Reference no: EM132249574
Case Study Part 4 – Liquidity & Turnover (Pepsi Co)
Then answer the following 6 questions below:
1. Liquidity is an indication of how easily a firm can pay its short-term bills. How does your firm’s liquidity compare to that of firms in its industry and sector?
2. Turnover ratios are also known as Efficiency ratios because firms invest in assets to produce sales. Low turnover ratios may indicate overinvestment. How does your firm’s turnover compare to that of firms in its industry and sector? Industries that rely heavily on fixed assets (aka asset intensive industries) will often have relatively low turnover ratios. Does seem true of your industry?
3. Generally we see a trade-off between liquidity and turnover. Mathematically it is true because current assets are in the numerator of liquidity ratios and in the denominator of the turnover ratios. Intuitively it is true because holding more current assets, particularly cash, reduces risk but may do little to increase sales. Do you see evidence of that here? Do you see it in all of the turnover ratios or just some?
4. Generally we see a trade-off between profit margin and turnover, as high margin products often have lower sales volume than low margin products. (Note that there is no direct relationship between liquidity and profit margin.) Do you see evidence of that trade-off here?
5. Return on Assets (ROA) is one measure of the effectiveness of a firm’s investment policy. ROA is equal to Net Profit Margin times Total Asset Turnover. How does your firm’s ROA compare to that of firms in its industry?
6. Complete the following sentence, filling in the blanks: (Enter your firm’s name) has relatively __________________ liquidity and ___________________ turnover. Turnover directly affects a firm’s ROA, but so does profit margin. Increases in margin tend to decrease turnover and vice versa.
Therefore, firms with low turnover might still generate high ROA if margins are large enough, while firms with high turnover might still generate low ROA if margins are too low. (Enter your firm’s name) ROA is relatively _______ because _____________ (margins or turnover) is ____________.
Attachment:- Case Study.rar