3.4.

4 Classification of Financial Ratios

The ratios are classified as

1. Liquidity ratios

2. Profitability ratios

3. Activity ratios

4. Solvency ratios.

1. Liquidity Ratios:

Liquidity ratios measure the adequacy of current and liquid assets and help evaluate the
ability of the business to pay its short-term debts. The ability of a business to pay its
short-term debts is frequently referred to as short-term solvency position or liquidity
position of the business.

Few commonly used liquidity ratios are given below:

Current Ratio

Current ratio (working capital ratio) is a popular tool to evaluate short-term solvency
position of a business. Short-term solvency refers to the ability of a business to pay its
short-term obligations when they become due. Short term obligations (current liabilities)
are the liabilities payable within a short period of time, usually one year.

Formula

Current Ratio = current Assets/ Current liabilities

Table No. 1 current ratio (Rs Lacks)

YEAR CURRENT CURRENT RATIO

ASSETS LIABILLITY

2013-2014 1807.81 326.17 5.54

2014-2015 3269.01 811.63 4.03
2015-2016 4027.95 713.84 5.64
2016-2017 5466.31 1915.44 2.85
2017-2018 7350.27 3251.01 2.26

(Source: Balance Sheet)

INTERPRETATION:

According to the standards the current ratio of the company should be 2:1

The above table and diagram shows that the current ratio in the year 2013-14
was 5.54 and then it decreased to 4.03 in the year 2014-15, in this year onwards it
move upwards. 5.64 in the year 2015-16 and it again moves down to 2.85 and finally in
the year 2017-18 it moved down to 2.26. The normal current ratio is 2:1. The above
table shows current ratio is more than 2:1% in all the financial years. This shows that
the company is enjoying credit worthiness.

2.Quick Ratio

Quick ratio ( “acid test ratio” and “liquid ratio”) is used to test the ability of a business to
pay its short-term debts. It measures the relationship between liquid assets and current
liabilities.

Formula

Quick/Liquidity Ratio = Liquid Asset/Current Liabilities

Table No. 1 Quick Ratio (Rs Lacs)

YEAR LIQUID ASSETS CURRENT RATIO

LIABILLITY
2013-2014 7745.08 3251.01 2.38
2014-2015 3961.18 1915.44 2.06
2015-2016 2065.18 713.84 2.89
2016-2017 452.38 811.63 0.55
2017-2018 1319.18 326.17 4.04

(Source: Balance Sheet)

INTERPRETATION:

According to the standards the liquid ratio of the company should be 1:1

The above table and diagram shows the Quick ratio for the study period 2013-14 to
2015-16. There is a slight difference in ratios. At the period of 2016-2017 there was a
decrease in ratio to .55, In the year 2017-18 it has increased to 4.04. When we go
through the above periods each and every year are satisfactory ,which means
companies liquidity position is far better than the industry standard 1:1.

III. Absolute Liquid Ratio

Absolute liquid ratio to test the liquidity of the business. Absolute liquid ratio is computed
by dividing the absolute liquid assets by current liabilities.

Formula:

Absolute liquid ratio = Absolute liquid assets/Current Liabilities

OR

Absolute Liquidity Ratio = Cash + Bank +Marketable Securities/ Current

Liabilities

YEAR ABSOLUTE LIQUID LIQUID LIABILLITY RATIO

ASSETS

2013-2014 438.51 299.17 1.46

2014-2015 494.71 811.63 0.60
2015-2016 608.92 700.55 0.86
2016-2017 1022.14 1903 0.53
2017-2018 1782.51 3251.01 0.54

(Source: Balance Sheet)

INTERPRETATION:

The above table and diagram shows that the absolute liquid ratio in the year 2013-14
was 1.46 and then it decreased to 0.60 in the year 2014-15, in this year onwards it
move upwards. 0.86 in the year 2015-16 and it again moves down to 0.53 and finally in
the year 2017-18 it moved up with slight change to 0.54. Companies absolute liquidity
ratio for the above period also in a fair manner, from the table It is noted that ratio had
some fluctuations in the middle ,yet it has a slight increase in the last year.

