Categories of Financial Ratios
Liquidity Ratio – It analyzes a company’s ability to pay its liabilities both current and long-term liabilities. It measures a company’s cash levels and ability to convert assets into cash. The quick ratio measures the company’s ability to pay its current debts with quick assets (convertible to cash within 90 days). The current ratio measures a company’s ability to use current assets to pay current liabilities (Basu, 2018). The time interest earned ratio measures a company’s amount of income to cover future interest expenses.
Solvency Ratio – It indicates a company’s financial stability or ability to sustain operations in the long term since it measures debt relative to equity and assets. The debt to equity ratio is the difference between total assets of a company and its total liabilities (Basu, 2018). The equity ratio measures a company’s assets owned by investors by comparing total equity of the firm to its total assets. The debt ratio indicates the amount of assets a company must sell to pay its liabilities.
Profitability Ratio – It indicates the ability of a firm’s management to convert sales into cash flow and profits. The gross profit ratio measures the percentage of sales after pay a company’s expenses (Basu, 2018). The return on assets ratio (ROA) measures a company’s ability to manage assets to generate profits. The return on equity (ROE) measures a company’s ability to generate profits from investments of shareholders or stockholder’s equity (Tracy, 2012).
Calculations
Liquidity Ratios – Amazon (2017)
Current Ratio = Current Assets/ Current Liabilities
= 60,197/ 57,883
= 1.04
Quick ratio = Total quick assets/Current liabilities
= 40,678/57883
= 0.7
Solvency Ratio – Google Company (2017)
Debt to Equity ratio = Total debt/ Stockholder’s equity
= 3,969/152,502
= 0.03
Profitability Ratio – Apple Inc (2017)
Gross profit ratio = 100 x Gross margin/ Net sales
= 100 x 88,186/ 229,234
= 38.5%
Return on assets ratio (ROA) = 100 x Net income/ Total assets
= 100 x 48,351/375,319
= 12.9%
Return on equity (ROE) = 100 x Net income/Shareholders’ equity
= 100 x 48,351/134,047
= 36.1%
From the solvency, profitability and liquidity ratios of Apple Inc, Google Company, and Amazon Inc, the company’s are financially stable as they can pay liabilities with the company’s assets
References Alphabet Inc. (GOOG). (2018). Retrieved from Yahoo Finance: https://finance.yahoo.com/quote/GOOG/balance-sheet?p=GOOG Amazon.com, Inc. (AMZN.SN). (2018). Retrieved from Yahoo Finance: https://finance.yahoo.com/quote/AMZN.SN/balance-sheet?p=AMZN.SN Amazon.com, Inc. (AMZN.SN). (2018). Retrieved from Yahoo Finance: https://finance.yahoo.com/quote/AMZN.SN/balance-sheet?p=AMZN.SN Basu, C. (2018, February 03). Four Basic Types of Financial Ratios. Retrieved from Chron: http://smallbusiness.chron.com/four-basic-types-financial-ratios-used-measure-companys-performance-25299.html Tracy, A. (2012). Ratio Analysis Fundamentals. RatioAnalysis.net.