Final Project: Amazon Financial Statement Analysis

Running Head: Amazon P a g e | 0

FINANCIAL STATEMENT ANALYSIS Amazon, Apple & Alibaba

FISV 5526: Financial Reporting & Controls

Johnson & Wales University

By: Joshua Scott Neeper

April 18, 2017

Financial Analysis P a g e | 1

TABLE OF CONTENTS

Introduction ..................................................................................................................................... 3

Financial Snapshot .......................................................................................................................... 4

Profitability ..................................................................................................................................... 5

Overall Profitability (ROE) ......................................................................................................... 5

Return on Assets (ROA) ............................................................................................................. 8

Return on Net Assets (RONA) .................................................................................................. 11

Disaggregating ROA ................................................................................................................. 12

ROA ....................................................................................................................................... 12

Profit Margin ......................................................................................................................... 13

Asset Turnover ...................................................................................................................... 15

Disaggregating Profit Margin.................................................................................................... 18

Cost of Goods Sold Percentage ............................................................................................. 18

Selling, General & Administrative Expense Percentage ....................................................... 20

Other Expense Percentage ..................................................................................................... 22

Tax Expense Percentage ........................................................................................................ 23

Profit Margin From Above .................................................................................................... 25

Disaggregating Asset Turnover ................................................................................................. 26

Accounts Receivable Turnover ............................................................................................. 26

Inventory Turnover ................................................................................................................ 28

Fixed Asset Turnover ............................................................................................................ 29

Return on Common Equity (ROCE) ......................................................................................... 30

ROCE..................................................................................................................................... 30

Disaggregating (ROCE) ............................................................................................................ 32

ROCE..................................................................................................................................... 32

CEL (Common Earnings Leverage) ...................................................................................... 33

CSL (Capital Structure Leverage) ......................................................................................... 34

Adjusted Leverage ................................................................................................................. 35

Risk ............................................................................................................................................... 38

Short-Term Liquidity ................................................................................................................ 38

Cash Ratio.............................................................................................................................. 39


Current Ratio ......................................................................................................................... 40

Quick Ratio ............................................................................................................................ 43

Operating Cash Flow Ratio ................................................................................................... 46

Turnover ratios .......................................................................................................................... 48

Accounts Receivable Turnover Ratio .................................................................................... 48

Inventory Turnover Ratio ...................................................................................................... 50

Accounts Payable Turnover Ratio ......................................................................................... 53

Debt & Long-Term Solvency .................................................................................................... 54

Long-Term Debt .................................................................................................................... 54

Debt/Equity Ratio .................................................................................................................. 55

Debt/Assets Ratio .................................................................................................................. 56

Interest Coverage (Earnings Basis) ....................................................................................... 57

Capital Expenditures Coverage ............................................................................................. 58

Sales Overview ............................................................................................................................. 59

Decision Process ........................................................................................................................... 62

Would I Invest a $500k Inheritance Into One Company? ......................................................... 63

If An Amazon Executive, Would I Want To Be Acquired? ..................................................... 65

If An Amazon Executive, Would I Make an Acquisition? ....................................................... 66

Final Decision ............................................................................................................................... 67

Works Cited .................................................................................................................................. 68


INTRODUCTION

This financial statement analysis is divided into two sections, profitability, and risk. Each

calculation and section will encompass graphs and assessments. This data will illustrate my

perception and rationale beyond the numbers. I have chosen Amazon as the leading company to

examine in this analysis. Amazon is a very diversified company regarding revenue streams, and

their economies of scale have allowed them to compete across various industries. Selecting

comparable companies was relatively difficult as no company in the world directly competes with

Amazon as a whole.

Therefore, I’ve selected two companies, Apple and Alibaba, to compare their financials to

Amazon’s. These three companies have experienced abnormal revenue and earnings growth since

their inception, and all of them directly compete with one another to some degree. Whether its

Amazon Video encroaching on Apple TV’s market share or Alibaba’s ability to disrupt Amazon’s

supplier partners with their B2B model; they’re all intertwined, and these meticulous correlations

present different opportunities and weaknesses. I believe that comparing these companies and

analyzing their financials will uncover various economic management philosophies and long-term

fiscal strategies as an executive or a personal investor. Therefore, after assessing all data points,

metrics, and calculations, I will make one of the following decisions per assignment instructions:

1. If I inherited $500,000, would I invest all funds into Amazon?

2. If an executive at Amazon, would I make an acquisition?

3. If an executive at Amazon, would I want to be acquired?

I predict that after this analysis if I were an executive at Amazon – I would acquire Alibaba.

Disclosure: Apple and Alibaba’s annual financial data was derived from (Morningstar, n.d.) and (Nasdaq.com,

n.d.). Amazon’s financial information derived from their published 10k.


Amazon Apple Alibaba

Profitability

Overall Profitability (ROE) 12.29% 35.62% 32.93%

Return on Assets (ROA) 3.60% 14.93% 25.07%

Disaggregating ROA

ROA 3.60% 14.93% 25.07%

Profit Margin 1.96% 21% 72.17%

Asset Turnover 0.018 0.710 0.350

Disaggregating Profit Margin

COGS % 64.91% 60.92% 33.97%

SG&A Expense % 32.01% 6.62% 21.59%

Other Expense % 0.12% 0% 3.08%

Tax Expense % 1.05% 7.31% 8.89%

Profit Margin From Above 2.10% 21.29% 77.43%

Disaggregating Asset Turnover

Accounts Receivable Turnover 1.19 0.98 1.04

Inventory Turnover 8.13 58.35 N/A

Days Inventory Held 44.9 days 6.25 days N/A

Fixed Asset Turnover 5.34 8.72 8.21

Return on Common Equity

ROCE 14.52% 27.09% 38.76%

Disaggregating (ROCE)

ROCE 13.58% 27.09% 38.64%

CEL (Common Earnings Leverage) 0.83 0.73 0.98

CSL (Capital Structure Leverage) 4.53 2.47 1.58

Adjusted Leverage 3.77 1.81 1.54

Cash Ratio 0.44 0.26 2.08

Current Ratio 1.04 1.35 2.58

Quick Ratio 0.78 1.22 2.46

Operating Cash Cash Flow Ratio 37.53% 83.32% 109.22%

Efficiency Ratios

Accounts Receivable Turnover Ratio 19.44 7.2 8.99

Days Oustanding 18.78 days 50.69 days 40.60 days

Inventory Turnover Ratio 8.13 58.35 N/A

Days Held 44.9 days 6.25 days N/A

Accounts Payable Turnover Ratio 30.35 days 11.59 days N/A

Debt & Long-Term Solvency

Long-Term Debt 0.29 0.37 0.2

Debt/Equity Ratio 3.32 or 332% 1.51 or 151% .65 or 56%

Debt/Assets Ratio .09 or 9% .23 or 23% .14 or 14%

Interest Coverage (Earnings Basis) 8.84 N/A 42.05

Capital Expenditures Coverage 1.66 5.17 10.45

2016 Formula Snapshot

Short-Term Liquidity / Financial Health

Risk

FINANCIAL SNAPSHOT


PROFITABILITY

To measure a firm’s overall performance, one must use a methodical analysis by starting with

(ROE), return on equity. Profitability is broken into calculations which encompass various

financial metrics. The most attractive profitability calculations used in a financial analysis include

a profit margin, return on assets (ROA), and return on equity (ROE).

