Assignment 4
Kimber Wilson
The Business Enterprise BUS508
Dr. Steven Brown
March 13, 2011

1. Using the Current ratio, discuss what conclusions you can make about each company’s ability to pay current liabilities (debt).
The current ratio is the result of Current Assets divided by Current Liabilities. Bankers and analysts use this ratio to understand a company's ability to pay short-term obligations, its liquidity. A company is generally judged "liquid" if its current ratio is 2-to-1 (though there are differences by industry).
Example: Current Ratio=Current Assets Current Liabilities

Liquid Measurement Ratio | Coca-Cola’s Current Ratio | 1.13 | Liquid Measurement Ratio | PepsiCo’s Current Ratio | 6.40 |

This 2-to-1 ratio is a fairly conservative number and may not reflect the particular industry being examined where the ratio may be closer to 1.5 to1. Just using the 2 to 1 relationship, a banker would say that this company is a safe bet. What the banker is saying to himself or herself is that at least 50% of the current assets can be converted into cash reasonably fast. Since PepsiCo’s current ratio was calculated to be 6.4 as compared to Coca-Cola’s which was calculated to be 1.13; PepsiCo has more assets which can be converted into cash than Coca-Cola by a ratio of approximately 6:1 respectively. The reason for this is that PepsiCo has more diversity of product which includes beverages, and snack foods as compared to Coca-Cola which has mainly beverages.
The current ratio gives some indication of the company's ability to pay its current obligations when due. In general the higher the ratio is the greater the cushion. (e.g., 2:1 ratio indicates that for every $1 in liabilities, one has $2 to pay those liabilities). If this ratio is too high, as it is with PepsiCo, it could indicate that there is too much inventory on hand or that