation of financial ratios of the enterprise. The ratios
helps to conduct a comparative study through which financial forecasting can be done(da Silva
Luz and et.al., 2021). The company chosen for this report is Amazon, it is an American online
business Founded by Jeff Bezos. It deals in multiple product category such as clothing,
household appliances and Food items. It consist performance of the company by interpreting the
ratios. The organisation structure of the Amazon and strategic planning followed by the Amazon
is discussed in the given report. There are several issues faced by the company in changing the
style of management and plans regarding increasing the market share. In the market of e-
commerce there are several rivalries exist which are required to be considered for existing global
competition. There are several challenges on global basis which are required to be addressed by
the organisation is also encompassed in the following report.
MAIN BODY
1.Calculation of financial ratios Of Amazon.
1.) Liquidity ratios : This ratio reflect the ability of an organisation to pay off its short term
liabilities. It helps to determine the level of liquid assets present in the organisation.(Heo,
Lee, Park, and Grable, 2020) It includes current ratio, quick ratio and acid test ratio.
 For the year 2019 :
a.) Current ratio = Current assets / Current liabilities
= 96334 / 87812
= 1.09
 For the year 2020:
Current ratio = Current assets / Current liabilities
= 132733 / 126385
= 1.05
1

 Interpretation – From the above analysis of liquidity ratio of Amazon, the working
capital requirements of the Amazon can be computed. The current ratio for the year 2019
is 1.09 and for the year 2020 is 1.05. The ideal current ratio is 2:1. Therefore, it can be
interpreted that Amazon is not able to capable to complete its working capital
requirements and face problem in maintaining the level of liquidity for conducting day to
day activities of the business.
2.) Activity ratios : It is also known as efficiency ratios. It determines the effective usage of
assets employed in the organisation. It includes Inventory turnover ratio, debtor turnover ratio
and working capital turnover ratio (Le and Viviani, 2018).
a.) Assets turnover ratio = Net sales / Average total assets
 For the year 2019
= 280522 / 225248
= 1.24 times
 For the year 2020
= 386064 / 321195
= 1.20 times
b.) Fixed assets turnover ratio
 For the year 2019
= Net sales / Average fixed assets
= 280522 / 128914
= 2.17 times
 For the year 2020
= 386064 / 188462
= 2.04 times
Interpretation – From the above activity ratio, it use to compute how effectively an
organisation is using its fixed assets so that it will lead to increased profitability of the business.
Amazon is using its assets 1.24 times to create increased revenue and in 2020 the asset turnover
ratio is 1.20 times.
3.) Solvency ratios = This ratio reflects the organisation ability to pay off its long term liabilities
from the cash flows of the enterprise. It includes debt equity ratio, equity ratio and interest
2

coverage ratio (Lorne and Gogireddy, 2021).
a.) Debt equity ratio = Debt / equity
For the year 2019
= Long term debt / shareholder funds
= 35585 / 62060
= 0.57
For the year 2020
= 48833 / 93404
= 0.52
Interpretation – Every organisation require capital to run its business operations. The company
Amazon has used various sources of finance for its business. From the above computation of
debt equity ratio, it can be computed that in the year 2019, a fir is using more debt than the
equity which means 57% debt is employed in the business and 47% is equity. In the year 2020,
52% is debt and 48% is equity. Therefore, it can be concluded that firm is using debt as a source
of finance.
b.) Proprietary ratio = Shareholder's funds / Total assets
For the year 2019 = 62060 / 225248
= 0.27
For the year 2020
= 93404 / 321195
= 0.29
2. Strategic planning of the Amazon
Meaning : It is a process in which all the management work towards a common goal
which fulfils organisational and personal needs of the individual. In this, various plans are made
by integrating different departments of the enterprise. It focuses on utilising the resources in
effective way which increases the efficiency of the organisation (Petruska, 2018) .
The company Amazon has started its business by selling online books and expand its
business by operating in various areas. The strategic planning of Amazon can be explained as
given below:
a.) Strong relationship- The Amazon's strategic objective includes boosting relationship with
3

other countries. Maintaining relationships helps to spread wing in other locations as well. It
assists in expanding the operations on a worldwide basis.
b.) Raising customer experience- Delivering product is not enough , every organisation has to
increase its market share by meeting the dynamic demand of the customers (Samuel, Zheng and
Xie, 2020). Amazon's main aim is to make the company as consumer centric and for achieve its
goals, it is using internet and technology for reaching its target customer which aids in
maximising success of the firm.
c.) Focussing inventions – Amazon works with customer oriented approach rather than
competitor focus. It makes its strategies by thinking long term goals and commitment in
operational excellence. It's recent inventions are Kindle, Amazon echo, just walk out technology
and the climate edge which helps in covering major areas of the market and its constantly
changing demand.
3.Management change issues of the Amazon
Management is a term used to operate the activities by managing the people and
resources in such a way that it helps to achieve the organisational objectives. There are several
changes which are recently take place and creates a issue in managing the same. The
management issues are as follows:
a.) Physical stores: Recently, Amazon has started its operations on a physical basis. It's first
store is Amazon style which deals in clothing and it also offers new brand “ Know and love”, it
let customers select their desired item, size and colour. It also opened fresh grocery stores and
book stores. But the major challenge faced by the Amazon, is that it require huge number of
workforce to operate their decentralised chains across the world (Silva, 2019.). It has increase
the cost of operations and employees demand hike in salaries.
b.) Inventory management – Each organisation offer several products and services to its
customers. Before delivering the products in the existing market, Amazon has to manage its
inventory level so that it would not increase the unnecessary coast of holding the inventory. With
the introduction of new outlets, Amazon is required to keep inventory at huge level which
sometimes create the problem in transportation and increase the cost of handling the inventory.
4. Describing organisational structure of Amazon.
Organisational structure is a system which shows the reporting relationships within the
4

