Chapter 13, Problem 13.5PA

Interpreting Profitability, Liquidity, Solvency, and P/E Ratios

Coke and Pepsi are well-known international brands. Coca-Cola sells more than $46 billion worth of beverages each year while annual sales of Pepsi products exceed $66 billion. Compare the two companies as a potential investment based on the following ratios:

Ratio	Coca-Cola	PepsiCo
Gross profit percentage	60.7%	53.2%
Net profit margin	18.4%	10.2%
EPS	$1.90	$4.32
Inventory turnover ratio	5.3	8.2
Current ratio	1.13	1.24
Debt-to-assets	0.41	0.38
P/E ratio	20.4	19.3

Required:

1. 1. Which company appears more profitable? Describe the ratio(s) that you used to reach this decision.
2. 2. Which company appears more liquid? Describe the ratio(s) that you used to reach this decision.
3. 3. Which company appears more solvent? Describe the ratio(s) that you used to reach this decision.
4. 4. Are the conclusions from your analyses in requirements 1–3 consistent with the value of the two companies, as suggested by their P/E ratios? If not, offer one explanation for any apparent inconsistency.