Compare the ratios for the company you selected with the appropriate industry ratios including profitability, solvency, and efficiency ratios.

Financial ratios and industry averages paper $5

The Profitability Ratio:
Amazon is the company I have chosen. While the average for the sector was 28%, Amazon had a gross profit margin of 37%. Amazon generates higher profits than its competitors in this industry. The company’s return-on-assets ratio was 8.8% which is much higher than the industry standard of 4.4%. It is evident that Amazon uses its assets efficiently to create revenue for shareholders.

Solvency Ratios:
Amazon’s debt-to-equity ratio stood at 0.26, which means it has low levels of liabilities relative to shareholder equity, indicating strong financial health and stability. It was 1.55, which indicates that it can pay its current liabilities using liquid assets. This further confirms its solvency. Comparatively, industry averages for these ratios was 0.43 and 1.42.

Efficiency Ratios:
Amazon’s inventory turnover rate stood at 6 times per year, which meant that it had a more efficient inventory management system compared to other companies in the sector (industry average=3 times per year). Its receivable turnover ratio was also 11 times higher than the industry average at 9 times per annum. This shows how fast they can collect payment from customers, within credit terms and according to customer policy guidelines.

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