Discuss about the Financial Decision Making In Family Firms.
Financial decision making is a comprehensive financial and wealth planning process which helps the business and the individuals to meet the financial objectives. This process focuses on the financial statement of the company to take decision about the financial performance and the future policies and the strategies of the company (Mandell & Hanson, 2009). This process is also helpful for the individuals to make decision about the investment and divestment from the particular company or the industry. In the report, financial decision making process has been applied on Amazon to measure the performance and the investment position of the company. Financial modelling process has been done on the company to make decision about the USD 30,00,000 investments in the Amazon.
Amazon Inc is an American company which is based in Washington. It has been founded by Jeff Bezos in 1994. The company is the one of the largest internet retailer all over the world in conditions of total turnover and the market capitalization (Reuters, 2018). The business is second largest in terms of total sales after Alibaba. Earlier the website has been started like an online bookstore and later, it has been entered to new market to sell various other products. The current position of the business explains about the better financial and non financial position.
The market position of the company is quite strong. The evaluation on the Amazon Inc explains that the company’s market share is continuously improving and currently the company is leader in the industry. The customer base and the existence of the company at foreign market has also been improved which has helped the company to meet its objectives. Currently, approx 5,66,000 people are working with Amazon Inc and the company is managing various subsidiaries as well.
Financial analysis is a process which evaluates all the financial related transaction of the business through financial statement to reach over a conclusion about the financial performance of the company (Koropp et al, 2014). The financial analysis study has been done on Amazon Inc.
Ratio analysis is a financial analysis model which focuses on few financial figures to measure the profitability level, liquidity level, solvency level, gearing level etc of a business. It helps the investors to identify the financial performance of the organization and make better choice about the investment into the organization (Dema-Moreno, 2009). The ratio analysis study of Amazon Inc has been given below:
Profitability ratio evaluates the profitability level of an organization on the basis of the total turnover and the profits of the company. The profitability ratios of the company are as follows:
|
Profitability Ratios: |
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
Return on Capital employed |
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
Operating profit / |
745 |
178 |
2,233 |
4,186 |
4,106 |
|
|
Capital employed (total assets – current liabilities) |
17,179 |
26,416 |
31,545 |
39,586 |
73,427 |
|
|
Answer: |
% |
4.34% |
0.67% |
7.08% |
10.57% |
5.59% |
|
Gross Profit Margin |
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
Gross profit / |
11,686 |
15,470 |
21,945 |
30,103 |
40,683 |
|
|
Sales Revenue (note used operating revenue) |
74,452 |
88,988 |
107,006 |
135,987 |
177,866 |
|
|
Answer: |
15.7% |
17.4% |
20.5% |
22.1% |
22.9% |
|
|
Operating profit margin |
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
Operating profit / |
745 |
178 |
2,233 |
4,186 |
4,106 |
|
|
Sales Revenue |
% |
74,452 |
88,988 |
107,006 |
135,987 |
177,866 |
|
Answer: |
1.00% |
0.20% |
2.09% |
3.08% |
2.31% |
(Morningstar, 2018)
The table explains that the return on capital employed (ROCE) level of the company has been lowered in current year. In last 5 years, various fluctuations have been faced by the company due to the changes into the profits and the capital of the business. Further, the gross profit margin of the business has been improved and explains about better strategies of the company in last 5 years. In addition, the operating profit of the company has been lowered which have impacted on the operating margin of the company.
Liquidity ratio evaluates the short term debt obligation level of an organization on the basis of the current assets and liabilities of the business. The liquidity ratio of the business is as follows:
|
Liquidity Ratios |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Current Ratio |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Current Assets / |
24,625 |
31,327 |
36,474 |
45,781 |
60,197 |
|
Current liabilities |
22,980 |
28,089 |
33,899 |
43,816 |
57,883 |
|
Answer: |
1.07 |
1.12 |
1.08 |
1.04 |
1.04 |
|
Acid test ratio |
2013 |
2014 |
2015 |
2016 |
2017 |
|
Current Assets – Inventory / |
17,214 |
23,028 |
26,231 |
34,320 |
44,150 |
|
Current Liabilities |
22,980 |
28,089 |
33,899 |
43,816 |
57,883 |
|
Answer: |
0.75 |
0.82 |
0.77 |
0.78 |
0.76 |
The table explains that the current ratio of the business has been lowered in current year. The company has reduced the liquidity level according to the industry. Further, the quick liquidity level of the company is average in last 5 year and explains about better liquidity position of the company (Rabin, 2013).
