AMAZON.COM Harvard Case Solution & Analysis

AMAZON.COM Case Study Analysis

Profitability ratio:

A profitability ratio is defined as the ability of the company to earn profits through its sales, operations, or shareholder’s equity.

Gross profit ratios define the performance and efficiency of the business, it is calculated by dividing the gross profit by total net sales. The gross profit ratio of every industry varies from industry to industry the gross profit of Amazon is 24.41% in 2020, 26.65% in 2019, and 25.64% in 2018. The gross profit ratio of Amazon shows that the gross profit ratio is high because it is more than 20%. So the business performance is efficient.

The operating profit ratio explains that the profit a company earns after paying the variable cost of production i.e. raw material, wages. It is calculated by dividing the operating profit by net sales and multiplying the result by 100. The operating profit margin of Amazon is 5.93%, in 2020, 5.18% in 2019, and 5.33% in 2018. The operating profit margin is comparatively low which means that the company is not earning enough from the business to pay the costs that are followed by the business.

The net profit ratio is defined as the profit that is from after-tax. It measures the amount of net income and a profit that is generated in terms of percentage.  The net profit margin is calculated by subtracting the cost from revenue and then dividing the results by revenue. The net profit margin of Amazon is 5.53% in 2020, 4.13% in 2019, and 4.33% in 2018 and the results tell us that the net profit ratio is low because it is lower than 5%. It means that less of every dollar sales in kept as profit in the company.

Return on equity is defined as the rate of the returns that a common stockholder will earn in return to its holdings. The Return on equity ratio is calculated by dividing the net income by average shareholder’s equity. The return on equity of Amazon is 22.84% in 2020, 18.67% in 2019, and 23.46% in 2018. So the return on equity ratio of the company is good because it is between 15-20% and that is considered as good.

Return on Assets defines that how much money a company makes through investing or using its assets. The return on assets is calculated by dividing the net income by average total assets. And the Return on Assets of Amazon is 6.64% in 2020, 5.14% in 2019, and 6.19% in 2018.  And it shows that the return on assets is good because it is more than 5%. It means that the company is earning efficient profits.

Solvency ratios

The solvency ratio is the examination of a company to evaluate its ability to compensate the long-term debts and other long-term obligations. The solvency ratios include Debt to equity ratio, debt to asset ratio, and interest coverage ratio. The debt to equity ratio explains the financial leverage of the company and for amazon, the debt to equity ratio is 0.903 in 2020, 1.018 in 2019, and 0.914 in 2018. That shows that the company has 0.903 of debt on every \$1 equity. And respectively. The debt to assets ratio is defined as the proportion of the asset that the company finance through debt. The amazon debt to assets ratio is 26.27% in 2020, 28.06% in 2019, and 24.46% in 2018. The interest coverage ratio is 13.90 in 2020, 9.09 in2019, and 8.77% in 2018. That defines that how easily a company can pay its interest. The interest coverage ratio is more than 1. That means that the interest coverage ratio of amazon is good and the company can pay off its debts and it is better.

Efficiency ratios

Efficiency ratios explain the ability of a firm to use its assets to generate income. The efficiency ratios are day’s sales outstanding, inventory turnover days, and day’s payable outstanding. The day's sales outstanding explains the average number of days that a company takes to receive the payments against their sales. So the amazon’s days sales outstanding is 23, 27, and 26, respectively. The inventory turnover days explain how quickly the company sells out its inventory and the inventory turnover of amazon is 30, 36, and 36 respectively. The day’s payable Outstanding defines the average days that a firm takes to pay the invoices. And the day’s payable outstanding are 144, 139, and 130 days.

Furthermore, we have analyzed the other ratios, i.e. cash conversion cycle and Earning per share. The cash conversion cycle is defined that how much time a firm takes to convert its investment into resources and inventory. And the cash conversion cycle of amazon is -91, -76, and -67. This shows that the business has the highest liquidity.

Earnings per share are defined that how much money a company makes against its shares and then it is calculated by dividing the net profit by the number of shares outstanding. And the EPS of Amazon is 42.64 in 2020, 23.46 in 2019, and 20.68 in 2018. As the number is positive and it shows it is good for the company.

Question 4

Conclusion and recommendations

Amazon has faced a huge increase in sales and has also faced numerous challenges related to its supply chain and inventory management. In this report, we have analyzed the ratios of the company. As described earlier, the sales have increased so the profitability of the company has also increased by huge margins. The earning per share has also increased by almost 20. So it means that it became an even more attractive option for the investors to invest. Few things that amazon must consider to make this successful for a long time. First, amazon should manage the inventory system because the sudden demand surge has affected the business and possess a challenge for the company. Along with that, amazon should also focus on the supply chain system, it should outsource few services to speed up the system and reduce the tensions from the workers. Amazon should also focus on its warehouse workers and their safety to prevent any legal obligation. Now coming towards the sustainability goals; the company is investing in sustainability projects but still, there is a need to have morgen projects to meet the goals...................

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