Assignment 5: Financial Management - Essay Example

In theory, the concept states that the higher the ratio, the better (Loth, 2011). However, the current ratio can be misleading both in a negative and a positive way, that is, a current ratio that is very high is not good and a current ratio that is low cannot be very bad (Loth, 2011). Between PepsiCo and Coca-Cola Enterprises, it can be seen that PepsiCo has the better capability of paying its current liabilities. The current ratio of PepsiCo is 1.4 and that of Coca-Cola Enterprises is 1.1 (see the appendix).

The current ratio ideology states that the higher the ratio the better. The ratio of PepsiCo is higher and thus it has the best chance to pay its current liabilities. Profitability ratios just like the operational performance ratio give the users a better understanding of how well the company utilizes its resources in order to generate shareholder value and profit. The long-term profitability of the company is important for the survival of the company and also the benefit received by the shareholders.

These ratios offer insight into the company’s profits. There are four important profit margins that display the amount of profit that is generated by the company’s sales at different sections of the income statement (Loth, 2011). An individual is unlikely to invest in a company that operates on losses. The profitability ratios as stated earlier indicates the how well the company has utilized its resources in order to generate shareholder value and profit. For example, return on assets is one of the profitability indicator ratios; return on assets indicates how profitable the company is in relation to the total assets.

It illustrates how well the management is using the company’s total assets to generate profit. “The higher the return, the more efficient management is in utilizing its asset base” (Loth, 2011). For example, between PepsiCo and Coca-Cola Enterprises, one would invest in