Question

What ratios can be used to evaluate a companies (amazon) ability to pay current liabilities and why?

What ratios can be used to evaluate a companies (amazon) profitability and why?

Answer 1

1) Ratios can be used to evaluate a company's ability to pay current liabilities are Liquidity Ratios:- Itinvolves following ratios:

A) Current ratio, which is the ratio of current assets to current liabilities. This ratio indicates a company's ability to pay its short-term bills. A ratio of greater than one is usually a minimum because anything less than one means the company has more liabilities than assets. A high ratio indicates more of a safety cushion, which increases flexibility because some of the inventory items and receivable balances may not be easily convertible to cash. Companies can improve the current ratio by paying down debt, converting short-term debt into long- term debt, collecting its receivables faster and buying inventory only when necessary.

B) Cash ratio helps to determine a company’s ability to meet its short­term obligations. Having below a 1.0 cash ratio is desirable. Having a high ratio could imply that the company has too much cash on hand and having too low of a ratio could mean the company doesn’t have enough money to pay short­term debts.

Cash Ratio= Cash+Cash Equivalents/ Total Current Liabilities

C) The acid­test ratio tells whether the company can pay all of its current liabilities if they all came at once immediately.

  Acid­Test Ratio= Cash and Cash Equivalents+ Short­Term Investments+ Net current receivables/Total Current Liabilities

All of the above listed ratios help determine what position a company is in as regarding to paying current liabilities. Having more assets than liabilities will always help. But, as long as the company is at or above the industry average and in the desired ranges by the Risk Management Association, then a company will be in a good position to pay off its current liabilities.

2) Ratios can be used to evaluate a company's profitability are Profitability Ratios:-Profitability ratios indicate management's ability to convert sales dollars into profits and cash flow. The common ratios are gross margin, operating margin and net income margin.

A) The gross margin is the ratio of gross profits to sales. The gross profit is equal to sales minus cost of goods sold.

B) The operating margin is the ratio of operating profits to sales and net income margin is the ratio of net income to sales. The operating profit is equal to the gross profit minus operating expenses, while the net income is equal to the operating profit minus interest and taxes.

C) The return-on-asset ratio, which is the ratio of net income to total assets, measures a company's effectiveness in deploying its assets to generate profits.

D) The return-on-investment ratio, which is the ratio of net income to shareholders' equity, indicates a company's ability to generate a return for its owners.