organisation which helps to achieve goals of an enterprise. An organisation can effectively
complete its tasks by clearly defining the roles of each person in the organisation.
In context of Amazon, the organisational structure can be defined as given below-
a.) Hierarchical corporate structure – It is a form of structure in which it follows the chain of
command flowing from top level executives to regular employees of the organisation. Amazon
has adopted hierarchical system because it is having large number of employees (Wankhede,
Wukkadada and Nadar, 2018). It helps to create a clear path of responsibilities and
accountability allotted to each personnel.
b.) Flexibility of the business – There are several changes takes place within the organisation or
outside the enterprise which affects the operations of the business. The plans of the organisation
are planned in such a way that it does not impact the working of the organisation when
fluctuations are made in the economy. With respect to Amazon, it integrates several small teams
and helps to manage the operations effectively.
c.) Stability in top management – The most vital feature of an organisation is stability and
Amazon is successful in generating revenue by adopting clearly defined relationships and use of
internet helps to access more customer base.
5. Elaborating market challenges and global competitors of Amazon.
There are several competitors of Amazon which can be described as given below-
 e-bay : It is a largest common platform which is a direct rivalry of Amazon. The price
war is also continued between both the companies. In past few years, e-bay sales was
declining but there is an advantage that it offer auction sales whereas Amazon is not
providing auction sales.
 Flip kart- It is sharing same business model as Amazon. Flip kart business is growing
rapidly and it play price wars with the company.
The market challenges faced by the company Amazon can be described as given below-
 Change in sales tax laws – There is a sudden change in the tax laws and Amazon put the
burden of the taxes on third party sellers. Now, Amazon is taking steps to minimise the
burden of third party sellers.
 Product reviews and seller feedback – Product reviews refers to the issues relating to
product and feedback of seller entails issues regarding order fulfilment and customer
service. Many times, the negative feedback of the customers harms the goodwill of the
5

company and results in declining profitability (Yuliarti, and Diyani, 2018). The firm
should not wait for the feedback of the buyer but made a proactive strategy for reducing
the risks of the company and identify the threats and opportunities in advance basis.
 Customer return policy – The return policy of the Amazon is very flexible and
customers take advantage of this quality. Customers return the product by exchanging
with the defected product but if Amazon starts tightening its rules, it will result in losing
the large market share. Therefore, a company should frame its regulations in such a way
that customers does not lost its trust and on the same time company's profitability should
also not hampered (Zeller, Kostolansky and Bozoudis, 2019).
CONCLUSION
From the above report, it can be concluded that Financial management assist in planning
the activities of the organisation which helps in effective utilisation of the resources. The
computation of financial ratios of Amazon helps to know the trends of the future on the basis of
judging the current performance of the Amazon. The working capital requirement, financing
pattern, performance of the company and strategies used by Amazon is helpful to gain the
insights about the company. There are several challenges which are faced by the Amazon on
global basis. Therefore, an enterprise should frame its policies and procedures in such a way that
it should not adversely effect the company, when internal or external factors are changed.
6

REFERENCES
Books and Journals
da Silva Luz, E.,and et.al., 2021. Challenges of the lumber production in the Amazon region:
relation between sustainability of sawmills, process yield and logs
quality. Environment, Development and Sustainability, 23(4), pp.4924-4948.
Heo, W., Lee, J.M., Park, N. and Grable, J.E., 2020. Using Artificial Neural Network techniques
to improve the description and prediction of household financial ratios. Journal of
Behavioral and Experimental Finance, 25, p.100273.
Le, H.H. and Viviani, J.L., 2018. Predicting bank failure: An improvement by implementing a
machine-learning approach to classical financial ratios. Research in International
Business and Finance, 44, pp.16-25.
Lorne, F.T. and Gogireddy, M.R., 2021, March. Digital social contracts with AI robots: some
implications for Amazon. Com. In European, Asian, Middle Eastern, North African
Conference on Management & Information Systems (pp. 78-89). Springer, Cham.
Petruska, K., 2018. Amazon Prime video: Where information is entertainment. In From
Networks to Netflix (pp. 355-364). Routledge.
Samuel, J., Zheng, Z.E. and Xie, Y., 2020. Value of Local Showrooms to Online
Competitors. MIS Quarterly, 44(3).
Silva, E.F., 2019. Challenges of Mining in the Brazilian Amazon.
Wankhede, K., Wukkadada, B. and Nadar, V., 2018, July. Just walk-out technology and its
challenges: A case of Amazon Go. In 2018 International Conference on Inventive
Research in Computing Applications (ICIRCA) (pp. 254-257). IEEE.
Yuliarti, A. and Diyani, L.A., 2018. The effect of firm size, financial ratios and cash flow on
stock return. The Indonesian Accounting Review, 8(2), pp.226-240.
Zeller, T., Kostolansky, J. and Bozoudis, M., 2019. An IFRS-based taxonomy of financial
ratios. Accounting Research Journal.
7

APPENDIX
8

9

10