In the present report, an effort will be made in respect of presenting the economic issues that were being faced by the online retail giant Amazon. It is quite understandable that the company was facing issues of becoming profitable and create value for its shareholders. The reason being that the company had arranged for huge amount of funds from the shareholders and other financial institutions and the third parties. Due to the decrease in the value of the stocks as a result OF the dot com phenomenon in the year 2000 the company had lose a huge amount of its value. It is this required to identify the ways in which the company can increase its value by increasing the profitability of its business (Titman et al., 2017). For the analysis of the situation, a deeper study will be conducted of the various ratios and the income statement of, the company along with the balance sheet of the company. Based on the results of the analysis that is being carried out, several recommendations will be made in respect of the viability of the future operations of the company and the propriety of the investment made by the shareholders until date in the company.
As per the information that is being available from the income statement of the company, the following observations can be made:
The growth of the sales of the company amounted to $2761983000 and $1639839000 in the year 2000 and 1999 respectively. During the same corresponding period, the cost of sales OF, the company amounted to $21062016000 and $1349194000. This means that the common show a growth of around 68% in respect of its sales (Renz & Herman, 2016). However, deign the same period the cost of sales of the company grew at a pace of around 49%. It is very understandable that due to the difference in the growth rates of the sales of the company and the cost of sales it was possible for the company to earn profits. However, the rate of increase in the cost of the company cannot be justified by the overall increase in the gross profit of the company. The reason being that there are several other costs that will soon catch up with the profits of the company and diminish its overall return.
It can be observed that the expenditure incurred by the company in respect of the fulfilment costs has increased significantly over the years. The fulfilment costs of the company amounted to $15944, $65227, $237312 and $414509 respectively for the year 1997, 1998, 1999 and 2000 respectively (Lau, 2016). It can be clearly seen that the among incurred by the company in respect of the fulfilment costs increased around 25 times. The effect of the same can be felt in the loss that the company is presently earning. The expense has overshadowed the impact of the gross profit earned by the company. The company needs to control the amount of fulfilment costs immediately.
The interest expense of the company amounted to $326, $26639, $84566 and $130921 for the year 1997, 1998, 1999 and 2000 respectively. From this, it can be effectively concluded that the interest expense of the company has risen substantially over the period of four years. The reason being the ever-increasing borrowing amount of the company (Waxman, 2018).
|
Net Profit Margin |
||||
|
2000 |
1999 |
1998 |
1997 |
|
|
Net Profit |
-1411273 |
-719968 |
-124546 |
-31020 |
|
Sales |
2761983 |
1639839 |
609819 |
147787 |
|
Net Profit Margin |
-0.51 |
-0.44 |
-0.20 |
-0.21 |
It can be seen that the net profit margin of the company has been steadily decaling over the years. This is happening despite the fact that the sales of the company has been increasing steadily over the period of last four years. It can be seen that the sales OF the company amounted to 147787, 609819, 1639839 and 2761983 respectively for the year 1997, 1998, 1999 and 2000. This clearly depicts that the company has been able to steadily increase its customer’s base over the years (Finkler et al., 2016). The increase in the customer base of the company has however not been able to generate enough cash flows so as to cover up the expenses of the company and to generate profit for the company. The reason being that certain expenses of the company re so high that the company is not being able to cope up with them. For instance, the fulfilment costs OF the company amounted to 15944, 65227, 237312 and 414509 respectively for the year 1997, 1998, 1999 and 2000. This clearly shows the trend of the expenses that have been incurred by the company in respect OF the fulfilment costs. This clearly shows that the expenses of the company in this respect have increased over 25 times over the last four years. Another example OF such exuberant expenditure incurred by company includes expenditure related to the restructuring of the company (Zietlow et al., 2018). The restructuring expenses OF the company amounted to $3535, $8072 and $200311 respectively for the year 1998. 1999 and 2000. The expenditure incurred by the company in respect of restructuring of the company increased about 24 times within a period of just one year. Hence thought the sales of the company are increasing over the years the company is not able to increase its net profit at the Sam pace.
