Financial Statements are informational records detailing a company’s business activities over a period.
Tanner Hertz is a freshman studying Finance at Arizona State University. He is a current intern at Grand Haven Capital, a search fund focused on acquiring, growing, and operating one business for the long term.
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Austin has a Bachelor of Science in Engineering and a Masters of Business Administration in Strategy, Management and Organization, both from the University of Michigan.
Last Updated: January 7, 2024 In This ArticleFinancial Statements are informational records detailing a company’s business activities over a period.
Investors need financial statements to gain a full understanding of how a company operates in relation to competitors. In the case of Amazon , profitability metrics used to analyze most businesses cannot be used to compare the company to businesses in the same sector.
Amazon remains low in profitability continuously to reinvest in growing operations and new business opportunities. Instead, investors can point to the metrics signified in Amazon’s cash flow statement to demonstrate growth in revenue generation over the long term.
There are three main types of financial statements, all of which provide a current or potential investor with a different viewpoint of a company’s financials. These include the following below.
The balance sheet represents a company’s total assets, liabilities, and shareholder ’s equity at a certain time.
Assets are all items owned by a company with tangible or intangible value, while liabilities are all debts a company must repay in the future.
Shareholders' equity is simply calculated by subtracting total assets from total liabilities. This represents the book value of a business.
The income statement represents a company’s total generated income minus expenses over a specified range of time. This can be 3 months in a quarterly report or a year in an annual report .
Revenue includes the total money a company makes over a set time.
This includes operating revenue from business activities and non-operating revenue, such as interest from a company bank account.
Expenses include the total amount of money spent by a company over time. These can be grouped into two separate categories, Primary expenses occur from generating revenue, and secondary expenses appear from debt financing and selling off held assets.
The cash flow statement represents a company’s total cash inflows and outflows over a specified time range, similar to the income statement. Cash in a business can come from operating, investing, or financing activities.
Operating activities are events in which the business produces or spends money to sell its products or services. This would be income from the sales of goods or services or interest payments and expenses such as wages and rent payments for company facilities.
Investing activities include selling or purchasing assets, which can include investing in business equipment or purchasing short-term securities. Financing activities include the payment of loans and the issuance of dividends or stock repurchases.
Now that we have a general understanding of the financial statements, we can begin to take a look at Amazon’s most recent quarterly filing.
Company filings can be found by using EDGAR (database of regulatory filings for investors by the SEC) or from Amazon’s investor relations website.
Before we begin analyzing this sheet, it is important to take note of the statement just below the title, indicating that the data is being displayed in millions.
This can throw off newcomers, who may be very confused upon seeing Amazon’s revenue is $53,888. Amazon’s quarterly revenue is indeed $53.8 billion as calculated in millions.
When looking at Amazon’s assets, it is important to note the difference between current and total assets. Current assets are categorized separately due to the expectation that they can be converted to cash within the fiscal year.
Current assets can be used in the current ratio to analyze Amazon’s ability to pay off its short-term obligations. The current ratio formula is:
Amazon’s current ratio sits at 0.92, which is below the e-commerce industry average of 2.09 as of March 2023 (Source: Macrotrends).
This could mean that Amazon is potentially overvalued compared to competitors, but this is only one metric and should ultimately be all of an investment decision, especially considering the capital-intensive nature of Amazon’s business model.
It is also important to understand all of the vocabulary used to detail items in Amazon’s balance sheet. Some of the major items’ definitions can be found below:
Assets are classified as follows.
Liabilities are of the following types.
Amazon’s next statement in its quarterly filing is the income statement. The income statement is useful for comparing a company’s growth over time and matching it up against competitors in the same or different sectors.
An essential factor to note when looking at a company’s income statement is whether its revenue and net income are consistently growing year over year. Investors should also be aware of Wall Street expectations, as they can heavily influence the business’s share price.
Many important ratios are used when analyzing a company’s income statement. Some of the most notable ones include:
Let’s use these ratios to conduct a comparables analysis between Amazon and eBay, a company at a much lower valuation relative to the e-commerce giant.
Here are their ratios side-by-side, as of Amazon’s Q1 2023 and eBay’s Q1 2023 filings:
* = EV/EBITDA ratios sourced from finbox.com, March 2023 trailing twelve months (TTM)
Looking at these statistics on paper, it is clear to see that Amazon seems overvalued compared to eBay due to lower margins, negative earnings per share, and an EV/EBITDA multiple over three times as high as the business.
However, pure stats on an income statement cannot fully justify purchasing one company or another. The statement merely shows what a company is doing without a corporate spin.
One thing to note that is unique about Amazon’s business model is how the company invests huge amounts of capital into R&D and technology to expand its operations continuously.
Their numbers don’t account for the massive cash flows and growth opportunities that the business takes advantage of.
When conducting fundamental analysis, an investor must consider all aspects of a business beyond the financial statements, including comparing business models to competitors and setting benchmarks encompassing the overall sector.
Amazon’s cash flow statement is where the company begins to shine compared to its competitors in the online commerce sector. The company has consistently increased cash flow from operating activities and constantly returns value to shareholders in the form of capital appreciation.
It is notable for focusing on what the company is doing inside of its cash flow statements to get a better picture of why its income or stock price is trending a certain way.
For example, an explosive drop in net income in an otherwise stable company could be due to mismanagement or hampered growth but is most likely due to M&A activity charged in a quarter that may be skewing the numbers. The cash flow statement clears this up.
Compared to 2022, Amazon has increased its annual cash from operating activities by over 38% from the previous year based on a 12-month rolling basis.
This increase has also resulted in an 11.7% increase in investment expenditures, which should allow Amazon to continue growing faster than similar companies.
In comparison, according to eBay’s most recent 10-K filing, the company generated an 82% growth in operating cash flow (OCF), however, this stat can be very misleading due to the company’s lack of investment in processes such as R&D and SG&A.
In 2022, the company reported $92M in investing activities, representing only 26% of operating cash flows. Amazon reported over $37.6B in investing activities representing approximately 88% of its OCF.
The income statement can misrepresent how well a company is doing, as while eBay has a higher net income, Amazon strategically reinvests its cash flows into R&D and other expenses to produce more over time continuously.
What makes the cash flow statement so essential to fundamental analysis is the fact that it is tough to manipulate its numbers through financial engineering or clever accounting.
The statement purely shows precisely where all of the money a company makes is being used. Many investors use the cash flow statement to tell the true financial health of a business, as profits can often not be indicative of a growth company's value.
The stock price of a company can easily be swayed by sentiment or the market cycle , and the income statement can be skewed through large one-time transactions or large amounts of financed revenue. The amount of money in the possession of a company is very hard to adjust.
Amazon currently has much better growth prospects than eBay and thus sells at a higher premium in the open market , but you wouldn’t understand why unless you took in the full picture of the company.
