Abdulazeezabdullah · Follow
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Numbers can be a drag, right? But what if you were told that by understanding some key financial figures, you could unlock the secrets of a company? That’s the power of financial statement analysis. It’s like unlocking a company’s code, revealing its financial health, performance, and where it might be headed in the future.
Think of financial statements as a company’s story told through numbers. There’s the income statement, which shows how much money the company brought in (sales) and what it spent (expenses) to get there. The balance sheet gives us a snapshot of what the company owns (assets) and owes (liabilities) at a specific point in time. And the cash flow statement tracks the movement of cash — how much came in and how much went out.
Financial statement analysis isn’t just about memorizing numbers. It’s about using these financial reports to ask smart questions. Is the company making a profit? Can it cover its debts? Is it growing? By comparing these numbers over time and against similar companies, we can gain valuable insights into a company’s true potential.
This knowledge is like gold for investors trying to decide where to put their money. But it’s not just for them! Anyone interested in a company’s health, from potential lenders to employees or even curious customers, can benefit from understanding the financial story behind the numbers.
The following section dives into understanding the performance of Amazon and Walmart over the last three years. Accounting tools such as Horizontal, vertical and ratio analysis are used to understand the financial performance of these two businesses.
Note that the income statement and balance sheet figures of both Walmart and Amazon are quoted in $millions.
Horizontal, vertical and ratio analyses were carried out to understand both organization’s financial position.
Ratio Analysis
Ratio analysis is a quantitative technique that looks at financial statements like the income statement and balance sheet to provide insight into a company’s liquidity, operational effectiveness, and profitability.
1. Current Ratio: This measures a company’s short-term liquidity
Current Ratio = Current assets / Current liabilities
Amazon Current Ratio = 172351/164917
= 1.04
Walmart Current Ratio = 75655/92198
= 0.82
2. Debt Ratio: The debt ratio calculates how much of an organization’s assets come from debt in relation to its assets.
Debt Ratio = Total Liabilities / Total Assets
Amazon Debt Ratio = 164917/527854
= 0.31
Walmart Debt Ratio = 159206/243197
= 0.65
3. Gross Profit Margin: This shows the profit made on products after accounting for their cost.
Gross Profit Margin = Gross profit / Net sales
Amazon Gross Profit = 270046/574785
= 46.98%
Walmart Gross Profit = 142160/605881
= 23.46%
4. Operating Margin Ratio: This, also referred to as the return on sales ratio, assesses an organization’s operating efficiency by comparing its operating income to its net sales.
Operating margin ratio = Operating income / Net sales
Amazon Operating margin ratio = 36852/574785
= 0.06
Walmart Operating margin ratio = 20428/605881
= 0.033
5. Return on Asset Ratio: This indicates how efficiently the company uses its assets to generate profit.
Return on assets ratio = Net income / Total assets
Amazon Return on assets ratio = 30425/527854
= 0.06
Walmart Return on assets ratio = 11680/243197
= 0.05
Result Interpretation
When all is said and done, those are just numbers. What do the numbers imply in terms of the financial position of both organizations?
Evaluating the financial strength of Amazon and Walmart?
Amazon’s profitability is unpredictable. In 2021, the organization had a net income of $33 billion but experienced a 108% drop in 2022 resulting in a net income of -$2.7 billion. Likewise in 2023, the net income bounced back to $30.4 billion, showcasing this volatility. Within the same timeframe, Amazon’s cash flow recorded a significant improvement. Cash and cash equivalents grew from $36 billion in 2021 to $73 billion in 2023. Also, Amazon’s debt has grown considerably (long-term debt increased from $48 billion in 2021 to $58 billion in 2023). However, their current liabilities are relatively low compared to current assets, indicating the company’s ability to cover its short-term debts.
Walmart’s profitability relative to Amazon is a bit more consistent. While the net income has decreased over the last 3 years, it has remained positive. Although Walmart’s cash flow is lower than that of Amazon, its cash position is still healthy (Cash and cash equivalents decreased from $17 billion in 2021 to $8.6 billion in 2023).
In summary, Walmart has a more consistent financial performance than Amazon, with steadier profitability despite Amazon having a stronger cash flow position in 2023, but also has a higher debt load.
Is Amazon in a strong or weak financial position?
Amazon lies in a bit of a hurdle. Amazon seems to have found a middle ground between being in a strong or weak financial position. Its high gross profit margin (46.98%) shows it makes a good profit on each product sold and a moderate debt level (debt ratio of 0.31) suggests some flexibility for growth. However, a low operating margin ratio (0.06) and return on assets ratio (0.06) show some difficulty converting their high gross profit into overall company profitability. Also, the low current ratio (1.04) raises concerns about the organization’s ability to meet short-term obligations.
Overall, Amazon seems to be good at making money on each product it sells, but it struggles to translate that into strong overall company profitability. Their short-term liquidity is also a concern.
Is Walmart in a strong or weak financial position?
Walmart is in a weak financial position. The company’s operating margin and return on assets ratios suggest they efficiently convert sales into profit, even though their gross profit margin is lower than Amazon’s. However, the current ratio of 0.82 indicates they might struggle to meet their short-term obligations (like bills due within a year) with only their current assets. This raises concerns about their working capital management. Also, their debt ratio is significantly higher than Amazon’s, indicating a heavy reliance on debt financing. While debt can fuel growth, it also increases financial risk if not managed effectively.
While Walmart demonstrates some efficiency in turning sales into profit, its weak short-term liquidity and high debt burden create significant vulnerabilities. They need to address these issues to ensure long-term financial stability.
Which company (Amazon or Walmart) is in a better financial position?
Taking a closer look at Amazon and Walmart’s financial ratios reveals a complex picture of their health. While neither company is perfect, Amazon seems to have a slight advantage based on the financial statements provided. Let’s break it down.
Amazon makes a bigger profit on each item they sell compared to Walmart which translates to potentially higher overall profits if they can streamline their operations. Also, Amazon relies less on debt financing, which reduces its exposure to financial risk in the long run.
Although, Walmart excels at turning sales into profit, even though their profit margin per product is lower than Amazon’s. They earn less profit on each product they sell compared to Amazon and this could limit their overall profitability potential. Also, Walmart relies more heavily on debt financing, which increases its long-term financial risk if not managed carefully.
Despite operational efficiency challenges, Amazon’s significantly higher gross profit margin offers them more potential for overall profitability once they improve their operations. Additionally, their lower debt ratio indicates a less risky financial position in the long term.
Recommendations for Amazon CEO
· Focus on core business profitability: While Amazon Web Services (AWS) is a strong performer, Amazon needs to improve the profitability of its core retail business.
· Manage debt levels: The rapid increase in debt requires close monitoring and a plan for sustainable debt management.
· Improve operating efficiency: Focus on streamlining operations to convert their high gross profit into higher overall profitability.
Recommendations for Walmart CEO
- Invest in e-commerce: While Walmart has a strong physical presence, continued investment in e-commerce is crucial to compete with Amazon.
- Maintain cost controls: Walmart’s strength lies in its efficient operations. Maintaining cost controls will be important as they navigate an evolving retail landscape.
- Focus on Working Capital Management: Implement strategies to improve cash flow and optimize inventory levels to free up current assets and improve their current ratio.
- Debt Management: Consider a plan to reduce their debt ratio to improve their long-term financial stability. This could involve paying down debt or increasing equity through stock offerings.
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