There are a number of reasons that attract investors towards large-cap companies such as Amazoncom Inc. (NASDAQ:AMZN), with a market cap of US$739.64B. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the health of the financials determines whether the company continues to succeed. I will provide an overview of Amazon.com’s financial liquidity and leverage to give you an idea of Amazon.com’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into AMZN here. View our latest analysis for Amazon.com
Does AMZN produce enough cash relative to debt?
AMZN has built up its total debt levels in the last twelve months, from US$20.41B to US$44.15B – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$30.99B for investing into the business. On top of this, AMZN has produced cash from operations of US$18.43B during the same period of time, leading to an operating cash to total debt ratio of 41.76%, signalling that AMZN’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AMZN’s case, it is able to generate 0.42x cash from its debt capital.
Can AMZN meet its short-term obligations with the cash in hand?
Looking at AMZN’s most recent US$57.88B liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$60.20B, leading to a 1.04x current account ratio. For Online Retail companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can AMZN service its debt comfortably?
Amazon.com is a highly levered company given that total debt exceeds equity. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if AMZN’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In AMZN’s case, the ratio of 6.36x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as AMZN is a safe investment.
Although AMZN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for AMZN’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Amazon.com to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMZN’s future growth? Take a look at our free research report of analyst consensus for AMZN’s outlook.
- Valuation: What is AMZN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AMZN is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.