Analysis of Amazon Ratio of Activity

This is an analysis of the Amazon Inc. ratio of activity. Ratios of activity are commonly referred to as efficiency ratios. Activity ratios are a type of financial measurement approach that reveals the level of efficiency of a corporation in terms of leveraging its assets based on the balance sheet to generate cash and revenues. This analysis focus on four main ratios of activity, including Asset Turnover ratio, Accounts Receivable ratio, Inventory Turnover and Asset Turnover.

The asset turnover ratio is a ratio of activity measuring the ability of a firm to generate sales from its assets. The ratio makes a comparison of its net sales to the average total sales. The asset turnover ratio indicates how efficiently a firm can use its assets to yield sales. A higher asset turnover is favorable to the company. The higher turnover ratio shows that the company more effectively using the existing assets to yield revenues. A lower turnover ratio, on the other hand, demonstrate that the corporate is not using its assets efficiently enough to generate sales, and it is a pointer that the company has production or management problems. From our calculation, Amazon Inc. has an asset turnover of 0.475. This can be interpreted to mean that Amazon is generating $0.475 of sales for every $0.475 invested a dollar in assets. This is an indication of the effective use of assets to generate sales, given that Amazon has a very high asset level.

Accounts receivable ratio is applied in determining whether a firm’s effectiveness in the collection of its receivables. Receivables are generally the cash that is owed to the company by the customers. The accounts receivable cash ratio shows how well a company manages and utilizes the credit it gives to its clients and how fast that short-term debt is paid or collected. A higher receivables turnover ratio proves that the firm has an efficient plan for the collection of its debts. Higher turnover is also an indication that the company has high-quality customers that pay their debt on time.

A low turnover, on the other hand, is an indication that the firm is not efficiently or quickly collecting its debt. Low turnover also indicates poor quality client who does not want to pay on time. Amazon has a turnover ratio of 5.22. This is significantly high, indicating that Amazon does a very good job of collecting its debt. It also shows that Amazon has a good client base who pays willingly faster.

Inventory turnover ratio is an estimation of the number of times a firm sells and replaces its stock of goods over a given time. This ratio gives a highlight of how the firm manages its costs and the level of effectiveness in managing its sales. The higher the company inventory turnover ratio, then the higher the company is selling its inventory, and hence the better for the company. On the other hand, the lower the inventory ratio, the slower the company is selling its stocks, and hence bad for the company growth. We have an inventory turnover of 5225 for Amazon. This indicates how very effective amazon in managing its stocks is. Generally, Amazon is known to have a strategic advantage in moving its stocks.

Fixed turnover ratio is an indication that the efficiency of a firm in generating sales from its fixed assets. A high fixed asset ratio is a demonstration that the firm is using its fixed assets more effectively, and a lower fixed turnover reveals that the corporate is not using its fixed assets effectively. Amazon has a 10.83% fixed asset turnover ratio which is high.

References 

Amazon 2019 Annual Reports. Retrieved on 14 th March 2020 from https://www.marketwatch.com/investing/stock/amzn/financials 

Monea, M. (2009). Financial ratios–reveal how a business is doing?.  Annals of the University of Petroşani, Economics ,  9 (2), 137-145. 

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