Question

BUS350 Unit 1 Discussion 2 – Table

Company: Amazon

	Industry	Company
Current Ratio	1.14	1.08
Quick Ratio	0.84	0.80
Inventory Turnover	10.57	11.22

• After reviewing, the results in your table, what information does the current and quick ratios provide about this company?
• What additional information does knowing the Days Sales in Inventory give Sam & Martin about this company?
• How does the company that you researched compare with its Industry?

Answer 1

Current ratio = Current Assets / Current Liabilities

A company should have a current ratio of at least more than one , as it shows that it has sufficient assets to fund its short term liabilities. However there is a slight difference in the industry average, but the current ratio for amazon seems reasonable.

Quick ratio is a slight variation, which is calculated by adding cash, cash equivalents, short-term investments, and current receivables together then dividing them by current liabilities. Which can be also be expressed as Current Assets less the inventory in hand. Quick ratio of 0.8 is also close to the industry average of 0.84 hence it is reasonable as well.

Since its current and quick ratio is close to industry averages, that means it has been efficiently managing its working capital.

Inventory turnover which is COGS / Avg Inventory gives us an estimate of how many times the company is able to sell its inventory in a year. Which is higher for amazon compared to the industry average.

Similarly, converting it to days of inventory on hand, we just have to simply divide 365 by Inventory turnover.

Which is 35 (365/10.57) days for industry and 33 (365/11.22) days for amazon, which means amazon is able to sell its inventory in 33 days, whereas on an average other players in the industry takes around 35 days.

Amazon is therefore performing better than the industry.