However, all three profitability ratios can require disaggregation, depending on the analyst. For

specific purposes, this section will include some disaggregation.

OVERALL PROFITABILITY (ROE)

ROE calculates the profit a company generates from shareholder’s invested funds. ROE is

expressed as a percentage and beneficial to track year-over-year. A sound investor and analyst

want to see a positive ROE. A ROE of 3% or less before disaggregating would indicate severe

financial turmoil and a loss of investor confidence and stock valuation.

ROE = Net Income ÷ Shareholders’ Equity

Amazon

= $2,371,000,000 ÷ $19,285,000,000 = 0.1229 = 12.29%

Apple

= $45,687,000,000 ÷ $128,249,000,000 = 0.3562 = 35.62%

Alibaba

= $11,049,000,000 ÷ $33,550,000,000 = .3293 = 32.93%


Visualization:

2012-2015 Chart Data Supported by (Morningstar, n.d.) and (Nasdaq.com, n.d.)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%


Amazon, 12.29%

Apple, 35.62%Alibaba, 32.93%

2016 Overall Profitability (ROE)


2012 2013 2014 2015 2016

Amazon -0.49% 3.06% -2.35% 4.94% 12.29%

Apple 42.84% 30.64% 33.61% 46.25% 35.62%

Alibaba 13.43% 53.42% 157.44% 27.63% 32.93%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

5-Year ROE (2012-2016)



Assessment:

Graph one illustrates the company’s’ utilization of invested funds from shareholders to generate

returns for the year 2016 while the second graph shows this over a 5-year interim. For comparison

purposes, the average ROE in the United States has been approximately 10% throughout the

1990’s and early 2000’s. Each of these companies has delivered above average returns for 2016,

compared to historical data.

Apple and Alibaba’s supernormal economic profits can be explained by competitive strategies,

lean operating business models, and economic demand. Amazon’s supernormal sales growth

(when compared to Apple and Alibaba) can be defined through economies of scale, revenue

diversification, profit reinvesting, and asset growth. However, Amazon’s cost of capital could be

impacting their ROE. Other consideration, Apple performed a 7-1 stock split back in June of 2014

(Stephens, John, 2014). This stock split made Apple’s share price very affordable while Amazon

has never performed a stock split. Additionally, Alibaba went public in 2014 and was one of the

most anticipated and largest IPOs to date.

The 5-year graph illustrates the 2014 uptick in ROE for Apple and Alibaba. I believe that

Amazon’s ROE will reach if not surpass Apple and Alibaba’s ROE in next 2-3 years. Pre-2012

ROE data shows that Amazon’s ROE ranged from mid-20’s to low 60’s. During this interim,

Amazon made massive investments across various departments that were showing positive

indicators and which explain their steady ROA growth in the following section.

The 5-year percentage trend from 2012-2016 generated the following results: Amazon 103.99%,

Apple -16.85%, and Alibaba 145.20%. Over the past 5-years, Amazon and Alibaba have increased

their ROE while Apple’s ROE has declined. Shareholders’ equity, which measures a firm’s net

worth, will be explained later about this.


RETURN ON ASSETS (ROA)

ROA often referred as ROI (return on investment), measures how efficient a company’s

management is at using their assets to produce earnings. In other words, are a company’s assets

generating positive earnings, i.e. profit? ROA like ROE is expressed as a percentage and is highly

suggested to disaggregate this calculation and monitor it year-over-year. Efficacious and yet few

managers can deliver high ROAs or ROIs with little investment.

= Net income + (1-T) * Interest expense + MI in earning

Average total assets

Amazon

= $2,371,000,000 + (1 – 39%) * $484,000,000 + 0

($64,747,000,000 + $83,402,000,000) ÷ 2

= $2,075,760,000

$74,074,500,000

= 3.60%

Apple

= $45,687,000,000 + (1 - 39%) * 0 + 0

($290,345,000,000 + $321,686,000,000) ÷ 2

= 14.93%

Alibaba

= $11,049,000,000 + (1 – 39%) * $301,000,000 + $54,000,000

($52,945,500,000 + $37,108,200,000) ÷ 2

= $11,286,610,000

$45,026,850,000

= 25.07%


Visualization:


0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%


Amazon, 3.60%

Apple, 14.93%

Alibaba, 25.07%

2016 ROA


2012 2013 2014 2015 2016

Amazon -0.13% 0.75% -0.51% 0.99% 3.60%

Apple 28.54% 19.34% 18.01% 20.45% 14.93%

Alibaba 8.96% 15.14% 26.32% 13.16% 25.07%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

5-Year ROA (2012-2016)


Assessment:

Over the past 5-years, I can see that Apple’s ROA has dramatically declined while Alibaba has

surpassed Apple. Amazon’s ROA has been relatively steady over the past 5-years. However,

Amazon’s ROA dipped below zero in 2012 and 2014. Amazon has made ongoing investments in

the years that produced a negative ROA resulting in positive ROA the following year.

Furthermore, Amazon is on track to generate a positive ROA 3-years running, 2015 thru 2017.

Concluding, Amazon has increased its ROA approximately 3% over the past years while Apple’s

ROA has suffered -13.64% but Alibaba has been impressive by producing a 5-year aggregate

increase of 16.20%.


RETURN ON NET ASSETS (RONA)

RONA is calculation used to discern whether a company is positioning their assets in a viable yet

economical way compared to its competitors and the industry. A higher RONA indicates a

healthier profit performance. However, this calculation and not one single calculation can illustrate

the whole story of a company’s fiscal health. Like ROA and ROE, RONA is expressed as a

percentage.

= Net Income ÷ (Fixed Assets + Net Working Capital)

Amazon

= $2,371,000,000 ÷ ($29,114,000,000 + $1,965,000,000) = .0763, 7.63%

Apple

= $45,687,000,000 ÷ ($27,010,000,000 + $27,863,000,000) = .8326, 83.26%

Alibaba

= $11,049,000,000 ÷ ($2,107,000,000 + $12,683,000,000) = .7471, 74.71%

Assessment:

Apple and Alibaba have respectably high RONAs while Amazon’s is very alarming. However,

Amazon has the lowest net income and lowest working capital. Their fixed assets are surprisingly

higher than Apple’s. This information indicates that Amazon has made investments into PP&E

which are producing low ROIs and a small operating profit margin. Amazon’s fulfillment centers

have a strong bearing on this calculation.


DISAGGREGATING ROA

ROA

ROA = Profit Margin * Asset Turnover

Amazon

= 1.96% * 1.84 = 3.60%

Apple

= 21.19% * .70 = 14.93%

Alibaba

= 72.17% * .35 = 25.07%

Visualization:

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%


Amazon, 3.60%

Apple, 14.93%

Alibaba, 25.07%

2016 ROA



PROFIT MARGIN

= Net Income + (1-T) * Interest Expense + MI in Earnings

Sales

Amazon

= $2,371,000,000 + (1 – 39%) * $484,000,000 + 0

$135,987,000,000

= $2,666,240,000

$135,987,000,000

= 1.96%

Apple

= $45,687,000,000 + (1 - 39%) * 0 + 0

$215,639,000,000

= 21%

Alibaba

= $11,049,000,000 + (1 – 39%) * $301,000,000 + $54,000,000

$15,638,000,000

= 72.17%


Visualization:

Assessment:

This graph illustrates the 2016 profit margins for each company. Amazon and Apple maintain

inventory to operate their businesses while Alibaba does not carry product inventory. Each of the

companies operates at their profit margin, but varying margins are contributed to inventory levels,

sales, net income, minority interest earnings, taxes and interest expense. To compare these

companies equally, I used a marginal tax rate of 39% which accounts for the 35% federal rate and

4% for the state rate.