|
Debt Equity Ratio |
||
|
2000 |
1999 |
|
|
Total Liabilities |
3102420 |
2199572 |
|
Shareholders’ Equity |
-970251 |
266278 |
|
Debt Equity Ratio |
-3.20 |
8.26 |
The debt equity ratio of any company demonstrates the ratio between the total liabilities OF the company and the shareholders equity father company. This ratio is an indication to how much of the assets acquired by the company are financed by the equity shareholders of the company. The more the amount recorded by the company in respect of the ratio, better will be the liquidity or the solvency position of the company (Ogiela, 2015). It is seen from the table that the Liabilities of the company has increased significantly over the years whereas the shareholder so the company has decreased significantly over the period of one year. The main reason behind this is the net loss that the company is earning for the last few years. The additional capital that has been invested by the shareholders in the company amounted to $1194369 and $1335303 in the year 1999 and 2000 respectively (Moutinho & Vargas-Sanchez, 2018). The reason being that more number of shareholders invested in the shares OF the company during this period. However, the total amount of the shareholders equity is diminished by the accumulated deficit and the other comprehensive loss earned by the company. The other comprehensive loss earned by the company amounted to (1709) and (2376) for the year 1999 and 2000 respectively and for the same period the accumulated deficit OF the company amounted to (882028) and (2293301) respectively for the year 1999 and 2000 respectively. Hence it can be seen that the company has been able to increase it is paid up share capital over the years but the same could not be said about the total shareholders equity. As the total shareholders, equity is subjected to the profits and the losses earned by the company in the respective period (Andreou et al., 2014). As the company has not been able to generate sufficient or positive returns, the debt equity ratio of the company has dwindled over the years. This possess a serious threat to the solvency of the company as the assets that are acquired by the company seems to be acquired by use of the borrowings from the third parties or from institutions in the form of loan The company must immediately strive to improve its profitability (Schaeck & Cihák, 2014).
Current ratio:
|
Current Ratio |
||
|
2000 |
1999 |
|
|
Current Assets |
1361129 |
1006477 |
|
Current liabilities |
974956 |
733234 |
|
Current Ratio |
1.40 |
1.37 |
The current ratio of any company establishes the relationship between the current asserts of the company and the current liabilities of the company. This relationship depicts the preparedness of the company in respect of meeting up with its short and term liabilities by utilising the short-term assets of the company. This gives an idea about the liquidity of the company. In the present case, it can be seen that the current assets of the company amounted to $1006477 and $1361129 in the year 1999 and 2000 respectively. For the same period, time the current liabilities of the company increased from $733234 in the year 1999 to $9784956 in the year 2000 (Sheffet et al., 2014). As the rate of increase in the current assets of the company is higher than the rate of increase in the current liability so the company, the company had been able to increase its current ratio from 1.37 in the year 1999 to 1.40 in the year 2000. Hence, it can be said that the company has been able to improve its liquidity by improving its ability to meet up its current liabilities that crop up during the regular operations of the company (Petty et al., 2015).
|
Quick Ratio |
||
|
2000 |
1999 |
|
|
Current Assets |
1361129 |
1006477 |
|
Inventories |
174563 |
220646 |
|
Quick Assets |
1186566 |
785831 |
|
Current Liabilities |
974956 |
733234 |
|
Quick Ratio |
1.22 |
1.07 |
It can be seen from the table that the quick ratio of the company has increased. This suggests that the company’s ability to meet its very short term obligations has improved.
Inventory to Net Working Capital Ratio:
|
Inventory to Net Working Capital Ratio |
||
|
2000 |
1999 |
|
|
Current Assets |
1361129 |
1006477 |
|
Current Liabilities |
974956 |
733234 |
|
Working Capital |
386173 |
273243 |
|
Inventories |
174563 |
220646 |
|
Ratio |
45% |
81% |
It can be said that the inventory of the company is now being owned by cash ore than it was owned one year back. The reason being that the ratio of the company has improved.
|
Debt To Asset Ratio |
||
|
2000 |
1999 |
|
|
Total Liabilities |
3102420 |
2199572 |
|
Total Assets |
2135169 |
2465850 |
|
Debt To Asset Ratio |
1.45 |
0.89 |
It can be seen that the total assets of the company has decreased over the period of one year and for the same period the liabilities of the company has increased. Hence, the ratio of the company has increased significantly.
|
Inventory Turnover Ratio |
||
|
2000 |
1999 |
|
|
COGS |
2106206 |
1349194 |
|
Inventory |
174563 |
220646 |
|
Inventory Turnover Ratio |
12.07 |
6.11 |
It can be noticed that the cost of goof sold of the company has increased over the period of one year and during the same time; the inventory of the company has decreased. Hence, the ratio has increased significantly over the period of one year.
|
Fixed Assets Turnover Ratio |
||
|
2000 |
1999 |
|
|
Sales |
2761983 |
1639839 |
|
Fixed Assets |
366416 |
317613 |
|
Fixed Asset Turnover Ratio |
7.54 |
5.16 |
It can be seen that the fixed asset turnover ratio of the company has improved significantly over the period of one year.
|
Total Assets Turnover Ratio |
||
|
2000 |
1999 |
|
|
Sales |
2761983 |
1639839 |
|
Total Assets |
2135169 |
2465850 |
|
Total Asset Turnover Ratio |
1.29 |
0.67 |
It can be seen that the total asset turnover ratio of the company has improved over the period of one year.
|
Gross Profit Margin |
||
|
2000 |
1999 |
|
|
Gross Profit |
655777 |
290645 |
|
Sales |
2761983 |
1639839 |
|
Gross Profit Margin |
24% |
18% |
It can be seen that the profitability of the company has improved significantly over the period of one year.
|
Cash Ratio |
||
|
2000 |
1999 |
|
|
Cash |
822435 |
133309 |
|
Marketable Securities |
278087 |
572879 |
|
Current Liabilities |
974956 |
733234 |
|
Cash Ratio |
1.13 |
0.96 |
As the cash ratio of the company has improved the current liability of the company has improved significantly.
