Question

Comparative Analysis Problem: Amazon.com, Inc. vs. Wal-Mart Stores, Inc.

CT10-3.  

Amazon.com, Inc.'s financial statements are presented in Appendix D. Financial statements of Wal-Mart Stores, Inc. are presented in Appendix E. Instructions for accessing and using the complete annual reports of Amazon and Wal-Mart, including the notes to the financial statements, are also provided in Appendices D and E, respectively.

Instructions

(a)  

At December 31, 2015, what was Amazon's largest current liability account? What were its total current liabilities? At January 31, 2016, what was Wal-Mart's largest current liability account? What were its total current liabilities?

(b)  Based on information in these financial statements, compute the following 2015 values for Amazon and 2016 values for Wal-Mart:

• 1.Working capital.
• 2.Current ratio.

(c)  

What conclusions concerning the relative liquidity of these companies can be drawn from these data?

(d)  Based on the information contained in these financial statements, compute the following 2015 ratios for Amazon and 2016 ratios for Wal-Mart.

• 1.Debt to assets.
• 2.Times interest earned.

(e)  

What conclusions concerning the companies' long-run solvency can be drawn from these ratios?

Answer 1

Solution - Question No.a

The current liabilities status of Amazon.com as at 31st December, 2015

Details	$ millions
Accounts payable	20397
Accrued expenses	10384
Unearned revenue	3118
Total Current Liabilities	33899

The total current liabilities recorded at Amazon.com as at 31st December 2015 works out to $ 33899 million. The largest current liability is Accounts payable $ 20397 millions which is 60% of the total current liabilities.

The current liability status of Wal-Mart stores as at 31st January 2016

Details	$ millions
Short term borrowings	2708
Accounts payable	38487
Accrued Liabilities	19607
Accrued Income taxes	521
Long term debt within one year	2745
Capital lease and financial obligation due within one year	551
Total Current Liabilities	64619

The total current liabilities recorded at Wal-Mart as at 31st January 2016 works out to $ 64619 million. The largest current liability is Accounts payable $ 38487millions which is 60% of the total current liabilities.

Solution Question No.b

The formula for working capital = Current Assets - Current Liabilities

The formula for current ratio = Current Assets / Current Liabilities

Using the formulas, the working capital and current ratio at Amazon.com is as follows:-

Ratio	Details	Values (in $)	Value (in $)
Working capital	Current assets	36474	2575
	Current Liabilities	33899
Ratio	Details	Values (in $)	Ratio
Current ratio	Current assets	36474	1.08
	Current Liabilities	33899

Using the formulas, the working capital and current ratio at Wal-Mart is as follows:-

Ratio	Details	Values (in $)	Value (in $)
Working capital	Current assets	60239	-4380
	Current Liabilities	64619
Ratio	Details	Values (in $)	Ratio
Current ratio	Current assets	60239	0.93
	Current Liabilities	64619

Solution Question No.c

The working capital and current ratio recorded at Amazon.com is $ 2575 millions and 1.08 times respectively. The resultant ratios denotes that, the company will be just able to manage the current obligations by liquidating the current assets. The ideal current ratio is 2 times. The current ratio recorded at Amazon is weak.

The working capital and current ratio recorded at Wal-Mart is -$ 4380 and 0.93 times respectively. The resultant ratio denotes that the current liabilities of the company is more that the current assets. The company will struggle to pay off the current obligations. The liquidation of current assets will not be enough to settle the obligations of current liabilities. The company has to arrange for funding from external sources to pay off the current obligations. The current ratio recorded at Wal-Mart is adverse.

Solution Question No.d

The formula for debit on Assets = total debt / total assets (Total debts include Borrowings and other liabilities)

The formula for Times interest earned ratio = EBIT (income before interest and taxes) / Interest expenses

Using the formula the Debt on assets and Times interest earned ratio of Amazon is worked out as follows:-

Ratio	Details	Values (in $)	Ratio
Debt on assets	Total debts	52060	79.55%
	Total Assets	65444
Ratio	Details	Values (in $)	Ratio
Times Interest earned ratio	EBIT	2233	4.86
	Interest expenses	459

Using the formula the Debt on assets and Times interest earned ratio of Wal-Mart is worked out as follows:-

Ratio	Details	Values (in $)	Ratio
Debt on assets	Total debts	115970	58.11%
	Total Assets	199581
Ratio	Details	Values (in $)	Ratio
Times Interest earned ratio	EBIT	24105	9.46
	Interest expenses	2548

Solution Question No.e

The debt on assets and Times interest earned ratio recorded at Amazon is 79.55% and 4.86 times respectively. This denotes that 79.55% of the company assets are being financed by the creditors. The higher debt on assets ratio denotes higher financial leverage and higher risk. The company is earning 4,86 times of its interest expenses. This denotes that the company is comfortable in paying the cost of debt.

The debt on assets and Times interest earned ratio recorded at Wal-Mart is 58.11% and 9.46 times respectively. This denotes that 58.11% of the company assets are being financed by the creditors. Compared to Amazon.com, the Wal-mart is placed better in terms of financial leverage and risk. The company is earning 9.46 times of its interest expenses. This denotes the company is more comfortable in paying the cost of debt when compared to Amazon.com.