Essay On “The Nature Of The Company's Business-Level Strategy”
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Company’s business level strategy is that in which it is using the technology of internet to go beyond the limits. The company used a combined strategy to achieve greater heights (Jones, 2008). This combined strategy had two important components;
Be unique, i.e. sale and purchase of books through websites. It was a kind of differentiation strategy in which the company got the ability of online collection of books and confirming their availability to more and more customers.
Selling or providing products and services at low cost. This low cost is also afforded by handling of huge quantities of products and discounts taken as a result of direct business with publishers and distributors.
This combined strategy of selling books on the internet at the lowest possible price gave the company a competitive advantage over the rival companies. This strategy also facilitated the company to get more loyal customers as the company has claimed that more than 40% of its business runs with the help of repeat customers. Moreover, strategies to improve immediate delivery also helped Amazon in getting strong foundations in the business (Jones, 2008).
“Return on Invested Capital” (ROIC)
ROIC is an estimate of the periodic yield earned in the business. This earning is based on the after-tax calculation. Formula for ROIC calculation is ROIC = 100 × NOPAT ÷ Invested capital, e.g. 100 × 356 ÷ 30,413 = 1.17% (Stock Analysis on net, 2015).
This table is showing that ROIC of the company was high in the year 2010, but then moved down in the coming years. Though, it moved up from the year 2012 to the year 2013 but again went down in 2014 (Stock Analysis on net, 2015). ROIC shows that the company has to work on the periodic yield earned in the business that is based on the after-tax calculation. Here, NOPAT refers to the net operating profit after taxes that don’t include other sources of income. So, the results are showing that the company is not good in earning through its own sources. ROIC is also showing that Amazon is not doing good in using its own capital as ROIC tells about the efficient use of one’s own capital (MorningStar, 2015).
“Return on Total Assets” (ROA)
ROA is determined as the net income divided by the average total assets. Amazon.com Inc’s yearly net income for the 4th quarter in December 2014 was $856 million, and the company’s average total assets for the 4th quarter that ended in December 2014 (i.e. total assets for September 2014 plus total assets for December 2014 divided by 2) were $47,462 million. So, Amazon.com Inc’s yearly ROA for the 4th quarter is calculated as 1.80%. Similarly, for the fiscal year that ended in December 2014, net income was about -241 million in dollars, and average of total assets (i.e. total assets in December 2013 plus total assets in December 2014 divided by 2) was about $47,332 million. Calculation tells about -0.51% ROA (GuruFocus, Amazon.com Inc (NAS:AMZN) Return on Assets, 2015).
ROA shows the profitability of the company relative to its total assets. It is also showing the efficiency of management in using the assets of the company to get earnings. And in the above table, we can see that Amazon is not performing well in ROA (Investopedia, 2015). Its ROA is negative meaning it is losing the value of assets to earn.
Formula for calculation of current ratio is Current Ratio = Current assets / Current liabilities
Current ratio shows the ability of the company to pay short-term obligations (Graham, & Smart, 2011). This table is showing that the company’s current ratio was higher in 2011 as compared to the present value. Moreover, that ratio deteriorated from the year 2012 to the year 2013 but then improved again in 2014. Overall, we can say that the company’s ability of payment of short-term obligations has not been changed much in the last five years. If we consider the competitors of Amazon, we can find that the Current ratio for Target Corp. remained better than Amazon in the last five years. On the other hand, the Current ratio remained less for Wal-Mart Stores Inc. in the last five years as compared to Amazon (Stock Analysis on net, Amazon.com Inc. (AMZN), Liquidity Analysis, 2015).
Quick ratio is a kind of liquidity ratio that is obtained by the division of Total Quick Assets with Current liabilities. Total Quick Assets can be considered as cash along with short-term marketable investments and receivables. Formula for the calculation of Quick Ratio is Quick Ratio = Total Quick assets / Current liabilities
Quick ratio is helpful in measuring the ability of the company to meet its short-term obligations with the help of most liquid assets (Mowen, Hansen, & Heitger, 2015). This table is showing that quick ratio of the company was higher in 2010 in the last five years. It means the company has $0.97 of liquid assets to cover $1 of current liabilities in 2010. Quick ratio of the company further deteriorated from the year 2012 to the year 2013 but then improved in 2014. Quick ratio for the company remained better as compared to Target Corp. and Wal-Mart Stores Inc (Stock Analysis on net, Amazon.com Inc. (AMZN), Liquidity Analysis, 2015).
