Comparing Coca-Cola Enterprise and Pepsi Co. Financial Management - Research Paper Example

? Running Head: Financial Management Insert His/her Ability to pay Current Liabilities: As per the working attached the current ratio of Pepsi Co is 1.436 and that of Coca-Cola Enterprise 1.134, which represents that per $1 of the Current Liabilities, there are the Current Assets worth $1.436 and $1.134, for PepsiCo and Coca-Cola Enterprise respectively. This apparently shows that the Pepsi Co is in better position to pay off its liabilities than Coca-Cola Enterprises, as for every $1 of Current Liability Pepsi Co has $1.436 of Current Assets, that can be converted into cash and discharge the liabilities. Profitability Ratios and their Influence on the Investing Decisions: Profitability ratios depict that how well a business is performing in terms of profit. Profit is the key to every business and the main objective behind the functioning and existence of any business. Profitability Ratios are the most frequently used tools of financial ratio analysis and is used to determine the company's bottom line. They are equally important for all, Management, Owners and prospective Investors. The first thing that attracts investors to a Company is its profitability and what the investors will get in return of their investment, as profit whether distributed or not is Profitability measures are important to company managers and owners alike. If an entity has to attract investors , the owners have to show some attractive profits to lure them into investing and for that the profitability ratios are the key. Company’s overall efficiency and performance is shown by the profitability ratios and one can easily compare financial information available for two or three companies to ensure the worth of each after making and investment. Financial Ratios used to determine the satisfaction of a Company’s Stockholders: The Return on Equity is an important ratio as it calculates the company’s earnings performance and tells the shareholders how much are they getting on every $1 of their investment (as capital) made in the company. This ratio explains the shareholders how effectively their money is being employed and getting the profits for the company each period. Shareholders, on comparing the ratios with similar companies or industry as a whole, can get the satisfaction or dissatisfaction that their monies are utilized properly and getting the desired results or not. However, it should be kept in mind while making the comparisons that there are variations in this ratio among some types of businesses. The Dividend Payout Ratio, as the shareholders are always looking for the return, not in form of figures in the financial statements but also in their hands as ready cash. This ratio indicates the dividend a company pays to its common shareholders on every $1 net profit it earns. That is how much of the profit is distributed by the company to its shareholders as return and how much is retained. And no matter how forward looking the shareholders are they are always looking for some materialistic return and dividend is one of those things that satisfy the shareholders the most. Guidelines to invest in one of those companies: The debt ratio gives an idea how much the Company is indebted as compared to the assets it held. That is the amount of total liability per $1 of its total assets. The more the debts are the more riskier is the company and its operations to invest in as its shows that the company is not able to pay its debts from the assets it holds if all the amount is called currently. Further it also indicates that in case of liquidation the shareholders equity would be utilized and the owners share in the assets will be reduced or nullified. Comparing Coca-Cola Enterprise and Pepsi Co, in this regard Coca-Cola Enterprise is less risky because of its 0.946 debt ratio as compared to Pepsi Co’s 0.562. The Current Ratio highlights the liquidity of the company, higher the current ratio means more liquid the company is and that the company’s cash is generated fast enough to settle its current liabilities. However, in this analysis the debtors and creditors turnover period shall also be taken into account. All thing taken the same in case of both companies, it is apparent from the calculation that the Pepsi Co is more liquid than Coca-Cola Enterprise because of its Current ratio of 1.143 as compared to Coca-Cola Enterprise’s 1.134. The Fixed Assets Turnover Ratio shows that how productive and efficient a company’s fixed assets (Property, Plant and Equipment) are in terms of generating sales. It presents sales generated per $1 of fixed assets held by the Company. The higher the ratio the better would be the company, but in order to make the comparisons the allowance for depreciation and useful lives of assets must also be considered as this may happen that the assets have low value because they are fully depreciated and the company has to make major investments in the fixed assets in some time or vice versa. Assuming that all other things are almost the same it is apparent from the ratios that Pepsi-Co is better than Coca-Cola Enterprise because of its 3.553 as compared to 3.458 of the latter. The Return on Assets Ratio indicates the efficiency and productivity with which a company utilizes its total assets to make profit. Higher return means efficiency of management in utilizing the resources it is provided with and can be taken as a few resources are used unutilized. It shows the profit made by the company on every $1 of its Total Assets. The figures clearly tell that the Pepsi-Co is in a better position here too by generating $ 0.157 income on every $1 Total assets as compared to the Coca-Cola’s $0.046 income on every $1 total assets. The Return on Equity Ratio as clearly mentioned above indicates the income earned per $1 of shareholders equity and shows how efficiently and effectively the equity is utilized. Coca-Cola Enterprise is way better in that aspect with its 1.766 ROE as compared to Pepsi Co’s 0.409. The Dividend Payout Ratio is the measure of the dividend (cash) given out of every $1 income to the shareholders of the company. It is an inducement and attractions and investors are more attracted to the dividend they are offered on their investments too. The Coca-Cola Enterprise is better in this regard as compared to Pepsi-Co as it has dividend payout ratio of 0.167 as compared to 0.157. Most Important of them all is the Return on Equity (ROE) as it is highly important ratio that calculates a company’s performance, productivity, efficiency and effectiveness. The shareholders realize by looking at the ratio that how effectively and efficiently their monies are utilized by the management, and how well are the results in the form of income. It is a profitability indicator and is looked upon by the investors before making any investment as it clearly tells them what will be per $ return if they make an investment in that particular company. As every investor before making an investment is looking for the return they will get on that particular investment and investors tend to invest in companies having a high return on equity apart from other favorable things. But this ratio usually is held more prior and important. References Accounting ratios, Accounting ratios for financial statement analysis, 2011. http://cpaclass.com/fsa/ratio-01a.htm Loth, R. Debt Ratios: The Debt ratio, 2011. http://www.investopedia.com/university/ratios/debt/ratio2.asp Peavler, R. Use Profitability Ratios in Financial Ratio Analysis, 2011. http://bizfinance.about.com/od/financialratios/a/Profitability_Ratios.htm Read More