Understanding Amazon's Capital Structure (AMZN)

Amazon.com, Inc. (NASDAQGS: AMZN) is a Fortune 50 company and the world’s largest online retailer of consumer products. While Amazon’s stockholders have seen their shares appreciate by over 150% in the past three years, many would be surprised to know that the majority of Amazon’s capital structure consists of debt.

A company’s capital structure is merely a calculation of the amount of debt versus equity the business holds on its balance sheet. Equity simply indicates what portion of a company is owned by shareholders and is generally measured by subtracting the amount of treasury stock from the sum of common stock and retained earnings. Amazon’s stockholders’ equity amounts to $13.384 billion, as of its 10-K for the year ended December 2015. This comprises of additional paid-in capital and common stock at par value worth $13.399 billion, retained earnings of $2.545 billion, treasury stock of $1.837 billion and accumulated other comprehensive loss of $723 million. As of Aug. 8, 2016, Amazon has 474 million shares outstanding and 10 million in convertible securities, known as diluted shares. The online retailer is trading near $766 a share, amounting to a market capitalization (market cap) of approximately $363.35 billion.

The other factor of capital structure, debt, measures the total amount of money owed to creditors. Like a company’s assets, debt is broken into two categories: current liabilities, which mature within a year, and all other liabilities that are due in over a year’s time. The distinction between these two types of debt is important because current liabilities can become an immediate threat to a business’s solvency. Amazon’s 10-K from December 2015 shows the company to have $33.899 billion in current liabilities, with $20.397 billion in accounts payable, $10.384 billion in accrued expenses and unearned revenue of $3.118 billion. Long-term debt and other long-term liabilities amount to $8.235 billion and $9.926 billion, respectively, resulting in total liabilities of $52.06 billion, a gain of 144% since December 2012.

On account of the accommodative monetary policy of the Federal Reserve (Fed), interest rates have been at historically low levels following the 2008 financial crisis. This has prompted many corporations, including Amazon, to increase their leverage through the issuance of bonds. Since the start of 2009, Amazon has underwritten nearly $8 billion in bonds at a weighted-average interest rate of 3.44% and a median of 3.3%. Nonetheless, this surge in the issuance of debt has significantly changed the capital structure of Amazon. Since December 2012, Amazon’s current and acid-test ratio have dropped to 1.08 and 0.774, respectively, making it more difficult for the company to meet its near-term financial obligations.

Furthermore, Amazon’s debt-to-equity ratio has seen considerable growth. This measure of leverage is utilized in calculating the ownership of a company versus the amount of money that is owed to creditors. The debt-to-equity ratio is found by dividing total liabilities by stockholders’ equity. In December 2012, Amazon already had a high ratio of 336% compared to its competitors, such as Apple Inc. (NASDAQGS: AAPL), which had a ratio of 49%. However over the past three years, that ratio has grown further to 389%.

Enterprise value (EV) is frequently used by investment bankers to measure a company’s price if it were to be sold on the market today. EV is determined by first calculating the sum of a company’s total debt and market cap, and then subtracting that number by total cash and other liquid assets. From 2012 to 2015, Amazon’s EV increased by 166%, from $146.117 billion to $389.255 billion, as its market cap and net debt grew by 168% and 145%, respectively. While the amount of Amazon’s leverage may provoke uncertainty among investors, it is the new normal for most businesses. As long as the Fed keeps interest rates near 0%, the trend of debt accumulation is likely to continue.