The current ratio measures the company’s ability to pay its short term obligations with its short term assets. This means that it shows the company’s ability to pay current debt. The concept behind the current ratio to be sure if the company’s short-term assets, which are cash, marketable securities, account receivables, inventory, and cash equivalents, are presently available to pay its short-term liabilities which are account payables, accrued expenses, taxes, and notes payable. The higher the current ratio, the more liquid the company is. In theory, the higher the current ratio, the better because a ratio under 1 implies that the company would be unable to meet its obligations. However, not doing well financially does not necessarily mean that the company will bankrupt. Between Coca Cola and PepsiCo, PepsiCo has a higher current ratio implying that is more capable of paying its obligations. Although both companies have the ability to pay current debt, financial records show PepsiCo’s shows the likelihood to stay afloat because their short term debt and current portion of long term debt is more than six times greater. Basically, Pepsi is more liquid. According to the financial report, it is noted that Pepsi had a higher Current Ratio than Coca-Cola, in 2008 we see that Coca-Cola might have struggled to pay off debts, while Pepsi had sufficient amount to fulfill its short term obligations. However, this does not mean that Coca-Cola is failing. It could mean that Pepsi has become more aggressive in its marketing and options to customers.
2. Determine what profitability ratios can tell you about a company’s performance and how that information would influence investing decisions.
The profitability ratios evaluate the ability of the company to generate revenues in excess of operating costs and other expenses, some accounts compare firm’s earnings with total sales or FINACIAL MANGEMENT 3 investments that might reveal the effectiveness of management in operating business. The return of assets for indicates how profitable a company is relative to its total assets. According to Kennon (2011) as a general rule, anything below 5% is very asset-heavy (manufacturing, railroads), anything above 20% is asset-light (advertising firms, software companies), however in the comparison of both companies that are in the same business, the difference in return on asset appears to be a result of PepsiCo’s management doing a much better effort than Coca Cola. This would be good news to PepsiCo’s investors because it provides high earnings in relation to all of the resources it had at its disposal (the shareholders’ capital plus short and long-term borrowed funds). The return on assets would influence shareholder investing decisions.
The return on equity ratio is another profitability ratio which is very important in measuring how much the shareholders have earned from their investment in the company. Basically, the equation divides the net income by the average shareholders’ equity. The return on equity tells common shareholders how effectively their money is being employed (investopedia.com)
While a high return on equity indicates a good investment, it is important to be careful with the number that has been used. A small equity based or small net income could produce a high return on equity. The return on equity of Coca Cola is much better than PepsiCo, but the shareowners equity and the net income is much smaller than PepsiCo. The investing decision needs to be interpreted in different context of the company’s performance and some certain averages to conclude more accurate results.
3. Determine which financial ratios you would use and how you would use them to determine which company has the most satisfied stockholders.
To satisfy the stockholder, the company should have enough income to