Interpreting Profitability, Liquidity, Solvency, and P/E Ratios
Coke and Pepsi are well-known international brands. Coca-Cola sells nearly $32 billion worth of beverages each year while annual sales of Pepsi products exceed $43 billion. Compare the two companies as a potential investment based on the following ratios:
Ratio | Coca-Cola | PepsiCo |
Gross profit percentage | 64.3% | 53.1% |
Net profit margin | 17.9% | 11.9% |
Return on equity | 25.9% | 35.8% |
EPS | $ 2.51 | $ 3.26 |
Receivables turnover ratio | 9.6 | 9.2 |
Inventory turnover ratio | 4.8 | 8.0 |
Current ratio | 1.12 | 1.36 |
Debt-to-assets | 0.37 | 0.45 |
P/E ratio | 20.0 | 16.4 |
Required:
1.Which company appears more profitable? Describe the ratio(s) that you used to reach this decision.
2.Which company appears more liquid? Describe the ratio(s) that you used to reach this decision.
3.Which company appears more solvent? Describe the ratio(s) that you used to reach this decision.
4.Are the conclusions from your analyses in requirements 1–3 consistent with the value of the two companies suggested by the P/E ratios of the two companies? If not, offer one explanation for any apparent inconsistency.
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