Analysis Of Amazon.com’s Financial Performance And Strategies For Improvement

Increase in Net Sales, Gross Profit, and Operating Expenses

Discuss about the Financial Statement Analysis of Amazon.com.

As per the case study which is provided for Amazon.com, the net sales of the company has increased from the figures of 1999. The net sales of the business in the year 2000 is shown as $ 2,761,983 which is much more than previous years figure $ 1,639,839. The sales has increased for the company as the company has taken necessary steps to re-design the business model of the business. The gross profit of the company is shown as $ 655,777 which in comparison to previous year was $ 290,645. There has been sufficient increase in the gross profit margin of the company which is a positive sign for the business. The operating expenses of the company which is shown in the financial statements of the company for the year 2000 reveals that the company has incurred lot of expenses during the year. The operating expenses of the company is shown in the profit and loss statement as $ 1,519,657 for the year 2000. This is one of the major causes due to which the company has earned an operating loss of $ 1,106,677. The company has incurred a loss of $ 1,411,273 for the year 2000 which is more than the loss which was incurred during the previous year (Palepu, Healy and Peek 2013). The main reason for the increase in the level of losses of the company is due to the increased cost of operations of the business.

The current assets of the company which shows the liquidity position of the business and is considered to very important for the business (Mathuva 2015). Even though the current assets of the business have increased from previous year’s comparison, however the value of the total assets have fallen from the previous year which is not a good sign for the business. In addition to this, the financial statements of the company for the year 2000 shows that the level of total current liabilities have also increased. In order to overcome the losses of the business and to also improve the profitability of the business the company had to take a series of loans from banks. This has resulted in increase in the overall borrowings of the company as per the annual reports of the company. The annual reports of the business also show that the losses which are incurred by the business have also affected the shareholder’s equity of the company which is shown in negative. The cash flow from operating activities shows that the company has negative cash flow for the year 2000 is $ 130,442. The cash from financing activities and investing activities show favorable results and moreover the financing activities of the business shows favorable results due to the long-term proceeds which the business has taken. The cash and cash equivalent balance which is shown in the cash flow statement of the business is $ 822, 435 which is significantly more than the previous year’s figure. The main reason for such an increase in the cash and cash equivalent figure is due to the long-term loan which is taken by the business (Martínez-Sola, García-Teruel and Martínez-Solano 2013).

Evaluation of Financial Ratios

The key financial ratios are used as financial indicators as to the performance of the business and are important for the business. In many cases companies provide certain ratios which are significant for the business in the financial statements of the company (Attig et al. 2013). In the case of Amazon.com, the case study has shown certain ratio which are related to sales margin and different turnover ratio. The computation of some significant ratio for two years is shown below:

The profitability ratio of the company as shown in figure 1 comprises of gross profit margin, net profit margin, return on assets and return on equity (Agha 2014). The gross profit margin of the business shows that the ratio has improved from previous year which may be due to the increase in the sales of the business. The net profit margin of the company shows that the ratio is in negative which is not a favorable sign and it can be attributed to the increased amount of operating costs of the business (Mathuva 2015). The return on assets and return on equity of the company also display negative results which is not favorable for the business.

The solvency ratio of the company reveals the liquidity position and situation of the business. The solvency ratio of the business comprises of current ratio, quick ratio, debt to equity ratio, debt ratio and equity ratio (Jiménez, Lopez and Saurina 2013). As shown in the table above the current ratio of the business has increased slightly improved from the previous year which is mainly due to the favorable cash and cash equivalent balance. The debt equity ratio is shown in negative which is not a favorable sign as the equity value of the company has become negative due to the losses which Amazon.com has suffered. The equity ratio of the company is shown to unfavorable which is due the losses which is faced by the business.

The efficiency ratio of Amazon.com shows significant ratios such as inventory turnover ratio, payables turnover ratio. The inventory turnover ratio shows that the estimate has increased from the previous year which is favorable sign for the business. The account payable turnover ratio also has shown an increase from the previous year’s estimate which is also a favorable result (Gautam, Petander and Noel 2013). The efficiency ratio of the company shows that the company.

As per the case study on Amazon.com, the business was engaged in retailing business is based on the internet selling. In 1990 the prices of internets stocks prices started to fall which resulted in the fall of the stock prices of Amazon.com. The stock prices of Amazon.com fell from $113 in December 1999 to about $ 15 in the beginning of the year 2000. The market valuation of the company also fell from $ 35 million to less than $ 5 million within a year time period. The management of the company analyzing the current market condition started looking for alternatives business models so as to ensure the survival of the business in difficult times. The management of the company in order to combat the situation management decided to close the online toy store which the company operated and instead of it entered into a partnership agreement with a retail toy store so as ensure that the expertise of Amazon.com can be effectively used.

Impact of Competition on Amazon.com’s Performance

With the current situation of the company’s net profit and shareholder’s equity, it is difficult for the business to survive any further if the management of Amazon does not take any necessary steps. The business needs to incorporate a new business model which can suit the needs of the company. Another factor which has impact on the business of Amazon.com is that new and emergent competitors are entering the retailing market and thereby creating intense competition among the companies in the industry. The business needs to formulate a strategy which can give Amazon.com a distinctive advantage so that the business can effectively face the competitors of the company. In order to survive the market condition, the management of the company needs to further diversify the products which the online retail store has to offer. The management of the business in order to survive the current market condition needs to formulate strategies which combat the market condition.

