Ratio, Vertical, and Horizontal Analyses XACC 280 Submitted by: Jenna Eaton Date: March 25, 2011 Determining a company’s financial health involves analyzing their financial statements. The examination and review of financial records includes three components known as liquidity, profitability, and solvency. A company’s liquidity is a term used to describe the company’s ability to pay short-term debts when they are due. Profitability is a term used to express a company’s performance over a period of time. A company’s solvency refers to the company’s ability to meet long-term financial obligations along with being able to reinvest for future growth. In order to measure these characteristics three tools are used. These tools include ratio analysis, vertical analysis, and horizontal analysis. Profitability, liquidity, and solvency ratios are used to help measure the financial stability of a company. These ratios go beyond the typical financial statement data providing a better view into the financial health of a company. With the vertical analysis, the balance sheet items are divided by the total assets. The figure computed provides a decimal point figure that is then converted into a percent. This percentage can then be used to measure a company’s growth, expansion, or contraction over a period of time. With the horizontal analyses intracompany comparisons are performed using the balance sheet, retained earnings, and income statements. This method uses the financial statement data for at least the last two years and then takes a secondary look at the last five to ten years of financial data. This analysis helps determine whether the company has increased or decreased. We can use these tools to measure PepsiCo Incorporated financial performance. First we start with calculating the current ratio for 2005. To determine this ratio we must start with the formula where “current ratio=current assets / current liabilities”. We then take the data from the consolidated balance sheet in our text and input the data to find the solution as follows: 10,554(current assets ) CurrentRatio = 1.11 9,406 (current liabilities) The current ratio for Pepsi Co Inc. for the year 2005 equates to 1.11:1. Now we need to calculate the same data for the year 2004 using the same formula. 8639 (current assets ) Current Ratio = 1.28 6752 (current liabilities ) The current ratio for PepsiCo Inc. for the year 2004 equates to 1.28:1. Now that we have this data we can proceed with performing a vertical analyses. For the vertical analyses we take the items from the balance sheet and then divide by the total assets. This will tell us what the cash value is compared to their total assets. The formula used will look like the following: Percentage= Cash + Cash equivalents / Total Assets. For 2005 we take the data provided in our text and input the data as follows: 1716 (cash cash equivalents ) %= = 0.054 31727 (total assets ) Converting the .054 into a percentage would equate to 5.4% in cash with cash equivalents. Next we look at the same values for 2004. 1280 cash cash equivalents ) %= = 0.046 27987 (total assets ) Converting the .046 into a percentage leaves us with 4.6% in cash with cash equivalents. The data provided in this formula can be used to look at the overall picture compared to the company’s current assets. Using this data we can start to put together the pieces in order to see the whole picture. So next we should take a look at how these numbers fit together when combined to create a complete picture. Using the same type of equation where the percent equals the current assets divided by the totals assets as follows: 10454 current assets ) For 2005 PepsiCo formula: % = = 0.3295 or 32.95% 31727 total assets ) 8639 (current assets ) For 2004 PepsiCo formula: % = = 0.3087 or 30.87% 27987 (total assets ) For the horizontal analyses for PepsiCo we need to calculate the increase or decrease for 2004 to 2005. So we take the data provided to calculate the change in assets by percent. The formula to determine this calculation uses the 2005 total current assets which divided by the 2004 current assets as follows: 10454 2005 assets 1.2101= = A total difference of 21.01 % which is an increase from 8639 (2004assets ) 2004. Next we look at the company’s liabilities using the following formula: s 9406 total current liabilitie (2005) 1.393 = = A total difference of 39% which equates to 6752 total current liabilties(2004) an increase in liabilities from 2004 to 2005. This could be result of the company acquiring additional assets during this period. For the Coca-Cola Company we can use the same equations to come up with ratio comparative data starting with vertical, then horizontal, and then reviewing the overall picture. Current Ratio for 2005 10250 current assets ) = 1.042 > 1.042:1 9836 current liabilities) Current Ratio for 2004 12,281current assets ) = 1.103 > 1.103:1 11133 current liabilities ) 2005 percentage in cash and equivalents 4701 cash cashequivalents ) = 0.1598 > 15.98% in total assets 29427 total assets ) 2004 percentage in cash and equivalents 6707 casb equivalents ) = .2133 > 21.33% in total assets 31441total assets ) 2005 percent of current assets 10250 current assets = .348 > 34.8% in current assets 29427 total assets 2004 percent of current assets 12281 current assets = .391 > 39.1 % in current assets 31441 total assets ) Then taking the two compilations for each year with 10250 divided by 12281 results in a difference of .835 or 83.5%. This would be a significant decrease from 2004 compared to 2005. To calculate the difference we subtract the 83.5 from 100 and we end up with 16.5. This would a total of 16.5 % decrease in total assets. Next we can look at the decrease in liabilities using the same type of formula. We know that for 2005 we had 9836 in total liabilities and in 2004 we had 11133. If we divide the numbers we have .8835 which would be a difference of 88.35%. We can then take this number and subtract from 100 to obtain our decrease in liabilities which equals 11.65% from 2004 to 2005.