Financial Company Analysis

Running head: AMAZON, INC. FINANCIAL RATIO ANALYSIS

Amazon, Inc.

Financial Ratio Analysis

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Amazon Inc. Financial Ratio Analysis

Amazon Inc. was the first company to reach $100bilion in annual sales ever in their last financial three years (2018-2020) (Izogo & Ozo, 2010). Below are financial ratios that show the company’s performance during that financial year.

Liquidity Ratios

a.) Current ratio = Current assets / Current liabilities

The current ratio is a measurement a company’s capability to pay off its current liabilities with it current assets. Economists believe that the greater/higher the ratio, the better liquidity position of a company and hence they have high chances of paying their debts (Uechi et al., 2020). For

Amazon Inc., the following were the current ratios:

	2018	2019	2020
Current ratio	1.10	1.10	1.05

Amazon Inc. was in a better position in 2018 than in 2020. In 2018 it had a current ratio of 1.1 and in 2020 it had a current ratio of 1.05 which is much lower than 2018 and 2019

b.) Quick/Acid test ratio = (Current assets – Inventories) / Current liabilities

This is the measurement of an organization’s ability to fulfill its short-term goals using its liquid assets with exception of inventories. The following are the quick ratios of Amazon Inc.

	2018	2019	2020
Quick/Acid test ratio	0.85	0.86	0.86

A higher acid test ratio is preferable because it shows that a company can pay debts without selling its long-term assets. For Amazon Inc., the year 2018 had lower ratio of 0.85 compared to

2020 which had 0.86. This shows that the company performed well in 2020 than 2018

Solvency Ratios

Solvency is described as the capacity of a business to meet its long-term financial obligations. In the case of Amazon Inc., I have looked at the debt to equity ratios and debt to asset ratio.

a.) Debt to equity (DTE)=Total Debt/total Equity

These ratios show the financial leverage level of being used by a company which incorporates of both short- and long-term debt.

	2018	2019	2020
Debt to equity (DTE)=	0.85	0.86	0.86

A rising DTE ratio represents higher debt and interest expenses therefore making it expensive to raise more debt (Uechi et al., 2020). Amazon Inc. had a debt to equity ratio of 0.85, 0.86 and 0.86 in 2018,2019 and 2020 respectively. A company with lower DTE is considered to be financially stable. Hence, those with higher DTE ratio are considered riskier to invest in. a company leveraging higher debts have higher chances of not making payments.

b.) Debt to assets (DTA) = Total debt / Total assets

Debt to asset ratio is a leverage measure that measures the percentage of a business’s assets financed with both short- and long-term debt. In the year 2020; debt to asset ratio was 0.26

In the year 2018; debt to Asset ratio was 0.24

If a company has a higher DTA, it is considered to be riskier to loan to or invest in since they are more leveraged. A higher number/ratio should imply a greater financial risk due to the higher leverage degree. For instance, in the year 2020, Amazon Inc. had a DTA ratio of 0.28 compared to the previous year which had a DTA of 0.24. This shows that Amazon Inc. had to pay out a large profit in principle and interest payments in 2020. Therefore, a well performing company will have a lower Debt to Asset ratio.

Profitability Ratios

Profitability of a company is the most crucial aspect to be considered when looking for a company to invest in. These ratios give investors ideas of whether a company will make profits and the relationship between that profit and other information about the company (Uechi et al.,

2020). This is because if a company is making high revenues, that does not really translate into dividend for shareholders not unless the organization has the ability to clear all its costs and expenses. In these ratios, I will look at the profit margin and return on asset.

a.) Profit margin=Net income/Revenue

The profit margin of Amazon Inc. is calculated as follows;

	2018	2019	2020
Profit margin	0.09	0.04	0.06

A higher profit margin is more preferable but with most ratios, it is not adequate to look at it in isolation. Investors are advised to compare it to the past performance of the company, its competitors and the market average. However, a company with low profit margin implies that it is likely to land in a critical position if the conditions in the market changes. In this case, Amazon Inc. performed well in the year 2020 with a profit margin of 0.06 that 2018 with a profit margin of 0.06

b.) Return on Assets (ROA) ratio

This is the percentage of annual net income to total assets of a company in a given financial year that measures its efficiency in asset use to generate net income.

ROA=Annual Net Income/Average total Assets

For Amazon Inc., the following calculations show the return on Asset for the year 2018, 2019 and 2020.

	2018	2019	2020
Return on Assets	0.11	0.04	0.08
Assets Turnover Ratios	0.12	0.03	0.05

According to Case (2016), a high value of return implies that a company is making profits. In this case, Amazon Inc. made higher profits in 2018 than in 2020 and 2019

The total asset turnover ratio is management tool to know how efficiently various resources and underlying asset are used. Total asset turnover ratio provide vision to overall efficient utilization of company's total asset. The same ratio can be used separately if focuses is to made on particular resource.

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, 488-509.