Amazon’s low-profit margin suggests that they have funds invested in assets, and their operating

expenses are higher than Apple and Alibaba’s. Apple’s above average profit margin contributes to

the fact they are maintaining margins, by eliminating any minority interest earnings and interest

expenses. Apple should not have any interest payments given they're $20 billion plus cash and

cash equivalent levels.

Alibaba’s profit margin is impressive but contributed to their low overhead and operating costs.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%


Amazon, 1.96%

Apple, 21%

Alibaba, 72.17%

2016 Profit Margin



ASSET TURNOVER

= Sales ÷ Average Total Assets

Amazon

= $135,987,000,000

($64,747,000,000 + $83,402,000,000) ÷ 2

= 1.836

Apple

= $215,639,000,000

($290,345,000,000 + $321,686,000,000) ÷ 2

= .71

Alibaba

= $15,638,000,000

($52,945,500,000 + $37,108,200,000) ÷ 2

= .35


Visualization:


2012 2013 2014 2015 2016

Amazon 2.11 2.05 1.88 1.78 1.83

Apple 1.07 0.89 0.83 0.89 0.71

Alibaba 0.42 0.62 0.6 0.42 0.35

0

0.5

1

1.5

2

2.5

5-Year Asset Turnover

2012 2013 2014 2015 2016

Amazon $32,555,000,000 $40,159,000,000 $54,505,000,000 $64,747,000,000 $83,402,000,000

Apple $176,064,000,00 $207,000,000,00 $231,839,000,00 $290,479,000,00 $321,686,000,00

Alibaba $6,849,871,592 $9,254,944,066 $16,185,052,451 $37,061,853,426 $52,879,383,642

$0

$50,000,000,000

$100,000,000,000

$150,000,000,000

$200,000,000,000

$250,000,000,000

$300,000,000,000

$350,000,000,000

5-Year Total Assets - Alibaba adjusted for exchange rate


Assessment:

Graph one illustrates that Amazon has the highest asset turnover year-over-year compared to Apple

and Alibaba. These results are indicative of Amazon’s business operations and need for high

turnover. The trends lines show that Amazon has a good asset turnover that is poised to increase

in the years to come, unlike Apple and Alibaba.

Graph two illustrates total asset growth over a 5-year interim. Total assets are referenced because

it’s important to understand that Apple has increased its total assets significantly. This is partially

contributed to Apple’s surplus in cash which has dramatically increased approximately $10 billion

over the past 5-years.


DISAGGREGATING PROFIT MARGIN

COST OF GOODS SOLD PERCENTAGE

= COGS ÷ Sales

Amazon

= $88,265,000,000

$135,987,000,000

= 64.91%

Apple

= $130,723,700,000

$214,568,400,000

= 60.92%

Alibaba

= $4,990,900,000

$14,693,500,000

= 33.97%


Visualization:

Assessment:

This graph illustrates each company’s COGS, direct costs attributed to a company’s production of

goods/services sold by the corporation. Amazon and Apple’s COGS are notably high. This

explains Amazon’s low-profit margin. Amazon’s cost to produce its goods and services requires

more capital to operate as a company. Alibaba’s respective COGS is contributed to low capital

requirements for their operating expenses.

Additional factors that affect each of the company’s COGS include SG&A and R&D expenses.

Apple has the highest R&D spending but is not included in their SG&A expense. The next section

will not factor in Apple’s R&D cost.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%


Amazon, 64.91%Apple, 60.92%

Alibaba, 33.97%

2016 COGS



SELLING, GENERAL & ADMINISTRATIVE EXPENSE PERCENTAGE

= SG&A ÷ Sales

Amazon

= $43,536,000,000

$135,987,000,000

= 32.01%

Apple

= $14,194,000,000

$215,568,400,000

= 6.62%

Alibaba

= $3,172,000,000

$14,693,500,000

= 21.59%


Visualization:

Assessment:

This graph illustrates the SG&A expense for 2016. Amazon, which has the highest, contributes to

their growth rate over the past 5-years. Their SG&A expense has more than doubled in the past 5-

years including Alibaba’s. Apple’s SG&A expense has increased less than $4 billion during this

interim while their R&D spending has grown approximately $5 billion.

The abnormal uptick in Amazon and Alibaba’s SG&A expense over the past 5-years is contributed

to revenue growth which requires additional employees and increased overhead. This graph can

be interpreted as a warning for each of the companies. Amazon’s elevated SG&A expenses make

them more susceptible to potential layoffs if their sales and ROA decline. Apple’s abnormally low

SG&A expense indicates a level of stagnation with revenue growth and new product launches.

Their small SG&A expense also explains their cash reserves as it’s not spent on employees or new

assets but rather R&D. Furthermore, Apple’s outsourcing and application developer platform save

them money. Also, this line item is where Amazon accounts for legal and litigation costs.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%


Amazon, 32.01%

Apple, 6.62%

Alibaba, 21.59%

2016 SG&A Expenses Percentage



OTHER EXPENSE PERCENTAGE

= Other Expenses ÷ Sales

Amazon

= $167,000,000

$135,987,000,000

= .12%

Apple

= $0.00

$215,639,000,000

= 0%

Alibaba

= $453,000,000

$14,693,500,000

= 3.08%

Assessment:

Other expenses for each of the companies does not show abnormality. However, Amazon’s other

expense category encompasses marketing related, contract based, customer intangible asset

amortization expenses, and expenses related to legal settlements which are arguably a tax

deduction. If the other expenses were valued over $500 million, more insight and analysis would

be required.


TAX EXPENSE PERCENTAGE

= Taxes ÷ Sales

Amazon

= $1,425,000,0000

$135,987,000,000

= 1.05%

Apple

= $15,685,000,000

$215,639,000,000

= 7.31%

Alibaba

= $1,306,000,000

$14,693,500,000

= 8.89


Assessment:

The tax expense percentage for each of these companies is not excessive which tells me they are

minimizing their tax exposure and operating efficiently. However, Apple’s controversial tax status

in Ireland benefits them more so than if their tax status was dependent solely on U.S tax code. If

their tax expenses exceeded 20%, it would require further attention. Potential problems could arise

for some of these companies if President Trump’s tax bill gets passed which would eliminate many

tax deductions and ambiguities. Details of those are limited right now. The crux of Trump’s tax

bill is to decrease the corporate tax rate which is good, but it still taxes a company’s money that is

transferred from overseas back to the U.S.

In a recent interview between Apple’s CEO Tim Cook and CNBC’s Mad Money host, Jim Cramer;

Tim Cook talked about this very aspect. His thoughts and insight were valuable to me. Per Tim

Cook, the issue today is that we are a global economy and when a global company produces sales

in another country and pays those country’s taxes, why should a U.S corporation pay additional

taxes to bring that money back into the U.S (CNBC, 2017)? Tim Cook also discussed how this had

impacted their internal reporting and controls. When they invest in R&D or new ventures, they

have to borrow against their cash reserves.


