Financial Ratios And Financial Ratio Analysis

1797 Words Apr 28th, 2015 8 Pages
Abstract The paper concentrates on the basic types of financial ratios and the importance of the financial ratio analysis. It discusses about the significance of these ratios and how these ratios are helpful in drawing conclusions and monitoring the firm’s performance over period to period and to compare the performance to that of the competitors. Financial ratios of PepsiCo is discussed over a period of three years from 2012 to 2014 from the respective year’s income statements and balance sheet and risk and returns of PepsiCo are determined.

Ratio analysis involves methods of calculating and interpreting financial ratios to analyze and monitor the firm performance. The basic inputs to ratio analysis are the firm’s income statement and balance sheet. (Gitman and Zutter, 2012)
Purpose of analyzing financial ratio: Analyzing the financial ratios is of interest to the shareholders, creditors and the firm’s own management. The benefits for the three parties are:
• As these ratios give information regarding the firm’s current and future level of risk and return, which affects the share price both the current and prospective shareholders are interested in these ratios.
• The firm’s creditors are interested in the short term liquidity of the company and its ability to make interest and principal payments.
• Creditors also are concerned with the firm’s profitability.
• Management uses these ratio’s to monitor the…

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