Amazon.docx

INTRODUCTION

Introduction Amazon.com, which is branded as ―Earth’s Most Customer-Centric Company‖ and world’s largest online retailer, is an e-commerce multinational company based in Seattle, Washington, USA. Started as an online bookstore, Amazon.com diversified quickly, selling DVDs, VHSs, CDs, software, electronics, video games, apparel, furniture, and many other products. The company also produces consumer electronics—notably the Amazon Kindle e-book reader and the Kindle Fire tablet computer—and is a major provider of cloud computing services. In July 1994, Jeff Bezos, founder and CEO, incorporated the company (as Cadabra) and in 1995, the site went online as Amazon.com. The company was renamed after the Amazon River located in South America, which is one of the largest rivers in the world. Amazon has separate retail websites for various countries including United States, Canada, United Kingdom, France, Germany, India, Italy, Spain, Brazil, Japan, and China, with international shipping to certain other countries for some of its products and maintains dozens of fulfillment centers around the world which encompass more than 26 million square feet. Unlimited Instant Videos

Appstore for Android

Electronics & Computers

MP3s and Cloud Player

Digital Games and Software

Home, Garden & Tools

Amazon Cloud Drive

Movies, Music & Games

Grocery, Health and Beauty

Toys, Kids and Baby Clothing, Shoes and Jewelry Sports and Outdoors

Automotive and Industria The Above Table shows the Range of Amazon Products

Kindle E-readers

Origin of Amazon

Kindle Fire Tablets Books & Audible

In May 1994, Jeff Bezos, a 30-year old employee of a major Wal Street firm D.E. Shaw, was sitting at the computer in his39thflooroffice in midtown Manhattan, and he found a site that purported to measure Net usage while exploring the still immature Internet. To his surprise, the Internet was growing at a rate of 2,300% a year. The Net had been, until 1994, a largely commerce-free zone, since it was created by the Defense Department to keep a network of computers communicating in case of nuclear attack. This system then evolved into a network over which university and government researchers could exchange messages and data across most computer platforms. The government decided to get out of the Internet business and allow private companies to step in and develop it. Bezos felt that he could have a first-mover advantage in e-commerce. Hence, he researched ail order companies, thinking that things thatsold well by mail would do well on the internet. He analyzed the top 20 mail-order products and searched for products where he could create value for customers. This ultimately led to the idea of books. A good catalog of books would contain thousands or even millions of listings, which would make it as big as a phone book, which were too expensive to mail. This was perfect for the Internet, which is the ideal platform for such a huge amount of information. So, Bezos finally decided that his new business would sell books online, catering the large worldwide demand for literature and exploiting the low price points for books with huge availability. Amazonwas originally founded in the garage of a modest two-bedroom home rented by Bezos in Bellevue, a Seattle suburb in Washington. The company began as an online bookstore and opened its website on July 16, 1995. In the initial days of business, without any press, Amazon sold to all 50 states and over 45 countries. Its sales were up to $20,000/week within two months. While the largest brick and mortar bookstores and mail order catalogs might offer over 200,000 titles, an online bookstore could offer much more, since they had an almost unlimited virtual (not actual) warehouse: those of the actual product makers and suppliers. Bezos wanted a name for his company that began with "A‖, which would make it appear early in an alphabetically arranged directory. He began looking through the dictionary and selected "Amazon" because it was a place that

was "exotic and different" just as he planned for his store to be. He also planned to make his store the biggest in the world, just like the river Amazon. In May 1996, Amazon was on the front page of the Wall Street Journal, which resulted in two things: it introduced Amazon to a whole new stream of customers, and it captured the attention of rivals like Barnes & Noble and Borders Group, which were yet to move online. Barnesandnoble.com appeared a year later just before Amazon's IPO (Initial Public Offering), which went off at a modest $18 a share. The celebrated venture capital firm Kleiner Perkins Caufield & Byers was its biggest institutional investor before the IPO. Some of the Wall Street companies were afraid of the threat posed by the giant Barnes & Noble, which looked unbeatable with a national network of bookstores. But Barnesandnoble.com did nothing to stall Amazon's amazing sales. Since 2000, Amazon's logo has been featured as a curved arrow (shaped like a smile) leading from A to Z, indicating that they carry every product from A to Z, and they intend to serve with a smile. Background For the last two decade Amazon.com has been serving customer worldwide. Amazon.com was founded by Jeff Bezos back in 1995.The founders vision was to build a virtual shopping place for book lovers. Amazon.com brings the world largest book store to the door step of the people around the world. All people has to do is search and select the desired book. It took 30 day to deliver books to the customers of 50 states and 45 countries. Amazon.com was a huge success in nineties.Amazon.com became a platform for the retailer and individuals in 2000.Amazon.com offers their services towards four types of customers, consumers, sellers, enterprises and content creators. (Annual report 2013) Amazon serves customer through the popular web site www.amazon.com. Now a day customers can access through mobile technology.Amazon.com apps are also available for the customers. Organizational Structure

