Is Amazon’s (AMZN) Growth Sustainable

About Amazon

Amazon is one of the largest American organizations; it is well-known for its electronic commerce and cloud computing services, which are available in many countries across the world. Jeff Bezos, the current CEO, launched the company on July 5, 1994. In terms of market value, it has risen to become the world’s most valuable retail firm in America. It is also regarded as the world’s largest online corporation in terms of revenue margins (Amazon, 2017).

Revenue

Revenue is one of a company’s financial indicators because it deals with the things sold and services provided to its customer base. Amazon’s primary source of sales or revenue is the diverse range of goods and services that they sell to their consumers, mainly from their websites. Additional revenue is also generated from the products and services sold by third-party agents including services. The company has been making significant revenue from computing and storage services offered to other companies. Net sales for the year ended 2016 were valued at 135.9 billion US Dollars. It was a 27% increase from figures recorded in 2015 and a 50% increase from the figures recorded in 2014. In the second quarter of 2017 that ended on June, 30, the company recorded net sales of 38 billion, which were a 26% increment from the sales recorded in the second quarter for the fiscal year 2015.

Net Income

Net income is similar to a company’s profit, as it is calculated by deducting the costs of doing business from the revenue generated. The net income/loss for the year 2014 was a loss of 241 million US Dollars followed by a net income of 2015 of 596 million and 2371 million US Dollars in the fiscal year ended 2016. This significant improvement across the three years shows the extent of the healthy financial performance experienced by the company over the years. In the second year of 2017, the net income was 197 million US Dollars in comparison to $ 857 million in the same quarter for the previous year. It indicates that net income for 2017 will be lower than that of 2016.

Gross Profit Margin

Gross profit margin is a profitability ratio that is used to determine the financial health of a company. It is derived by dividing a company’s gross profit over the revenue generated within that particular period (BPP Learning Media, 2015). The gross profit margin for the year 2014 was 0.2%, 2.01% in 2015 and 3.07% in the year 2016. It is an indicator that the financial health of the company has been increasing over the years. The gross profit for the second quarter in 2017 was valued at 628 million dollars in comparison to 1.3 billion US Dollars for the second quarter in 2016, an indicator of lower profitability than the year 2016.

Net Profit Margin

Net profit margin is another profitability ratio that is derived by comparing the net profit of a company by the revenue generated. The net profit margin for the year ended 2016 was 1.7%, while that of 2015 was 0.5% and for the year ended 2014 the net profit margin was -0.2%. It is also an indicator that the company’s profitability has been increasing from 2014 onwards. However, since the net profit for the second quarter was 197 million US Dollars in comparison to 857 million US Dollars, it can be assumed that 2017 will have lower profitability than 2016.

Return on Assets

Return on Assets is a profitability measure used to determine how profitable an organization is in comparison to the total assets it has in that year. The net income of the company is quite lower when comparing to its total assets. Thus, the return on assets has been significantly low across the years. The return on assets figure was 0.4% in 2014, 0.9% in 2015, and 2.88% in 2016. It shows an increment in relation to profitability measure across the years.

Current Ratio

The current ratio is an example of a liquidity ratio that looks at the ability of the company to meet its short-term obligations from its current assets (Gallo, 2015). It is derived by dividing the current assets over the current liabilities of a company. The current ratio for 2014 was 1.1, while that of 2015 and 2016 were 1.0. It shows that the company is not in a position, where the current assets can completely meet their short-term obligations, as an ideal figure for this ratio should be 2.

Earnings per Share (EPS)

Earnings per share (EPS) ratio is the proportion of the company’s profit that has been allocated to every share of common stock in the company. The EPS for the year 2014 was -0.52, 1.28 in 2015 and 5.01 in the end of 2016 (Amazon, 2017). This increment over the three years indicates that the company has been able to generate higher earnings in the year 2016 in comparison to the year 2014. Higher earnings per share ratio means that the company has higher amounts of funds available for reinvestment in diverse projects or to pay out dividends to their shareholders.

Price to Earnings Ratio (P/E Ratio)

The price per earnings ratio is another market ratio that is used to determine whether the shares of a company are under or overvalued. Amazon’s P/E ratio as at the 30th of June, 2017 stood at 250.65. In comparison, at the end of 2016, it was 172.64. The positive trend in this ratio can be exemplified by the growth in the company’s share price over the years.

Debt Measures

Debt measures include the ratios that aid in determining the financial leverage of the company. They may include the debt to equity ratio and the debt to assets ratio. The debt to equity ratio for Amazon has not significantly changed from 2014 to 2016. In 2014, the debt to equity ratio stood at 1.50, which then declined to 1.31 in 2015 and 1.06 in 2016. The reducing figures for this ratio are attributed to the significant increase in the amount of equity from 2014 to 2016, which is from 13.3 billion to 19.2 billion in 2016. This increment in shareholders might be an indicator of perceived future positive performance, which also leads to increase in their share value. The debt to asset ratio represents the percentage of the company’s assets that were financed by long-term debt including loans and long-term creditors. This ratio for Amazon for the year 2016 was 0.13; in 2017, the ratio was recorded as 0.09. The decrease in this ratio is an indicator of reduced dependence on debt to finance the acquisition and maintenance of their assets.

Conclusion

From the above ratios, the company’s general financial performance is enhancing, particularly visible from the improvement in figures from 2014 to 2016. The financial health of the company has significantly developed, specifically by looking at the profitability and market ratios, which have positive trends. The company’s liquidity position should be improved, as the company is not in a position to adequately meet their short-term obligations from their current assets, based on their current ratio over the years. The company’s positive financial performance is mainly influenced by the increase in revenue figures and net income as well.

Sustainable Growth Rate

Sustainable Growth Rate for an organization is the maximum rate of growth that a company can achieve without having to borrow additional funds externally or without increasing their financial leverage. In the year ended 2016, Amazon’s growth rate in relation to their Return on Equity (ROE) was 14.52%. It is a significant improvement from the average growth rate 10 years ago of -2.35%. The return on equity can be taken to be the company’s sustainable growth rate, as it does not issue out dividends, which would aid in deriving the dividend payout ratio. The company can be able to maintain its growth rate mainly from the fact that most of its operations use the Internet. Their businesses through the Internet including their e-commerce and cloud computing services have massive growth potential over the years due to increasing demand. Even amidst stiff competitive rivalry from the likes of Apple and Google, Amazon’s ability to remain successful is attributed to their ability to come up with diverse innovative solutions in different industry sectors (Bajpai, 2017). They are, therefore, able to create lasting value for their shareholders over the years to come.

References

Amazon. (2017). Annual Reports, Proxies and Shareholder Letters. Retrieved on August 07, 2017 from http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual

Bajpai, P. (2017, April 27). Is Amazon’s (AMZN) Growth Sustainable? Retrieved on August 07, 2017 from http://www.nasdaq.com/article/is-amazons-amzn-growth-sustainable-cm780329

BPP Learning Media. (2015). ACCA Financial Reporting. London: BPP Learning Media.

Gallo, A. (2015, September 14). A Refresher on Current Ratio. Retrieved on August 07, 2017 from https://hbr.org/2015/09/a-refresher-on-current-ratio