Corporate Performance Report

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Amazon Financial Returns and Capital Constraint

Name: Garry Bray

Ashford University

Course: BUS401

Instructor: Richard Burke

Date: 29 October 2020

Introduction

Financial statements of companies are utilized to demonstrate the performance of the company and other information that can be useful to stakeholders. Investors require such information when making investment decisions. Therefore, management must find approaches that will attract investors to their companies. Increasing return on equity is one of the ways used by the companies to attract investors and use debts to meet asset requirements of the enterprise. This exercise use DuPont analysis to analyze the economic conditions and business performance of Amazon. DuPont analysis breaks down ROE into operating efficiency, asset efficiency, and leverage to find out which activities are contributing the most to changes in return on equity (ROE) (Doorasamy, 2016).

Return on Equity

Return on equity is the amount paid to shareholders as return to the amount they have invested in the company. Return on equity is calculated as: the net profit margin * Asset Turnover *equity multiplier.

(NASDAQ, 2020)

Net profit margin is calculated as;

= = 0.0413 or 4.13 %

Asset turnover = = = 1.4463

Equity Multiplier = = = 3.67

ROE = 0.0413 * 1.4463 * 3.67 = 0.2192

Net profit margin shows that the company 0.0413 for every dollar of sales as profit. The company’s ability to use its assets to generate sales effectively is indicated by its asset turnover. Amazon generates 1.4463 dollars for each dollar of assets. The equity multiplier is a measure of the percentage of assets that are owned by shareholders at Amazon. According to the financial information from Amazon’s financial statements, 3.67 an indication that most of the assets are funded by equity compared to debt. The company takes low debt which is important for company because it cannot be liquidated in case of insolvency.

Constant Growth Stock Valuation

Stocks can be valued using the constant growth stock valuation model (CGSV), to determine the rate growth of the asset under consideration. The formula for CGSV is given as

P= D/(r-g). P stands for the current price, D stands for the next dividend of the company. However, the dividend policy of the company allows the company to recycle back revenues to the business and does not pay dividends. Amazon has observed premier stock growth and thus has not hurt the investors with a stock price of $1785. The stock has generates a return of 30 percent annually but does not pay dividends since it is ploughed back into the business.

D = amazon has an EPS of 6.47

Stock price = $1785

Growth rate = 6.94

CGSV = $6.47/ ($1785+6.94) = 0.0036 + 0.0694 = 0.073

Constant growth stock valuation is more appropriate technique given the fact that it does not make dividend payment to its shareholders.

Capital Constraint

Amazon is a leader in the industry beating giants in the e-business such as Wal-Mart, Chewy.com, eBay, Netflix and other related companies. The company has been able to beat competition and remain at the top of the industry. Analyzing the company’s financial strengths of the capital positions is achieved through analyzing its financial obligations in terms of debt and equity, capitalization ratio of the company, and the debt and debt to equity ratio. The company has applied capital rationing strategy to ensure that only the profitable business are invested using the limited capital. Besides, the company has been able to focus on projects that guarantee highest returns, enabling it beat competition in the market (Buddenberg, 2018). Amazon is overvalued with a market cap of $1.66 trillion, Amazon’s stock is being valued at over four time its potential 2020 revenue of $400 billion.

References

Buddenberg, J. (2018). Aggressive Working Capital Strategies for Network-enabled Business Models (Doctoral dissertation, IE University).

Doorasamy, M. (2016). Using DuPont analysis to assess the financial performance of the top 3 JSE listed companies in the food industry. Investment management and financial innovations, (13, Iss. 2), 29-44.

NASDAQ. (2020, January 02). Amazon.com Inc. (NASDAQ:AMZN). Retrieved from NASDAQ:AMAZON: https://www.stock-analysis-on.net/NASDAQ/Company/Amazoncom-Inc/Ratios/DuPont