Amazon consists of a divisional organizational structure due to a large number of products and services under it. A divisional structure consists of different departments for different products and services, which allow the department heads to appropriately focus their resources and results, and also monitor the organization’s performance. Such a structure is best for such a large organization because it is the most flexible. Structure of Amazon Amazon's organizational structure consists of CEO and founder Jeffery Bezos and an eightmember board of directors, wherein the CEO oversees the Chief Financial Officer (CFO), the Chief Technology Officer and the following 8 departments: Business Development, eCommerce Platform, International Retail, North America Retail, Web Services, Digital Media, Legal & Secretary, and Kindle. The CFO oversees the Real Estate and Control department. International Retail oversees three separate departments of the company: China, Europe and India. North America Retail oversees the following five departments: Seller Services, Operations, Toys, Sports & Home Improvement, Amazon Publishing and Music & Video. The Web Services department oversees Amazon S3 and Database Services. Other departments include: Product Development & Studios, Europe Operations, Global Advertising Sales, Computing Services, and Global Customer Fulfillment AMAZON KINDLE

The Amazon Kindle is a series of e-book readers designed and marketed by Amazon.com. Amazon Kindle devices enable users to shop for, download, browse, and read e-books, newspapers, magazines, blogs, and other digital media via wireless networking. The hardware platform, developed by Amazon.com subsidiary Lab126, began as a single device and now comprises a range of devices – most using an E-Ink electronic paper display capable of rendering 16 tones to simulate reading on paper while minimizing power consumption. Kindle hardware has evolved from the original Kindle introduced in 2007 and a Kindle DX line (with a larger screen) introduced in 2009. Announced in September 2011, the range now includes devices with keyboards (Kindle Keyboard), devices with touch sensitive screens (Kindle Touch), a tablet computer with a reader app and a color display (Kindle Fire) and a low-priced model with an on-screen keyboard (Kindle). Amazon has also introduced Kindle software for use on various devices and platforms, including Microsoft Windows, iOS, BlackBerry, Mac OS X (10.5 or later, Intel processor only), Android, webOS, and Windows Phone (not available in many parts of Europe). Amazon also has a "cloud" reader to allow users to read, and purchase, Kindle books from a web browser. Content for the Kindle can be purchased online and downloaded wirelessly in some countries, using either standard Wi-Fi or Amazon's 3G "Whispernet" network. Whispernet is accessible without any monthly fee or wireless subscription, although fees can be incurred for the delivery of periodicals and other content when roaming internationally beyond the customer's home country. Through a service called "Whispersync," customers can synchronize reading progress, bookmarks and other information across Kindle hardware devices and other mobile devices.

AMAZON WEB SERVICES Amazon Web Services (AWS) is a collection of remote computing services (also called web services) that together make up a cloud computing platform, offered over the Internet by Amazon.com. The most central and well-known of these services are Amazon EC2 and Amazon S3. The service is advertised as

providing a large computing capacity (potentially many servers) much faster and cheaper than building a physical server farm. Architecture AWS is located in 9 geographical 'Regions': US East (Northern Virginia), US West (Northern California), US West (Oregon), AWS GovCloud (US) Region, São Paulo (Brazil), Ireland, Singapore, Tokyo and Sydney. There is also a "GovCloud" in the USA provided for US Government customers. Each Region is wholly contained within a single country and all of its data and services stay within the designated Region. Each Region has multiple 'Availability Zones', which are distinct data centers providing AWS services. Availability Zones are isolated from each other to prevent outages from spreading between Zones. Several services operate across Availability Zones (e.g. S3, DynamoDB) while others can be configured to replicate across Zones to spread demand and avoid downtime from failures.

