Financial statements in accounting convey vital data to administrators and unit leaders about the health of processes and business profitability. Pronouncements on where a company should focus on development and where a company might be doing well are derivative from the financial reports. The publicly-traded company selected for the Financial Ratio Analysis assignment is Amazon. The Ratio analysis entails examining several forms of data contained within the financial statement. Amazon’s ratio analysis is based on available records that comprise debt-to-equity, current ratio, return on equity, quick ratio, working capital ratio, price-earnings ratio and earnings per share.
Debt to Equity
The debt to equity ratio entails determining a company’s financial leverage. A low debt to equity ratio might signify that an organization is not exploiting its development prospects. Nonetheless, a corporation should be cautious on prolonging as higher debt to equity ratio might signify an inability to meet their responsibilities. In 2017, the company recorded 2.40% debt, while in 2018, it dropped to 1.78% and experienced a surge in 2019, at 2.63%. 2018 recorded the lowest debt/equity ratio attributed to a difference of 34,372,000 in liabilities and shareholders’ equity.
The current ratio determines a corporation’s capability to pay interim and long-standing commitments. To gauge this competency, the current ratio take into consideration the corporation’s current total assets comparative to the establishment’s current total liabilities. The current ratio for Amazon for 2017-2020 is 1.04, 1.10, 1.09, and 1.11, respectively (Al-Marzooqi & Nobanee, 2020). A ratio beyond 1 signifies that a corporation can fund its responsibilities as it possesses extra assets compared to liabilities.
Return on equity
Return on equity is directly linked to the net revenue and shared equity. Amazon.com Inc. has exhibited considerable progression in return on equity each year from 2017 to 2018. The drastic surge in return on equity is particularly attributed to the enormous growth in net revenue from 3,033,000 in 2017 to 10,073,000.39 in 2018 (Cho, 2019). Nonetheless, common equity has exhibited a decline in equity from 2018 to 2019 by 4.46%.
A higher quick ratio will display improved corporation liquidity. The quick ratio can similarly be considered the acid test ratio and is regarded as more conservative than the current ratio. Amazon displays total current assets of approximately $35,705,000, an over-all current inventory of $ 10,243,000 and current liabilities of $ 33,887,000. Amazon recorded a quick ratio of 0.75 (Al-Marzooqi & Nobanee, 2020). Therefore, this specifies that Amazon possesses this as liquid assets, which may cater to all existing responsibilities.
Working capital ratio
According to Al-Marzooqi and Nobanee (2020), Amazon Inc. possesses a Working Capital of 1.82 B. This is 69.58% lesser than the Consumer Cyclical sector and considerably greater than the Internet Retail sector. Due to an upsurge in Current Liabilities within the fourth quarter of 2020, the Working Capital Ratio fell to 1.05, lower than Amazon Com Inc. average. It is important to note that an ideal working capital ratio should range between 1.2 and 2. A ratio of 1.0 signifies that for each dollar asset, the firm bears a dollar liability. In recent years, Amazon has gradually dropped in the total working capital it possesses.
The Price-earnings ratio varied between 2017 and 2020; however, it was quite high in 2017 compared to the previous two years. The extreme variation from 185.08 in 2017 to 72.62 in 2018 may be attributed to the enormous increment in prices. With the high stock prices, earnings per share increased from 6.15 in 2017 to 23.61 in 2018 (Cho, 2019). This spike in price-earnings ratio denoted that shareholders placed a greater dollar value on every dollar of the company’s income. Nonetheless, in 2019 the rate per share increased to 23.01.
Earnings per share
It is an important financial measure, which specifies the company’s profitability. In 2019, earnings for each share was $23.46, which was the greatest earning period. In 2018, the earning for each share was $20.68, slightly lower compared to 2019. In 2017 the earnings per share were low at $6.32, approximately lower than in 2018 and 2019. It is attributed to
a loss in in 2017, at approximately 3,033,00 compared to 2018 at 10,073,000 and 2019 at approximately 11,588,000. Every year the subjective average shares remained between $480,000 and $494,000.
Every ratio conversed in this report is vital for a corporation to plan for future operations. The ratios provide various glimpses into the company’s health. For Amazon’s administration, investors and stakeholders, the ratios demonstrate the efficacy of processes and maybe both positive and negative. The administration must use the tactical development ratios to increase sales and rationalize and be more efficient in its operations.
Al-Marzooqi, M. B., & Nobanee, H. (2020). Financial Analysis of Amazon. Available at SSRN 3647442.
Cho, J. (2019). Amazon. com, Inc.
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