Asset efficiency ratio evaluates the working capital requirement of an organization on the basis of the inventory, debtors and creditors amount. The asset efficiency ratio of the company is as follows:
|
Asset Efficiency Ratios |
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
Trade payable payment period ratio |
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
Accounts payable/ |
15,133 |
16,459 |
20,397 |
25,309 |
34,616 |
|
|
Cost of sales |
62,766 |
73,518 |
85,061 |
105,884 |
137,183 |
|
|
Answer: (note the above needs to be x 365) |
# days |
88.00 |
81.72 |
87.52 |
87.24 |
92.10 |
|
Inventory Turnover (days) |
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
Average Inventory / |
7,411 |
8,299 |
10,243 |
11,461 |
16,047 |
|
|
Cost of Sales |
# days |
62,766 |
73,518 |
85,061 |
105,884 |
137,183 |
|
Answer: (note the above needs to be x 365) |
43.10 |
41.20 |
43.95 |
39.51 |
42.70 |
|
|
Receivables Turnover (days) |
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
Average trade debtors / |
4,767 |
5,612 |
6,423 |
8,339 |
13,164 |
|
|
Sales revenue (note used operating revenue) |
# days |
74,452 |
88,988 |
107,006 |
135,987 |
177,866 |
|
Answer: (note the above needs to be x 365) |
23.37 |
23.02 |
21.91 |
22.38 |
27.01 |
The table explains that the trade payable days of the company has been improved along with the improvement in the inventory turnover days and receivable turnover days. It explains that the total cash turnover days of the company have been lowered and thus huge working capital is required by the company to manage the business (Brigham & Houston, 2012).
Gearing ratio evaluates the capital position, debt and equity level etc of an organization on the basis of the various capital aspects of the company. The gearing ratio of the company is as follows:
|
Gearing Ratios |
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
Gearing ratio |
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
Long term liabilities / |
7,433 |
15,675 |
18,161 |
20,301 |
45,718 |
|
|
Capital employed |
17,179 |
26,416 |
31,545 |
39,586 |
73,427 |
|
|
Answer: |
% |
0.433 |
0.593 |
0.576 |
0.513 |
0.623 |
|
Interest Coverage Ratio |
2013 |
2014 |
2015 |
2016 |
2017 |
|
|
EBIT / |
745 |
178 |
2,233 |
4,186 |
4,106 |
|
|
Net Finance Costs (used net interest expense) |
141 |
210 |
459 |
484 |
848 |
|
|
Answer: |
times p.a |
5.28 |
0.85 |
4.86 |
8.65 |
4.84 |
Lasty, the gearing ratio of the company explains that the overall capital structure of the business has been improved and it explains about better position of the company. The company is just required to manage the current position to manage the optimal capital structure level (Rose & Hudgins, 2012).
Common size evalaution is a financial analysis model which focuses on financial statement to measure the portion of each figure on the basis of the base figure. It helps the investors to identify the financial performance of the business and make better choice about the investment into the company. The common size analysis study of the company explains about various changes into the financial statement figures in last 5 years (Morningstar, 2018).
The income statement of the company explains that the gross profit level of the business has been improved whereas the level of operating profit of the company has been reduced due to huge operating expenses. In addition, the net income of the organization has been better in last 5 years.
The balance sheet of the business explains that the current assets of the business have been lowered and the non-current assets of the organization have been improved due to less requirement of working capital (Porcelli & Delgado, 2009). Further, the reduction in the current liabilities has also been noticed and the capital of the company has been fluctuated in a limit. It explains that the overall financial position and performance of the company has not been changed more in last 5 years.