PROFIT MARGIN FROM ABOVE

= NI + (1 – T) * Interest Expense + MI Earnings

Sales

Amazon

= $2,371,000,000 + (1 – 1.05%) * $484,000,000 + 0

$135,987,000,000

= 2.10%

Apple

= $45,687,000,000 + (1 – 7.31%) * 0 + 0

$215,639,000,000

= 21.29%

Alibaba

= $11,049,000,000 + (1 – 8.89%) * $301,000,000 + $54,000,000

$14,693,500,000

= 77.43%

Assessment:

This profit margin calculation shows the relationship between net income (mainly) and sales.

Amazon has the lowest profit margin which can indicate a higher risk regarding investment.

However, this calculation doesn’t account for economies of scale which Amazon has increased

year-over-year on a global scale. Alibaba is difficult to read as they are a relatively new company

with a high-profit margin. However, they show tremendous upside as their growth continues, but

their success could make them susceptible to potential acquisition.


DISAGGREGATING ASSET TURNOVER

ACCOUNTS RECEIVABLE TURNOVER

= Credit Sales ÷ Average Accounts Receivable

Amazon

= $8,339,000,000

($5,654,000,000 + $8,339,000,000) ÷ 2

= 1.19

Apple

= $29,299,000,000

($30,343,000,000 + $29,299,000,000) ÷ 2

= .98

Alibaba

= $1,704,400,000

($1,562,700,000 + $1,704,400,000) ÷ 2

= 1.04


Assessment:

This calculation is very critical to understand some of the risks each of the companies are taking

regarding extending credit. Amazon and Alibaba have a ratio greater than one which indicates they

are collecting their receivable balances which minimize their losses efficiently. Apple’s A/R

turnover raises some concerns. Their A/R turnover is less than one which indicates a struggle to

collect 100% of their receivable balances during a period. If this number continues to decline,

Apple could experience losses. Apple is a consumer products company at heart, and consumer

goods are typically purchased through credit directly by the business (Apple) or through a third-

party financing provider.

In relation to the economy, Apple’s 2016 credit sales of $29.3 billion could quickly decline if credit

markets tighten up or if the economy experiences another crisis on Wall Street or in international

markets. The more diversified each of these company’s sales become (international sales growth),

the more protected they will be against economic volatility instigated in one country.


INVENTORY TURNOVER

= COGS ÷ Average Inventory

Amazon

= $88,265,000,000

($11,461,000,000 + $10,243,000,000) ÷ 2

= 8.13, Inventory turns 8.13 times per year and held approximately 44.9 days.

Apple

= $130,723,700,000

($2,132,000,000 + $2,349,000,000) ÷ 2


Alibaba

= $4,990,900,000

($0.00 + $0.00) ÷ 2

= N/A, Alibaba does not hold any inventory.

Assessment:

Amazon’s inventory turnover could impact their cash outlay for new capital investments and short-

term liquidity if their turnover rates decline. A lower turnover rate increases carrying costs,

consequently reducing operating profit margins and ROA. When cash is tied-up, this limits a

company’s ability to invest in new projects and potentially make acquisitions.

Apple’s high turnover rate represents their ability to efficiently launch new products and speaks to

their streamlined supply chain. This should be no surprise as Apple’s CEO, Tim Cook comes from

a supply chain background.

Alibaba’s zero inventory makes them once again, attractive for an acquisition.


FIXED ASSET TURNOVER

= Sales ÷ Average Fixed Assets (Net)

Amazon

= $135,987,000,000

($29,114,000,000 + $21,838,000,000) ÷ 2

= 5.34

Apple

= $215,639,000,000

($27,010,000,000 + $22,471,000,000) ÷ 2

= 8.72

Alibaba

= $14,693,500,000

($2,107,000,000 + $1,474,000,000) ÷ 2

= 8.21

Assessment:

Alibaba and Apple are experiencing high RORs on their investments in PP&E. Their efficiency

indicates a level of investment attractiveness. Their ability to invest a dollar and generate high

RORs is very appealing which reduces risks compared to Amazon. Amazon’s turnover is still

encouraging in this arena, but their PP&E make-up is different than the others.

When a company can generate high RORs, this indicates a potential increase in ROE.


RETURN ON COMMON EQUITY (ROE)

ROCE

= Net Income – Preferred Dividends

Average Common Equity

Amazon

= $2,371,000,000 - $0.00

($19,285,000,000 + $13,384,000,000) ÷ 2

= 14.52%

Apple

= $45,687,000,000 - $12,150,000,000

($128,249,000,000 + $119,355,000,000) ÷ 2

= 27.09%

Alibaba

= $11,049,000,000 - $0.00

($33,550,000,000 + $23,459,000,000) ÷ 2

= 38.76%


Visualization:

Assessment:

This graph illustrates the 2016 ROCE (Return on Common Equity) for each company. Each

company has an above average ROCE and ROE. Alibaba, which has the highest, is the most

impressive and indicates serious growth but begs the question, is Alibaba’s growth sustainable

when compared to the P/E of Amazon and Apple?

Each of these companies has been able to meet expectations and increase their ROCE. However,

their strategies are different from one another, and their ROCE growth is dictated by management’s

effectiveness to deliver results.

None of these companies are at risk based on this graph. However, stagnant economic/GDP growth

in the U.S. could impact Apple and Amazon’s ROE as the majority of their sales are from the U.S.

Stocks and indexes are hitting all-time highs which have left some investors on edge about a

potential correction. However, a possible correction would not suffice or justify a decrease in these

company’s’ ROCE as long as management delivers results and beats expectations.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%


Amazon, 14.52%

Apple, 27.09%

Alibaba, 38.76%

2016 Return on Common Equity



DISAGGREGATING (ROCE)

Terms:

ROA - the return from operations independent of financing

CEL - the proportion of operating income (net income before financing costs and related tax

effects) allocable to the common shareholders

CSL - a measure of the degree to which a firm uses common shareholders' funds to finance

assets.

Adjusted leverage - CSL * CEL; indicates the combined multiplier effect of leverage (using

debt and preferred stock financing) to increase or decrease the return to common shareholders.

ROCE

= ROA * (CEL) * (CSL)

Amazon

= 3.60% * .83 * 4.53 = 13.58%

Apple

= 14.93% * .73 * 2.47 = 27.09%

Alibaba

= 25.07% * .98 * 1.58 = 38.64%

Assessment:

Refer to overall leverage assessment.


CEL (COMMON EARNINGS LEVERAGE)

= Net Income – Preferred Dividends

Net income + (1- T) * Interest Expense + MI in Earnings

Amazon

= $2,371,000,000 - $0

$2,371,000,000 + (1-1.05) * $484,000,000 + $0

= .83

Apple

= $45,687,000,000 - $12,150,000,000

$45,687,000,000 +(1-7.31%) * $0 + $0

= .73

Alibaba

= $11,049,000,000 - $0

$11,049,000,000 + (1-8.89%) * $301,000,000 + $54,000,000

= .98

Assessment:



CSL (CAPITAL STRUCTURE LEVERAGE)

= Average Total Assets

Average Common Equity

Amazon

= $74,074,500,000 ÷ $16,334,500,000 = 4.53

Apple

= $306,015,500,000 ÷ $123,802,000,000 = 2.47

Alibaba

= $45,026,850,000 ÷ $28,504,500,000 = 1.58

Assessment:



ADJUSTED LEVERAGE

= CSL * CEL

Amazon

= 4.53 *.83 = 3.77

Apple

= 2.47 *.73 = 1.81

Alibaba

= 1.58 * .98 = 1.54

Assessment:



Overall Visualization:

2012-2015 Chart Data Supported by (Morningstar, n.d.)

