Finance paper

( Fall 14 ) ( [Type the company address] ) ( ) ( 08 Fall )

I. Industry and Strategy Analysis

a. Industry Analysis

i. Value Chain Analysis

Any process costing time or direct money for a product, adds value to the final product in it is being utilized efficiently. In the e-commerce industry value is added through several factors I will explain in detail.

· Inbound Logistics: During this stage companies in this Industry add value to there firm or product by defining its inbound logistics strategy. In addition it also keeps adding value to the product when spending on expedited delivery of products from wholesalers/private sellers to their distribution centers. When this stage is utilized efficiently it ends up better serving the company and adding value to the end customer.

· Operations: In this kind of industry efficient operation management helps add value to the firm. The daily operations should be organized so that orders leave to end customers from the appropriate geographical location of warehouse, to save on un-necessary costs.

· Outbound Logistics: In order to maximize customer satisfaction the outbound logistics should be well managed, as customers are sensitive to delivery dates. In this kind of industry companies are in-charge of shipping to final customers, and providing efficient logistics solutions to be able to provide better prices. Therefore to add value companies should be able to provide services to all geographical location at an excellent quality level.

· Research and Development: One of the most important factors of adding value is researching the market and the needs wants, and desires of the consumer to be able to provide them. Development consists of all kinds of development from management system up to the online website or sale location.

· Marketing and Sales: This part of the value chain analysis includes how the company markets its products and services mainly focusing on price, promotion, product and place. The sales part consists of growth rate of the industry in this case the growth rate is determined by Amazon, as it is the major player in the industry. In an industry where being a cost leader is a goal firms try to spend less on marketing expenses, and use free advertisement such as email, marketing campaigns, and creative own ways of marketing their product or service.

· Service: Participating firms have to go above and beyond, and do anything to achieve maximum satisfaction for its customers. Customers should be able to easily order from there website or from the mobile application. Customer service hours should be available at all time with a Toll Free number. The product has to arrive on time, which is what satisfies all customers. Finally they should work hard to be able to provide every customer with good they offer no-matter where his geographical location is. In other words in the consumer say jump amazon asks how high? This is what companies have to do to add value in this industry.

ii. Porters Five Forces

1. Rivalry Among Existing Firms: Amazon participates in more than one industry, which results in facing high competition in several industries a result of lack of concentration. The industries where high competition is faced are retail, e-commerce services, digital content and digital media devices, and web services. Amazon is in its way different than all other competitors, it offers low competitive prices, a great brand image, and competes in both low prices, and offering better service. Amazon seeks to reduce its variable cost and to leverage its fixed costs. Their variable costs include product and content costs, payment processing and related transaction costs, picking, packaging, and preparing orders for shipment, transportation, customer service support, costs necessary to run AWS, and a portion of our marketing costs. Their fixed costs include the costs necessary to run our technology infrastructure; to build, enhance, and add features to our websites, our Kindle devices, and digital offerings; and to build and optimize our fulfillment centers. Therefore I believe rivalry among existing firms is high.

2. Threat of New Entrants: Amazon has a powerful Infrastructure, 100,000 employees, 100,000,000 active users, one of the best supply chain management systems, low pricing, existing contracts and relationships with vendors, a 19 years old company which makes it rich in experience. Amazon also enjoys economies of scale, efficient distribution channels, and first mover advantage a result of its early entrance. Therefore entering the industry requires the enterer to beat all these factors, which is difficult.

As a result barriers to entry are high and that makes the threat of new entrants low.

3. Threat of Substitute Products: The level of threat depends on two factors prices and performance of relative products, and the buyer’s willingness to switch to another product. If we view amazon as a whole as one product I believe the threat is low because it offers low prices, and ease of orders, which does not encourage consumers to switch. If we analyze products separately for a single purchase some products may be found for better prices. The reason threat is low when analyze a group of products together is that they average to be cheaper than a group of products bought separately from several other vendors a result of logistics costs on the consumers side.

4. Bargaining Power of Buyers: Bargaining power of buyers is always higher when competition exists. In this industry consumers are price sensitive and can push prices down if they are over priced by switching to other providers. However amazon leaves no space for switching because it strives to offer lower prices to maintain its business within the industry. The bargaining power of buyers is moderate, which, is why the prices are low. Switching costs are not low a result of amazon price subscription for free delivery. Consumers cannot bargain prices because the effect of there of bargaining power has already been absorbed by the industry.

