Question

This week 13 financial ratios were defined and used to analyze a company. For this week's discussion forum, each student should choose a different company (Amazon).   For this company and the industry it is in, report at least on each of the types of ratios: Profitability, Asset Utilization, Liquidity, and Debt Utilization. Using these ratios, comment on whether this firm would be a good investment. This is a great place to start to get your brain thinking about the type of information ratios provide.

Answer 1

Generally inorder to invest in a firm one has to look at the firm's profitability, liquidity,debt and solvency ratios which is one of the measures of the value of the firm in the market and how much the firm is competitive with its competitors

Profitability ratio which explains the company's ability to generate profit, and profitable sales from its resources

Liquidity ratios explains the company's ability to meet its short term obligations which are further classified into

a: Current ratio - it has to maintained at 2:1 ratio refers to employing current liabilities and current assets , the working capital requirements etc

b: Quick / Acid test ratio - it has to be maintained at 1: 1 ratio over and above refers to employing more current assets and which affects working capital of the firm and under maintainence puts the company into risk

c : Cash ratio- refers to the amount of cash that has to be maintained in liquid form in the firm for day to day uses

Debt & Solvency ratio explains company's ability to meet long term obligations of the firm it consists of

a : Debt equity ratio which has to be maintained at 2:1 ratio

b : Debt to capital employed ratio

c : Debt to total assets employed in a firm ratio

d : Interest coverage

Now applying same to the given case study Amazon

Profitability Ratios

Gross profit margin - 40.25%

Operating profit margin - 5.33%

Net profit margin - 4.33%

Return on equity - 23.13%

Return on assets - 6.19%

Analysing this Amazon has improved a lot in its profitability and in providing better return to its shareholders in comparison with the profitability of its competitors such as Walmart etc

Liquidity ratio

Current ratio - 1.10:1

Quick ratio - 0.80:1

Cash ratio - 0.6:1

Through this chart the company ensures it has an enough working capital requirements

Debt & Solvency Analysis

Debt to equity - 1.13:1

Debt to capital - 0.53:1

Debt to assets - 0.30:1

Interest coverage - 8.95 times

Through this we can per say the company has a balanced debt equity coverage and provide equal security to shareholders and it's borrowers by meeting their obligations in paying dividends and interest timely

Interpretation : yes this firm would be a good investment