MBA FPX 5014 Assessment 1 Financial Condition Analysis: Costco

Student Name

Capella University

MBA-FPX5014 Applied Managerial Finance

Prof. Name

Date

Executive Summary

Pacific Coast Technology is a small technology company founded by Maria Gomez, who also serves as the president. Maria is considering a buyout offer from a larger publicly traded company, aiming to receive a financial reward for her entrepreneurial efforts while ensuring the company reaches its full potential under new ownership. In order to evaluate the potential corporate partner, Maria seeks a company chosen through trend analysis and industry average analysis. This report examines Amazon, one of the world’s largest online retailers, to determine its suitability as a potential corporate partner for Pacific Coast Technology.

Amazon Background

In 1994, Jeff Bezos and his wife, MacKenzie, established Amazon as an online bookstore in Seattle, Washington. With an initial investment of $10,000, Amazon went public on May 15, 1997, at $18 per share, resulting in a valuation of $300 million. Over time, Amazon’s share price increased significantly. For instance, if someone had invested $100 in Amazon’s IPO (equivalent to five shares), by February 20, 2020, those shares would have been worth $129,186, with each share closing at $2,153.10. Through innovation and steady revenue growth, Amazon reached a market value of $1 trillion in 2018, making it the second-largest company behind Apple. Jeff Bezos, the founder, also became the world’s richest person.

Financial Analysis

Liquidity

Examining Amazon’s current ratio, which measures its ability to pay current liabilities using current assets, we observe the following values:

• 2019: Current Assets – $96,334 billion; Current Liabilities – $87,812 billion; Current Ratio – 1.10
• 2018: Current Assets – $75,101 billion; Current Liabilities – $68,391 billion; Current Ratio – 1.09
• 2017: Current Assets – $60,197 billion; Current Liabilities – $57,883 billion; Current Ratio – 1.04

Comparing these values with the retail industry average current ratio of 1.47, it is evident that Amazon has consistently remained below the industry average. Although Amazon’s current ratio has shown a slight increase over the years, it still indicates a potential liquidity issue as it remains below 1, suggesting that current liabilities may exceed current assets.

Another liquidity measure is the quick ratio, which excludes inventory from current assets. Amazon’s quick ratio for the years 2019, 2018, and 2017 is as follows:

• 2019: Current Assets – $96,334 billion; Inventory – $20,497 billion; Current Liabilities – $87,812 billion; Quick Ratio – 0.86
• 2018: Current Assets – $75,101 billion; Inventory – $17,174 billion; Current Liabilities – $68,391 billion; Quick Ratio – 0.85
• 2017: Current Assets – $60,197 billion; Inventory – $16,047 billion; Current Liabilities – $57,883 billion; Quick Ratio – 0.76

Although Amazon’s quick ratio has improved over the years, it remains below 1, indicating potential difficulties in paying off short-term liabilities. As the quick ratio increases, liquidity also improves.

Asset Management

Total asset turnover, which reveals how efficiently a company utilizes its assets to generate revenue, is an important metric. Amazon’s total asset turnover for the years 2019, 2018, and 2017 is as follows:

• 2019: Revenue – $280,522 million; Total Assets – $225,248 million; Total Asset Turnover – 1.25
• 2018: Revenue – $232,887 million; Total Assets – $261,648 million; Total Asset Turnover

Solvency Ratio

Debt to Equity Ratio (US millions)

The debt to equity ratio measures the extent to which a company finances its operations through debt compared to shareholder’s equity. A higher ratio indicates a greater reliance on debt financing. For example, a ratio of 2.63 means that there are $2.63 in liabilities for every $1 of shareholder’s equity. A lower ratio suggests a more financially stable business. While Amazon has shown slight improvements in its debt to equity ratio over the past three years, it remains above the industry average and indicates a reliance on debt financing.

Profitability

Net Profit Margin (US millions)

The net profit margin measures the percentage of revenue that translates into net income. A higher net profit margin indicates better profitability. Amazon’s net profit margin has improved from 1.7% in 2017 to 4% in 2018 and 2019. However, it remains relatively low compared to the average net profit margins in the retail sector. This may be due to factors such as low product prices and high operating expenses.

