Discussion Post: Financial Statements
The four key users of financial statements are owners/managers, lenders, investors and governments. These users rely on financial statements to evaluate a company's past financial performance as indicators in areas of profitability, liquidity, leverage, and efficiency; to create benchmarking matrixes; and to support future decision-making.
Choose two companies in the same industry whose financial statements are available online. Complete several financial ratios for each company and compare them. Share your analysis and answer the following questions in a minimum of 175 words:
1) What did your analysis tell you about these companies?
2) What sorts of decisions would this analysis help you make; such as buying stocks, considering accepting an employment offer,etc.? )
Prompt I:
Pepsi and Coke are the two leading beverage companies in the world. Specialization in carbonated drinks, the soft drink giants are stable and secure companies. However, each company edges the other in certain categories.
When looking at the profitability of both soda companies, for investors, Pepsi had a higher rate of return for investor than Coca-Cola. During a 5-year period, 2015-2019, Pepsi posted capital gains of 41.46% compared to 19.91% return for Coke investors.
Conversely when looking at the overall profitability of each company. Coca-Cola out preformed Pepsi over the same 5-year period. From 2015 to 2019 coke increased its income margin by 7.30%. Whereas Pepsi only increased by 2.30% over the same time frame.
Both Pepsi and Coke are industry giants that continue to grow. As an investor both could be a good option, but Pepsi has and should produce higher returns.
Prompt II:
The two companies I chose are in the industry of hardware and home improvement, Home Depot and Lowe's. In my analysis, I computed a few financial ratios from their 2020 financial statements that I found online. Regarding the current ratio, Home Depot's is 1.23 and Lowe's is 1.19. The higher the current ratio, the better the liquidity when referring to a short-term scenario of a company. Therefore, Home Depot would appear to be most suitable upon comparison for the sake of a supplier.
As for the quick ratio, this is a ratio that excludes the inventory from the current assets because inventory may have a longer turnover so it may inflate the liquid in assets unnecessarily. The quick ratio for Home Depot is .51 and for Lowe's is .33, therefore Home Depot is again looking most favorable of the two. However, both companies have numbers below 1 which is not a best-case scenario and may reflect an unhealthy business.
Cash ratio is another way to measure the liquidity of a company. The cash ratio for Home Depot is .34 and Lowe's is .25 Basically, these two companies are not too far apart regarding the numbers and the position of their short-term solvency using the three ratios detailed above. It appears that both are having trouble in seeing more favorable short-term liquidity. Perhaps the large inventory and longer turnover of the products are a big factor. I would have to dig deeper into the long run factors of the companies, if I were to make any investments.
The response should include a reference list. Using double-space, Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.