Profitability Ratios:

Profit is the primary objective of all businesses. All businesses need a consistent
improvement in profit to survive and prosper. A business that continually suffers losses
cannot survive for a long period.

Profitability ratios measure the efficiency of management in the employment of business

resources to earn profits. These ratios indicate the success or failure of a business
enterprise for a particular period of time.

Some important profitability ratios are given below:

Net Profit Ratio

Net profit ratio (NP ratio) is a popular profitability ratio that shows relationship between
net profit after tax and net sales. It is computed by dividing the net profit (after tax) by
net sales.

Formula:

Net Profit Ratio = Net Profit After Tax/Net Sale

YEAR NET PROFIT SALES RATIO

2013-2014 1075.70 3617.13 29.73%

2014-2015 1585.69 5218.88 30.38%
2015-2016 1738.63 6152.06 28.26%
2016-2017 1379.30 7284.65 18.93%
2017-2018 996.72 8374.90 11.90%

(Source: Balance Sheet)

Interpretation:

The above table and diagram shows that the Net Profit Ratio during the study period is
lower than the upcoming years. It was 29.73 in the year 2013-14 and further increased
to 30.38 in 2014-15, It has decreased gradually to 18.93 in 2016-17 and to 11.90 in
2017-2018. The company is not effective at its cost controls.

Gross Profit Ratio

Gross profit ratio (GP ratio) is a profitability ratio that shows the relationship between
gross profit and total net sales revenue. It is a popular tool to evaluate the operational
performance of the business. The ratio is computed by dividing the gross profit figure by
net sales.

Formula:

Gross Profit Ratio = Gross Profit / Net Sales

YEAR GROSS PROFIT SALES RATIO

2013-2014 1966.17 3617.13 54.35

2014-2015 2052.71 5218.88 39.33
2015-2016 3355.83 6152.06 54.54
2016-2017 2556.81 7284.65 35.09
2017-2018 2799.85 8374.90 33.43

(Source: Balance Sheet)

Intepretation:

The above table and diagram shows the relationship between the gross profit and net
sales in percentage. During the study period the average gross profit position was 54.35
and it is in decreasing trend , however the company maintains a good gross profit ratio.
at the time of 2015-2016 it started to increase from 39.33 to 54.54 ,gradually it has
decreased to 33.43 in 2017-18. This ratio indicates that there is no effective cost control

Operating Ratio

Operating ratio (operating cost ratio or operating expense ratio) is computed by dividing
operating expenses of a particular period by net sales made during that period.
Like expense ratio, it is expressed in percentage.

Formula:

Operating Ratio = Operating Expenses / Net Sale * 100

YEAR COST OF GOODS SALES RATIO
SOLD +
OPERATING
EXPENSES
2013-2014 1068.02 3617.13 29.53
2014-2015 889.67 5218.88 17.05
2015-2016 1287.09 6152.06 20.92
2016-2017 1247.24 7284.65 17.12
2017-2018 2725.94 8374.90 32.55

(Source: Balance Sheet)

The above table and diagram shows that operating ratio in the year 13-14 was 29.53, it
has decreased to 17.05 in the year 14-15 and it has again increased to 20.92 in the
year 15-16 and decreased to 17.12 in next year there is an fluctuating trend, however it
has increased to 32.55 in the final year. As the low operating ratio means high net profit
ratio ,operational efficiency of the management is considered to be poor

Operating profit ratio

The operating profit margin ratio indicates how much profit a company makes after
paying for variable costs of production such as wages, raw materials, etc. It is also
expressed as a percentage of sales and then shows the efficiency of a company
controlling the costs and expenses associated with business operations.

