Effect of foreign exchange movement on the financial performance of Amazon Inc.
Introduction
In this study, emphasis will be given on understanding the Effect of foreign exchange movement on the financial performance of Amazon Inc (“Amazon.com Inc. – AnnualReports.com”, 2019). This particular research focus mainly on the foreign exchange movement as it fluctuates due to global economy. Literature review had been written in the study that aligns with the research aims and questions. Data collection and data analysis had been explained in the study.
Preliminary Literature Review
The exchange rates are the price of the currency of one country about the same pricing of another country’s currency (Ogato, Mulyungi & Shukla, 2018). With time, such prices fluctuate more or less with regards to certain changes altogether social, political and economic. In this respect, with each fluctuation, the exchange rate impacts several major things of the socio economic structure of the respective nation such as the price of the domestic and foreign goods, strength of the external sector participation in the international trade, the domestic and international interest rate etc. (Parlak & İlhan, 2016). Due to such fluctuation, it affects the international finance in terms of the trade and other financial curriculum. In order to hedge against such fluctuation, the financial organisations implement certain methods in order to deal with such problems and taking appropriate decisions in such situations. Beside this, it impacts three major curriculum of a financial organisation, which are, import, export and interest rate (“Conversion rates – Exchange rates – OECD Data”, 2019). These factors are immensely affected by such fluctuation and results a consideration amount of changes in the economic operation of the entity. Thus, the organisations needs to evaluate the risks of such fluctuations in terms of doing business overseas (“Conversion rates – Exchange rates – OECD Data”, 2019). Many organisation can face loss or even meet their break-even point even after increasing their sales due to the fluctuation in the foreign exchange prices. Rather than just making certain impact upon the profitability of the entity, such fluctuations also affects the key ratio of the company which may increase or decrease the ultimate efficiency of the entity during their operations (Ogato, Mulyungi & Shukla, 2018).
There are majorly four kinds of inflation that can be seen in the current scenario of market. In the first place, if the inflation rate is less than 10%, it is being regarded as the low inflation. In case it is limited between 10-30%, it is called the medium inflation (Parlak & İlhan, 2016). On the other hand, the inflationary measure of 30-100% is being regarded as the high inflation (Zhao & Duncan, 2018). Anything above 100% is called the hyperinflation (Andrianto & Diputra, 2017).
According to Williams (2018), the exchange rate can be fluctuated in case each of the given circumstances take place in an organisation (“Conversion rates – Exchange rates – OECD Data”, 2019). First of all, the higher import of product increase the demand of foreign currency, thus, makes the exchange rate weak. Beside this, by having greater capital outflow, the exchange rate might also get weaken (Parlak & İlhan, 2016). More speculation acquired by the companies can also cause a significant cause for the inflation in this respect. Beside this, the percentage of export can also cause several reasons to strengthen the inflation rate of a country (Ogato, Mulyungi & Shukla, 2018).
On the other hand, the fluctuation in the exchange rate can also make certain impact upon the interest rates of the country, which eventually influence the profitability and other operations of the countries (Parlak & İlhan, 2016). In this respect, there are certain things, which can influence the bank interest rate of the country, which includes the funding requirements, competition, government policies, and target of desired profit, time, and quality of assurance, reputation of the company, competitive products and guarantee of a third party (Ogato, Mulyungi & Shukla, 2018).
Another consideration which is needed to be discussed in this given respect is the profitability ratio. In this respect, the total amount of benefit incurred is being calculated with the total assets or equity shares in order to analyse the affectivity of the company in terms of its investments (Parlak & İlhan, 2016). In this regards, the inflation in the exchange rate can reflect severe impact upon the profitability ratio of a company (“Amazon.com Inc. – AnnualReports.com”, 2019). For instance, if a company pays a significant amount is order to enhancing its assets, but due to the inflation of the exchange rate, the revenue decreased. Thus, the return on assets of the company will be decreased (“Amazon.com Inc. – AnnualReports.com”, 2019). Beside this, the same thing is applied for the return on equity where the inflation can affect over the shareholders and thus can affect the return on equity of the company (Luo & Zheng, 2018).
As rightly put forward by Ugwu (2017), there are several other factors, which can cause inflation in the exchange rate such as uncertain economic climate and fear for terrorism. In this regard, it is the key consideration of many of the countries regarding the overseas trading and making certain profits (Parlak & İlhan, 2016). In case of a transactional foreign exchange gain or loss, the differences can be created when the transaction is recorded in a specific time where the exchange rate was different and within the time of payment, the exchange rate changed. Such things cause a huge business interruption and cause significant loss in the profitability of the company (“Amazon.com Inc. – AnnualReports.com”, 2019). These impact can be seen upon the sales, cost of sales and gross profit of the company. Such profits or loss is not limited to the percentage movement in the exchange rates. In case of Amazon, as it can be seen exchange rate in Australia in terms of dollar and the gross profit margin incurred by the company, it can be seen that the profitability of the company was quite substantial with the exchange rate (“Amazon.com Inc. – AnnualReports.com”, 2019). That means, the company was able to increase their profit margin in respect with the growth of the exchange rate by implementing the substantial plans to counter with it (“Amazon.com Inc. – AnnualReports.com”, 2019). Beside this, the company irrespective of the fact that the exchange rate of the concurrent currency was respectively low in this respect incurred the downfall in the profit (Parlak & İlhan, 2016).
