Financial Analysis
XACC280
January 26, 2014
Financial Analysis
Even though just numbers can give you an idea, financial information has to be taken in a critical manner to be completely useful, because without it, it may lead to a wrong investment decision while complete information may give a better reasoning. A good review of vertical analysis, horizontal analysis, liquidity ratio, solvency ratio, and profitability ratio, will help consider to have a full perspective to make a good decision, either to invest or just know the financial situation of a company.
Vertical analysis or common size analysis evaluates financial data by expressing each item as a percentage of the base amount . PepsiCo has more assets 10,405, and 31,727 current and total respectively (Table 1), than Coca-Cola 10,250 and 29,427 current and total respectively (Table 2) for 2005, The vertical analyses can be check for each company, Assets, Liabilities, and Retained Earnings with Total Equity as a base to a comparison (Table 3)
PepsiCo vertical analysis
2005
2004
Current Assets
=
10454
32.95%
8639
30.87%
Total Assets
31727
27987
Current Liabilities
=
9406
53.82%
6752
46.68%
Total Liabilities
17476
14464
Retained Earnings
=
21116
147.46%
18730
136.20%
Total Equity
14320
13752
Table 1
Coca-Cola vertical analysis
2005
2004
Current Assets
10250
34.83%
12281
39.06%
Total Assets
29427
31441
Current Liabilities
9836
75.24%
11133
71.80%
Total Liabilities
13072
15506
Reinvested earnings
31299
191.37%
29105
182.65%
Total Equity
16355
15935
Table2
Vertical Analyses
2004
2005
Assets
PepsiCo
30.87%
32.95%
2.08%
Coca-Cola
39.06%
34.83%
-4.23%
Liabilities
PepsiCo
46.68%
53.82%
7.14%
Coca-Cola
71.80%
75.24%
3.45%
Retained Earnings*
PepsiCo
136.20%
147.46%
11.26%
Coca-Cola
182.65%
191.37%
8.72%
* base is Total equity
Table 3 Reviewing Table 3, intra-company as well as inter-company, we can notice that PepsiCo increased its assets and equity, it also increased its liabilities from 2004 to 2005, while Coca-Cola decreased its assets and its liabilities, resulting a reduction of its current ratio from 1.10 to 1.04 (Table 4). "The current ratio is a widely used measure for evaluating a company’s liquidity and short-term debt-paying ability" (Weygandt, Kimmel, & Kieso, 2008).
Coca-Cola 2004 and 2005 ratios
Current Ratio
=
current assets
current liabilities
Percentage
Rate
Proportion
2005 ratio
=
10250
104.21%
1.04
1.04:1
9836
2004 ratio
=
12281
110.31%
1.10
1.10:1
11133
Table 4 Yet Coca-Cola vertical analyses look not as good as PepsiCo, the debt paying ability was reduced more than considerable numbers for PepsiCo from 2004 to 2005, while in 2004 the current ratio was 8.20 in 2005 was reduced to 1.11 (Table 5), just these figures indicate that PepsiCo may start to have cash flow problems.
PepsiCo the 2004 and 2005 ratios
Current ratio
=
current assets
current liabilities
Percentage
Rate
Proportion
2005 ratio
=
10454
111.14%
1.11
1.11:1
9406
2004 ratio
=
8639
819.64%
8.20
8.20:1
1054
Table 5
"Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash" (Weygandt, Kimmel, & Kieso, 2008). Liquidity ratio includes current ratio, explained before, acid test ratio that measures immediate short-term liquidity, receivables turnover ratio that measures liquidity of receivables, and inventory turnover ratio that measures liquidity of inventory Within profitability ratios there is the profit margin ratio that measures success over a period of time; it is very common that any person think about profit margin either to invest or to know if the company is leaving enough money from its
