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    The Delicate Balancing Act of Amazon.com’s Debt Management

    BySam Figg

    Nov 20, 2023
    The Delicate Balancing Act of Amazon.com’s Debt Management

    In the world of finance, volatility is not necessarily synonymous with risk, as noted by Warren Buffet. When evaluating the riskiness of a company, one crucial aspect to consider is its use of debt. Excessive debt can lead to the downfall of a business, resulting in insurmountable challenges. To determine the risk associated with Amazon.com, Inc. (NASDAQ:AMZN) and its debt load, we must delve deeper into the matter.

    Debt becomes a genuine problem for a company when it struggles to pay it off promptly, either by generating sufficient capital or utilizing its existing cash flow. Capitalism operates on the principle of “creative destruction,” where failed businesses are liquidated by their creditors. Although this may not occur frequently, it is not uncommon for heavily indebted companies to dilute shareholders in an effort to raise capital at a distressed price. However, debt, when utilized wisely, can be a powerful tool for businesses that require capital to invest in growth opportunities with high rates of return.

    To assess a company’s debt levels, we must consider its cash reserves in conjunction with its debt. As of June 2023, Amazon.com had a total debt of US$87.5 billion, representing an increase from US$78.5 billion the previous year. Conversely, the company held US$64.0 billion in cash, resulting in a net debt of approximately US$23.5 billion.

    Examining Amazon.com’s balance sheet, we discover that it faces liabilities of US$148.2 billion due within 12 months and US$160.8 billion due beyond that. Offset by US$64.0 billion in cash and US$34.9 billion in receivables due within 12 months, the company’s liabilities outweigh the combination of its cash and short-term receivables by a total of US$210.1 billion. However, considering Amazon.com’s massive market capitalization of US$1.39 trillion, these liabilities are likely manageable. Nonetheless, the strength of its balance sheet should be monitored closely, as it may evolve over time.

    To assess debt levels relative to earnings, we rely on two main ratios. The first ratio involves dividing net debt by earnings before interest, tax, depreciation, and amortization (EBITDA). The second ratio measures how many times earnings before interest and tax (EBIT) cover interest expenses, also known as interest cover.

    Amazon.com’s net debt is only 0.37 times its EBITDA, indicating a relatively low level of debt. Furthermore, its EBIT is 18.1 times the size of its interest expense, demonstrating a healthy ability to manage its debt. The company has also experienced a 14% growth in EBIT over the past year, further enhancing its capacity to handle debt-related obligations.

    While a company’s balance sheet provides valuable insights into its debt situation, its future earnings are pivotal in determining its ability to maintain a healthy financial position going forward. Seeking professional opinions on Amazon.com’s prospects may shed light on the subject.

    One important consideration when evaluating a company’s financial stability is its ability to generate free cash flow, as lenders prioritize actual cash over accounting profits. In the past few years, Amazon.com has experienced considerable cash burn. Although investors expect this situation to reverse in due course, it underscores the increased risk associated with the company’s use of debt.

    In conclusion, despite the challenges posed by Amazon.com’s conversion of EBIT to free cash flow, several factors indicate a positive outlook. Its ability to cover interest expenses with EBIT is commendable. When considering all the elements discussed, it appears that Amazon.com manages its debt relatively well. However, it is crucial to maintain vigilance due to the high level of debt, making ongoing monitoring essential. Additionally, focusing on the growth of earnings per share can provide valuable insights into the company’s overall performance.

    If you prefer investing in companies with zero net debt, we have a special list of such companies with a track record of profit growth that you can access for free.


    Q: What is net debt?
    A: Net debt is calculated by subtracting a company’s total cash and cash equivalents from its total debt.

    Q: How do I determine a company’s ability to manage its debt?
    A: Ratios such as net debt to EBITDA and interest coverage ratio can provide insights into a company’s capacity to handle its debt obligations.

    Q: Why is it important to monitor a company’s debt levels?
    A: High levels of debt can increase a company’s financial risk and impact its ability to invest in growth opportunities.

    Q: What is free cash flow?
    A: Free cash flow represents the amount of cash a company generates after accounting for operating expenses and capital expenditure.

    Q: How can earnings per share impact investment decisions?
    A: The growth of earnings per share can indicate a company’s financial health and its potential for future profitability.