Amazon Com In The Year 2000 Case Solution

1. From Yr. 2000 case: Do you agree with Ravi Suria's analysis of the credit risks associated with Amazon bonds.

Ravi Suri studied the financial statements and financial history of Amazon.com for the evaluation of its creditworthiness in the stock market. He came out to the conclusion that the company has a feeble balance sheet, and it is unable to manage its working capital effectively. In addition to that, he found out that operating cash flows of the company are turning out to be negative, making it an unfit investment option. Suri’s analysis was based upon a number of poor decisions made by the company’s management including the issuance of $1.25B in the form of convertible debt in 1999, with a similar action taken in 2000 with $680M in convertible debt. 

Ravi Suri’s analysis can be agreed upon due to the fact that Amazon.com is a highly leveraged company and there a number of credit risks attached to this type of firms. A mix of high debt and negative cash flows made the company vulnerable of the critical point of view of the stake holders of the company. A profitable company should have positive cash flows at each point in time. This helps the company to effectively maintain the operating expenses and ensure a smooth flow of company’s operations. In the year 2000, a debt ratio of 82 shows the extent of debt in the company, similarly, proving that the level of cash in the firm’s financial system is at an unsafe position.