Ratio Analysis,”1) you cannot assess the firm’s liquidity with only two ratios.2) eBuy has a higher current ratio but a lower quick ratio when compared to the industry. 3) is not correct since the relationship between the current and quick ratio doesn’t address the liquidity of accounts receivable. 4) is the most reasonable statement since a higher current ratio and lower quick ratio (as compared to the industry) indicates that eBuy has lots of inventory. The inventory build-up may be due to illiquid/non-salable inventory holdings.For eBuy, gross margin is 64.82% (= sales-COGS/sales = [2877-1012]/2877) and operating margin is 23.64% (= EBIT/Sales = 680/2877). If you take Gross Margin – Operating Margin, you get Operating Expense/Sales. For example, for Amazona 67.21-24.75 = 42.46%. This means that operating expenses at Amazona consume 42.46% of sales. For eBuy, this is only 41.18%. Hence, relative to sales, eBuy has lower operating expenses. eBuy’s gross margin is lower than Amazona indicating that ebuy has higher cost of goods. Since
eBuy has lower gross and operating margin the data do not support the conclusion that eBuy is more profitable than Amazona.”