Financial Ratio Analysis A. Compute the following ratios: Coca-Cola Company 12/3
ID: 2792790 • Letter: F
Question
Financial Ratio Analysis
A. Compute the following ratios:
Coca-Cola Company
12/31/2016
12/31/2015
Liquidity Ratios
Current Ratio
1.28
1.24
Solvency Ratios
Debt-assets Ratio
0.74
0.72
Profitability Ratios
Profit Margin
0.39
0.41
Return on Assets
0.07
0.08
Return on Owners’ Equity
0.28
0.29
PepsiCo Inc.
12/31/2016
12/26/2015
Liquidity Ratios
Current Ratio
1.28
1.31
Solvency Ratios
Debt-assets Ratio
0.85
1.01
Profitability Ratios
Profit Margin
0.26
0.22
Return on Assets
0.09
0.08
Return on Owners’ Equity
0.56
0.45
Dr. Pepper Snapple Group Inc.
12/31/2016
12/31/2015
Liquidity Ratios
Current Ratio
2.60
1.15
Solvency Ratios
Debt-assets Ratio
0.78
0.75
Profitability Ratios
Profit Margin
0.36
0.33
Return on Assets
0.09
0.09
Return on Owners’ Equity
0.40
0.35
B. Analyze/assess/discuss your findings
Coca-Cola Company
12/31/2016
12/31/2015
Liquidity Ratios
Current Ratio
1.28
1.24
Solvency Ratios
Debt-assets Ratio
0.74
0.72
Profitability Ratios
Profit Margin
0.39
0.41
Return on Assets
0.07
0.08
Return on Owners’ Equity
0.28
0.29
PepsiCo Inc.
12/31/2016
12/26/2015
Liquidity Ratios
Current Ratio
1.28
1.31
Solvency Ratios
Debt-assets Ratio
0.85
1.01
Profitability Ratios
Profit Margin
0.26
0.22
Return on Assets
0.09
0.08
Return on Owners’ Equity
0.56
0.45
Dr. Pepper Snapple Group Inc.
12/31/2016
12/31/2015
Liquidity Ratios
Current Ratio
2.60
1.15
Solvency Ratios
Debt-assets Ratio
0.78
0.75
Profitability Ratios
Profit Margin
0.36
0.33
Return on Assets
0.09
0.09
Return on Owners’ Equity
0.40
0.35
Explanation / Answer
All three types of ratios can be analyzed internally and externally.
Internal analysis means comparing the ratios of the company with previous period’s ratios. External analysis is comparing the ratio of one company with the other in the same time period.
Current ratio
Internal analysis:
Coca-Cola Company: Current ratio has improved from 1.24 to 1.28 which is a good sign and it implies an increase in current assets and now the company is in a better position to meet its short term obligation like short term loans and pay to its creditors.
PepsiCo Inc.: Though the Current ratio is decreased from 1.31 to 1.28, the company is still in a better position (current assets are more than current liabilities) to manage its short term obligation/debts and it can also be interpreted that the company is managing its cash reserves or current assets in a better way.
Dr. Pepper Snapple Group Inc.: Current ratio has improved from 1.15 to 2.60 which is not a good sign and it implies an increase in current assets more than required which means that the company is not managing its current assets for example cash reserves properly.
External analysis: Coca-Cola and Pepsi Cos are operating with good current ratio where as Dr. Pepper Snapple Group Inc has a ratio more than the industry ratio. This indicates that Coca-Cola and Pepsi Cos are better managers of the current assets and liabilities.
Debt ratio
Internal analysis:
Coca-Cola Company: An increase in debt ratio from 0.72 to 0.74 is acceptable and it implies that the company has acquired more debt but it is not more than the assets which is a good sign because it will reduce overall cost of capital.
PepsiCo Inc.: company has reduced its debt ratio from 1.01 to 0.85 which is a good sign having more debt that assets(in case of 1.01) implies a financial risk. The company reduced this risk by a decrease in debt ratio.
Dr. Pepper Snapple Group Inc.: An increase in debt ratio from 0.75 to 0.78 is acceptable and it implies that the company has acquired more debt but it is not more than the assets which is a good sign because it will reduce overall cost of capital.
External analysis: All three companies have debt ratios less than one which indicates that they are financially less risky. Among all three Coca-Cola is less risky with a debt ratio of 0.74, but this difference not significantly large than other companies.
Profitability ratios
Profit Margin, Return on Assets and Return on Equity will tell the company’s ability to generate returns. The higher these ratios better is the company’s performance.
Internal analysis:
Coca-Cola Company: Company observed a decrease in all the three ratios, which indicates that the company’s performance in terms profitability and returns is decreased from previous year.
PepsiCo Inc.: Company achieved an increase in all the three ratios, which indicates that it is improved its performance in terms profitability and returns from previous year.
Dr. Pepper Snapple Group Inc.: Company achieved an increase in two among the three ratios and the third ratio return on assets is unchanged. Overall indication is that the company improved its performance from previous year in terms of profitability and providing returns to its share holders.
External analysis:
Though Coca-Cola observed a decrease in profitability ratio, it is still the highest profitable company among all the three companies with a ratio of 0.39. Return on assets ratio is 0.09 which high and same for companies PespsiCo and Dr. Pepper Snapple Group Inc. Return on Equity is 0.56 which is highest among all the three for PepsiCo Inc which indicates that it gave highest returns to its owners when compared with other companies of the industry.
Overall, It is Profitable and for investors it is advisable to invest in PepsiCo Inc because it is Profitable and providing high returns in the industry or in the given three companies.
Additional information:
For further information on calculation and understanding of ratios additional information is:
Current Ratio = Current Assets / Current Liabilities
2. A financial ratio that measures the extent of a company’s or consumer’s leverage. The debt ratio is defined as the ratio of total – long-term and short-term – debt to total assets, expressed as a decimal or percentage. It can be interpreted as the proportion of a company’s assets that are financed by debt.
3. Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or relative to the same ratio from a previous period indicates that the company is doing well.
Refer to thelink for formulae:
https://www.myaccountingcourse.com/financial-ratios/return-on-equity
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