Download financial ratios explained

Business Management
Financial Ratio Analysis
a. Profitability ratios: show the state of the company’s financial performance
or how well it is generating profits (the higher the better)

Return on Sales: profit margin—the net income a business makes
per unit of sales

Return on Investment: return on equity—the income earned on
the owner’s investment

Earnings per share: the profit earned for each share of stock
outstanding
b. Liquidity ratios: Measures the ability of the firm to pay its short-term
obligations
1. Current ratio: current assets divided by current liabilities
2. Quick ratio (acid test ratio):

Computed by subtracting inventory from current assets
and dividing results by current liabilities

Often a better indicator of a firm’s ability to pay debt
because current ratio ignores inventories
c. Activity ratios: May be used to analyze how well a firm is managing its
assets

Inventory turnover ratio: measures how fast a company’s
inventory is turned into sales (usually the faster the better)

Accounts receivable turnover ratio: measures how well a
company’s credit and collection policies are working by indicating
how frequently accounts receivable are converted into cash
d. Leverage or debt ratios:

Lenders look at ratios to determine whether the potential
borrower has put enough money into the business to serve as a
protective cushion for the loan

Debt-to-equity ratio: total liabilities divided by total equity
(indicates the extent to which a business is financed by a debt as
opposed to invested capital

Debt-to-total assets ratio: serves as simple measure of a
company’s ability to carry long-term debt (amount of debt
should not exceed fifty percent of value of total assets)
Financial Ratio Analysis for Coke and Pepsi
Name _______________________________
For each of the ratios below, complete the table and write an analysis of the results.
A. Liquidity Ratios
2013
Pepsico
2012
Pepsico
2013
Pepsico
2012
Pepsico
Ratio
Coca-Cola
Coca-Cola
Current Ratio
1. How does Coca Cola compare to Pepsico? Are the ratios in the acceptable range? Explain what this
ratio means. Look at this ratio for each company over the last few years. What is the trend?
Ratio
Coca-Cola
Coca-Cola
Quick Ratio
2. How does Coca Cola compare to Pepsico? Are the ratios in the acceptable range? Explain what this
ratio means. Look at this ratio for each company over the last few years. What is the trend?
B.
Profitability Ratios
2013
2012
Ratio
Coca-Cola
Pepsico
Coca-Cola
Pepsico
Return on Sales
(profit margin)
3. How does Coca Cola compare to Pepsico? Are the ratios in the acceptable range? Explain what this
ratio means. Look at this ratio for each company over the last few years. What is the trend?
Ratio
Return on Equity
(After-tax ROE)
Coca-Cola
2013
Pepsico
Coca-Cola
2012
Pepsico
4. How does Coca Cola compare to Pepsico? Are the ratios in the acceptable range? Explain what this
ratio means. Look at this ratio for each company over the last few years. What is the trend?
2013
Pepsico
2012
Pepsico
Ratio
Coca-Cola
Coca-Cola
Return on Sales
(profit margin)
5.
How does Coca Cola compare to Pepsico? Are the ratios in the acceptable range? Explain what
this ratio means. Look at this ratio for each company over the last few years. What is the trend?
6.
Now go to www.bizmonitoring.com where you will analyze the financial figures for either Coke
or Pepsi. Click on Free Business Analysis. Enter the appropriate data for your assigned
company. Click Calculate. You will be given the financial ratios along with explanations of what
they mean. Print out this report.
Explain the activity ratios and leverage ratios in the space below comparing Coca Cola and
Pepsico in as much detail as possible. Type your name and print out your analysis. Attach the
Bizmonitoring to your paper.