Amazon is one of the largest companies in the world, with a net worth of over $1 billion. Operating in a number of countries, it serves as a marketplace where goods are sold and delivered both directly and via third-party sellers. The company was started relatively recently, and its rapid growth has been the topic of much interest from entrepreneurs and researchers, given its lack of a global customer base such as those of Microsoft or Apple. For purposes of this assignment, its 2019 financial statement will be analyzed and its strategy evaluated. It is the most recent such document available and contains valuable information that can help determine the company’s state and practices.
Amazon’s profit margin increased substantially between 2017 and 2018 as a result of the growth of its revenue but stagnated the next year. The most likely reason for this growth is the increase in service sales, which grew by nearly 50% without a correspondingly large cost increase. The most likely reason is Amazon Web Services, which is growing rapidly and is currently Amazon’s most profitable division (Castro-Leon & Harmon, 2016). With that said, its cash amounts grew between 2018 and 2019, but not by a large amount. Amazon’s strategy is the likely reason, as the company focuses on business growth rather than the accumulation of liquidity (Kumar, 2017). As such, it reinvests most of its profits back into the business for future returns.
Amazon’s accounts receivable has also grown somewhat, most likely indicating overall steady growth for the company. Per Amazon (2020), the figure is mostly formed by the company’s customers, with vendors in second place and sellers in third. The company offers the last category a program where they can take out loans to procure inventory and fulfill other business purposes. As such, they can start businesses with profitable ideas and a minimum of starting capital. Amazon (2020) notes that its allowance for doubtful accounts is not large, amounting to $718 million for 2019 compared to the $20,718 million total figure. This result likely indicates that the company’s account collection practices are efficient and effective.
As a reseller, Amazon operates with a substantial amount of inventory, and its efficiency in managing products has contributed strongly to its success. Per Amazon (2020), the company primarily uses the FIFO method of valuation, valuing items at either cost or net realizable value, whichever is lower. As Amazon is a reseller that expects high turnover, the FIFO method makes the most sense since it is trying to dispose of the oldest inventory first. Robinson et al. (2020) state that the method’s most significant advantages are its simplicity and the transparency it provides. For a massive public company such as Amazon, both of these qualities are highly valuable.
Amazon has little to no direct competition in the form of other online retailers, and it has successfully been outperforming brick-and-mortar alternatives. It has adopted a growth-focused model and achieved consistent growth throughout recent years. It plans to continue using the same approach in the future, while there is still space for expansion. Moreover, the emergence of COVID-19 has positioned the company excellently due to its ability to continue operating when most people are confined to their homes, delivering products to their doorsteps. As such, it is reasonable to assume that Amazon’s performance in 2020 and onward will also remain strong, with continued expansion even if some ratios such as the profit margin remain low on purpose.
References
Amazon. (2020). 2019 Amazon annual report. Web.
Castro-Leon, E., & Harmon, R. (2016). Cloud as a service: Understanding the service innovation ecosystem. Apress.
Kumar, R. (2017). Strategic financial management casebook. Elsevier Science.
Robinson, T. R., Henry, E., & Broihahn, M. A. (2020). International financial statement analysis (4th ed.). Wiley.