Amazon, Inc. Financial Ratio Analysis Students Name ✓ Solved

Amazon, Inc. Financial Ratio Analysis Students Name

Amazon Inc. was the first company to reach $100 billion in annual sales in their last financial three years. Below are financial ratios that show the company’s performance during that financial year.

Liquidity Ratios

The current ratio is a measurement of a company’s capability to pay off its current liabilities with its current assets. Economists believe that the higher the ratio, the better the liquidity position of a company, which enhances its chances of paying its debts. For Amazon Inc., the current ratios were as follows: current ratio of 1.1 in 2018 and 1.05 in 2020, indicating a decline in liquidity.

The Quick/Acid test ratio measures an organization’s ability to fulfill its short-term goals using its liquid assets, excluding inventories. For Amazon, the quick ratios were 0.85 in 2018 and increased to 0.86 in 2020, indicating improved performance in liquidity.

Solvency Ratios

Solvency describes the capacity of a business to meet its long-term financial obligations. The debt to equity ratio (DTE) measures the financial leverage of a company. Amazon’s DTE was 0.85 in 2018 and increased slightly to 0.86 in 2020. A rising DTE ratio suggests higher debt and interest expenses which can make raising further debt more expensive.

The Debt to Assets (DTA) ratio measures the percentage of a company’s assets financed through debt. Amazon reported a DTA of 0.24 in 2018 and it increased to 0.28 in 2020, indicating a higher financial risk due to increased leverage.

Profitability Ratios

Profitability ratios are crucial for assessing a company's ability to generate profit relative to its sales. The profit margin ratio was recorded at 0.06 for both 2018 and 2020, suggesting consistency in profitability. Additionally, the Return on Assets (ROA) ratio indicates how efficiently assets generate net income, achieving a ROA of 0.08 in 2018 but declining subsequently.

Asset Turnover Ratios

The total asset turnover ratio assesses how efficiently a company utilizes its assets. Amazon has been effective in using its resources, but the exact turnover ratio data for the recent years can showcase its efficiency in leveraging its growing asset base.

Conclusion

In summary, Amazon's financial ratios from 2018 to 2020 show trends in liquidity, solvency, and profitability that investors should analyze. While liquidity ratios have slightly declined, indicating a need to monitor short-term obligations, solvency ratios reflect a growing reliance on debt, thus requiring careful consideration in investment decisions. Profitability ratios suggest that the company has maintained a consistent profit margin, but the profitability efficiency as observed through ROA has shown some vulnerability in terms of managed assets compared to previous years.

References

  • Case, J. C. (2016). AN EXPLORATION OF MODERN FINANCIAL REPORTING (Doctoral dissertation, The University of Mississippi).

  • Izogo, E. E., & Ozo, J. U. (2020). Critical Evaluation of How Well Placed Amazon is to Sustain Its Historical in Online Retailing. British Journal of Marketing Studies, 3(6), 31-42.

  • Uechi, L., Akutsu, T., Stanley, H. E., Marcus, A. J., & Kenett, D. Y. (2020). Sector Dominance Ratio Analysis of Financial Markets. Physica A: Statistical Mechanics and its Applications, 421.