Analysis Of INC

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Analysis Of INC


The assessment of companies provides insightful information for stakeholders. The management of a company assesses their performance related to their targets while the shareholders investigate real or potential gain in their investment. The strongest indicative tool is financial assessment whose data is often available in annual reports. However, other assessments include management, operations and market evaluations. Even as such, the primary goal is to establish the viability of the marketplace to realize maximum return within the business environment. External evaluation on industry and competition shows how a company is fairing alongside its peers while internal evaluation on financials indicates the viability on meeting daily operations, long term liabilities and realization of profits. It also shows the risks the company is exposed to on the basis of the value of its assets. The current paper evaluates the external and internal characteristics of the business environment of Amazon. The evaluation is done based on market and financial evaluation.     

Need custom written paper? We'll write an essay from scratch according to your instructions! Plagiarism Free Price from only 11.99$/page Call Now Start Chat Order Now, Inc, Inc widely known as Amazon was formed in 1996 as a bookstore. However, the company later diversified into sales of virtually all products including books, movies, music, household items, groceries, electronics and so forth. Amazon is an e-commerce company that sells products through its website. Its headquarters are in Seattle, Washington. It has gone further by customizing its website and allowing producers to sell their products through the website. The company has two markets in North America and globally. The North American market is majorly formed by U.S and Canada while the international market is the rest of the world. The company maintains low prices for customers in terms of products and shipping. To achieve this, the company has integrated technology in virtually every aspect of its operations. This includes the use of robots. It also has more than 130, 000 employees (Reuters,2014).

Industry Description

Amazon is engaged in e-commerce business. According to Shaw, Blanning, Strader and Whinston (2000. p.195), e-commerce, also known as electronic commerce, is the exchange of goods and services through internet or on the basis of an online service such as online payment. E-commerce has been promoted by increased uptake of the use of the internet and movable internet enabled products such as mobile phones, tablets, lap tops and position technologies.  Companies can develop their business electronically and sell directly to customers. However, there are companies engaged in retail sales and delivery through the internet. Amazon includes both services and sell products to its customers through the World Wide Web. Amazon competes according to the same model with Google Express and AliBaba. There are, however, other retail chains with stores and online platforms such as Wal-Mart. Despite this competition, Amazon still sells more products online than it first 12 competitors that include Staples and Wal-Mart (Worstall 2013).

Industry Competition

Amazon had successfully managed to remain on top of its competitors. According to Roose (2014), Amazon strategically beats competition through various ways. The company offers suitable service for consumers with a clear overview of the product they want and subsequently recommendations for new product. At the same time, it offers delivery in two days. Also, as already been noted, the company maintains low prices for its consumers.

However, competitors still stage competition on e-commerce efficiency and retail business. Google through its Google shopping Express offers same day delivery services and rolled out the business in three states. Other companies include Postmates and Instacart in the U.S. Whereas Amazon has a successful wedged off competition to date, these companies are attacking its core business including Google that has a sufficient financial muscle. On the other hand, Wal-Mart offers Amazon competition on retail sales by offering products at a lower price. Wal-Mart sells products to their customers through its stores and online websites. Wal-Mart stores are easily accessible with no waiting period. On international platform, Amazon competes with Ali Baba (Roose 2014).

Financial Analysis

Financial analysis shows a firm’s ability in managing short-term and long-term financial obligations. Short-term obligations show the operational efficiency of companies, while long-term financial obligations indicate the risk exposures of the company. Financial management in a company thus revolves around fixed and current assets against long-term and current liabilities. The financial assessment on Amazon is thus accomplished to show short-term financial position, long-term financial status, risk exposures and relativity of the company evaluation. 

Short-Term Financial Evaluation

According to Mathisen and Pellechio (2007, p.5), the company’s short-term financial position reflects the extent to which its short-term liabilities differ from its short-term assets. It is also known as working capital management. The assets majorly include the inventory and liquidity items of the firm while liabilities include recurrent costs, securities and loans. Though a specific timeframe is difficult to tag to the term, ‘short term’ assets have a time limit of up to three years while a time limit for liabilities is one year. Liquidity ratio is the comparison between current assets and current liabilities.

