The incredible growth of Amazon.com has put fear into the hearts of traditional
ID: 2445139 • Letter: T
Question
The incredible growth of Amazon.com has put fear into the hearts of traditional retailers. Amazon.com's stock price has soared to amazing levels. However, it is often pointed out in the financial press that the company did not report a profit until 2003 (several years after it went public). The following financial information is taken from the 2003 financial statements of Amazon.com.
($ in millions)
2003
2002
Current assets
$ 1,821
$ 1,616
Total assets
2,162
1,990
Current liabilities
1,253
1,066
Total liabilities
3,198
3,343
Cash provided by operations
392
174
Capital expenditures
46
39
Dividends paid
–0–
–0–
Net income (loss)
35
(149)
Sales
5,264
3,933
Instructions
(a)
Calculate free cash flow for Amazon.com for 2003 and 2002, and discuss the company's ability to finance expansion from internally generated cash. Thus far, Amazon.com has avoided purchasing large warehouses. Instead, it has used those of others. It is possible, however, that in order to increase customer satisfaction the company may have to build its own warehouses. If this happens, how might your impression of its ability to finance expansion change?
(b)
Discuss any potential implications of the change in Amazon.com's cash provided by operations from 2002 to 2003.
(c)
What were Amazon’s stock prices around this period? Based on your findings in parts (a) and (b), can you conclude whether Amazon.com's amazing stock price is justified at that time?
The incredible growth of Amazon.com has put fear into the hearts of traditional retailers. Amazon.com's stock price has soared to amazing levels. However, it is often pointed out in the financial press that the company did not report a profit until 2003 (several years after it went public). The following financial information is taken from the 2003 financial statements of Amazon.com.
($ in millions)
2003
2002
Current assets
$ 1,821
$ 1,616
Total assets
2,162
1,990
Current liabilities
1,253
1,066
Total liabilities
3,198
3,343
Cash provided by operations
392
174
Capital expenditures
46
39
Dividends paid
–0–
–0–
Net income (loss)
35
(149)
Sales
5,264
3,933
Explanation / Answer
a) Free Cash Flow = Operating Cash Flow - Capital Expenditured
Free Cash Flow for 2003 for Amazons .com = 392-46 = $346
Free Cash Flow for 2002 for Amazons .com = 174 - 39 = $135
Meeting Expansion from internally generated cash is possible if it wants to continue with using the warehouses of others for the purpose but in case if it wants to built its own warehouse in the coming time , the internally generated cash is not sufficient for the expansion it wishes and it might have to rely on external financing sources for the expansion of warehouses it desires.
b) The Cash provided by opeartions from 2002 to 2003 has shown a positive upside move which is even reflected in increase in sales from 2002 to 2003 which shows that the financial stability of the company has improved signifcantly and the company is generating more cash from its core activity from the previous year which is good from the standpoint of both the Company and Shareholders. With the Increse in sales the Net profit has increased which otherwise was running in losses the last year.
c) Amazons Stock price around 2002 was $14.80 and 2003 was $26.03
Yes depending on the volume of sales at the time , the price of the Amazon stock is justified
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