5. Bargaining Power of Suppliers: The bargaining power of suppliers is low a result of several factors. Amazon has more than 100 million active members and that makes it easier for suppliers to sell their products. Switching costs for suppliers are high because the give up 100 million users that there product was available to. When a company wants to sell a product in amazon and be an official affiliate amazon sets the price. Selling on amazon is an easy economical way to expose new products and to avoid unessential costs associated with a sale of a product. Another reason their bargaining power is low is that most companies have difficulties selling their products when first introduced.

b. Company Strategy Analysis:

Amazon.com, Inc. is an American company headquartered in Seattle, traded in the NASDAQ, and serves consumers globally. It is an e-commerce company that offers a wide range of product from shoes, books, music, groceries to cloud services to customers globally. Amazons mission is to be the earth’s most customer-centric company for four primary customer sets: consumers, sellers, enterprises, and content creators.

Amazon is highly integrated with value chain of the Industry. First, its supply chain management is one of the world most efficient supply chains. Amazon is highly diversified geographically, as it serves people all around the world from 10 different countries, Austria, Canada, France, Germany, Japan, Spain, United States, China, Italy, and the United Kingdom. Being diversified geographically helps receiving products from global wholesaler, and delivering to final buyer at a lower price (operation management). Delivering products to final customers has never been any better than how amazon does it, they are always on time when delivering shipments, offer free two day shipping with amazon prime.

Its marketing consist primarily of targeted online advertising, television advertising, public relations expenditures; and payroll and related expenses for personnel engaged in marketing, business development, and selling activities. Amazon views it Amazon prime as a marketing tool. The company is experiencing high growth Sales in North America grew 30%, 43%, and 46% in 2012, 2011, and 2010, compared to the comparable prior year periods. International they grew 23%, 38%, and 33% in 2012, 2011, and 2010, compared to the comparable prior year periods. The increase in sales and growth was achieved without heavily investing in marketing, as amazon is known by not spending heavily on marketing.

It is involved in more than one industry, and participating in more than one industry can be economically beneficial for example the two kinds of goods inferior and normal goods to reduce risk. Amazon competes in several industries, which makes it a well-diversified company. Such as cloud services, jewelry, electronics, groceries and etc. This company has worked hard during the years to acquire other business and expand their business activity. One of the companies acquired is the famous shoe company Zappos.

It is one of the few companies that are able to maintain tight margins and expand at an above average rate. Within the industry amazon prices are the best when compared to competitors. The company also offers Amazon Prime, which is a service you can purchase to receive free two day shipping, access to instant movies, documentaries, and television shows for an annual subscription fee of $80. This shows how good the value chain actually is.

Amazon is a cost leader in the Industry benefiting from economies of scale a result of its size, efficient supply chain management, and better sourcing. As mentioned earlier that its mission is to be the most customer centric company in the world, being a cost leader helps achieving the mission. As know about Amazons domination strategy, it dominates any competitor when it comes to pricing pushing them away from competing.

Amazon is different and unique within the industry. It provides intrinsic value via product variety, bundled services, and on time delivery. Not only than but it also a better brand image and reputation when compared to eBay. In addition to that it offers a very efficient supply chain management that adds value to the product at a lower cost. Their product line includes apparel, automotive, electronics, books, games, and tens more. With this broad product and service offering to customers are pleased and benefit from a competitive advantage amazon is characterized with.

II. Financial Statement Ratio Analysis:

a. DuPont Analysis

Return on Equity = Profit Margin * Total Asset Turnover * Equity Multiplier

2010	=	3.37%*2.10*2.74	=	19.391%
2011	=	1.31%*2.18*3.26	=	9.310%
2012	=	(0.06)%*2.11*3.97	=	-0.503%

· DuPont Analysis tells us that the Return on Equity is affected by three factors operating efficiency, which is measured by profit margin, asset use efficiency, which is measured by the total asset turnover, and financial leverage, which is measured by the equity multiplier. As you can see the total Asset turnover and financial leverage has been relatively consistent in the past 3 years and that the factor affecting the Return on Equity is the profit Margin declining dramatically. We could’ve measure the Return on equity the traditional way with an irrelevant variance however; the traditional way does not provide use with details on what is aspect is affecting the Return on Equity.