It has to be understood that at [resent the company is unable to register profits due to the immense expenditure that it is incurring year after year. the returns that will be generated from these expenditures will be take time to come. The reason being that whatever step the company is taking is subjected to various sorts of factors that are beyond the control of the company and the company has to gain step back and mould its actions according to the scenario that has cropped up recently (Attig et al., 2016). This is the reason why the company is not making headway in terms of tangible profits to be shown to the shareholders of the company. However, the potential of the company in respect OF its profit earning capacity cannot be denied. The reason being that the consumer has completely accepted the model presented before them by the company regarding online retailing. The change in the preference of the consumers can be seen from the increased sales recorded by the company in year in year on basis.
There are severe implication so the competition that the company is facing from the offline retailers in the present time. The purpose of countering them, the company had to close the online portal of its website selling toys under the brand name of another company. In place of selling it on amazon, the company is pairing up with the toy company so as to create a website for the company, manage the inventory the company, and provide world calls delivery services and customer services (Bundy et al., 2015). THz Toy Company in turn is expected to own the inventory of Amazon Company. This model has significantly helped the company to overcome the obstacle of the presence of competitors in the market. The reason being that by optimally utilising its present asset the company is able to generate profits without having to make the sale itself.
Every organisation must remember the Iron Law of Responsibility. This law suggest that the company is only a trustee of the resources OF the society. It must make sure that it utilises the resources in the most appropriate manner possible and generate value for its shareholders in return of the right granted to it by the society to use its resources. In case the company fails to meet the expectation of the society, it can take it back too (Pauw et al., 2015). Hence, if the organisation becomes insolvent it must make sure to abide by several ethical principles. They can be summarised as follows:
The are several external factors that are going to affect the business of the entity. They as follows:
There are several competitors that are going to crop up before the company from time to time. In order to deal within the same the company needs to continuously monitor the various ways in which it can gain an added advantage over its competitors.
The company must be agile enough to adapt the mode of its operations rapidly depending upon the change in the demands and the expectation of the customers (Ward & Forker, 2017).
The company must make sure that it undertakes to objectively identify the presence of
Requisite infrastructure in the market. The infrastructure of the company will include the presence of trained professionals of Informational technology, customer relationship managers etc.
There is every possibility for the company to engage itself in merger and acquisition of several entities that will fall in line with the objective of the company to deliver the products to the customers fast, reliable and at cheaper price (Francis et al., 2015).
Conclusion and recommendation:
After conducting in depth analysis of the factors that are going to affect the performance of the company in the future and the various indicators of the company like the various ratios and the profit and loss statement of the company, it can be concluded that at present the company is not at a position to demand the confidence of the shareholders. This is because of the fact that the company is unable to generate positive profits over the period of last four years. The reason for this being that the company has to incur a large amount of expenditure in respect of the restructuring of the company. In addition to that, the company has taken a large amount of borrowing that is demanding a large amount OF interest expense from the company every year. Hence, the expenditure of the company is eating away any gross profit that the company is presently earning.
However, there are several steps that are being taken up by the company in order to ensure that the operations of the entity become viable in the long term. All the steps taken by the company whether regarding the reconsideration OF the business model or regarding the acquisition or merger of the entities aligned with its objectives are prudent. Hence, it is assured that the company is going to deliver value to all its shareholders in the future. Therefore, it will be wise to purchase the shares and invest in the company at present, as the prices of the shares of the company are very low at present. Hence, there is a chance of massive wealth creation for the present shareholders in the future.
Reference
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Ashmarina, S. I., Zotova, A. S., & Smolina, E. S. (2016). Implementation of financial sustainability in organizations through valuation of financial leverage effect in Russian practice of financial management.
Attig, N., Boubakri, N., El Ghoul, S., & Guedhami, O. (2016). The global financial crisis, family control, and dividend policy. Financial Management, 45(2), 291-313.
Bundy, D. A., Dhomun, B., Daney, X., Schultz, L. B., & Tembon, A. (2015). Investing in onchocerciasis control: financial management of the African Programme for Onchocerciasis Control (APOC). PLoS neglected tropical diseases, 9(5), e0003508.
Cashin, C., Bloom, D., Sparkes, S., Barroy, H., Kutzin, J., O’Dougherty, S., & World Health Organization. (2017). Aligning public financial management and health financing: sustaining progress toward universal health coverage. World Health Organization.
Engel, L., Bar, Y., Beaton, D. E., Green, R. E., & Dawson, D. R. (2016). Identifying instruments to quantify financial management skills in adults with acquired cognitive impairments. Journal of clinical and experimental neuropsychology, 38(1), 76-95.
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