On the other hand, in case of the return on assets of the company, a general tendency can be seen in terms of the inflation rate and the ROA value of the company (Parlak & İlhan, 2016). In this respect, there was a substantial downfall in the ROA value of the company whenever the prices of the Australian dollar raised in comparison with the American dollar (Ogato, Mulyungi & Shukla, 2018). In this regard, the ROA value of the company was increased when the exchange rate raised in this respect (“Amazon.com Inc. – AnnualReports.com”, 2019).
On the other hand, the return on equity of the company was also affected by the inflations incurred due to the period of last 10 years where the significant changes can be seen in the financial performance of the entity, specifically upon the return on assets (“Amazon.com Inc. – AnnualReports.com”, 2019). Beside this, along with the rises in the exchange rate, the return on equity also raised in this respect, which means, the company was able to manage its profitability ratios in a sustainable way (“Amazon.com Inc. – AnnualReports.com”, 2019).
In order to reduce the losses incurred by such inflationary changes, certain attempts has been made by the company in order to hedge their exposure (“Amazon.com Inc. – AnnualReports.com”, 2019). In this case, the cost-associated hedges may not have work for the company perfectly where the cost of revenue varied from the incurred revenue of the company (Ogato, Mulyungi & Shukla, 2018). In this cases, the variable costs incurred in this respect has been deducted in arriving at the gross profit of the company which help it to continue their operation without causing any major disruption (“Amazon.com Inc. – AnnualReports.com”, 2019).
Research Aim and Research Questions
Research Aim
The aim of the research is to evaluate the impact of the foreign exchange movement on the financial performance of Amazon Inc.
Research Questions
- Is there any impact of foreign exchange fluctuations on the Return on Assets (ROA) of Amazon Inc.?
- Is there any effect of foreign exchange fluctuations on the Gross profit margin of Amazon Inc.?
- Is there any significant influence of foreign exchange fluctuations on the Return on Equity of Amazon Inc.?
Research Plan
Several research plan are explained in this part. In case of researcher philosophies, three of them are present that needs to be evaluated by the researcher and these are Positivism, Interpretivism and Realism. In this particular researcher, interpretivism research philosophy will be selected. It deals with emotions of human beings and used for secondary analysis. In case of research approach, there are two of them that needs to be evaluated by the researcher and these are inductive approach and deductive approach (Fletcher, 2017). The researcher will be selecting deductive approach for this study. The deductive approach will be used as data had been collected from previous studies and evaluation takes place. It starts with a general theory in order to arrive at conclusion based on evidence (Mackey & Gass, 2015).
Overview of proposed methods of data collection
In this particular research, researcher will be collecting data from secondary sources such as annual report of the company (Amazon) (“Amazon.com Inc. – AnnualReports.com”, 2019). From these secondary sources, data can be easily gathered which is authentic by nature. As far as data regarding foreign exchange is concerned, it will be taken from the website of Organization for Economic cooperation and Development (OECD) (“Conversion rates – Exchange rates – OECD Data”, 2019).
Data Analysis
The collected data from the secondary sources will be analysed by the researcher in order to get outcome of the given research topic. Secondary analysis can be termed as a practice by making use of secondary data in the given research (Flick, 2015). This type of data saves both time as well as money and further avoids unnecessary duplication of research effort at the same time. The researcher for analysing the data in the most appropriate way will use thematic analysis.
Gantt chart schedule
| Activities | 1st Week | 2nd week | 3rd week | 4th week |
| Selection of topic
Effect of foreign exchange movement on the financial performance of Amazon Inc. |
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| Constructing research aims and questions | ||||
| Literature review | ||||
| Data Collection | ||||
| Data Analysis | ||||
| Submission of Professional Project |
Field of research: The research focuses on the relationship between the exchange rate movement and the financial performance of the company. The research concentrates on the foreign exchange movement as due to the fluctuations in the global economy, the foreign exchange rate of each country changes and it affects the multinational businesses like Amazon Inc. The researcher aims to work in the risk management department of a multinational company, so the research on of the current risk, i.e. foreign exchange fluctuations will be effective and also important.
Research aim: The aim of the research is to evaluate the impact of the foreign exchange movement on the financial performance of Amazon Inc.
Research questions:
- Is there any impact of foreign exchange fluctuations on the Return on Assets (ROA) of Amazon Inc.?
- Is there any effect of foreign exchange fluctuations on the Gross profit margin of Amazon Inc.?
- Is there any significant influence of foreign exchange fluctuations on the Return on Equity of Amazon Inc.?
Search term: Foreign exchange fluctuations, Amazon Inc., Return on Assets and Foreign exchange, Return on equity
Secondary data: The data on the company performance of the company will be extracted from the annual report of the company. Link: http://www.annualreports.com/Company/amazoncom-inc. The data on the foreign exchange will be extracted from the website of Organisation for Economic Co-operation and Development (OECD). Link: https://data.oecd.org/conversion/exchange-rates.htm
Variables: Company performance: Return on Assets (ROA), Return on Equity (ROE) and Gross profit margin. The foreign exchange rate of Australia: Official exchange rate (LCU per US$, period average)
