Merits and Shortcomings of Ravi Suria

Discuss the merits and shortcomings, if any, of Ravi Suria’s assessment of Amazon’s financial situation, given the information available to him at the time of his report. Do you agree with his conclusions?

The merits of Ravi Suria’s assessment include:

  * The assessment was considering operational figures, especially cash flow per unit of product sold, as the most critical measurements of Amazon’s. I think that’s a proper assessment, because by then Amazon was expanding its self-distribution capacity and cash flow was critical to expand warehouse and inventories.

* The assessment was based on the concern that the capital market was shrinking. I think that’s a proper assumption. As Business Week later pointed out, Amazon’s access to new capital would likely be cut off by now.

The shortcomings of this assessment include:

  * The analyst was examining the inventory turnover ratios from a static point of view. I think that’s absolutely misleading. To Amazon, an e-commerce company which was still fast growing, we should examine its inventory level through a dynamic point of view, by considering the nature that its inventory investment would be accumulated before its revenue being generated.

  * The analyst declared that the profitability of Amazon was too low to support its sustainability. It was also misleading, as Amazon did have certain level of profitability with books, music and video segments, and the other new segments were still growing, not yet reached the level of profitability.

In one word, I think the analyst raised warnings against Amazon, that’s considerable.

But the true situation of Amazon was not that severe from a dynamic point of view towards such a fast growing e-commerce company.