The incredible growth of Amazon.com has put fear into the hearts of traditional retailers. Its stock price has soared to amazing levels. However, in 2001 many investors were very concerned about whether Amazon would survive since it had never earned a profit, and it was burning through cash. Some investors sold, but others decided to hold on to their investment in the company’s stock. The following information is taken from the 2001 and 2004 financial statements of Amazon.com.

Broadening Your Perspective 641

($ inm illions) __2001_ _2_0 04_ Current assets $1,207.9 $2,539.4 Total assets 1,637.5 3,248.5 Current liabilities 921.4 1,620.4 Total liabilities 3,077.5 5,096.1 Cash provided by operations (119.8) 566.6 Capital expenditures 50.3 89.1 Dividends paid 0 0 Net income (loss) (567.3) 588.5 Average current liabilities 948.2 1,436.6 Average total liabilities 3,090.0 4,773.4 Instructions

(a) Calculate the current ratio and current cash debt coverage ratio for Amazon.com for 2001 and 2004, and discuss its comparative liquidity.

(b) Calculate the cash debt coverage ratio and the debt to total assets ratio for Amazon.com for 2001 and 2004, and discuss its comparative solvency.

(c) Amazon.com has avoided purchasing large warehouses. Instead, it has used those of others. In order to increase customer satisfaction Amazon may have to build its own warehouses. Calculate free cash flow for Amazon.com for 2001 and 2004, and discuss its ability to purchase warehouses and to finance expansion from internally generated cash.

(d) Based on your findings in parts

(a) through (d), can you conclude whether or not Amazon.com's amazing stock price is justified?

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