Ratio Analysis

Strategic Resource Allocation - Ratio Analysis Assignment

Instructions: (1) Please submit an electronic copy by email and hand in a paper copy of the assignment in class; (2) Make sure you write down the names of your group members on the first page of your report; (3) If you make any assumptions, please state them clearly in the write-up; (4) Please be explicit regarding which formula you are using; (5) The assignment comprises three questions.

QUESTION 1

Consider Amazon’s financial information as reported in the three exhibits below:

a) Calculate and interpret the following ratios:

Leverage Ratios: Debt/equity ratio, Total debt ratio, Times interest earned

Liquidity Ratios: Current ratio, Quick ratio

Activity Ratios: Asset turnover ratio, Average collection period, Inventory turnover ratio

Profitability Ratios: Gross margin, Operating margin, ROA, ROE

b) Choose the 2-4 ratios which you feel are most significant and indicate what follow-up (if any) you might do if you were a financial manager at Amazon.

QUESTION 2

Try to match each of the following types of company with their corresponding balance sheet and financial ratios as given in the table below:

1. Aerospace manufacturer

2. Japanese trading company

3. Automobile manufacturer

4. Electric utility

5. Supermarket chain

In doing so, consider the operating and competitive characteristics of the industry and their implications for: (1) collection period; (2) inventory turnover; (3) amount of plant and equipment and (4) appropriate financial structure. Then identify which one of the five sets of balance sheets and financial ratios best matches your expectations.

| | | | A | B | C | D | E |

Balance Sheet Percentages | | | | | | |

Cash | | | | 7.60% | 2.70% | 1.40% | 7.20% | 12.70% |

Receivables | | | 31.70% | 4.70% | 2.90% | 60.30% | 11.50% |

Inventories | | | 5.30% | 2.00% | 23% | 8.70% | 48.10% |

Other current assets | | 1.20% | 3.00%...