Regression analysis is a financial analysis model which focuses on the stock price of the company to measure the changes and the investment risk level of the company. It helps the investors to identify the market and investment performance of the business and make better choice about the investment into the company.
The regression analysis of the Amazon Inc explains systematic and unsystematic risk of the company. It explains about the beta and alpha of the company. The appendix explains that the beta of the company is 0.37 and the alpha of the company is 0.023 (Yahoo finance, 2018). It explains that the changes into the stock price of the company are related to the market price of the company and thus the risk level of the company is lower.
On the basis of the ratio analysis, it has been evaluated that the financial performance of the company has been changed a bit in last 5 years. The profitability position explains that few changes are required to be done by the business to improve the profitability level. Further, the liquidity position of the business explains that the liquidity level has been reduced by the business due to which the working capital requirement has also been lower. In addition, it has been measured that the asset efficiency position of the company has been improved due to which more working capital is required by the business. Further, the gearing position of the company explains that the capital structure of the company is quite optimal.
In addition, the common size analysis explains that the financial position and the financial performance of the business has been improved and explains about better position of the company. The regression analysis also explains about better position of the stock in the market.
This analysis explains that the stock of Amazon is better choice for the investor to investor for the short term as well as long term. It would help the investors to improve the return from the market along with the lower risk. This concludes that the investors should invest into the stock of Amazon Inc.
Recommendation and Conclusion for Amazon:
The study explains about the financial performance of Amazon Inc for the investment point of view. On the basis of the study, it has been measured that the Amazon Inc is good option for the investor to make the investment. The investment for the short term as well as long term in the Amazon Inc is better for the investors as the risk level of the business is lower along with the high return. It would help the investors to improve the return from the market along with the lower risk. This concludes that the investors should invest into the stock of Amazon Inc.
To conclude, the overall position of the business is quite good in the industry. The company is the leader in the industry and thus the return of the business would not be hampered much due to external position and the internal position of the company is quite better. It explains that the investor should invest in Amazon Inc for better returns.
I have learnt various new things through this study. My knowledge about the financial analysis and its model has been improved as well as I have started learning that how could the financial analysis model be applied in the real companies to reach over a conclusion about the investment and other objectives. In this study, I have learnt that investment into the stock of Amazon Inc would be a better choice for the purpose of investment for short term as well as long term.
References:
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage Learning.
Dema-Moreno, S. (2009). Behind the negotiations: Financial decision-making processes in Spanish dual-income couples. Feminist Economics, 15(1), 27-56.
Koropp, C., Kellermanns, F. W., Grichnik, D., & Stanley, L. (2014). Financial decision making in family firms: An adaptation of the theory of planned behavior. Family Business Review, 27(4), 307-327.
Mandell, L., & Hanson, K. O. (2009, January). The impact of financial education in high school and college on financial literacy and subsequent financial decision making. In American Economic Association Meetings (Vol. 4, p. 2009).
Morningstar. (2018). Amazon Inc. [online]. Retrieved from: https://financials.morningstar.com/cash-flow/cf.html?t=AMZN®ion=usa&culture=en-US
Porcelli, A. J., & Delgado, M. R. (2009). Acute stress modulates risk taking in financial decision making. Psychological Science, 20(3), 278-283.
Rabin, M. (2013). Risk aversion and expected-utility theory: A calibration theorem. In Handbook of the Fundamentals of Financial Decision Making: Part I (pp. 241-252).
Reuters. (2018). Amazon Inc. [online]. Retrieved from: https://www.reuters.com/finance/stocks/company-profile/AMZN.O
Rose, P. S., & Hudgins, S. C. (2012). Bank management & financial services. McGraw-Hill Education.
Statista. (2018). Amazon Inc. [online]. Retrieved from: https://www.statista.com/topics/846/amazon/
Yahoo finance. (2018). Amazon Inc. [online]. Retrieved from: https://finance.yahoo.com/quote/AMZN/
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