Amazon Inc. Financial Ratio Analysis Students Name Institute

Amazon, Inc. Financial Ratio Analysis Students Name Institution Affiliation Amazon Inc. Financial Ratio Analysis

Amazon, Inc. has achieved remarkable milestones, notably becoming the first company to surpass $100 billion in annual sales within recent years. To evaluate its financial health and performance, this paper conducts a comprehensive analysis of Amazon's financial ratios, covering liquidity, solvency, and profitability ratios, based on data from 2018 to 2020. These ratios offer insights into the company's ability to meet short-term obligations, leverage management, and generate profits, which are vital for investors, creditors, and managerial decision-making.

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Financial ratio analysis is a fundamental tool used to assess a company's financial health by interpreting various ratios derived from its financial statements. For Amazon Inc., evaluating liquidity ratios reveals how well the company can meet its short-term liabilities. The current ratio, calculated by dividing current assets by current liabilities, measures liquidity. Amazon's current ratio declined from 1.1 in 2018 to 1.05 in 2020, indicating a slight decrease in liquidity, although it remained above 1, implying sufficient short-term asset coverage. A higher current ratio typically signifies better liquidity, minimizing insolvency risks (Uechi et al., 2020). Despite the slight decline, Amazon maintained a manageable current ratio, demonstrating stable short-term financial health.

Similarly, the quick or acid-test ratio, which deducts inventories from current assets before dividing by current liabilities, gauged Amazon's liquid asset strength. The ratio increased marginally from 0.85 in 2018 to 0.86 in 2020. A quick ratio close to or above 1 is preferred, indicating the company's capacity to settle short-term obligations without relying on inventory sales. Amazon's steady quick ratio suggests consistent liquidity management, with a slight improvement in 2020, reflecting enhanced liquidity without inventory dependency (Uechi et al., 2020).

Turning to solvency ratios, Amazon's debt to equity (DTE) ratio offers insights into its leverage. The DTE remained stable over the period, at 0.85 in 2018 and 0.86 in both 2019 and 2020, indicating that Amazon maintained a balanced approach towards debt financing. A lower DTE generally indicates excessive reliance on equity and lower financial risk, whereas higher ratios suggest increased leverage and potential risk during economic downturns (Uechi et al., 2020). Since Amazon’s DTE remained relatively low and stable, it reflects prudent leverage management.

Moreover, the debt to asset (DTA) ratio, which measures the percentage of assets financed by debt, increased slightly from 0.24 in 2018 to 0.28 in 2020. This increase signifies a marginal rise in financial leverage, implying Amazon utilized more debt relative to its assets. A lower DTA ratio is preferable as it indicates lower financial risk. Although Amazon’s DTA increased, it remained within a manageable range, supporting its overall financial stability.

Profitability ratios provide critical insight into Amazon’s ability to generate earnings relative to its sales and assets. The profit margin, calculated as net income divided by revenue, was steady at approximately 6% in 2018 and 2020, suggesting stable profit generation despite revenue growth (Case, 2016). While a higher profit margin indicates efficient cost management and pricing strategies, Amazon’s margin reflects consistent profitability, crucial for sustaining investor confidence.

The return on assets (ROA), indicating how efficiently assets generate net income, decreased from around 8% in 2018 to slightly lower in 2019 and 2020. This decline might imply increased asset utilization challenges or higher costs. Despite this, Amazon maintained a positive ROA, depicting effective management of its asset base to generate earnings (Uechi et al., 2020). The asset turnover ratio, measuring how effectively the company employed its assets to generate revenue, was around 0.50, reflecting moderate efficiency in asset utilization.

In conclusion, Amazon’s financial ratios over the analyzed period portray a company with solid liquidity, stable leverage, and consistent profitability. Although slight declines in some ratios warrant ongoing monitoring, Amazon's strategic management of finances supports its market-leading position and sustainable growth prospects. These ratios serve as vital indicators for stakeholders to assess Amazon’s financial resilience and operational efficiency amid dynamic market conditions.

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