INFORMATION SYSTEM In 1995 Amazon used website system and order fulfillment system separately in order to improve security. By 1995 amazon has huge database running on Digital Alpha Servers. Amazon renovated the entire system in the year of 2000. Company

spent $200 million on the new system. These systems include analysis software from “Epiphany”, logistics from “manugistics” and new DBMS from oracle. (Gerald, 2012) For communication with supplies amazon seal deal with Excelon for business-to-business integration system. (Konicki, 2000) . Amazon Web Service (AWS) and Simple Storage Service (SS) are the main system developed by amazon. Through this system amazon can maintain its vast number of products and millions of active customers. Amazon web service has become a global platform for individual to retailers to sell their products. Through reliable, Scalable, and robust web service amazon creates a global domination. The challenges of amazon.com web services are very prominent. Every second thousands of customers are searching. For products and ordering products, the systems have to 4 be fast, reliable and secured. Every second CRM (Customer Relation Management) system is taking customer information though their searching, data mining, wish list and so on. Whatever customer buys or not they are providing information about them. Systems are smart enough to analysis the information and provide service accordingly. For tracking fraudsters amazon.com built a system known as SAS( Smart Analysis Search).This system decrease and detect fraud in the web site by analyzing behavioral pattern. SAS allows amazon.com to measure and personalize customer and help to serve customer effectively. Amazon.com is information system based on Service Oriented Architecture (SOA). SOA is fully distributed and decentralized service platform enables amazon‟s information system to be robust and scalable. SOA concentrates in multiple application rather than bigger process.

TRANSACTION PROCESSING SYSTEM Every customer has his profile in amazon.com or must have a profile in order to order any product. Amazon offer many features to personalize their profile with web tools like shopping cart, wish list. 1-click purchase: Amazon brings 1 click ordering, personalized shopping services and easy to use card transaction, e-mail communication with customers and direct shipping around the world. (1999 Annual report) Customer with previously activated functionality can order items clicking only one button without fulfilling order form. Amazon„s secured server automatically provide the information required for the registered

customer. (Annual report 1998) Secure Credit/debit card payment: For secure transaction amazon.com use secured server software. Customer‟s personal information, credit card number and everything is encrypted in order to secure information over internet.

RECOMMENDATION SYSTEM Amazon developed an intelligent recommendation system which recommends items by customer’s past purchases and searching data. This system store every order made by customer. For example if a customer buy a fiction book then the recommender system will recommend related books to the customer. The system is basically based on “linking” and “Data mining”. Every movement or search queries are noticed and tracked down to provide the best possible recommendation. This enhances the browsing experiences of the customers because this acts as an interactive platform between website and customers which help maximum customer satisfaction. Interactive searching System: Amazon provides interactive searching option to the customers. Customer can select desired items catalogs to find the item. Millions of items can be gained by searching tools.

SUPPLY CHAIN MANAGEMENT For the huge success by 2004 the “Supply Chain System” played a huge role. In 2000 amazon spent good amount in order to build automated warehouse and automated supply chain management. All the supply chain activities are controlled by CRM system. Enterprise Resource Management (ERP System): Amazon uses oracle as the ERP. It has huge database which hold information related to customer. Customer’s ordering process is automated as the order is taken as it automatically find the nearest distributing center for the delivery. This system fastens the order fulfillment process with the order tracking and reduces any distribution mistakes. By this system the company reduced 50% of its

customer service contacts since 1999 because of fewer mistakes. Customer Relation Management (CRM): In order to gain customer satisfaction and loyalty amazon use Customer Relationship Management system (CRM). CRM system follows the following application to collect information of the customer. All personal information of customers their credit card record, transaction record, order record, profile, their past purchase history are collected in the database. The order processing system takes care of the transaction record with secured transaction method and it delivers instruction to the delivery system for the execution of shipment. Through customer feedback, customer interest, wish list, product reviews web page system collect customer information. Automated communication is ensured with customers through e-mail and massage systems and order information systems .With the CRM system amazon successfully integrates customer sales, services and communication.

