Question
Amazons income statement, balance sheet, and cash flow statement are provided below for the years 2014, 2015, 2016 in Exhibit 1, 2 and 3 respectively. You are a financial analyst in Wall Street, and your manager has asked you to do the following;
Part a) Calculate financial ratios based on the financial statements of Amazon, and critically evaluate the trends, providing reasons as to why the ratios are changing. Secondly, Based on the ratios you calculated, explain how your calculated ratios could be improved, and how do they compare to competitor businesses? (45 marks)
Part B) Model the income statement forward for the years 2017 and 2018. In your model, state the assumptions you have made, and provide graphs to show your projections. Finally, explain how you could improve your model. (40 marks)
Exhibit 1. Amazon Income statement 2014-2016 ($ Millions)
| 2016 | 2015 | 2014 | |
| Net product Sales | 94,665 | 79,268 | 70,080 |
| Net service Sales | 41,322 | 27,738 | 18,908 |
| Total net sales | 135,987 | 107,006 | 88,988 |
| Operating expenses | |||
| Cost of sales | 88,265 | 72,651 | 62,752 |
| Fulfillment | 17,619 | 13,410 | 10,766 |
| Marketing | 7,233 | 5,254 | 4,332 |
| Technology and content | 16,085 | 12,540 | 9,275 |
| General and admin | 2,432 | 1,747 | 1,552 |
| Other operating expense | 167 | 171 | 133 |
| Total operating expense | 131,801 | 104,773 | 88,810 |
| Operating income | 4,186 | 2,233 | 178 |
| Interest income | 100 | 50 | 39 |
| Interest expense | (484) | (459) | (210) |
| Other income (expense) | 90 | (256) | (118) |
| Total non operating income | (294) | (665) | (289) |
| Income (loss) before income taxes | 3,892 | 1,568 | (111) |
| Provision for Income taxes | (1,425) | (950) | (167) |
| Equity method investment activity | (96) | (22) | 37 |
| Net income (loss) | 2,371 | 596 | (241) |
Exhibit 2. Amazon Balance statement 2014-2016 ($ Millions)
| 2016 | 2015 | 2014 | |
| Current assets | |||
| Cash and cash equivalents | 19,334 | 15,890 | 14,557 |
| Marketable securities | 6,647 | 3,918 | 2,859 |
| Inventories | 11,461 | 10,243 | 8,299 |
| Accounts Receivable | 8,339 | 5,654 | 5,612 |
| Total current Assets | 45,781 | 35,705 | 31,327 |
| PP&E | 29,114 | 21,838 | 16,967 |
| Good Will | 3,784 | 3,759 | 3,319 |
| Other Assets | 4,723 | 3,445 | 2,892 |
| Total Assets | 83,402 | 64,747 | 54,505 |
| Current liabilities | |||
| Accounts payable | 25,309 | 20,397 | 15,459 |
| Accrued expenses | 13,739 | 10,372 | 9,807 |
| Unearned revenue | 4,768 | 3,118 | 1,823 |
| Total current liabilities | 43,816 | 33,887 | 28,089 |
| Long Term debt | 7,694 | 8,227 | 8,265 |
| Other long-term liabilities | 12,607 | 9,249 | 7,410 |
| Stockholders’ equity | |||
| Common stock | 5 | 5 | 5 |
| Treasury stock | (1,837) | (1,837) | (1,837) |
| Additional paid-in capital | 17,186 | 13,394 | 11,135 |
| Other comprehensive loss | (985) | (723) | (511) |
| Retained earnings | 4,916 | 2,545 | 1,949 |
| Total stockholder equity | 19,285 | 13,384 | 10,741 |
| Total liabilities and equity | 83,402 | 64,747 | 54,505 |
Exhibit 3: Cash flow statement
| 2016 | 2015 | 2014 | |
| Cash and cash equivalents, beginning of period | 94,665 | 79,268 | 70,080 |
| Operating activities | |||
| Net income (loss) | 2,371 | 596 | (241) |
| Adjustments to reconcile net income (loss) to net cash from operating activities: | |||
| Depreciation of PP&E | 8,116 | 6,281 | 4,746 |
| Stock-based compensation | 2,976 | 2,119 | 1,497 |
| Other operating expense | 160 | 155 | 129 |
| Other expense (income) | (20) | 250 | 59 |
| Deferred income taxes | (246) | 81 | (316) |
| Excess tax benefits from stock based compensation | (829) | (119) | (6) |
| Changes in operating assets and liabilities | |||
| Inventories | (1,426) | (2,187) | (1,193) |
| Accounts recievable | (3,367) | (1,755) | (1,039) |
| Accounts payable | 5,030 | 4,294 | 1,759 |
| Accured expenses | 1,724 | 913 | 706 |
| Additions to unearned revenue | 11,931 | 7,401 | 4,433 |
| Amortisation of unearned revenue | (9,976) | (6,109) | (3,692) |
| Net cash provided by operating activities | 16,443 | 11,920 | 6,842 |
| Investing activities | |||
| Purchases of PP&E | (6,737) | (4,589) | (4,893) |
| Acquisitions net of cash | (116) | (795) | (979) |
| Sales of marketable securities | 4,733 | 3,025 | 3,349 |
| Purchases of securities | (7,756) | (4,091) | (2,542) |
| Net cash provided by investing activities | (9,876) | (6,450) | (5,065) |
| Financing activities | |||
| Excess tax benefits from stock-based compensation | 829 | 119 | 6 |
| Proceeds of debt issuance | 621 | 353 | 6,359 |
| Repayment of long-term debt | (354) | (1,652) | (513) |
| Repayment of capital leases | (3,860) | (2,462) | (1,285) |
| Repayment of finance lease | (147) | (121) | (135) |
| Net cash provided by financing | (2,911) | (3,763) | 4,432 |
| Foreign currency effect on cash | (212) | (374) | (310) |
| Net increase (decrease) in cash and cash equivalents | 3,444 | 1,333 | 5,899 |
| Cash and cash Equivalents end of period | 19,334 | 15,890 | 14,557 |
