Accounting Capstone Essay
It appears to me that both companies have had some weaknesses and have shown some improvements.
I am wary of Pepsico because its current liabilities have increased faster than its assets. However, Coca-Cola’s assets have decreased along with its liabilities.
Both companies have increased inventory, though Pepsico’s increase has been much higher than Coca-Cola’s (9.86% to 0.28%). Normally, this is cause for concern, but both companies’ inventory turnover also has improved.
There are several other pros and cons for both companies. One reason to be cautious about either one is that they both have weak acid test ratios. Pepsico’s fell from 0.95 to 0.87. Coca-Cola’s fell from 0.81 to 0.72). An acid-test ratio of less than 1 shows that a company will have difficulty paying its debts.
My final decision is based on profitability.
Pepsico’s profit margin decreased from 14.4% to 12.5%.
Coca-Cola’s decreased from 22.3% to 21.1%.
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Both have decreased, but Coca-Cola’s is much higher. So, I would choose Coca-Cola.
What Does Acid-Test Ratio Mean?
A stringent indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets.
Investopedia explains Acid-Test Ratio
Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this type of business.
The term comes from the way gold miners would test whether their findings were real gold nuggets. Unlike other metals, gold does not corrode in acid; if the nugget didn’t dissolve when submerged in acid, it was said to have passed the acid test. If a company’s financial statements pass the figurative acid test, this indicates its financial integrity