0

0.5

1

1.5

2

2.5

3

3.5

4


Amazon, 3.77

Apple, 1.81Alibaba, 1.54

2016 Adjusted Leverage


2012 2013 2014 2015 2016

Amazon 3.97 4.12 5.07 4.89 3.77

Apple 1.49 1.68 2.08 2.43 1.81

Alibaba 1.5 2.65 3.8 1.76 1.54

0

1

2

3

4

5

6

5-Year Financial Leverage Average (2012-2016)


Overall Financial Leverage Assessment:

Amazon’s adjusted leverage indicates that they’re more dependent on borrowing more so than

Apple and Alibaba. Furthermore, Amazon’s high capital structure leverage (CSL) suggests they

use common shareholders’ funds to finance assets at a rate much higher than Apple and Alibaba.

The high nature of Amazon’s leverage is indicative of their capital-intensive industry and debt

dependency.

Capital intensive industries typically have higher leverage than other industries such as the services

sector. Therefore, Amazon’s short-term Debt/Equity ratio could be high and pose concerns about

their liquidity but their long-term D/E ratio not so much. Companies who have more debt than

equity tend to be highly leveraged.

Apple and Alibaba are less dependent on borrowing for their operations, unlike Amazon.

Therefore, I find no significant comparison or concern at this time other than Amazon’s immediate

liquidity.


RISK

Risk reflects the ability of a company to generate cash flows to satisfy its obligations. Failure to

do this generally results in bankruptcy at worst or indicates immediate attention to a company’s

solvency and ability to operate efficiently. Highly leverage companies are most susceptible to

this.

The ratios in this section are divided between short-term risk (liquidity) and long-term risk

(solvency). Liquidity risk relates to cash flows from operations, while solvency risk is influenced

by investing and financing decisions.

SHORT-TERM LIQUIDITY

In general, liquidity ratios are metrics that measures a company’s ability to meet its debt

obligations. Does the company have a healthy margin of safety? A higher ratio indicates a

company’s ability to cover debts.


CASH RATIO

This ratio is commonly used by short-term lenders as it measures a company’s liquidity and how

easily it can service its debt and cover its short-term liabilities. This is a constant ratio which

doesn’t account for accounts receivable. Specifically, can a company meet all its current liabilities

without selling or liquidating other assets in the process?

A ratio greater than one suggests that a company has enough cash and cash equivalents to pay off

all short-term debts and still have cash remaining. If the ratio is less than one, a company does not

have a sufficient level of cash and cash equivalents to pay off its short-term debt. Do a company’s

current liabilities exceed its cash and cash equivalents?

= (Cash + Cash Equivalents) ÷ Current Liabilities

Amazon

= $19,334,000,0000 ÷ $43,816,000,000 = .44

Apple

= $20,484,000,000 ÷ $79,006,000,000 = .26

Alibaba

= $16,724,000,000 ÷ $8,046,000,000 = 2.08

Assessment:

Alibaba has highest cash ratio which measures a company’s short-term liquidity and determines

how easily a company can service debt and cover short-term liabilities. Though this ratio is a

decent indicator of a company’s current liquidity, it doesn’t represent the entire picture.

Furthermore, marketable securities and A/R is not accounted for in this calculation.


CURRENT RATIO

Unlike the cash ratio, the current ratio measures a company’s ability to pay both short and long-

term debts. If the ratio is below one, this would indicate a company’s inability to pay off its

liabilities after depleting cash and cash equivalents and liquidating its assets.

However, a ratio that is abnormally high would indicate that a company is not managing their

working capital successfully.

= Current Assets ÷ Current Liabilities

Amazon

= $45,781,000,000 ÷ $43,816,000,000 = 1.04

Apple

= $106,869,000,000 ÷ $79,006,000,000 = 1.35

Alibaba

= $20,729,000,000 ÷ $8,046,000,000 = 2.58


Visualization:


0

0.5

1

1.5

2

2.5

3


Amazon, 1.04

Apple, 1.35

Alibaba, 2.58

2016 Current Ratio


2012 2013 2014 2015 2016

Amazon 1.12 1.07 1.12 1.08 1.04

Apple 1.5 1.68 1.08 1.11 1.35

Alibaba 2.37 1.8 1.81 3.58 2.58

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5-Year Current Ratio (2012-2016)


Assessment:

Each company has a current ratio greater than one which shows that each of them can pay back

their liabilities. A ratio less than one would specify severe liquidity problems or cash flow

discrepancies that could lead a company into bankruptcy. Furthermore, Amazon and Apple’s

assets allow for this ratio to be greater than one.

Looking deeper, Amazon’s current ratio should make any manager and investor nervous. Their

2016 current ratio of 1.04 barely passes the threshold. If this subpar current ratio for Amazon

continues, it could pose a significant risk in terms of meeting their current obligations. This directly

reflects the risk in which management is currently taking. Their capital is highly leveraged right

now, and any volatility in their operations could have a negative ripple effect.

Apple and Alibaba’s 2016 current ratio poses no concern at this time. However, if Apple’s lack of

new product advancements and launches continues, further insight and analysis would have to be

performed as this could impact their ROCE.


QUICK RATIO

The quick ratio known as the acid test ratio measures a company’s ability to pay current liabilities

with quick assets (current property that can convert into cash within 90 days). A ratio of greater

than one indicates that a company has $1.00 plus and change to cover its current liabilities. A ratio

less than one would indicate a company’s inability to cover 100% of its current liabilities with

quick assets.

= (Cash + Marketable Securities + Receivables) ÷ Current Liabilities

Amazon

= $19,334,000,000 + $6,647,000,000 + $8,339,000,000

$43,816,000,000

= .78

Apple

= $20,484,000,000 + $46,671,000,000 + $29,299,000,000

$79,006,000,000

= 1.22

Alibaba

= $16,724,000,000 + $1,373,000,000 + $1,703,500,000

$8,046,000,000

= 2.46


Visualization:


0

0.5

1

1.5

2

2.5


Amazon, 0.78

Apple, 1.22

Alibaba, 2.46

2016 Quick Ratio


2012 2013 2014 2015 2016

Amazon 0.78 0.75 0.82 0.77 0.78

Apple 1.24 1.4 0.82 0.89 1.22

Alibaba 2.01 1.59 1.63 3.46 2.46

0

0.5

1

1.5

2

2.5

3

3.5

4

5-Year Quick Ratio (2012-2016)


Assessment:

These quick ratios and graphs illustrate each company’s ability to pay its current liabilities with

quick assets (current assets that can convert into cash within 90 days or less). Apple and Alibaba

have quick ratios greater than one. A quick ratio greater than one means a company can sufficiently

meet their short-term liabilities with very liquid assets. This translates into greater financial

security in the short term.