Formula

OPERATING PROFIT RATIO = Operating Profit / Sales *100

YEAR OPERATING SALES RATIO
PROFIT
2013-2014 1536.62 3617.13 42.48
2014-2015 1383.27 5218.88 26.50
2015-2016 2376.72 6152.06 38.63
2016-2017 1733.52 7284.65 23.79
2017-2018 2037.28 8374.90 24.32

(Source: Balance Sheet)

INTREPRETATION:

The above table and diagram shows that operating profit ratio in the year 13-14 was
42.48, it has decreased to 26.50 in the year 14-15 and it has again increased to 38.63 in
the year 15-16 and decreased to 23.79, however it has increased to 24.32 in the final
year. This is an indicator that the profit generated from operations are not enough
compared from sales

Activity Ratios:

Activity ratios (also known as turnover ratios) measure the efficiency of a firm or
company in generating revenues by converting its production into cash or sales.
Generally a fast conversion increases revenues and profits.

1. Inventory Turnover Ratio

Inventory turnover ratio (ITR) is an activity ratio and is a tool to evaluate the liquidity of
company’s inventory. It measures how many times a company has sold and replaced its
inventory during a certain period of time.

Formula:
Inventory Turnover Ratio = cost of goods sold / Average Inventory at Cost

YEAR COST OF GOODS AVERAGE STOCK RATIO

SOLD
2013-2014 638.48 283.56 2.25
2014-2015 220.23 806.12 0.27
2015-2016 307.98 1560 0.19
2016-2017 423.95 2159.6 0.19
2017-2018 1963.35 2476.32 0.79

(Source: Balance Sheet)

INTERPRETATION:

The above table and diagram shows that the stock turnover ratio in the year 2013-14
was 2.25 and then it decreased to 0.27 in the year 2014-15, in this year onwards it
again moves downwards. 0.19 in the year 2015-16 and remains constant to 0.19 in year
2016-2017 and finally in the year 2017-18 it moved up with slight change to 0.79.
Company’s inventory ratio for the above period is in a fair manner, from the table It is
noted that ratio had some fluctuations in the middle, yet it has increased in the last year

2.Fixed Assets Turnover Ratio

Fixed assets turnover ratio (sales to fixed assets ratio) is a commonly used activity ratio
that measures the efficiency with which a company uses its fixed assets to generate its
sales revenue. It is computed by dividing net sales by average fixed assets.

Formula:
Fixed Assets Turnover Ratio = Net Sale / Average Fixed Assets

YEAR SALES FIXED ASSET RATIO

2013-2014 3617.13 804.02 4.49

2014-2015 5218.88 639.53 5.16
2015-2016 6152.06 504.43 6.19
2016-2017 7284.65 1292.36 5.63
2017-2018 8374.90 1433.29 5.84

(Source: Balance Sheet)

INTERPRETATION:

The above table and diagram shows that the fixed asset turnover ratio in the year
2013-14 was 4.49 and then it is increased to 5.16 in the year 2014-15, in this year
onwards it again moves upwards to 6.19 in the year 2015-16 and it has a slight
decrease to 5.63 in year 2016-2017 and finally in the year 2017-18 it moved up with
slight change to 5.84. Companies fixed asset turnover ratio for the above period is in a
fair manner, from the table It is noted that ratio had some fluctuations in the middle, yet
it has increased in the last year Hence from the above table states that the company
has purchased more fixed assets compared to previous years.

Capital turnover ratio:

The working capital turnover ratio is also referred to as net sales to working capital. It
indicates a company's effectiveness in using its working capital. The working capital
turnover ratio is calculated as follows: net annual sales divided by the average amount
of working capital during the same year.
CAPITAL TURNOVER RATIO = Sales / Capital employed

YEAR SALES CAPITAL RATIO

EMPLOYED
2013-2014 3617.13 2237.36 1.61
2014-2015 5218.88 3158.62 1.65
2015-2016 6152.06 4312.21 1.42
2016-2017 7284.65 5187.97 1.40
2017-2018 8374.90 5993.36 1.39

(Source: Balance Sheet)

INTERPRETATION:

The above table and diagram shows that the capital turnover ratio in the year 2013-14
was 1.61 and then it is increased to 1.65 in the year 2014-15, in this year onwards it
moves downwards to 1.42 in the year 2015-16 and it has a slight decrease to 1.40 in
year 2016-2017 and finally in the year 2017-18 it again decreased with slight change
to 1.39 Capital turnover ratio indicates the poor efficiency of the organization the
disappointing factor is the strength of the ratio is decreasing year by year from 2014 -
2018.