Amazon has a liquidity ratio of 1.07. It is an indication that the current assets are almost even to the current liabilities. The company maintains averagely similar proportions of cash and cash equivalent and inventories for the current assets. Current liabilities are dominated by account payable at 66%. The account receivable is about 50% more than cash and cash equivalents. This indicates that the company has to convert its inventory and securities to meet short-term debts. The debt is from operations (suppliers) and Amazon does not have a short-term loan. The short-term assets of the firm form 61% of the total assets of the company. There are marketable securities with a value of $3,789 million that form 0.09% of the company’s assets. The account receivable is valued at $4,767 million. The short-term/working capital management is sustainable and breaks even. The margin is, however, very small (Brigham & Houston 2012, p. 180). 

Long-Term Financial Position

Long-term assets are long-term property owned by a firm; they have low liquidity because the company is not expected to convert them into cash in the short run. The assets have a longer life span of more than three years. The fixed assets include tangible items used in production such as plants, machinery, vehicle, furniture and so forth. There are also intangible assets such as patents, franchise and goodwill. Equally, long-term liabilities do not require payment within a short term and include forms of capital mobilization used by a firm such as loans, equity and leases (Choi & Meek 2011, p.17).

Amazon has long-term assets in the forms of property and equipment, good will and other assets with a value of $ 15,534 million. The long term assets have a market value of $10, 948 and form about 39% of the total assets. The value of long-term liabilities, excluding equity, is $7,433 million which is 47% of the long-term assets. The debt ratio that is a function of total debt to total assets is 75.7%. The proportion of long-term debts to total assets is 18.5%. Thus, Amazon maintains strong management, whereby only 18.5% of the total assets cover its debts. The proportion of the debt, however, requires efficient working capital management since most of the debts are held in account payables (Amazon 2014).   

It is thus important to evaluate inventory management practices in the company noting that accounts receivable are about 50% the value of accounts payable and 57% of the total assets of the company. The inventory turnover is 10, indicating that Amazon sold 10 items of a similar product for the financial year ending December 2013. The day sales are outstanding thus showing that Amazon takes a 36.5 (365 days over 10) waiting period before selling a product. The company takes a month to realize sales (Amazon 2014; Brigham & Houston 2012, p. 256).

Capital Structure

The capital structure indicates the forms of capital used by a firm. Amazon is a public company with equity. The company has 5,000 shares with a value of $ 9,746 million. The equity is 24% of the totals assets of the firms. The 75% financing is held in account receivables while 1% makes loans in the company. The company has tangible capital in terms of property and equipment and an intangible value as goodwill valued at $2,655 million. The company invested in new equipment valued $3,444 million in the year 2013. Amazon, however, simplifies equipment and property for its operations. The company had a long-term capital lease obligation of $ 1,435 million and gross lease obligations of $2,437 million. The capital leases cover technological infrastructure and buildings. The company also has financial leases under rent agreement on housing occupancy or land. The leases are valued at $ 555 million (Amazon 2014, p. 65).


Profitability indicates the return to be expected from investments in a company. It is expressed in various models including profitability ratio and return of equity, RoE. Amazon has a profitability ratio of 0.003, indicating that for every one dollar invested in the company, the company earns $0.003. Profitability is expressed in terms of net revenue to sales. RoE, on the other hand, shows the rate of return on each dollar invested in a company. Amazon had a RoE of 2.8% expressed in terms of net profits to equity. The financial year ending 2013 generated an increase of 2.8% on equity invested in Amazon. Amazon experienced a loss of $ 39 million in 2012 and is, therefore, on a recover path. The profits realized in 2011 were $ 631million compared to $ 274 million in 2013. The growth potential is, therefore, large. However, competition and recent economic recessions are some of the leading factors in the fall of the company’s growth. In 2013, the company retained earnings and as s result did not pay dividends (Brigham & Houston 2012, p.146).