Amazon’s low quick ratio would only be concerning if its 5-year trend was decreasing. If so, that

would indicate Amazon’s difficulty in maintaining or increasing sales, paying bills too quickly,

and/or collecting receivables slowly. None of those scenarios are true for Amazon.

Apple and Alibaba’s high quick ratios suggest they’re experiencing one or all of the following

situations: 1) top-line sales growth, 2) converting receivables in cash quickly, and/or 3) able to

cover financial obligations with ease. High quick ratios are typically associated with companies

with high inventory turnover rates or no inventory at all.

Apple and Alibaba do not concern me in this ratio, but Amazon’s low rate can be concerning to a

conservative investor. However, this rate could suggest some potential issues within Amazon’s

available capital. I do not believe their solvency is in question due to their economies of scale and

year-over-year revenue growth.


OPERATING CASH FLOW RATIO

This ratio measures how well a company’s operations generate cash flows to cover its current

liabilities. However, this ratio can be manipulated by a corporation’s decision to include

depreciation expenses and lengthening their accounts payable periods. A ratio greater than one is

typically desired from investors. However, a ratio less than one could indicate a need for more

capital but is not necessarily bad if a company has made investments in income-producing assets

that are not yet producing.

= Cash Flow from Operations ÷ Current Liabilities

Amazon

= $16,443,000,000 ÷ $43,816,000,000 = .38

Apple

= $65,824,000,000 ÷ $79,006,000,000 = .83

Alibaba

= $8,788,000,000 ÷ $8,046,000,000 = 1.09


Visualization:

Assessment:

Amazon and Apple have ratios less than one which indicates a need for more capital or suggests

they’ve made investments in income-producing assets or R&D in Apple’s case. Alibaba’s

operating cash flow ratio means their impressive ability to generate cash flows is valued higher

than their current liabilities. I believe that investors are investing in their long-term abilities rather

than their current situations which have kept their stock valuation respectively high.

Alibaba’s operating cash flows are not only attractive for a potential acquisition, but it also

suggests that Alibaba’s fiscal policy has positioned themselves to make potential acquisitions. All

financial indicators and calculations suggest Alibaba’s recent growth is just the beginning.

Overall, Amazon and Apple seem to be moderately leveraged and waiting on their investments to

start producing new cash flows in the near future. If they don’t, or they miss their expectations,

they will endure a stock value decrease.

0.00

0.20

0.40

0.60

0.80

1.00

1.20


Amazon, 0.38

Apple, 0.83

Alibaba, 1.09

2016 Operating Cash Flow Ratio



TURNOVER RATIOS

ACCOUNTS RECEIVABLE TURNOVER RATIO

= Sales ÷ Average Accounts Receivable

Amazon

= $135,987,000,000

($8,339,000,000 + $5,654,000,000) ÷ 2

= 19.44 = (365 ÷ 19.44) = 18.78 days

Apple

= $215,639,000,000

($29,299,000,000 + $30,343,000,000) ÷ 2

= 7.20 = (365 ÷ 7.20) = 50.69 days

Alibaba

= $15,638,000,000

($1,703,500,000 + $1,561,900,000) ÷ 2

= 8.99 = (365 ÷ 8.99) = 40.60 days


Visualization:

Assessment:

This graph illustrates each company’s accounts receivable turnover ratio which is represented in

days. Given the principle, time value of money, a company loses money when collection duration

increases on its credit sales.

For companies like Apple who run periodic sales promotions advertising 0% interest; this directly

affects this ratio. Amazon, who is arguably leveraged in the short-term, has maintained a healthy

accounts receivable turnover rate. Alibaba’s 40.6 days is not surprising given their position in

international trade and their ability to offer trade assurance. International trade typically

experiences different payment/Incoterms which lengthen the transaction time. Therefore,

Alibaba’s 40.6 ratio is relatively low and non-concerning given their impressive short-term

liquidity.

0

10

20

30

40

50

60


Amazon, 18.78

Apple, 50.69

Alibaba, 40.6

2016 Accounts Receivables (Represented in Days)



INVENTORY TURNOVER RATIO

= Cost of Goods Sold ÷ Average Inventory

Amazon

= $88,265,000,000

($11,461,000,000 + $10,243,000,000) ÷ 2


Apple

= $130,723,700,000

($2,132,000,000 + $2,349,000,000) ÷ 2


Alibaba

= $4,990,900,000

($0.00 + $0.00) ÷ 2

= N/A, Alibaba does not hold any inventory.


Visualization:

2012-2015 data provided by (Morningstar, n.d.) and (Nasdaq.com, n.d.)

0

5

10

15

20

25

30

35

40

45


Amazon, 44.9

Apple, 6.25

Alibaba, 0

2016 Inventory Turnover (represented in days)


2012 2013 2014 2015 2016

Amazon 43.77 45.29 45.68 47.22 44.89

Apple 3.26 4.37 6.3 5.81 6.25

Alibaba 0 0 0 0 0

0

10

20

30

40

50

60

5-Year Inventory Turnover (2012-2016) (represented days)


Assessment:

Theses graphs illustrate the 2016 and 5-year inventory turnover ratio represented in days.

Alibaba’s inventory turnover ratio is not applicable as they do not carry inventory. Amazon and

Apple’s inventory turnover is not concerning when examining the 5-year trend. However,

Amazon’s inventory turnover is worth monitoring from a management perspective. If Amazon’s

inventory turnover increase in days, this will increase carrying costs.

At this time neither of them are concerning. If either company experiences an increase or decrease

of 5-days, then further examination will be needed. Alibaba’s zero inventory makes it attractive

for an acquisition and justifies their profit margins.


ACCOUNTS PAYABLE TURNOVER RATIO

= Purchases ÷ Average Accounts Payable

Accounts payable for these companies is tough to dissect in their financial statements. The

purchases item for this calculation should be represented as such in an income statement. These

companies do not provide individual purchases in their financial statements. However,

Morningstar.com has calculated this ratio, and the results are below.

Amazon

= 30.35 days

Apple

= 11.59 days

Alibaba

= N/A, not listed

Assessment:

This ratio shows Amazon and Apple’s average amount of time to pay its suppliers. Apple’s short-

term liquidity is stronger than Amazon’s, but Amazon’s A/P turnover is within normal payment

terms. Net 30 is very common in business. Therefore, this ratio is non-concerning.

Amazon could renegotiate with suppliers for more favorable pricing if they can pay quicker than

30 days.


DEBT & LONG-TERM SOLVENCY

Solvency, not to be confused with liquidity, measures a company’s ability to pay long-term

debts. Solvency is a standing and for a company to be considered solvent its assets must be

valued higher than its debts.

LONG-TERM DEBT

= Long-Term Debt ÷ (Long-Term Debt + Shareholders’ Equity)

Amazon

= $7,694,000,000 ÷ ($7,694,000,000 + $19,285,000,000)

= .29

Apple

= $75,427,000,000 ÷ ($75,427,000,000 + $128,249,000,000)

= .37

Alibaba

= $7,779,380,949 ÷ ($7,779,380,949 + $31,465,404,108)

= .20

Assessment:

Not significant to assess.