Political competitive environment refers to the competitive environment of the business where the business operates. The level of competition in an environment also has an impact on the overall business of the company (McNair 2017). In the case study it is mentioned that Amzon.com started to face tough competition from the traditional retailers and also the newly online retail business sites. In addition to this, as per the case study the management of Amazon.com is concerned with the level of competition in the market can affect the business. Besides this, the market is changing as shown the stock prices of the company has significantly fallen and with the combined pressure of the competitors the survival of the business might be at stake. As shown in the case study as the competitive pressure in the market increased and the market condition worsen, the profitability of the company was affected and there was continued pressure from the shareholders of the company on the management to generate profits for the business (Hendrischke 2013). Thus, from the above discussions it is quite clear that the business Amazon.com is also affected by the level of competition in the retailed market.

Insolvency is a situation where the company dissolves the business of company or ceases to continue its operation (Duffy 2017). In case insolvency, businesses are expected to follow certain ethical considerations which are discussed below:

• When a business is being or deemed to be dissolved, it is the duty of the management of the company to ensure that all necessary books of accounts and records are maintained about the economical transactions and payoff which takes place after a company is deemed to be dissolved (Friedman 2013). Another consideration is that it is the responsibility of the management to protect the interests of the creditors of the business including the other stakeholders of the business.
• It is essential that the management of the company ensures that the company does not involve itself in kind of trading or business transactions. This is due to the fact that the business already owes debt to other stakeholders and it is unethical for the business to involve itself in any further trading activities.
• Compensation proceedings for the business is essential so as to proceed with the dissolution plan of the business. An external Liquidator is appointed to supervise that the proceedings of the dissolution is smoothly undertaken. The liquidator of the business is responsible for monitoring the amounts which are paid to different class of creditors and also the shareholders (Rainey 2015). It is also an ethical consideration that the management of the business ensures that the fees of the liquidator are paid first and then the rest of the creditors in preferential sequence.
• The management also must ensure that no secret profit is kept by the directors of the business and all the debts of the company are paid off in preference order.
• The management must also ensure that the all the legal requirements which are set out by the government are followed. This also falls under the purview of ethical consideration of the business.

Merger and acquisition is a strategy which business often follow where two or more companies combine together for achieving better performance in the market. In other words, business combine together to gain certain competitive advantage, some specific business features, cost advantage and other such advantage (Fäh 2016). The external factors which affect the merger and acquisition decisions of the business are explained below:

1. Strategic Fit: The most important consideration which business need to consider while opting for merger and acquisition is whether the company which is selected for merger and acquisition is whether it is a strategic fit. This means that the company which is selected for the merger and acquisition must be similar to the host company in respect of organizational culture, competitive situation, leadership style, complementary products. The main purpose of merger and acquisition is to ensure that the newly formed company has some competitive advantage which can help the business in further development (Holburn and Vanden Bergh 2014).
2. Level of Competition: Merger and Acquisition decisions of a company is also affected by the level of competition in the market. If the competition level in the market is fierce then it is often the strategy of the management of companies to merger with a similar company so that they can face the competition in a better way and also further develop the business. In addition to this, business also often merger so as to overcome severe market conditions and survive in the same. In the case study given in the question, Amazon.com is also facing similar market condition.
3. Opportunities: Another condition which affects the decisions of merger and acquisition is the availability of opportunities in the market for further growth and development. In order to take advantages of an opportunity business considers merger and acquisition decisions. For example, if a business has the opportunity to further diversify or penetrate aa new market then business is likely to consider merger decisions (Krishnan and Masulis 2013). Similarly, when a business faces a threat which can affect the survival of business, merger is the clear option in order to further strengthen the business and survive the threat which the business faces.
4. Governmental Policies: The merger and acquisition of the business is also depended on the regulation of the governments. The general rules which are established in case of merger and acquisition of the business also needs to be considered.

In the case of Amazon.com, the business can withstand the tough competition and severe market condition if the company can merger or acquire similar business in order to combat the severe market condition.

The recommendations which can be suggested to Amazon.com for further improving the business conditions and improve the profitability of the business are given below:

• The management of Amazon.com needs to formulate a proper strategy which can help the business to survive the market conditions and at the same time identify a business model which the company can implement in order to improve the profitability of the business and meet the expectation of the shareholders of the company.
• The management of the company can improve the business of the company by further diversifying the products of the business. This will help the business to reduce the market risks which the company faces. As per the case study, Amazon.com is able to generate some profits due to the diversification of products such as toys, books and other similar products. This will increase the chances of the business to improve the profitability of the business.
• The management of the company can also consider merging or acquiring other businesses so as to ensure that the business can survive the current market condition.
• The management of the company can also consider reducing the operating costs which the business incurs so as to improve the profitability of the business. The business also needs to reduce the loans which are used by the business to finance the activities of the business.
• The management of Amazon.com needs to identify a business area which is profit so as to further expand that area and the area which is least profitable which can be sold off so as to ensure the business does not faces any losses

References

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Friedman, M., 2013. To bail out or not to bail out: Moral hazard and other ethical considerations. Geo. JL & Pub. Pol’y, 11, p.411.

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