Liquidity Measurement Ratios of Coke and Pepsi - Essay Example

The current ratio, being an indicator of working capital, also means that Coca-Cola operated within its working capital range and was therefore not in a good position to pay for its current liabilities as they fell due. A comparison of the company’s current ratio with the ratio in the period that ended in 2011 suggests a decline because 2011 had a current ratio of 1.399. This raises concern because the company could be experiencing a continuously declining solvency potential and may compromise stakeholders such as suppliers and investors. Pepsi reported a current ratio of 1.095. Like the ratio for Coca-Cola, this was low, compared to the recommended ratio of 2:1. The organization, therefore, operated close to its working capital and was unlikely to meet its short-term liabilities as they fell due. Pepsi’s current ratio for the year ended 2011 was however 0.961, an indication that current liabilities were more than current assets. Consequently, Pepsi experienced an improvement in its ability to meet its current liabilities, from the year ended 2011 to the year ended 2012 (Debarshi, 2011).

Pepsi is doing better in the management of its current assets and liabilities, to better solvency. This is because it reported a higher ratio than Coca-Cola did, 1.095 compared to Coca-Cola’s 1.071. In addition, Pepsi improved its ratio in the year 2012 while the ratio for Coca-Cola decreased to suggest better management in Pepsi than in Coca-Cola.

The companies’ profits over the past three years

Coca-Cola had better profitability than Pepsi. Return on assets measures effectiveness in the use of assets to generate income. Higher values are therefore preferred. Coca-Cola had a return on assets ratio of 11.46, a value higher than Pepsi’s 8.33 percent and this suggests more effective assets management in Coca-Cola. The following table summarizes the companies’ return on assets ratios for the years 2010, 2011, and 2012.

Table 2: Return on assets

Year

Coca Cola

Pepsi

2010

7.26

9.29

2011

8.24

8.87

2012

11.46

8.33