b. Profitability Analysis

i. Re-casted Income Statement

ii. Re-casted Balance Sheet

iii. Common Size Income Statement

iv. Profit Margin

Profit Margin= Net Income / Sales

2010	=	1152/34,203	3.37%
2011	=	631/48,077	1.31%
2012	=	(39)/61093	-0.06%

· Amazon has had low profit margins throughout the years due to the nature of its business, focusing on providing customers with low prices, which leaves them limited space for profit margins. During the past three years profit margin kept declining until it reached a negative profit margin. One explanation could be because of there acquiring of new assets costing billions of dollars, the other can be fighting competition by reducing price and lowering margins. Third is the increase in spending. The company has grown during the past three years dramatically to have more than double the sales when comparing 2010 to 2012. The profit margin should be improved by reducing operating expenses. They should focusing on increasing profit in the meantime no matter how high the growth rate of the company is because the operating costs are grow at a faster rate, which isn’t improvement and can effect the company. Total operating expenses was higher than net sales in 2012 and lower in 2010, which tells us operating expenses require close monitoring.

v. Return on Assets

Return on Assets= Net Income / Total Assets

2010	=	1152/18,797	=	6.13%
2011	=	631/25278	=	2.50%
2012	=	(39)/32555	=	-0.12%

Return on assets tells us how much profit a company is able to generate for each dollar of assets invested. Return on Assets for companies vary because it mainly depends on the industry therefore, ROA can only be compared to previous ROA or to competitors in the industry. A perfect explanation for the decline in ROA is that Total assets are increasing and net income is decreasing. The reason net income is decreasing is the increase in operating expenses throughput the past three years. The increased are assets are from new asset purchases; new assets usually do not pay back immediately and need time to see the results. When new assets start to generate revenue I expect return on assets to slightly improve. The reason a say slight improvement is that, it is not only affected by assets but mainly affected by operating expenses growing faster than sales.

vi. Return on Equity

ROE= Net Income/Total Equity

2010	=	1,152/6,864	=	16.78%
2011	=	631/7,757	=	8.13%
2012	=	-39/8192	=	0.48%

Return on Equity is a comprehensive indicator of a firm’s performance because it provides an indication of how well managers are employing the funds invested by the firm’s shareholders to generate returns. Usually a high growth company is accompanied with a high ROE; in amazon case there is something different because it is acquiring new assets that do not pay pack immediately. Amazon should improve its efficiency and prove its ability in earning more on its equity even though the results do not seem that bad, in order to attract short term investors and increase equity. Equity has decreased from 2010 to 2011 A result of its spending on assets.

vii. Accounts Receivable Turnover

Accounts receivable turnover= Sales/Accounts Receivable

2010	=	34204/1,587	=	21.6
2011	=	48077/2,571	=	18.7
2012	=	61093/3,364	=	18.2

It is an accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. Amazon in 2010 had a good ratio compared to following years. In 2010 it was 21.6 and decreased to 18.2 in 2012. The higher the ratio the better, it implies that it has fewer amounts to be collected either because it operates on cash bases or efficient collection. In amazons case it has good ration because it operates on quick receivable and a result of their efficiency. The rates in 2012 began to decrease and this indicates that credit policies should be monitored closely and compared to earlier years. Most receivables are primarily related to vendor and customer receivables. Due to the growth in sales the company may have lost some efficiency in handling receivables.

viii. Inventory Turnover

Inventory Turnover= Cost of goods sold/ Inventory

2010	=	26,561/3,202	=	8.295
2011	=	37,288/4,992	=	7.470
2012	=	45,971/6,031	=	7.622

Inventory turnover shows how many times a company's inventory is sold and replaced over a period. To determine whether those ratios are healthy they should be compared to the industry, in this case amazon is the industry. Amazon uses a First in First Out method for accounting for its inventory, which helps recording costs at their fair values. The higher the number the faster the inventory is moving. Ratio decreasing indicates either overstocking of products or poor sales. Another factor is the increase of price of goods sold relatively when compared to previous years.