Debtor turnover ratio :

The receivables turnover ratio is an activity ratio measuring how efficiently a firm uses
its assets. Receivables turnover ratio can be calculated by dividing the net value of
credit sales during a given period by the average accounts receivable during the same
period.

DEBTOR TURNOVER RATIO=Credit sales / Average Accounts Receivable

YEAR CREDIT SALES AVERAGE RATIO
ACCOUNTS
RECEIVABLES
2013-2014 3617.13 686.83 5.26
2014-2015 5218.88 870.07 5.99
2015-2016 6152.06 4634.63 1.32
2016-2017 7284.65 4546.55 1.60
2017-2018 8374.90

(Source: Balance Sheet)

INTERPRETATION:

Creditor turnover ratio

Accounts payable turnover ratio (also known as creditors turnover ratio or creditors'
velocity) is computed by dividing the net credit purchases by average accounts payable.
It measures the number of times, on average, the accounts payable are paid during a
period.

CREDITOR TURNOVER RATIO = Credit Purchase / Average accounts

Payable
YEAR CREDIT AVERAGE RATIO
PURCHASE ACCOUNTS
PAYABLE
2013-2014 6058.51 241.12 25.12
2014-2015 8578.35 235.31 36.45
2015-2016 7371.54 395.86 18.62
2016-2017 1193.97 747.82 1.59
2017-2018

(Source: Balance Sheet)

INTERPRETATION:

Solvency Ratios:

Solvency ratios (also known as long-term solvency ratios) measure the ability of a
business to survive for a long period of time. These ratios are very important for
stockholders and creditors.

Solvency ratios are normally used to:

 Analyze the capital structure of the company

 Evaluate the ability of the company to pay interest on long term borrowings

 Evaluate the ability of the the company to repay principal amount of the long
term loans (debentures, bonds, medium and long term loans etc.).

 Evaluate whether the internal equities (stockholders’ funds) and external equities
(creditors’ funds) are in right proportion.
Some frequently used long-term solvency ratios are given below:

1.Debt to Equity Ratio

Debt to equity ratio is a long term solvency ratio that indicates the soundness of long-
term financial policies of a company. It shows the relation between the portion of assets
financed by creditors and the portion of assets financed by stockholders. As the debt to
equity ratio expresses the relationship between external equity (liabilities) and internal
equity (stockholder’s equity), it is also known as “external-internal equity ratio”.

Formula:

Debt to Equity Ratio = Total Liabilities / Stockholder’s Equity

YEAR TOTAL LONG SHAREHOLDER RATIO

TERM DEBT FUND
2013-2014 822.84 2237.36 0.36
2014-2015 1528.03 3158.62 0.48
2015-2016 2614.89 4312.21 0.60
2016-2017 9644.21 5187.97 1.85
2017-2018 1484.11 5993.36 0.24

Interpretation:

The above table and diagram shows that the debt equity relationship of the company
during the study period. It was 0.36 in the year 2013-14 and then went up to 0.48 again
in the next year moved up to 0.60 but from the year 2016 to 2017 onwards it reached up
to1.85. and it has a great fall to 0.24 in the year 2017-18. In all the years the equity is
more when compared with borrowings. Hence the company is maintaining good debt
position

2. Proprietary Ratio

The proprietary ratio (also known as net worth ratio or equity ratio) is used to evaluate
the soundness of the capital structure of a company. It is computed by dividing the
stockholders’ equity by total assets.

Formula:

Proprietary Ratio = Stockholders’ Equity / Total Assets.

