Question

Compute amazon Profitability and Price/earnings/ ratio. Please explain what the ratio means, why the ratio is important, and relate the result to some context that makes it meaningful (competition, industry, year over year)

Answer 1

Amazon is an American conglomerate which is having diversified exposure towards various businesses including E-Commerce, cloud computing, digital streaming and other misc services.

The overall profitability of Amazon in the past year has been around 10 billions dollars . This is one of the highest profits which has been generated by a company all across the globe in past year and it is also reflecting that Amazon is continuously striving towards maximisation of its profit as it can be seen through the growing trend of profitability.

Price to earning ratio of Amazon has been around(total market capitalisation / total earning)= (1222/10)= 122.2 or 123 which is reflecting that Amazon is trading at price to earning ratio of 123 which is making it a highly expensive company.

Price to earning ratio is important because it is reflecting the the price of the company in respect to the earnings generated by the company so it is reflecting the total earnings which has been priced in the market and that has been telling the investors about the sentiments of the market participants about the earnings of the company and projection of the future profits of the company.

The price to earning ratio has continuously grown over the year because Amazon was almost trading at a price to earning of 80, before one year but it has increased in its price to earning and it is also trading at a premium to the industry players like Alibaba which has just a price to earning ratio of 30 so it is having an expensive valuation because the investors are expecting that this company is going to maximize its rate of return in the future.