Days Inventory= Inventory/ Average cost of goods sold per day

			AVG. GOGS/ DAY	# Of Days
2010	=	26561/365	72.76986301	44.00173186
2011	=	37288/365	102.1589041	48.86505042
2012	=	45971/365	125.9479452	47.8848622

As the ratio is decreasing we can see the number of days increasing. It is not something bad to inventory for this long for this kind of industry because the nature of the products does not perish or loose value.

ix. Accounts Payable Turnover

Accounts payable turnover= Cost of Goods Sold/Accounts Payable

2010	=	26,561/8051	=	3,30
2011	=	37288/11145	=	3.35
2012	=	45971/13318	=	3.45

Days Payable= Accounts Payable/ Average purchases (or cost of good sold) per day

			AVG GOGS/ DAY	# Of DAYS
2010	=	26561/365	72.76986301	110.6364595
2011	=	37288/365	102.1589041	109.094749
2012	=	45971/365	125.9479452	105.7420983

The turnover is a measure of how fast a firm pays its suppliers or section owing money. The higher the turnover rates the better because it indicates faster payments to vendors in amazon’s case. As you can see above the ratio is increasing which means there is improvement in paying accounts payable, and that will definitely help the company engage in new contracts with other vendors at an easier rate. The day’s payable shows us a more accurate measure of how it usually takes them to pay its payable. They have started at 110 days in 2010 and improved to 105 days in 2012. This tells us that amazon is a responsible company and strives to improve no matter how it is doing financially. It has succeeded in improving ratios while profit margins decreased.

x. Fixed Assets Turnover

Fixed Asset Turnover= Net Sales/ Net Fixed Assets

2010	=	34,204/2414	=	14.1
2011	=	48,077/4417	=	10.8
2012	=	61093/7060	=	8.6

The fixed asset turnover ratio measures how successful a firm is able to earn income on its net fixed assets. Net fixed assets consist primarily of Property, plant, and equipment. Decreasing fixed asset ratios are considered bas when decreasing in the situation of all assets remaining constant. However with amazon the decrease is not considered bad because it has had some increases in net fixed assets resulting from new purchases of assets. As mention previously this does not mean amazon is not performing well, it means it is in the process of showing greater returns in future years from current investments. It is not common that newly acquired assets pay back right away.

C. Risk Analysis

i. Current Ratio

Current Ratio= Current Assets/ Current Liabilities

2010	=	13,747/10,372	=	1.33
2011	=	17,490/14,896	=	1.17
2012	=	21,296/19,002	=	1.12

The current ratio is a liquidity measure, which measures the ability of a firm to cover its current liabilities using its current assets or revenues generated from current current assets. Any number above 1 indicated that the company is able to cover its liabilities, but does not guarantee that it will not go through rough financial issues. Amazon current ration declined which isn’t a good indicator because it shows the firm is unable to cover its current liabilities as easy as it use to be. The decline can be due to increased spending, or decline in management efficiency a result of the high growth in sales. Investors should not disregard this ratio, as it is an important ratio that has to be improved for security and assurance of company’s continuity.

ii. Quick Ratio

Quick Ratio = Cash + Short Term Investments + Accounts Receivable / Current Liabilities

2010	=	(3777+4985+1587)/10372	=	1.00
2011	=	(5269+4307+2571)/14896	=	0.83
2012	=	(8084+3364+3364)/19002	=	0.79

The quick ration is similar to the current ratio; it is a measure for the company’s short-term liquidity. It tells us about the ability of the firm to cover its current liabilities using its most liquid assets such as cash, short-term investments and accounts receivable. Amazons has lost a portion of its liquid assets that can be used to cover current liabilities due to several factors. Firstly the decline of short-term investments while current liabilities is increasing. Secondly the accounts receivable system needs to be improved. The quick ratio is low is because most of amazons assets are inventory however, that does not justify the decline and should be improved to gain better positioning.

iii. Cash Ratio

Cash ratio= (cash + marketable securities) / Current Liabilities

2010	=	(3777+4985)/10372	=	.84
2011	=	(5269+4307)/14896	=	.64
2012	=	(8084+3364)/19002	=	.60

The cash ratio measures the firm’s ability to cover current liabilities by only using the cash available and the marketable securities owned. In all liquidity measures declining ratios is unacceptable but explainable. Cash ratio is not the only ratio we rely on when analyzing liquidity and does not danger us when not accounting for a majoring of the assets to cover liabilities. The expansion of amazon, increase in operating expenses, and decline in management efficiency has led to a decrease in the cash ratio. Amazon with a ratio of .60 can face difficulties in covering short-term liabilities with ease.

iv. Liabilities-to-Equity Ratio

Liabilities to equity ratio = Total Liabilities / Shareholders Equity

2010	=	(10,372+1561)/6864	=	1.75
2011	=	(14,896+255+2370)/7757	=	2.26
2012	=	(19002+3084+2277)/8192	=	2.97

This ratio compares the liabilities to the amount invested by shareholders (equity). It is not a perfect measure on whether a company is using outside financing. The increase liabilities to equity ratio are due to expansion plans they are implementing. A high ratio often indicates that that company is using debt to finance its growth. We will have a closer look by analyzing the debt to equity ratio to better understand how the growth is financed.

