Does Amazoncom Inc.’s (NASDAQ:AMZN) Debt Level Pose A Problem?
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$780.24B. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to their continued success lies in its financial health. 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. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into AMZN here. See our latest analysis for Amazon.com
How much cash does AMZN generate through its operations?
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, AMZN currently has US$30.99B remaining in cash and short-term investments , ready to deploy into the business. On top of this, AMZN has generated cash from operations of US$18.43B over the same time period, resulting in an operating cash to total debt ratio of 41.76%, meaning that AMZN’s current level of operating cash is high enough to cover debt. 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.
Does AMZN’s liquid assets cover its short-term commitments?
At the current liabilities level of US$57.88B liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$60.20B, with a current ratio of 1.04x. Generally, for Online Retail companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can AMZN service its debt comfortably?
Considering Amazon.com’s total debt outweighs its equity, the company is deemed highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can check to see whether AMZN is able to meet its debt obligations by looking at the net interest coverage ratio. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In AMZN’s case, the ratio of 6.32x suggests that interest is well-covered. Large-cap investments like AMZN are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
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. This is only a rough assessment of financial health, and I’m sure AMZN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Amazon.com to get a more holistic view 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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