DEBT/EQUITY RATIO

= Total Liabilities ÷ Shareholders’ Equity

Amazon

= $64,117,000,000 ÷ $19,285,000,000 = 3.32 or 332%

Apple

= $193,437,000,000 ÷ $128,249,000,000 = 1.51 or 151%

Alibaba

= $ 21,800,000,000 ÷ $33,550,000,000 = .65 or 65%

Assessment:

This ratio measures how much debt the company is using to finance its assets in relation to

shareholders’ equity. A ratio great than one or 100% means a company is considered somewhat

high-risk as they aggressively fund their growth with debt. Their highly-leveraged position is

associated with high-risk and potentially resulting in volatile earnings on a short-term basis.

Alibaba’s D/E is conservative and considered low-risk. Amazon and Apple’s high D/E might be

high-risk and unpredictable, but the potential for high returns is considerably high.


DEBT/ASSETS RATIO

= Long-Term Debt ÷ Total Assets

Amazon

= $7,694,000,000 ÷ $83,402,000,000 = .09 or 9%

Apple

= $75,427,000,000 ÷ $321,686,000,000 = .23 or 23%

Alibaba

= $8,267,000,000 ÷ $56,350,000,000 = .14 or 14%

Assessment:

This ratio measures how much a company finances its assets through debt. If the ratio is less than

.5 or 50%, then this suggests a company’s debt is primarily financed through equity. This

calculation can also be adjusted to account for both short and long-term debt over total assets. I’ve

chosen to use long-term debt in this calculation.

Amazon has the lowest long-term debt. However, this ratio does not account for the quality of

assets as it combines tangible and intangible assets together. Therefore, reading beyond the

numbers, this ratio does not consider long-term debt used for acquisitions which allows a company

like Amazon to book portions of acquisition costs under goodwill. Each of these company’s total

assets outweighs their long-term debt obligations.


INTEREST COVERAGE (EARNINGS BASIS)

= Net Income + Interest Expense + Tax. Exp.

Interest Expense

Amazon

= $2,371,000,000 + $484,000,000 + $1,430,000,000

$484,000,000

= 8.84

Apple

= $45,687,000,000 + $0.00 + $15,690,000,000

$0.00

= N/A

Alibaba

= $11,049,000,000 + $301,000,000 +$1,306,000,000

$301,000,000

= 42.05

Assessment:

This ratio calculates the margin of safety a company has which is aimed at meeting their interest

obligations. A ratio of 1.5 is considered the bare minimum that is acceptable to lenders. Low-

interest coverage questions a company’s solvency and increases their default risk.

None of the companies have a concerning interest coverage ratio. However, Alibaba’s is very

respectable and speaks to their high liquidity and solvency.


CAPITAL EXPENDITURES COVERAGE

= Cash Flow from Operations ÷ Capital Expenditures

Amazon

= $16,443,000,000 ÷ $9,876,000,000 = 1.66

Apple

= $65,824,000,000 ÷ $12,734,000,000 = 5.17

Alibaba

= $8,788,000,000 ÷ $841,000,000 = 10.45

Assessment:

This ratio calculates a company’s ability to generate cash flows from operations to fund capital

expenditures. These companies have positive ratios, and cash flows from operations which are

higher than their capital expenditures. A lower ratio would indicate a company’s struggle to

produce positive cash flows to cover their growth and investments.

Apple and Alibaba are non-concerning at this time. However, Amazon can be concerning to

potential investors if this was the only ratio they examined. This ratio does not explain Amazon’s

previous investments which are generating growth.


SALES OVERVIEW


$0

$50,000,000,000

$100,000,000,000

$150,000,000,000

$200,000,000,000

$250,000,000,000


Amazon, $135,987,000,000

Apple, $215,639,000,000

Alibaba, $15,900,000,000

2016 Sales/Revenue


2012 2013 2014 2015 2016

Amazon $61,093,000,000 $74,452,000,000 $88,988,000,000 $107,006,000,00 $135,987,000,00

Apple $156,508,000,00 $170,910,000,00 $182,795,000,00 $233,715,000,00 $215,639,000,00

Alibaba $3,140,000,000 $5,500,000,000 $8,580,000,000 $12,300,000,000 $15,900,000,000

$0

$50,000,000,000

$100,000,000,000

$150,000,000,000

$200,000,000,000

$250,000,000,000

$300,000,000,000

5-Year Sales/Revenue Trend (2012-2016)


Assessment:

These graphs show a plethora of future opportunities and projected sales growth. Alibaba seems

attractive for an acquisition while Amazon is poised to surpass Apple’s revenue/sales by 2020 or

earliest of 2018 if Amazon acquired Alibaba.

I measured percentage change between 2012-2016, and it generated the following results:

Amazon 122.59%

Apple 37.78%

Alibaba 405.8%

After measuring this percentage change between 2012-2016, I averaged the year-over-year growth

increase then average all of them to generate an annual average year-over-year growth rate.

Amazon experiences an annual sales growth rate of 22.18% compared to Apple’s 9.07% and

Alibaba’s 50.9%.

2017 2018 2019 2020 2021

Amazon $166,148,916,60 $203,000,746,30 $248,026,311,83 $303,038,547,79 $370,252,497,69

Apple $235,197,457,30 $256,529,866,67 $279,797,125,58 $305,174,724,87 $332,854,072,42

Alibaba $24,001,050,000 $36,229,584,975 $54,688,558,520 $82,552,379,086 $124,612,816,23

$0

$50,000,000,000

$100,000,000,000

$150,000,000,000

$200,000,000,000

$250,000,000,000

$300,000,000,000

$350,000,000,000

$400,000,000,000

$450,000,000,000

5-Year Projected Sales Growth (2017-2021)



Alibaba’s IPO was in September 2014. Their sales growth is expected after the IPO. However,

Amazon’s trend line shows consistent year-over-year sales growth. Apple’s weak sales growth is

due to limited product launches and increased competition within the media industry. Apple TV

has seen increased threats from companies like Amazon Video, Hulu, and Netflix. Secondly,

Apple’s iWatch has seen major threats from companies like Garmin and Fitbit. Lastly, Apple’s

iTunes has taken some dramatic hits from companies like Spotify. This doesn’t mean that Apple

doesn’t have a pipeline of new products to debut soon.

This sales overview provides more insight and indicates a need for additional calculations that are

focused on geographical locations and individual product/service revenue streams. The following

section will present other data. This information will allow one to make a strategic decision as a

hypothetical investor with $500,000 to invest, or as an Amazon executive; should Amazon make

an acquisition or should Amazon be acquired?


DECISION PROCESS

As I outlined in the introduction, I must select one of three decisions. Therefore, I will use the data

in this analysis coupled with additional factors outside of this analysis to decide. This review has

been very thorough which has uncovered certain correlations and opportunities for all three

companies. Though financial data presents many trends, correlations, and facts; it does not speak

to management’s philosophy or long-term strategies and visions.

Each of these decisions can be made through varying perceptions and positions. Thusly, any

decision made and/or recommended is neither right nor wrong. As I walk through this decision

process, I will be asking myself several questions such as:

- If an individual investor, how much risk would I be comfortable with?

- What long-term goals do I have personally and as a potential executive?

- Should I decide based on past results, present conditions, or future potential?

- Where do I see each of these company’s industries headed?

- What is each company’s future benefit to society and how impactful is it?