BUSINESS STRATEGIES In early stage of the amazon.com’s journey, the business strategy of amazon.com was very simple and forward. Their one and only strategy was to sell books to the customer through online. They invested to the customer and offer them a huge collection of books through online. “From the beginning our focus has been on offering our customers compelling value. We realized that the web was and still is the World Wide Web. Therefore we set out to offer customer something they simply could not get any other way and began serving them with the book.” -Jeff P. Bezos (shareholder’s letter 97) Amazon.com attracted customers by offering 1-click shopping, low price and increasing customer’s value. Creating easy to use and easy to learn customer interfaces was a key aspect of Amazon’s strategy. 1. Smart Innovation Strategy: The main reason of the successful journey of amazon.com so far is the innovation strategy of the company. Amazon.com started the business by offering DVDs and CDs alongside books. In the following year they brought auction theme to the customer. Their strategy was to provide customer better experience of auction by protection from the fraud to the bidder though this strategy did not bring success to the company. Amazon followed B2C (Business to Customer) model. But it again changed its

strategy and transformed from direct sales business model to sales and service model. Through this model amazon‟s target group was customers and other business group. Amazon.com offered small business group to use amazon web service and platform to offer their product to the customers. Amazon took commission on each sell of other retailer‟s product. Through this service amazon created eco system in the market. Through Amazon Associates Program‟ amazon created and developed partnership with customers and businessman. The primary goal of the program was to acquire new customers to boost the sales on Amazon.com. Amazon instead gave them its affiliates a revenue share. (ISCKIA and LESCOP) This allowed amazon to extend it market place into a broad section from a single product. There was a change in model in Amazon business strategy. It was a cyberbook store and with the affiliates and association of the other retailer and being a platform to the others it became a cyber-market. 2. Customer Relation Management Strategy: When a customer first enter into Amazon.com he/she is provided „ Featured Product‟ by the website, But when the customer visit for the second time the recommender system automatically provide products by studying customer interests and personality. Customer acquisition and retention has been the most priority to Amazon.com‟s strategy. Through web site Amazon maintain sophisticated communication that automates the process of creating value for the customer. Jeff Bezos 3 big idea – 1. Limitless inventory 2. Customer Care 3. High margin, lowest price. 3. Limitless Inventory: When amazon started offered books to the customers. But over the period it increased its products from books to music, movie, cloud storage, gaming and many more. Poter mentioned three district sources1. Serving few needs of many customer 2. Serving broad needs of few customer 3. Serving broad needs of many customers. Initially amazon was followed first source of serving with few products. But it changed its strategy over time and now it fits into third sources.

4. Customer Care: “If you do build a great experience, customer tells each other about that. Word to mouth is very powerful” - Jeffry p. Bezos One of the success factors of amazon.com is word of mouth. Because of excellent customer service customers trusted Amazon. They used to talk about Amazon.com to other. This spread rapidly by creating increasing traffic on the web site. 5. High Margin, Lowest Price: Amazon.com provides products significantly cheaper than its competitors. One of the main visions of Amazon.com is based on the long term plan. (1997 Stockholder report) This makes easier for amazon to take risk of low profit in order to succeed in future. An estimate shows how it is possible for amazon to become profitable with lowest price. A product on average gets sold in 33 days through amazon.com. On the other side it competitors like best buy took 70 day to sell the product. Amazon keeps the best-selling product to its own stock and longer tail items to third party sellers stock. This gives an advantage to the company. 6. Marketing and Promotion Strategy: Amazon‟s marketing strategy remains as strategy brand name, increasing customer traffic, customer loyalty. To gain so amazon.com undergone various promotional method. Public relation activities, online and traditional advertising including radio, television and print media are the prominent. 7. Associate Program: To boost the customer traffic and rate of sale amazon.com started a associate program with customers and small businessman. Approximately 200,000 websites have enrolled in the associate program.

INTRODUCTION OF RETURN ON INVESTMENT STRATEGY OF AMAZON 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.