Long-term debt to Total assets is a ratio that shows the percentage of total assets of the company that are financed with the help of loans. Moreover, financial obligations in this case may last for over one year. The company’s long-term debt to total assets ratio for the quarter in the end of December 2014 is calculated to be about 0.23 (GuruFocus, Amazon.com Inc (NAS:AMZN) Long-Term Debt, 2015)
Debt-to-equity ratio is a kind of solvency ratio that is calculated by the division of total debt with total equity of shareholders. Its formula is Debt-to-Equity Ratio = Total debt ÷ Equity (Damodaran, 2012).
Debt-to-equity ratio shows the proportion of equity and debt used by the company to finance its assets. It is also considered as the company’s financial leverage to consider long-term debt (Megginson, & Smart, 2008). This table is showing that the company’s debt-to-equity ratio was lowest in 2010 as compared to other years in the past five years. Moreover, the debt-to-equity increased with about twice the amount from 2013 to 2014 (Stock Analysis on net, Amazon.com Inc. (AMZN), Long-term Debt and Solvency Analysis, 2015).
Above mentioned ratios and calculations have shown that Amazon was performing better in 2010 and after that year the company’s performance has went down. Although it is performing better than other companies such as Wal-Mart in some aspects such as quick ratio, still it requires further improvements. Overall, Amazon.com can be considered as a company to transform the business especially online business by continuous building and rebuilding of new models for the development of business. The company is found to have an objective of building loyal customers by fulfilling their demands. Moreover, the company has presented an extraordinary ability to develop new types of doing businesses as well as launching them. Amazon.com can be considered as a model of renewal and innovation (Johnson, 2010).
Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of any Asset, University Edition: Wiley.
Graham, J., & Smart, S. (2011). Introduction to Corporate Finance: What Companies Do: Cengage Learning.
GuruFocus. (2015). Amazon.com Inc (NAS:AMZN) Return on Assets. Retrieved from http://www.gurufocus.com/term/ROA/AMZN/Return+on+Assets/Amazon.com+Inc
GuruFocus. (2015). Amazon.com Inc (NAS:AMZN) Long-Term Debt. Retrieved from http://www.gurufocus.com/term/Long-Term%20Debt/AMZN/Long-Term%252BDebt/Amazon.com%2BInc
Investopedia. (2015). Return on Total Assets – ROA. Retrieved from http://www.investopedia.com/terms/r/returnonassets.asp
Johnson, M. W. (2010). Amazon's Smart Innovation Strategy. Retrieved from http://www.businessweek.com/innovate/content/apr2010/id20100412_520351.htm
Jones. (2008). Organizational Theory, Design, And Change, 5/E: Pearson Education.
Megginson, W., & Smart, S. (2008). Introduction to Corporate Finance: Cengage Learning.
MorningStar (2015). Return on Invested Capital. Retrieved from http://news.morningstar.com/classroom2/course.asp?docId=145095&page=9
Mowen, M., Hansen, D., & Heitger, D. (2015). Cornerstones of Managerial Accounting: Cengage Learning.
Stock Analysis on net. (2015). Amazon.com Inc. (AMZN), Liquidity Analysis. Retrieved from https://www.stock-analysis-on.net/NASDAQ/Company/Amazoncom-Inc/Ratios/Liquidity
Stock Analysis on net. (2015). Amazon.com Inc. (AMZN), Long-term Debt and Solvency Analysis. Retrieved from https://www.stock-analysis-on.net/NASDAQ/Company/Amazoncom-Inc/Ratios/Long-term-Debt-and-Solvency
Stock Analysis on net. (2015). Amazon.com Inc. (AMZN), Return on Capital (ROC). Retrieved from https://www.stock-analysis-on.net/NASDAQ/Company/Amazoncom-Inc/Performance-Measure/Return-on-Capital
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