- Economically speaking, should I account for true economic profit and future demand?

I will walk through each decision individually as a process and end with my final decision.


WOULD I INVEST A $500K INHERITANCE INTO ONE COMPANY?

This analysis standalone has illustrated some very critical factors in which I’ve learned. Financial

leverage is nothing to dismiss. History has proven that companies with high financial leverage are

not only volatile and susceptible to economic crisis, but they pose almost an unquantifiable risk

that leads to insolvency.

The last financial crisis the United States experienced proved just this. Dozens and dozens of banks

coupled with General Motors and AIG suffered massive losses and in some cases, became

insolvent. This was contributed to abnormally high financial leverage positions.

In the wake of the crisis and economic turmoil, the biggest concerns were disruptions in the credit

markets. These credit markets were and are utilized by publicly traded companies. When a

corporation’s dependency increases on financing their operations, this can produce catastrophic

liquidity issues and disrupt a company’s ability to grow in the wake of an economic crisis.

Amazon has proven to be questionably leveraged in this analysis and is still considered a high-risk

investment given their profitability. Apple is not concerning in this aspect due to their high

liquidity ratios. Alibaba is the most conservative investment at this time.

Without performing a stock analysis, of the three, Alibaba would be the safest investment for

$500,000. However, Amazon’s forward P/E is stronger than Apple’s, but Apple has proven to be

very fiscally responsible.

Each of these companies has or still is experiencing abnormal growth. It would be fiduciarily

irresponsible of me to use the discounted abnormal earnings valuation i.e. the Random Walk

Model, to value any of these companies as companies with high growth rates more often than not,

attract competition which reduces their growth rates over time. Therefore, their abnormal growth

is not sustainable in the long-run. As Amazon’s achieves their economies of scale, as Apple’s


limited product launches and increased competition from Samsung and Microsoft continues, and

as Alibaba’s uncertain future is debated, these companies will plateau, and their abnormal earnings

will return to normal levels.

The question any long-term investor must ask themselves is, are these company’s growth rates and

returns sustainable for the next 5-10 years? I do not have the answer for that. However, I believe

that any of these companies would be safe for a $500,000 investment during a short-term 1-3 year

interim. Per, (MSN Money, n.d.), Amazon, Apple, and Alibaba’s current beta in order are 1.48,

1.17, and Alibaba is shown as N/A.

If I had to choose one company to invest all $500,000 into at this time, I would select Alibaba for

their financial leverage, liquidity, sales growth, and ROE growth. I would combine this with my

economic perception that this is just the beginning for Alibaba and their future is undoubtedly

attractive. Their business model is more appealing to me than Amazon or Apple’s.


IF AN AMAZON EXECUTIVE, WOULD I WANT TO BE ACQUIRED?

To put it simply, NO. Amazon is not on the brink of failure or insolvency. However, their ratios

might indicate a need for more capital. If my assessments are valuable and accurate, I predict that

Amazon will perform a 10 to 1 stock split when their stock price reaches or hovers around the

$1,000 per share price for a length of time. By doing so, Amazon would attract new investors and

raise more capital.

Furthermore, there is not one company that could afford and/or have the scope to acquire or merge

with Amazon other than Wal-Mart. Even if Wal-Mart entertained the idea, I’m not sure it would

be approved by either side’s board of directors or investors. This acquisition or merger would be

the largest in world history. Soo large, it would have the greatest market cap in the world that

would equate close to if not surpass the $1 trillion mark. If this option were on the table, as an

executive, I would want to be acquired or merge.

To be specific, if an Amazon executive, I would not want to be acquired by either Apple or Alibaba.

I do believe there are potential opportunities that both Amazon and Apple could collaborate on

such as merging Amazon Video with Apple TV and the potential to start an internet service that

competes with Century Link and Google Fiber.

Apple is one company that could afford to buy Amazon, but it’s not within their scope. Microsoft

would have a better chance to acquire Amazon and would be fascinating to explore the future

possibilities of what those two companies could accomplish. Alibaba cannot afford Amazon, but

this leads to the last decision I can make.


IF AN AMAZON EXECUTIVE, WOULD I MAKE AN ACQUISITION?

An acquisition for Amazon is very attractive. However, it would make no sense for Amazon to

acquire Apple but buying Alibaba would have both short and long-term benefits. Alibaba is within

the scope of Amazon.

Amazon would see an increase in their ROE, ROA, profit margin, cash & cash equivalents,

operating cash flow and other liquidity ratios. However, Alibaba’s sales do not compare with

Amazon’s, but their projected growth of abnormal earnings is impressive enough to indicate

positive returns for Amazon across the board. The question remaining is if Amazon could afford

Alibaba?


FINAL DECISION

At the end of my introduction, I predicted that Amazon needs to acquire Alibaba. After examining

the data in this analysis and walking through each decision, I select the choice: if an Amazon

executive, I would make an acquisition, specifically Alibaba. This is a long-term decision. If I

were making a short-term decision, this would not be my decision.

Alibaba’s scope aligns with Amazon’s and helps Amazon grow into new business segments which

complement their existing supply chains and sourcing capabilities. Furthermore, Alibaba’s

position within China would allow Amazon to penetrate the Chinese market quicker and more

successfully.

Alibaba is viewed as the Amazon of wholesale and international trade. Amazon and their suppliers

connect (B2C) as Alibaba joins (B2B). Combining these two models would allow Amazon to

diversify their business outside of B2C and into B2B. This combination would present new

opportunities that would require another analysis and possible case study.

From a financial perspective, this acquisition would immediately impact Amazon’s bottom line. It

would add approximately $56 billion in new sales over the next three years if my sales projections

are accurate. Additionally, Alibaba’s profit margin would yield Amazon a minimum of 1/3 of

sales.

Calculating the present value of forecasted abnormal earnings would put this into perspective.

However, this calculation assumes that a company’s forecasted earnings = their current abnormal

earnings. The discounted cash flow model can also be used for a valuation.

Of the ratios I calculated, Alibaba is a conservative acquisition and financially healthy. The ratios

did not indicate any concern for Alibaba’s fiscal health.


WORKS CITED

CNBC. (2017, May 4). Jim Cramer talks with Tim Cook: The full interview . Retrieved from

MSN Money: http://www.msn.com/en-us/money/videos/jim-cramer-talks-with-tim-cook-

the-full-interview/vi-BBAIlWR

Investopedia.com. (n.d.). Economic Value Added - EVA. Retrieved May 3, 2017, from

Investopedia: http://www.investopedia.com/terms/e/eva.asp

Morningstar. (n.d.). AMZN, AAPL, BABA. Retrieved from MORNINGSTAR:

http://financials.morningstar.com/ratios/r.html?t=AMZN

MSN Money. (n.d.). AMZN, APPL, BABA. Retrieved May 4, 2017, from MSN Money:

www.msn.com/money

Nasdaq.com. (n.d.). AAPL, BABA Company Financials. Retrieved April 18, 2017, from

Nasdaq.com: www.nasdaq.com

Stephens, John. (2014, June 13). A Split Decision on Stock Splits, Such As Apple's (AAPL).

Retrieved from Nasdaq.com: http://www.nasdaq.com/article/a-split-decision-on-stock-

splits-such-as-apples-aapl-cm361551

Business

Final Project: Amazon Financial Statement Analysis