Pepsico Paper

The data taken from the annual report is (figures in $ million)

2009 2008

Current Assets 12,571 10,806

Total Assets 39,848 35,994

Current Liabilities 8,756 8,787

Total Liabilities 22,406 23,412

The ratios are calculated as

2009 2008

Current Ratio 1.44 1.23

Debt Ratio 0.56 0.65

Current Ratio is calculated as current assets/current liabilities and is a measure of liquidity. It shows the ability of a firm to meets its current liabilities from its current assets. If the ratio is greater than 1, it implies that current assets are more than current liabilities and so the liquidity is good as the firm has enough current assets to meet its current liabilities. For PepsiCo, the current ratio is greater than 1 and has increased from 2008 to 2009. We can say that PepsiCo has good liquidity and has also improved its liquidity by increasing the current ratio. The down side of a higher current ratio is that current assets have increased at a higher rate than current liabilities and so this would impact the profitability of PepsiCo, as it would have more investment in current assets. Given the same net income as higher investment in current assets would increase total assets and so reduce the return on assets.

Debt ratio is calculated as Total Liabilities / Total Assets. Debt ratio is a leverage ratio and is a measure of the financial risk of a firm. It shows the proportion of liabilities for each $ of assets and so gives an indication of the amount of debt financing used by the firm. Higher the ratio more is the debt financing and more would be the financial risk. When a firm uses debt to finance its assets, the debt has to be serviced and in case a firm is not able to meet its debt obligations, then it can be declared bankrupt. Thus use of debt increases the financial risk of the firm. As a firm uses more debt, financial risk rises. For PepsiCo, the debt ratio which was 0.65 in 2008 has reduced to 0.56 in 2009. Thus incrementally,...