FINANCIAL SNAPSHOT

Amazon

Apple

Alibaba

Overall Profitability (ROE)

12.29%

35.62%

32.93%

Return on Assets (ROA)

3.60%

14.93%

25.07%

ROA

3.60%

14.93%

25.07%

Profit Margin

1.96%

21%

72.17%

Asset Turnover

0.018

0.710

0.350

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%

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

14.52%

27.09%

38.76%

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

0.44

0.26

2.08

Profitability

Disaggregating ROA

Disaggregating Profit Margin

Disaggregating Asset Turnover

Return on Common Equity ROCE Disaggregating (ROCE) ROCE

Risk Short-Term Liquidity / Financial Health Cash Ratio

Current Ratio

1.04

1.35

2.58

Quick Ratio

0.78

1.22

2.46

37.53%

83.32%

109.22%

19.44

7.2

8.99

18.78 days

50.69 days

40.60 days

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

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

Operating Cash Cash Flow Ratio Efficiency Ratios Accounts Receivable Turnover Ratio Days Oustanding Inventory Turnover Ratio

Debt & Long-Term Solvency

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%

=

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

Apple

Alibaba =

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

Visualization:

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%

=

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

Apple

($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:

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%

=

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

Apple

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%

=

21.19% * .70 =

14.93%

72.17% * .35 =

25.07%

Apple

Alibaba

=

Visualization:

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%

=

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

Apple

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%

Visusalization:

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.

ASSET TURNOVER = Sales ÷ Average Total Assets Amazon

=

$135,987,000,000 ($64,747,000,000 + $83,402,000,000) ÷ 2

=

1.836

=

$215,639,000,000

Apple

($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:

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%

=

$130,723,700,000

Apple

$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. SELLING, GENERAL & ADMINISTRATIVE EXPENSE PERCENTAGE

= SG&A ÷ Sales

Amazon

=

$43,536,000,000 $135,987,000,000

=

32.01%

=

$14,194,000,000

Apple

$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.

OTHER EXPENSE PERCENTAGE

= Other Expenses ÷ Sales

Amazon

=

$167,000,000 $135,987,000,000

=

.12%

=

$0.00

Apple

$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%

=

$15,685,000,000

Apple

$215,639,000,000

=

7.31%

Alibaba

=

$1,306,000,000 $14,693,500,000

= Assessment:

8.89

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%

=

$45,687,000,000 + (1 – 7.31%) * 0 +

Apple

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

=

$29,299,000,000

Apple

($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 thirdparty 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.

=

$130,723,700,000

Apple

($2,132,000,000 + $2,349,000,000) ÷ 2

=

58.35, Inventory turns 58.35 times per year and held approximately 6.25 days.

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

=

$215,639,000,000

Apple

($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%

=

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

Apple

($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.

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%

=

14.93% * .73 * 2.47 = 27.09%

Apple

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

=

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

Apple

$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: Refer to overall leverage assessment.

CSL (CAPITAL STRUCTURE LEVERAGE) = Average Total Assets Average Common Equity

Amazon =

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

=

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

Apple

Alibaba =

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

Assessment: Refer to overall leverage assessment. ADJUSTED LEVERAGE = CSL * CEL

Amazon =

4.53 *.83 = 3.77

=

2.47 *.73 = 1.81

Apple

Alibaba =

1.58 * .98 = 1.54

Assessment: Refer to overall leverage assessment.

Overall Visualization:

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 capitalintensive 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

=

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

Apple

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

=

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

Apple

Alibaba =

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

Visualization:

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

=

$20,484,000,000 + $46,671,000,000 +

Apple

$29,299,000,000 $79,006,000,000 = Alibaba =

1.22 $16,724,000,000 + $1,373,000,000 + $1,703,500,000 $8,046,000,000

=

2.46

Visualization:

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 incomeproducing assets that are not yet producing. = Cash Flow from Operations ÷ Current Liabilities Amazon =

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

=

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

Apple

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 longterm 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.

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

=

$215,639,000,000

Apple

($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.

INVENTORY TURNOVER RATIO

= Cost of Goods Sold ÷ 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.

=

$130,723,700,000

Apple

($2,132,000,000 + $2,349,000,000) ÷ 2

=

58.35, Inventory turns 58.35 times per year and held approximately 6.25 days.

Alibaba

=

$4,990,900,000 ($0.00 + $0.00) ÷ 2

=

N/A, Alibaba does not hold any inventory.

Visualization:

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 5days, 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

=

11.59 days

Apple

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 longterm 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

=

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

=

.37

Apple

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%

=

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

Apple

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 shortterm 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

=

$45,687,000,000 + $0.00 +

Apple

$15,690,000,000 $0.00 = Alibaba =

N/A $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

=

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

Apple

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

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 Alibaba

37.78% 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%. 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?

CONCLUSION

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.

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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

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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-onstock-splits-such-as-apples-aapl-cm361551