Executive Summary
PacificCoast Technology is a small company that is considering a buyout by a larger corporation with financial stability that can provide solid growth for the technology they have created. The senior leaders have tasked a group to analyze Amazon financial sustainability as a potential buyer. This report will conduct a financial analysis that examines multiple ratios to determine the viability of an acquisition. Using the data analyzed a comparison will be made to provide a trend and industry analysis and identify the strengths and weaknesses of Amazon. Lastly the report will come to conclusions and make a recommendation on whether a buyout by Amazon would be most beneficial to PacificCoast.
Company Background
Amazon.com, Inc. is a multinational publicly traded company that works mostly is the ecommerce sector founded by Jeff Bezos in 1994. They were on the forefront of their industry and has emerged in the 21st as one of the largest and most recognizable companies in the world. Amazon is one of the few companies that has affected other businesses performance across many industries and sectors. Amazon states that they are guided by four principles: customer obsession over competitor focus, passion for innovation, commitment to operational excellence, and long-term thinking (Amazon, 2020). They are seeking to dominate multiple markets by having a variety of subsidiaries and innovation including amazon.com, Amazon web services, Prime Video, Amazon music, Fire Tablet, Kindle e-readers, Fire TV, Echo and Alexa (Amazon, 2020). Amazon has been growing their reach over the last few years by acquiring companies like Whole Foods, Audible, and Ring. Having a hand in many sectors and capitalizing on a global internet driven world has led to Amazon being only the second company to be worth over a trillion dollars (Tuttle, 2018).
Financial Analysis Liquidity
Liquidity ratios use current assets and liabilities to determine whether a company can pay their short-term debt without putting stress on their finances (). While these ratios focus on the immediate, they can affect whether lenders and creditors will do business with a firm in the long run. Two calculations used to determine liquidity is the current and quick ratios. The major difference between the two ratios is the belief that inventory is a liquid asset. The quick ratio eliminates the inventory believing it cannot be turned into readily available cash to pay debts (). The tables below demonstrate the current and quick ratio for Amazon.com, Inc. The current ratio, including inventory is close to the ideal range and shows an increasing trend since 2017. Amazon currently has $1.10 in assets for every $1.00 in liabilities. The quick ratio, omitting the inventory, performs slightly worse at $0.86 in asset to every $1.00 in liability. However, the trend has a 3-year upward momentum and outperforms the industry average. This indicates that Amazon is year over year improving their assets to give them the ability to pay their short-term debts.
Asset Management
There are varying types of assets that a company has at their disposal, but the efficiency in which they manage these assets is essential to their financial success. Asset management is how effectively a company uses or turns over their assets to generate sales within a given period (). Two that were analyzed for Amazon was their total asset and receivables turnover. The tables below give a 3-year trend of Amazon’s turnover and indicates that they are not as efficient as the industry on utilizing the assets they have. Their asset turnover while still trending in the positive has seen fluctuations over the last few years with 2019 garnering the lowest asset turnover. Amazon generated $1.25 in sales for every $1.00 of asset, but the downward trend could indicate future problems. The receivables showcase the same fluctuation as their asset turnover and since 2017 have underperformed industry averages. The receivable turnover indicates how quick a company collects on outstanding cash from their customers. In 2019 Amazon receivables turnover was 13.48 which means that average collection happened every 27 days as opposed to the industry average of 25 days.
Solvency or Debt Management
Where liquidity ratios focused on the short-term solvency of a company, debt ratios look at the long-term ability to cover their debts. These ratios indicate the financial leverage of a company
to creditors. Specifically, the Times Interest Earned ratio, or TIE, is the ability of a company to pay their debt with the current income before taxes and interest. Amazon’s TIE for the last 3 years has been increasing significantly, as shown in the table below, and has put them in a better place to pay their debt. As of 2019, Amazon has enough income to pay their debt nine-fold in a year.
Profitability
Profitability ratios are used to understand how efficiently a company uses its assets and how well it controls operational costs (). Return on Assets, or ROA, is used to measure the company’s ability of turning assets into earnings. It is a good stability indicator if a company can turn assets into earnings. Amazon fluctuated slightly in their ROA percentage from 2017-2019 and saw their highest ROA in 2018 but dropped slightly in 2019. There could be several reasons for the drop, however they still are outperforming the competition average and well outpaced the 2017 ROA. Profit margin is the amount of earnings left after the bills are paid. As the ROA fluctuated so did the the profit margin from 2017-2019. In 2019, Amazon was making $.04 for every $1.00 sold. This was less than the year before and was very close to the industry average.
Market value ratios look at the current market price for a publicly traded company and used by investors to determine whether the company is currently under-priced or over-priced (). The price earning ratio examines the market price in relation to earnings per share and indicates how much an investor is willing to pay per earnings. The higher ratio indicates that investors see a potential for growth and could show stabilitiy financially. Amazon saw a massive P/E ratio in 2017 that dropped then rose from 2018 to 2019. Investors were willing to pay $80.31 for every $1 earnings in 2019 which was greater than the industry average of $68.20. The market book earnings ratio looks at the book value of a company in comparison to the market price (). The book value is what a company would be worth after selling their assets and paying their debt. The higher number can sometimes indicate that the stock is overvalued but this can be interpreted in different ways. The M/B ratio for Amazon is high in comparison to other industries but is only slightly higher than its industry average.
https://www.aboutamazon.com/?utm_source=gateway&utm_medium=footer
Tuttle, B. (September 4, 2018). Amazon just became the second company to reach $1 trillion.