Ratio analysis is a useful tool used by many different people to analyze a
company’s finances. People like potential investors, management inside of the
company, lenders, and shareholders all use ratio analysis periodically to test the
health of a particular company. Each different person or job title has their own
reasons for analyzing a company’s financial statements. For example I work in a
finance department and one of my duties is debt compliance. Since we are a
privately owned company, our ratios are used by management and lenders to assure
we are compliant with our loans and can continue to make payments in the future.
The main ratio we compute is debt service coverage ratio, which is found on almost
all of our compliance certificates. Most ratio analysis evaluates financial statements
based on liquidity, leverage, profitability, and turnover. Ahmed (1998) classifies
ratio analysis into the following four categories, “(1) the firm’s ability to meet its
short-term obligations, (2) the capital structure of the firm and its ability to meet its
long term obligations, (3) the profitability and efficiency resulting from the use of
capital, and (4) the efficiency resulting from the operational use of its assets.”
Based on the ratio analysis I did between PepsiCo and Coca-Cola Co I would
choose to invest in Pepsi. I believe Pepsi is the better value based on the valuation
ratios gathered in the assignment. EPS, P/S, and P/B all showed Pepsi to be a better
value than Coke. Coke is more profitable and beats Pepsi in other ratios but there
isn’t a ratio in the analysis that has me worried about the long-term health of Pepsi.
References
Ahmed Riahi-Belkaoui. (1998).6Financial Analysis and the Predictability of Important
Economic Events. Praeger.
