Introduction
Amazon, Inc. has shown strong performance amidst the international and local competitors. The profit margins have bettered with the sales in 2015 as compared to 2014. But, along with profits, liquidity and capital structure also plays a critical role in determining the sustenance of the performance. To evaluate the same, the Liquidity and Gearing Ratios have been evaluated for the financial years 2014-15 and 2015-16 as shown in the below table:
Ratio Analysis:
Liquidity ratios – These indicate the short term capacity of the organization to readily convert its current assets to cash in order to cover the short term liabilities. The two ratios used to evaluate the liquidity of Amazon are the current ratio and the quick ratio.
Current Ratio- The current ratio is derived by dividing the current assets by the current liabilities for the given period. The ratio implies the liquid or easily cash- convertible assets (i.e. current assets) of the firm to cover the short term liabilities. This ratio should be at least greater than 1 whereas a ratio of 2 and more is considered as ideal . However, for retailers like Amazon, the current ratio should be such that at least the current assets break even the current liabilities. In case of Amazon, the current ratio is just more than 1 which implies that the company's current assets are almost equal to current liabilities. The ratio has reduced marginally from 2014 to 2015. It is important for Amazon to better this ratio by reducing the unearned revenue and the accrued expenses. It should also increase the current assets.
Quick Ratio- This ratio is similar to current ratio but it takes into account only those current assets that can be quickly converted to cash. It does not account for inventory in current assets for the inventory cycle can result in delay . The quick ratio for Amazon has reduced by 0.05 in 2015. Besides, the inventory held by the company is a substantial amount of the total current assets. This is evident as the difference between the current and quick ratio is around 0.3. The company should therefore ensure that the cash is not held up in more amounts of inventory . The company should reduce the inventory optimally and enhance the liquidity.
Debt Ratios: These are concerned with the capital structure of the company.
Capital Gearing Ratio- This ratio represents the Long Term Debt to Total Capital deployed by the firm . From the figures, the debt component in the total capital is almost 60%. However, it has reduced marginally in 2015. The capital structure is favorable for the company's profits for the tax exemptions on the interest payable on long term debt.
Debt Equity Ratio- This ratio is the Long Term Debt to Total Equity ratio. The ratio per the standards is expected to be from 1.5 to 2 depending on the type of industry. D/E ratio of Amazon is 1.36 in 2015 which implies that the debt component is more in the total financing of the firm. This can be advantageous in terms of credit rating and limited dilution of ownership.
References
Hamister, J. (2012). Supply Chain Management Practices in Small Retailers. International Journal of Retail and Distribution Management, 427 - 450.
Khan, M. Y., & Jain, P. K. (2009). Financial Management. New Delhi: Tata Mc-Graw Hills.
Servaes, A. (2006). The Theory and Practice of Corporate Capital Structure. Deustche Bank: Corporate Capital Structure.
