Question

Use the following ratios for Pepsi to evaluate the company's 2019 performance relative to its 2018 performance in each of the areas requested. Be sure to identify the ratios used for each area and support your evaluation with the ratio values and their relationship (5 points each) Ratio December 2019 December 2018 Average colection period 42751 days 4032 days Current ratio 0 86 times 099 times Debt ratio 8107% 81 19% Inventory turnover 903 times 939 times Net profit margin 10 89% 19 35% PYL ratio 26 28 times 12 58 times ROE 49.45% 8601% Times interesteamed 94 times 69 times a Liquidity b Activity с Debt-Leverage d Debt-Coverage Profitability Market (Value

Answer 1

a) Liquidity: Liquidity ratios are one of the financial ratios used to measure the liquidity of the firm. Cuurent Ratio and Acid Test Ratio are the Liquidity Ratios. Current Ratio is used to measure the ability of the firm to meet its cyurrent obligation with its current assets. The good current ratio is 1.2 to 2. The current Ratio below 1 is to be considered as bad. Pepsi company's current Ratio in 2019 is 0.86 and in 2018 it is 0.99. It means the company has not enough liquid assets to cover its current Liabilities. The company' s ability to pay its current liabilities has decreased from 2018 to 2019.

b) Activity: Activity Ratios measures how effectively a company is leveraging its assets to generate cash. Average Collection period and Inventory Turnover Ratios are the types of Activity Ratios. Average Collection period in 2018 is 40.32 days and it is increased to 42.51 days in 2019. Inventoy Turnover Ratio measures how efficiently company is managing its inventory. The ratio has decreased from 9.39 in 2018 to 9.03 in 2019. It means the performance of the company has decreased.

c) Debt Leverage: Debt Leverage Ratio is used to measure the extent the company is using liabilities rather than equity for financing. The Debt ratio in 2018 is 81.19% and is sightly decreased to 81.07%. The company has good debt leverage ratio. The company should not have the leverage ratio more than 2, it means 200%.

d) Debt Coverage: Debt Coverage Ratio measures the ability of the company to make its debt related payments. Times Interest Ratio is the Debt coverage Ratio. It is 6.9 in 2018 and is increased to 9.4 times in 2019. It means its ability to pay the interest has increased

e) Pofitability: Net Profit Margin is used to find the profitability of the company. It is 19.35% in 2018 and decreased to 10.89% in 2019. The performance of the company decreased from 2018 to 2019. Return on Equity is also the types of Profitability Ratios which measures the managements ability to generate income with its available equity. ROE has decreased drastically from 86.01% in 2018 to 49.45% in 2019.

f) Market Value: Price Earnings Ratio is used to value the companies. The ratio has increased from 12.58 times in 2018 to 26.28 times in 2019. The value has increased over the period.