Stakeholder’s Equity of Amazon Essay

Introduction

Amazon.com, Inc. is the largest customer-focused online retailer based in Seattle, Washington that was founded in 1994 by Jeff Bezos. The company started as an online bookstore but widened its product base dramatically over the years to incorporate a whole range of products and services from cloud computing services to electronic gadgets to apparel & accessories, and much more. Today, the company operates through its three segments, including North America, International, and Amazon Web Services (AWS), with millions of customers across the globe (Amazon, 2018). The North American segment deals with retail sales of consumer products and subscriptions through North America-focused websites, while the international segment deals with these through internationally-focused websites. Lastly, the AWS segment consists of sales of databases and other related computer services to government agencies and academic institutions. The company has reported tremendous success and gained a strong reputation over the years. In a Harris Poll conducted in 2017, the company was ranked #1 for corporate reputation getting more than 23,000 votes (Farfan, 2018).

Amazon became a public limited company around twenty years ago and is listed on the NASDAQ Stock Exchange under the symbol “AMZN” (Amazon, 2018). The capital structure of the company relies on both debt and equity finances for its expenditures. For debt finance, the company obtains loans from financial institutions such as banks with an agreement to repay them along with the interest charge within a specific time. The loan may be secured or unsecured depending on its terms or conditions of it, and the company has to put its assets as collateral if it is a secured loan. On the contrary, equity financing is referred to the sale of shares of the company to investors to increase the working capital or to finance an acquisition. Thereby, it makes shareholders partial owners of the company. As mentioned before, the company’s stocks are listed and traded on NASDAQ Stock Exchange. However, its shareholders are not limited to individuals as there are many institutional investors presently holding its stocks.

Analysis of the Company’s Stockholder’s Equity

The company has two classes of shares authorized, namely, common stock and preferred stock. Common stocks or ordinary stocks are the most basic type of shares authorized and issued by companies. The number of shares held by a shareholder determines the extent of ownership he/she has in the company (Hartman, 2017). A shareholder with ordinary shares possesses the right to vote on critical matters such as the appointment of auditors of a company in the Annual General Meeting (AGM) and is also entitled to receive dividends or bonus shares when the Board of Directors approves them. On the other hand, preferred stocks carry a higher value than ordinary shares, and the shareholders with preferred stocks are paid a fixed dividend before any payout to ordinary shareholders. Even in the case when a company is making no profit or incurring a loss, shareholders holding preferred stocks receive a dividend payment from the company. However, preferred shares do not confer voting rights in the critical matters of the company to their holders.

It has authorized 500 million preferred shares at $0.01 par value but has not issued any of these shares, and subsequently, there are no outstanding shares of this class. The company has authorized 5,000 million common stock at $0.01 par value. As of December 31, 2017, it had issued 507 million shares with an increase of 7 million shares from the last year-end on December 31, 2016. The number of outstanding shares on December 31, 2016, was 477 million shares, which subsequently increased to 484 million shares and equalled $5 million (Amazon, 2018). The effect of this was the increase in its additional paid-in capital. Outstanding shares are an integral part of shareholders’ equity and are held by shareholders seeking a regular income in the form of dividends or capital gains from the increase in the stock price. It also includes share blocks that are possessed by institutional investors (non-bank organizations) and confined shares that are allotted to the officers of the company.

The par value of both the common stock and preferred stock is $0.01 (Amazon, 2018). It is the face value of stocks below which they cannot be sold upon initial offering. The purpose of the par value concept is to assure the prospective shareholders of the company that it would not issue shares less than the par value. Moreover, some state laws require a company not to sell its stocks below the par value, and this is the reason for setting a nominal par value ($0.01) of stocks to avoid any legal concerns if its shares start to sell in the penny stock range. A stock certificate of a share of stock carries the amount of par value on its face.

The company has successfully maintained its retained earnings under General Reserve. Retained earnings are the proportion of the company’s profit that it withholds for financing its future projects and are not used in the payment of dividends to the shareholders. In the case where a company’s Board of Directors approves the payment of dividends to shareholders out of profit, it is likely that its retained earnings would be insufficient to finance its capital expenditures. It is regarded as a good practice of a company to maintain sufficient retained earnings, and it also improves its market reputation and removes the need to rely on other sources of finance in times of need.

The retained earnings of the company for the year ended December 31, 2016, were $4,916 million. During the year, the company changed the applied accounting principle related to the stock-based compensation, and the cumulative effect of this change had a positive impact of $687 million on the retained earnings. Moreover, the net income generated from the company’s operations during the accounting year amounted to $3,033 million. With the effect of these two, the retained earnings at the close of the accounting year on December 31, 2017, were $8,636 million (Amazon, 2018). The company can finance its projects itself with this significant holding of retained earnings, and it does not need to approach financial institutions, which would cause the company to incur not only large transaction costs but also pay interest expenses.

Treasury stock or reacquired stock refers to the practice when a company itself buys back its already issued stocks from stockholders. With this reacquiring of shares, the number of outstanding shares is reduced, and investors are no longer its shareholders. The effect of reacquiring shares means that the ownership of the company is shared less by external investors, and the possible risk of a takeover from a potential investor is also reduced.

Stock repurchase activity was authorized by the Board of Directors in 2016 to repurchase up to $5.0 billion of the company’s common stock. The company has reacquired its shares worth $1,837 million during the years preceding 2015. However, there is no change in the treasury stock as no such repurchase was made in the last three years (Amazon, 2018).

Total shareholders’ equity of the company as of December 31, 2017, was $27,709 million, with an increase of approximately $8 million from the last year-end on December 31, 2016 (Amazon, 2018). The shareholders’ equity is the net value of the company, which shows the amount that shareholders would get in case of liquidation of the company after all of its debts are repaid. Table 1 provides the details of the shareholders’ equity of Amazon.

Table 1. Shareholders’ Equity. (Amazon, 2018).

($, in millions)
Shareholders’ equity as of December 31, 201619,285
The cumulative effect of a change in accounting principles related to stock-based consumption687
Net Income3,033
Other Comprehensive Income501
Exercise of common stock options1
Stock-based compensation and issuance of employee benefit plan stock4,202
Shareholders’ equity as of December 31, 201727,709
Table 1. Shareholders’ Equity. (Amazon, 2018).

Conclusion

The above analysis of the company’s shareholders’ equity reveals that the company uses a significant proportion of shareholders’ equity to finance its capital expenditures. The different sub-divisions of equity capital, namely, common stocks, preferred stocks, and retained earnings, make the company’s equity capital position strong. The increase in the shareholders’ equity is because of the transfer of the net income of the company during the accounting year to its retained earnings. Furthermore, seven million common shares were issued by the company during the last year which also added to its equity value. The rise in the shareholders’ equity is a good sign as it may indicate that the company’s profit increased, and investors highly regard this fact before they take any decision to invest their wealth.

References

Amazon. (2018). Annual reports, proxies and shareholder letters. Web.

Farfan, B. (2018). Amazon.com’s mission statement. Web.

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