Ratio and Financial Statement Analysis

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Company; Amazon Inc.

The Amazon is a multinational technological company that trades on e-commerce, cloud computing, artificial intelligence as well as digital streaming. As per the 2019 financial report, the company had an operating income of US$14.541billion that was likely to increase even more. The operating income was built around the company revenues and stock.

The operating profit margin is calculated using the formulae below

Gross profit – Operating Expenses = Operating Profit

Operating profit Margin = Operating profit/Gross revenue.

For example (Amazon Inc. data for three months up to March 2020)

Operating income = US$3,989 Million

Revenue = US$75,452million

OPM = ($3989/$75,452)* 100

= 5.286%

The previous operating profit margin was 4.25%. This means that, the company is expanding because the operating profit margin is higher as compared to the previous Operating profit margin.

Asset Turnover

This measures how a company converts its assets through sales. It is calculated as follows

Asset Turnover = Revenue/Total sales

The Amazon revenue for three months ending on March 2020 was $75,452 while its total assets for the three months was $223,243. Therefore the Asset turnover for the Amazon Company will be given by

Asset Turnover = $75,452/$223243

= 0.338

The Amazon Company has a high profit margin simply because it has low asset turnover.

Equity multiplier

This shows the leverage at which a business utilizes it liabilities is respect to its equity funding in financing its operations. It is calculated by dividing the total assets of the company with the Company equity.

Equity Multiplier = Assets/Equity

The Equity multiplier changes from company to company as every company has different amount of equity and assets. The equity multiplier for the Amazon Company can therefore be calculated as follows;

Assets = US$40,159 billion

Equity = US$9,746 billion

Therefore,

Equity Multiplier = $40,159/$9,746

=4.1205

Apple has an Equity Multiplier of 1.680, therefore it means that, Amazon Company has a higher leverage compared to Apple.

Return on equity

This represents the percentage of return that a company generates in respect to the amount of funds that the shareholders have invested in the business. It is calculated by dividing the Net income with the average shareholders

ROE = Net income/Shareholders Equity.

For example (Amazon Inc. data)

2018 2019

Net income = $10.073 Billion Net income = $11.588Billion

Shareholders’ Equity = 35.63billion Shareholders Equity = 52.804billion

ROE = (10.073/35.63)*100 = 28.30% ROE = (11.588/52.804)*100 = 21.90%

A higher amount of return on Equity means that, the management of the company is utilizing the shareholders’ funds efficiently while a lower return on equity suggests that, the management not using the shareholders money efficiently (Kumar, 2019). In our case, the Amazon Company did not utilize the shareholders’ funds effectively simply because that was a decline of ROE in 2019 compared to 2018.

Return on assets

It represents the dollar earnings that a company generates as per dollar of an asset. It is mainly used to determine the efficiency of a company and how its management can manipulate the company capital to generate income for the shareholders.

ROA can be given by

= Operating income/Total assets

For example (Amazon Inc. data)

2018 2019

Operating Income $10.073B $11.588

Total assets $147B $193.9B

ROA ($10.073B/$147B)*100 ($11.588/$193.9)*100

6.89% 5.99%

If a company realizes a higher return on assets, then it means that, the management is using the asset base efficiently. According to the above data, the Amazon Company did not utilize its asset base efficiently in 2019 because, the ROA of 2018 is higher than that of 2019.

DuPont Analysis

The DuPont analysis shows that, the Amazon Company is likely to increase its Return on Equity. This is because, the company has a higher profit margin compared to the previous years, has a higher asset turnover and a higher financial leverage as indicated in the Equity multiplier.

Ratio demonstrates the company’s weakest area

The Return of Equity ratio and the Return on asset ratio are the ratios that show the weakest area of the Amazon Company. This is because, in the two ratios, the amount of operating income in 2018 has been lower as compared to 2019. If an individual can analyze the company performance using the operating income, the he or she is likely to give false information. This is because, the ROA and ROE for 2018 is higher compared to that of 2019 despite the increase in operating income in 2019 than in 2018.

References

Analysis shows droughts shut down Amazon carbon sink. (2019). Physics Today. doi: 10.1063/pt.5.029975

Kumar, R. (2019). Wealth creation by Amazon. Strategic Financial Management Casebook, 413–440. doi: 10.1016/b978-0-12-805475-8.00014-8