Question

2016-2017 Coca-Cola’s annual report:

Gross & Operating profit margin- improved

Net profit margin/ROE/ROA -deteriorated

Current ratio - improved

Quick and Cash ratio - deteriorated

Debt-to-equity - deteriorated

Debt-to-capital - deteriorated

Interest coverage - deteriorated

2016-2017 Pepsi Cola annual reports:

Gross profit margin/Net profit margin/ROE/ROA- deteriorated significantly

Net profit margin - deteriorated significantly

Current/Quick/Cash ratios - improved

Debt-to-equity/Debt-to-Capital ratios - deteriorated

Interest Coverage ratio - improved exceeding 2015

Using the financial ratios of 2 companies above

1. Discuss what investors would need to consider about investing in each stock.

2. Is it okay to purchase one of these companies or their stocks?

Answer 1

1. What t are the considerations for the investors:

• Debt to equity ratio – this is required to identify how much debt is there in the business. A low figure is usually good.

In this case, both Pepsi and coca cola has lower ratio.

• Operating profit margin – this shows the operational efficiency and pricing power. A rising OPM is considered to be optimal for investment.

In this case, coca cola’s operating margin looks good compared to pepsi.

• Return on equity – the main aim of any investment is returns. A company with higher ROE is the best choice for the investor.

In this case, both the company’s ROE doesn’t look good.

• Interest coverage ratio – this indicates the solvency of the business. Again a company with better ratio is good for investment.

In this case, Pepsi cola’s interest ratio is better than coca cola.

• Current ratio – this shows the liquidity position of the company. A company’s whose current ratio iless than 1 is a matter of concern.

In this case, current ratio of both the companies has improved.

The investor need to consider the above ratios before he goes for an investment in any company. This seems to the be financial aspects. There may be other factors as well when deciding on the investment in a company.

1. When considering the major ratios that influence the investor’s decision on investment, it is advisable not to purchase any of the above stocks. Because many important ratios seems to be detoriating. Still it is the personal wish of the investor to decide on investment. Because some investors would not rely on these ratios alone and some would like to take risk on the belief that the stocks would trade well in the market.