Risks Management

Risk assessment is consideration between return and loss. It is the potential probability of monetary loss on the cost of the capital. According to Koller (2005 p.4), the definition of risk includes uncertainty which is the unknown based on what is known hence a factor of probability. Probability in the investments defines the likelihood in profits or losses of an investment. Thus, an assessment checks the extent to which the profits or losses are established within certain time period. Risk assessment includes depreciation of fixed assets and impairment of both short-term and long-term assets. This also includes credit derivative used to cover up loans.

Amazon has reported depreciation of property and equipment worth $ 3,253 million. The first risk management tool used by Amazon was used to check the impairment of goods beyond the current value. The goodwill is valued at $ 2,655 million. Asset impairment occurs when there is discrepancy between the fair values of assets so that it bears a less value due to changes in regulation, usage and technology. The market value of the asset cannot be recovered, and as a result asset is thus written off or sold. The rate of impairment exposes a firm to losses.  Amazon reports depreciation adjusted for impairment.  Depression negates the cost of capital and in 2013, after deposition of the assets, the company realized income. Negative value from depreciation and impairment reduces the company’s income.   

The expression of sufficiency ratio shows the status of a firm’s bankruptcy. The ratios show a firm’s ability in covering debts and meeting investment objectives of a firm. The values are representation from actual income generated by a company. The cash flow adequacy ratio shows obligations to meet long term debt, purchase assets and pay dividends. The cash adequacy is 1.2 given that the company did not pay dividends. Therefore, Amazon can fully meet its financial obligation. The total coverage ratio stands at 5. Therefore, as of 2013 the cash flow from operations could pay only a fifth of the total debt. Therefore, the cash at hand could not meet total debt. The company does not use any form of financial derivative such as swaps or hedges to protect their investments.

The company also faces foreign currency risk due to international trade and interest on capital. The company lost $ 1.3 million due to the fluctuations in foreign exchange rates. The fluctuation on interest rates also affects loans serviced by the business. The projection pushes the loans by over $ 97 million (Brigham & Houston 2012, p. 311).   

Estimated Company Valuation

Company evaluation is indicated after adjustment of depreciation, impairment, disposal and retirement of assets. Amazon has a market capitalization of $144.49 billion. The company expresses its investment at fair values showing valuation of the company assets and investment at existing market rates. The fair value of cash, marketable securities and cash equivalents was $ 12.5 billion in 2013. The value of fixed assets, notably, land and buildings, equipment and softwares, assets under constructions and corporate assets was $ 10.9 billion. Equipment and software formed 90% of the assets of the company with the highest depreciation and amortization rates. The company has lease obligations of $ 877 million. The valuation is done under revaluation statuses to establish impairment. The company values investment from equity at $127. Amazon gained an increased market value of $ 0.7 billion in acquiring Kiva Systems. In addition, there is a good will valued at $2 billion while intangible assets $ 1.2 billion (Amazon 2014, p.43).    

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Amazon requires an efficient and strict management of its working capital. This is ideal for a company dealing with the retails business. The account payable shows a large amount compared to cash and cash equivalent producing a large deficit. Thus, the company has to convert it inventory into sales. However, it is also ideal that the company maintains a large inventory due to the strict delivery timelines it operates in. These two contrasts should ensure the company is safe. For instance, the inventory ends up as bad stock during depreciation and offers successful business during an economic boom. Amazon is also very sustainable without any short-term loan and a moderate long-term loan.

The company presents a positive run bearing the loss in 2012 after a successful year in 2011. The profits posted in 2013 are a quick recovery from negative profits to half the value realized in 2011 for 2013. The company could, therefore, restore itself to its former position and sufficiency when the North American and international markets recover from economic recession

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