v. Debt-to-Equity Ratio

Debt-to-Equity ratio= Short term debt + Long term debt/ Shareholders Equity

2010	=	N/A	=	N/A
2011	=	255/7757	=	0.03
2012	=	3084/8192	=	0.38

The debt to equity ratio is a perfect measure to understand in what the company is funding its growth. The ratio for amazon when compared to the industry indicates a great low ratio. A low ratio is usually means that they finance growth by investors instead of debt. Some debt is healthy but not too much debt. Some debt can help avoid taxes, where more debt can affect a company’s credibility when it needs to borrow money for operations.

vi. Interest Coverage (Earnings Basis)

Interest coverage= (Net Income +Interest Expense + Tax Expense)/ Interest Expense

2010	=	(3495+39+75)/39	=	92.54
2011	=	(3903+65+33)/65	=	61.55
2012	=	(4180+92+112)/92	=	47.65

This ratio highlights the dollars of earning available for each dollar of required interest payment; it is used to determine how easily a company can pay interest on outstanding debt. The lower the ratio the more the company faces difficulties in covering debt expenses. Any number below 1 is considered unhealthy and indicates the company is not generating enough revenues to satisfy interest expense; a number from 1.5 to 1.0 is questionable. Amazons numbers is outperforming the industry and are great. However the decline in the interest coverage ratio is questionable and should not continue to decline or else the company will end up being at risk.

vii. Dividend Payout Ratio

Cash Dividends Paid / Net Income

2010	=	0/1,152	=	0
2011	=	0/631	=	0
2012	=	0/-39	=	0

Historical records indicate that Amazon has never paid out dividends.

viii. Sustainable Growth Rate

Sustainable growth rate = ROE x (1-divident payout ratio)

The company sustainable growth rate is equal to the ROE since dividend payout ratio is equal to zero.

III. Forecasting

a. Five-Year Forecasted performance and net profit

b. Explanations of process and assumptions

· Sales: Amazon’s sales are currently growing at a fast rate, and are expected to continue to increase a result of its new purchase of assets and investments that will generate additional sales. Amazon is aware of the external factors that may affect its market share and is monitoring consumer needs closely to increase their share in the market. I have calculated the expected growth of sales based on current (1-3 years old) growth rates. The average growth rate was not used but an expected growth rate based on current growth and including other factors such as market conditions in general such as economic conditions and expansion plans in emerging economies.

· Cost of Sales: Cost of sales are cost directly related to the sale of good so they tend to increase when sales increase It is considered healthy doe cost of sales to increase at a lower rate than the increase in sales, it indicates paying less for more (efficiency). In the past three years amazon has managed to lower the Cost Of Sales at an average of 1% annually. It is part of Amazons plans to decrease the Cost of Sales. Therefore when I calculated the expected COS I expected it to decrease between 1-3 % annually of Sales of the year when compared to the previous year.

· Selling, General, and Administrative Expenses: Was calculated using a simple expected growth. Sales growth rates were analyzed and SG&A Costs growth rate were analyzed and compared to growth in sales. The forecast was based on an average of the growth oft hese expenses. The Average was lowered at some years and increased in other years a result of the expected economic situations that determine employee’s pay.

· Operating expense and other Expenses: This portion was calculated using average growth of the expenses through the years. After the percentage of growth was determined it was multiplied by Sales forecasted for the year to know the amount it will cost the firm. Operating expense and other expense were calculated separately using the same method.

· Interest Income: It was calculated by multiplying expected growth rate take from the average growth of the interest income by the expected sales. In years where interest income was lower it is due to the expectancy of using cash for expansion.

· Interest Expense: Interest expense was also calculated by calculating is growth rate from previous rates and multiplying by sales. However, it was lowered in years such 2016, and 2017 a result of recovery of some debt or interest obligation expenses.

· Tax Expense: Is the amount the company pay in taxes. This expense is lowered when a company has debt and when it doesn’t have debt it pays a fixed percentage of its sales. The taxed we also calculated using averages, and in some years adjusted to account for debt.

· Net Income: The results we obtained after deducting all expected costs from expected sales. I expect the company to be profitable in the coming years because it expansion costs paid and assets purchased are going to pay back. Another reason is that it is working in decreasing variable expenses.

IV. Cost of Capital:

1. CAPM