Question

Good Afternoon, How do evaluate the following numbers on a companies financial statement.

1. Company's liquidity relative to the industry averages.

2. How do you evaluate a companie solvency and profitability for each company, relative to each other and to industry averages.

I chose Coca Cola and Pepsi as comparison but don't know where to start and need some help. Thank you.

Answer 1

Answer:

Liquidity Ratio- Company's liquidity position is known with the help of liquidity ratios, if ratio is above 1, it means company is liquid. It measures company's ability to pay its short term obligations.

Current Ratio = Current assets / Current liabilities.

Solvency ratios- These ratios tell the debt repaying capacity of company. How easily and quickly, company repays its debt.

Total debt to equity ratio = Total liabilities / Shareholder's equity

Debt Ratio= Total liabilities/Total assets

Profitability ratios- These ratios tell the profitability of the company. Higher the ratio is good, it means company is more profitable.

Net profit margin = Net profit / Net Sales

Return on Equity = Net profit / Shareholder's equity

Ratios comparison of Coca Cola & Pepsi-

Ratios (Dec. 2019)	Coca Cola	Pepsi	Comparison
Current Ratio	.76	.86	Pepsi's current ratio is higher than Coca cola, it means Pepsi's liquidity position is better than that of coca-cola's. Ratio above 1 is good.
Total debt to equity	2.25	2.20	Coca cola's debt to equity ratio is slightly higher than Pepsi's. Both the companies have higher debt in their capital structure.
Long term Debt to asset	.32	.37	Pepsi's LT debt to asset ratio is slightly higher than coca cola's. Lower the ratio is good.
Net profit margin %	22.52%	8.56%	Coca cola's net margin is way higher than the pepsi's net margin. Coca cola is more profitable.
Return on equity %	43.34%	48.86%	Pepsi's ROE is higher than Coca-cola. Pepsi provides higher return to its shareholders.