Market Value Ratios = Price/Earnings Ratio

The price/earnings (P/E) ratio evaluates a company’s stock price relative to its earnings per share (EPS). A higher P/E ratio suggests investors expect higher earnings growth, while a lower P/E ratio may indicate an undervalued company or better performance compared to past trends. Amazon’s P/E ratio has decreased over the years, indicating a decline in market expectations or improved performance relative to past trends.

Trend & Industry Average Ratio Analysis

Amazon has consistently remained below the retail industry’s average current ratio, indicating potential difficulty in paying off short-term liabilities. Although there has been a slight increase over the years, the quick ratio is still below 1, suggesting potential challenges in meeting short-term liabilities. Amazon’s total asset turnover has shown fluctuations, but there has been an improvement from 2018 to 2019. However, the debt-to-equity ratio remains above the industry average, indicating a significant reliance on creditor funding.

Strengths and Weaknesses

Amazon demonstrates a solid ability to pay off current liabilities, with improving liquidity ratios over time. However, there is room for improvement in terms of the quick ratio and debt-to-equity ratio. The net profit margin has shown improvement and is relatively better than many competitors in the retail sector. The decrease in the P/E ratio may be a point of concern, indicating potential undervaluation or unfavorable comparison with past trends.

Conclusion

Overall, Amazon is a robust company with a strong brand, innovative practices, and a vast market presence. Areas for improvement include asset turnover, debt-to-equity ratio, and price earnings ratio. Strategies such as eliminating obsolete inventory, setting time limits for product sales, and capitalizing on increased sales due to COVID-19 can contribute to financial improvement. Despite challenges, Amazon’s strengths have kept them relevant in the online retail world.

Recommendation

Considering Amazon’s success and track record in acquiring and developing businesses, I recommend Maria Gomez explore the opportunity to discuss present and future strategies with PacificCoast. Acquisitions have been a significant factor in Amazon’s growth, and their expertise in maximizing potential could benefit PacificCoast technology.

References 

DePillis, L. and Sherman, I. (2019). CNN Business, Amazon’s Extraordinary 25-year Evolution,  Retrieved from https://www.cnn.com/interactive/2018/10/business/amazon-history timeline/index.html 

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pricetoearnings-ratio-retail-secto 

Hayes, A., (2020), Investopedia, Asset turnover ratio, Retrieved from  

https://www.investopedia.com/terms/a/assetturnover.asp 

Hayes, A. (2020), Investopedia, Debt to equity ratio, Retrieved from  

https://www.investopedia.com/terms/d/debtequityratio.asp 

Investopedia, (2020). Investopedia, If You Invested Right After Amazon’s IPO, Retrieved from  https://www.investopedia.com/articles/investing/082715/if-you-had-invested-right-after amazons-ipo.asp 

Jan, I., (2020), Xplaind, Current ratio, Retrieved from https://xplaind.com/464202/current-ratio 

*Kenton, W., (2020), Investopedia, Profitability ratios, Retrieved from  

https://www.investopedia.com/terms/p/profitabilityratios.asp 

Kenton, W., (2020), Investopedia, Quick ratio, Retrieved from  

https://www.investopedia.com/terms/q/quickratio.asp 

Macrotrends, (2020), Amazon balance sheet 2005-2020, Retrieved from  

https://www.macrotrends.net/stocks/charts/AMZN/amazon/balance-sheet 

Perry, M., (2018), AEI, The general public thinks the average company makes a 36% profit  margin, which is about 5x too high, Retrieved from https://www.aei.org/carpe-diem/the-public thinks-the-average-company-makes-a-36-profit-margin-which-is-about-5x-too-high-part-ii 

Simply Wall Street, (2020), What is Best Buy’s P/E ratio after its share price tanked, Retrieved  from https://simplywall.st/news/what-is-best-buys-nysebby-p-e-ratio-after-its-share-price-tanked/ 

MBA FPX 5014 Assessment 1 Financial Condition Analysis: Costco

Wells Fargo, (2019), Wells Fargo works for small business, Average current ratio by industry,  Retrieved from https://wellsfargoworks.com/management/infographic/average-current-ratios-by-industry