YEAR SHAREHOLDER TOTAL TANGIBLE RATIO

FUND ASSET

2013-2014 2237.36 2628.94 0.85

2014-2015 3158.62 3985.43 0.79
2015-2016 4312.21 5067.43 0.85
2016-2017 5187.97 7142.88 0.72
2017-2018 5993.36 10695.83 0.56

Interpretation:

The above table and diagram shows that the proprietary ratio of the company during the
study period. It was 0.85 in the year 2013-14 and then went down to 0.79 again in the
next year moved up to 0.85 but from the year 2016 to 2017 onwards it went down to
0.72. and it has a slight fall to 0.56 in the year 2017-18. The above table and diagram
shows that the proprietary ratio during the study period had slight fluctuations. In all the
years the owner's contribution to the total assets was appropriate and they maintain
their share in the company's assets.

CHAPTER 5

5.1 FINDINGS AND SUMMARY

5.1.1 FINDINGS OF THE STUDY

 Sales Growth Rate

Amazon's five-year sales growth rate is close to 30%, which is no mean feat especially
for a company that has been growing throughout its corporate history. The company
continues to make a lot of capital investments each year, using mostly cash flow from
operations aided by a moderate amount of debt and leaving little cash for anything else
with all eyes on growth. Besides being on the forefront of e-commerce retailing, Amazon
also runs a publishing platform for authors and publishers where the company takes a
sales cut from every book it helps sell. Originally starting as an online bookseller,
Amazon has kept and augmented its book business tradition that still contributes to its
sales growth as of November 2015. Amazon started AWS way ahead of its competitors
including Microsoft's Azure. AWS is actually the fastest0growing source of revenue for
Amazon and has seen a near 40% sales growth rate.

 Profit Margins

While most companies focus on their bottom0line earnings and profits, at Amazon it is
all about the top-line revenue story. The company believes that by increasing market
share, it can eventually leverage economies of scale to lower cost. But such earnings-
flowing days have got to arrive sooner rather than later for the company. Without
making enough money to really grow shareholders' initial investments, Amazon may not
be able to sustain its sales exuberance forever. As of November 2015, Amazon's
operating margin and net profit margin are a mere 1.71% and 0.35%, respectively. The
company has even lost money in some quarters. Such anemic performance in
profitability does not contribute much to the increase of shareholders' equity, which over
time could lead to an even bigger discrepancy between market value and the
company's actual book value, making its stock vulnerable to potential price volatility.

 Valuation Metrics

Because the market has been valuing Amazon stock solely on its growth potential,
valuation numbers based on traditional valuation metrics including price0to0earnings
(P/E) ratio and price0to0book (P/B) ratio all look in the stratosphere for Amazon. The
company's P/E and P/B ratios are over 900 and 30 respectively, a real feat not present
even for other more valuable companies such as Apple and Microsoft. On average,
fairly valued companies most likely have P/E ratios in the mid0teens and P/B ratios in
the low single digits.

5.1.2 SUMMARY
For the three months ended 31 March 2018, Amazon.com, Inc. revenues increased
43% to $51.04B. Net income increased from $724M to $1.63B. Revenues reflect North
America segment increase of 46% to $30.73B, International segment increase of 34%
to $14.88B, Online Sales, Total increase of 18% to $26.94B. Net income benefited from
North America segment income increase of 93% to $1.15B.

5.2 LEARNING OUTCOMES

 Understanding of financial statement analysis

 List of 5 common categories of financial ratios
 How do we determine if the company is doing well financially or not?

5.3 CONCLUSION

The company’s overall historically reports its first-quarter results around the last week of
April, and with nearly two weeks before that next earnings report, one thing is clear:
options traders are already starting to price in a massive amount of volatility for the
stock. The rising levels of increasing volatility come as analysts slash their earnings
estimates and raise their revenue outlook. Meanwhile, the stock has already had an
incredible 2018, despite being nearly 10% off its highs; the stock is still up almost 21.7%
on the year.