The interest coverage ratio works out to 4.86,

that is EBIT is 4.86 times its interest expense.

The rule of thumb is that an interest coverage ratio of greater that two

is good, anything lower than that is of concern.

Except 2014, Amazon has maintained a sufficiently high interest coverage ratio,

though it has been on the decline.

This could be because Amazon has been taking on more long term obligation

which we discussed earlier.

Moving on to liquidity ratios,

they measure a company's ability to meet its short term obligations.

One liquidity ratio is a current ratio.

It measures whether a company's current assets are sufficient to meet

its current liabilities.

It is defined as the ratio of current assets to current liabilities.

In 2015, Amazon had current assets worth $36.47 billion and

current liabilities worth $33.90 billion which gives us a current ratio of 1.08.

For every $1 in current liabilities, Amazon has $1.08 in current assets,

the higher this ratio, the better liquidity a company has.

A current ratio of two or more is healthy and

anything lower may be cause for concern.

Amazon's current ratio has been just slightly higher than one,

the last four years.

However, that may not be of concern as it has a negative cash conversion cycle,

which means that its current assets are converted to cash

before its current liabilities become due.

While the current ratio tells us how easily a company pays off its current

liabilities, inventories cannot be used to payoff any of these obligations.

It may also be extremely difficult to convert inventory held to cash

at short notice.

In that sense, inventory is not very liquid.

And so it may not be appropriate to include inventory as

a part of current assets while calculating these liquidity ratios.

The quick ratio makes this adjustment.

It ignores inventory as a current asset and

is defined as current asset minus inventory divided by current liabilities.

In 2015 Amazon inventory was 10.24 billion dollars.

It's current assets and

current liabilities were 36.47 billion and 33.90 billion dollars, respectively.

Subtracting 10.24 billion from 36.47 billion and

then dividing by 33.90 billion dollars gives us a quick ratio of 0.77.

For every one dollar in current liabilities,

Amazon has 77 cents in current assets, excluding new entry.

Amazon's quick ratio, has been fairly stable, over the last four years.

A concern with the quick ratio is that accounts receivable is

also not truly liquid because a company's ability to convert receivables to cash,

depends on when it's customers or clients pay.

The cash ratio fixes this problem by ignoring all types of current assets

other than cash and cash equivalents.

It is defined as cash and cash equivalents divided by current liabilities.

Amazon had cash and cash equivalents worth $19.81 bilion and

current liabilities worth $33.90 bilion in 2015.

Dividing the two Amazon's cash ratio comes to 0.58.

That is for every $1 in short term obligations due

Amazon has $0.58 cents in cash and cash equivalence.

The cash ratio has held stable over the last few years and so

it doesn't seem to be of concern.

This concludes all the financial statements-based ratios.

Next time, we will look at the two-point identity

which will help us identify why a company's is too high or too low.

It helps us identify where is the company doing well and where is it doing poorly.

We will also look at one market price based financial ratio.

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