Financial Ratios And Financial Ratio Analysis

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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. Introduction Ratio analysis involves methods of calculating and interpreting financial ratios to analyze and monitor the firm performance. The basic…show more content…
Analysis of the PepsiCo financial ratios based on the inputs from the firm’s income statement and balance sheet helps to monitor the firm’s performance over time and to compare with that of the competitors. The financial ratios discussed in this paper are liquidity ratio, activity ratio, leverage ratio, profitability ratio market ratio. Liquidity ratio, activity and leverage ratio primarily measures risk whereas profitability ratios measures return and the market ratio measures both the risk and return. Liquidity ratio: The Liquidity of the firm is determined by the ability to satisfy its short term obligations as they come due. The common used liquidity ratios are the current ratio, Quick ratio and cash ratio. (Gitman and Zutter, 2012) Current ratio: Current ratio measures the firm’s ability to meet its short-term obligations. It is expressed as: Current ratio = Current Assets/Current liabilities (Gitman and Zutter, 2012). PepsiCo current ratio improved from the 2012 value of 1.10 to 1.24 in 2013 but then slowly deteriorated from 2013 to 2014 which is 1.14not reaching 2012 level. Quick ratio: The Quick ratio measures a company’s ability to meet its short term obligations with its most liquid asserts. For this reason it excludes inventories from total assets. (Gitman and Zutter, 2012) Quick ratio=Current assets-inventory/Current liabilities

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