There are four aspects one should look at when do financial statement analysis of a company: Business, Accounting, Financial and Prospective.
First look at the Business, Amazon’s executive has the incentive to manipulate the annual report as their compensation are mainly the stock-based, therefore heavily influenced by the stock price. Looking at the other side as the company interest aligns with the management compensation may lead to less manipulation. All in all, both side are arguable whether which side to take.
Secondly, accounting. There are many factors need to consider here. Firstly, Sales Allowance the account receivable to total sales of the Amazon level off, showing that the company is doing fine and no cookie jar reserve occurring. The second point is Unearned revenue represents an account that promise to perform the service at the future date. Amazon has an increase unearned revenue trend, this is good as it showing that the company secure a high proportion of sales, signal sustain growth and mean Amazon can use the customers' cash for free. The third point is The R&D, which can be recorded in two ways: capitalise and expense. The capitalise R&D asset will be amortised its value. Capitalising will impact on the financial statement by increase asset as long as the asset is not fully amortised, decrease expenditure by spreading the cost. The expense will generally reduce the net income by a larger amount. The asset will be an expense when it is generated internally and in the development process. Amazon does comply with the GAAP rule for the R&D. The fourth point is the Inventory method using in Amazon is FIFO whereas the Target inventory method is LIFO. The main reasons for the difference between the two company is rather due to the tax affect t rather than something else. However, the difference between these two company can affect COGS, therefore to make the comparison more accurate the adjustment will make a better analysis. The fifth point is the PPE between the Amazon and Target as a whole is different, this is due to the nature of the business that Amazon is mainly is the web service whereas the Target is a brick and mortar store. The level of PPE in Target is way higher than that of Amazon, although the recent Wholefood acquisition increases the PPE. Therefore, it is not fair to calculate PPE turnover between these two companies. Sixth is the stock base compensation in Amazon is higher than the Target as it is considered to be a tech company. The adjustment should be made.
Thirdly, the Financial analysis which uses the Du Pont analysis or ROE. The company has increase trend in ROE. The financial leverage is level off but the ROA increase when dig deeper one know that ROA increase due to large increase in profit margin with trade off of asset turnover. Both Amazon solvency and liquidity are great.
Fourth is prospect analysis, there are three main method here DCF, AEM and multiple. The DCF and AEM with the good assumption will result in an equal number. The multiple is benchmarking on what one considered as comps.
All in all, with more weight given to prospect analysis in consideration, one should consider to short the Amazon as its intrinsic value is less than market value.