Financial ratios are the principal tool of financial analysis. Ratios standardize the financial information of firms so comparisons can be made between firms of varying sizes. Choose two firms in the...

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Topic: Ratio Analysis of Walmart and Amazon
Introduction:
In this assignment I have analyzed the financial statements of Amazon Incorporation and Walmart. In analysis the financial statements I have done the Ratio Analysis of both the companies and tried to answer the following:
1. Whether the companies are Liquid or not.
2. Are the managers able to generate enough operating profits on the assets of the company.
3. The sources of finance of the companies.
4. Are the manages of the company able to provide enough profits to the shareholders of the company.
5. Are the managers able to create the shareholders’ value.
The ratio analysis has been done for the financial year 2019, taking the financial statements of the company into consideration. I have also analyzed the share prices of both the companies for the period starting from the year 2019 till the date 31st October 2020.
Body:
1. How Liquid are the companies:
Liquidity is the ability of the company to convert its assets into cash easily and quickly. Liquidity ratios are used to compare the financial position of the companies. Liquidity ratio is not very effective when the companies are in different industries, but when the companies are in the same industry, Liquidity ratios can be used as an effective comparative tool.
Liquidity Ratios are used by the investors to determine whether the companies are able to pay their cu
ent obligations with the cu
ent assets they have. The Liquidity ratios are used to determine the margin of the company with which the company is operating.
The most common liquidity ratio used is the Cu
ent Ratio. This ratio measures the liquidity position of the company by measuring the ability of the company to repay its short-term obligations. The formula for this ratio is as under:
Cu
ent Assets / Cu
ent Liabilities
The Cu
ent Ratio for Amazon and Walmart are as under:
    Particulars
    Amazon
    Walmart
    Cu
ent Ratio
    1.097
    0.7945
In the above table we can see that the cu
ent ratio of the Amazon Incorporation is greater than 1, which reflects that the cu
ent assets of the company are greater than the cu
ent liabilities of the company and hence the company is able to pay its cu
ent liabilities with cu
ent assets only.
Whereas the Cu
ent Ratio of the Walmart is less than 1, which reflects that the cu
ent assets of the company are not enough to cover its cu
ent liabilities and the company would need to raise long-term finance to pay it cu
ent liabilities.
2. Are the managers able to generate enough operating profits on the assets of the company:
Operating Performance ratios are used by the company to measure the operating effectiveness of the operations of the company. These ratios are used to determine the effectiveness with which the assets of the company are being utilized by the company. These ratios are very important in comparing two companies since the operating cost or the cost of generating the revenue for the company is the most important aspect in comparison of two companies.
The Different types of Operating Ratios are as under:
    Particulars
    Amazon
    Walmart
    Asset Turnove
    1.25
    2.22
    Inventory Turnove
    8.0761
    8.8805
    Receivable Turnove
    13.4763
    83.3807
Asset Turnover Ratio: This ratio measures the revenue earned by the company in comparison to the total assets of the company. This ratio helps to measure the efficiency with which the assets are used by the company. The formula for this ratio is as under:
Total Revenue / Total Assets
From the above table we can see that the Asset Turnover ratio of Amazon Incorporation is 1.25 Times, which means that the company is able to generate $1.25 for every one Dollar of Asset invested by the company. Even though the turnover ratio is greater than 1 and hence it signifies that the company is able to earn more than the amount invested in the assets of the company.
In case of Walmart the turnover ratio is higher in comparison to the Amazon Incorporation. This signifies that the Walmart is employing the assets more effectively and is able to generate more revenue for every one dollar invested in the assets of the company.
Inventory Turnover Ratio: This ratio measures the number of times the company has been able to sell its inventory in the given year and the number of times the company had to replace the inventory in the given financial year. The formula for this ratio is as under:
Total Revenue / Average Inventory during the period
Average Inventory: (Opening Inventory + Closing Inventory)/2
From the above table we can see that the Inventory Turnover ratio of both the companies is almost same. This means that both the companies are able to sell equal number of units in the financial year.
Receivable Turnover Ratio: This ratio is used to determine the effectiveness of the credit system of the company. Through this ratio the company can determine the effectiveness with which the company is able to collect the cash from its debtors. The ratio used to calculate this ratio is as under:
Net Credit Sales / Average Receivables
Average Receivable: (Opening Receivable + Closing Receivable)/2
From the table we can see that the Receivable Turnover ratio of the Walmart is very high. The reason for this that the company conducts its business mostly by offering credit period. Hence the credit sales of the company are large and the Receivable turnover ratio of the company is high. On the other hand, the Amazon Incorporation does not offer much credit period and the sales of the company is mostly in cash, hence the company has a very little credit sale. Hence the operating performance of the Amazon Incorporation is better than the Walmart.
3. How are the firms financing their assets:
There are generally two forms of financing available to the companies. The first is the Equity, Equity refers to the amount invested by the shareholders of the company to fund its operations. This amount is treated as shareholders’ funds in the balance sheet of the company. The second source of financing available to the companies is the debt, Debt refers to the loan taken by the company to fund its operations. The best structure of financing is that which maintains a balance between the equity and the debt so the company is able to take the advantage of leverage in the financial structure of the company.
The
The ratio used to determine the financial structure of the company is as under:
Debt-Equity Ratio: This ratio measures how much of the company is financed by debt and equity. The formula for this ratio is as under:
Long-Term Debt / Total Capital
The Debt-Equity ratio of Amazon Incorporation and Walmart is as under:
    Particulars
    Amazon
    Walmart
    Debt Equity Ratio
    0.3773
    0.8134
In the above table we can see that for every one dollar of equity employed by the company, the company has taken 0.3773 dollar of loan to fund its operations. Debt-Equity ratio of less than 1 signify that the company is able to fund its operations mainly through the equity. The reason for this is that the company has profitable business and is able to fund its operations through internally generated funds.
In case of the Walmart, we can see that for every one dollar of equity employed by the company, the company has taken 0.8134 dollar of loan to fund its operations. Debt-Equity ratio of less than 1 signify that the company is able to fund its operations mainly through the equity. The reason for this is that the company has profitable business and is able to fund its operations through internally generated funds. But since the company is in the retail business the company has raised more debt.
4. Are the mangers of the company able to provide good return to the shareholders of the company:
The funds are invested by the shareholders in the company to earn high returns. The return is based on the performance of the company because of which the share price of the company changes. The different ratios used to calculate the return for the shareholders of the company is as under:
    Particulars
    Amazon
    Walmart
    Gross Margin Ratio
    40.99%
    24.69%
    Operating Margin Ratio
    5.18%
    3.93%
    Net Profit Margin Ratio
    4.13%
    2.84%
    Return on...