Analyze and compare Amazon.com to Best Buy

Amazon.com, Inc. (AMZN) is one of the largest Internet retailers in the world. Best Buy, Co. Inc. (BBY) is a leading retailer of consumer electronics and media products in the United States. Amazon and Best Buy compete in similar markets; however, Best Buy sells through both traditional retail stores and the Internet, while Amazon sells only through the Internet. Current asset and current liability information from recent financial statements are as follows (in millions):

	Amazon	Best Buy
Current assets:
Cash	$19,334	$ 1,976
Short-term investments	6,647	1,305
Accounts receivable	8,339	1,162
Inventories	11,461	5,051
Other current assets	-	392
Total current assets	$45,781	$ 9,886
Current liabilities:
Accounts payable	$25,309	$ 4,450
Other current liabilities	18,507	2,475
Total current liabilities	$43,816	$ 6,925

Required:

a. Compute working capital for each company.

Amazon: $________

Best Buy: $________

b. Compute the current ratio for each company. Round to one decimal place.

Amazon: ________

Best Buy: _________

c. Compute the quick ratio for each company. Round to one decimal place.

Amazon: ________

Best Buy: ________

d. Can the working capital be usefully compared between the two companies? Which of the following statements is correct.

Answer: Yes, working capital is a good measure for comparing the liquidity of two companies because both companies belong to the same industry.

e. Which company has the greater debt-paying ability according to the current ratio?

Answer: Best Buy

f. Which company has a greater short-term debt-paying ability according to the quick ratio?

Answer: Amazon

g. Why are the results different between (e) and (f)? (Hint: Perform a vertical analysis of the current assets.) Round to one decimal place.

	Amazon	Best Buy
Current assets:
Cash	%	%
Short-term investments	%	%
Accounts receivable	%	%
Inventories	%	%
Other current assets	%	%
Total current assets	%	%

Amazon has % of its current assets consisting of cash and short-term investments, compared to % for Best Buy. This difference will improve Amazons quick ratio relative to Best Buys. Best Buy has 51.1% of its current assets in inventory, while Amazon only has 25.0% of current assets in inventory. This difference reflects Amazons pure Internet strategy, which causes the current ratio to be smaller than Best Buys. It also causes the relationship between the current and quick ratios to diverge between the two companies.