Capstone Discussion Questions

Capstone Discussion Question (DQ)
• Due Date: Day 2 [Post to Main forum]
• Review the annual reports for PepsiCo, Inc. and The Coca-Cola Company in Appendixes A & B of Financial Accounting (6th ed.). Select either PepsiCo, Inc. or The Coca-Cola Company. In your estimation, the company you chose may be financially healthier or weaker.
• Post your response to the following questions:
Would you invest in this company? Explain why or why not.
Justify your reasoning, by presenting at least three key financial ratios that analyze the profitability, the liquidity, or the solvency of the company.
• Respond to your classmates’ postings, by agreeing or disagreeing with their assessments while pointing to the data. o Respond to at least
one classmate who selected different ratios than those you selected or a different company to analyze. o Comment on the significance of the ratios and your classmates’ conclusions. o Use the same or other ratios to bolster your opinion.
•Post your answers directly in the message box of the Main forum. Also, post your completed assignment as a Microsoft (MS) Word attachment in the Assignment section of eCampus following correct naming convention

When comparing the financial information for the Coco Cola Company and the Pepsi Company, one would consider making a great investment within the Pepsi Company.
To calculate this decision one took three ratios in examination in order to make this summary. Within the profitability, liquidity, and solvency ratios, are ratios that determine the financial health of the company and it's weakness. All the ratios are important in making such investments but the three main ratios that were compared, from profitability were the current ratios for both companies, for liquidity the ratio used was the return of assets, and lastly from the solvency ratios were the debt to total assets ratio. The current ratio for the Pepsi Company in 2004 to 2005 were arrange from 1.11 percent and 4.14 percent. This ratio tells me that the Pepsi Company had increase in Assets and Liabilities in 2005. Next, I examined the Return of Assets ratio the Pepsi Company has had in 2004 to 2005. In 2004 the company had 23 percent in return of assets and in 2005 they had a 1.93 percent return in assets, this was a huge increase in returns. Lastly I determined the debt to total assets ratio to see how much assets are provided from their creditors, and in 2004 was at 86 percent and in 2005 it was at 73 percent, which shows the decrease in the creditors activities in the assets obtained within the
company.

I think that Pepsi would not be a good investment because they have a current ratio in 2004 that was 1.28 to 1 and in 2005 it decreased to 1.11 to 1.
I think that this decrease could be the beginning of a downfall, but it would help to have other year's current ratio's.

I also chose to find the profit margin if I figured out the profit margin correctly, then the profit margin is 55% that is too close to being half. Since the profit margin is defined as a measure of percentage of each dollar of sales that results in net income. If 55% is creating profit that means that 45% is not creating a profit. I think that the profit margin needs to be higher.

When I did the acid-test ratio it also decreased from 2004 to 2005. So unless I am not understanding all of this correctly I do not think that Pepsi Co. would be a good investment. ( the acid-test ratio decreased from .95 to 1 in 2004 and in 2005 it was .86 to 1. ) The acid-test ratio is showing the immediate liquidity. If I did this ratio correctly the company would not be able to cover their
liabilities.

To invest in a company I would like to see how profitable they are and whether or not they are able to last over the long haul. To check the profitability of PepsiCo I looked at profit margin for the last two years and the asset turnover for 2005. Once I look at how profitable the company is I looked at the solvency of the company by checking their debt to total assets ratio.
Profit margin for 2005 - 12.5% (Competitor (coca cola)-21.8%)
Profit margin for 2004 – 14.4% (Competitor (coca cola)-22.3%)
Asset turnover for 2005 -1.09 (Competitor (coca cola) - .76)
Debt to asset ratio for 2005-55.1%
Debt to asset ratio for 2004-51.7%
According to the data I have collected I would not invest in PepsiCo, they have shown to be less profitable than their immediate competitor for the last two years by a large percentage. The asset turnover is better than their immediate competitor but not by much. From these two ratios it shows that yes PepsiCo is profitable but not as profitable as their closest competitor, with whom I would rather invest my money.
According to the solvency ratio PepsiCo has over half of their assets owned by creditors, this number should be lower, but even at 50% they have a relatively good debt to asset ratio.
To assess the PepsiCo for this short-term payment, I used the acid-test ratio, the current ratio, and the receivables because they are each specific as far as liquidity, profitability, and solvency.
When using the acid-test ratio, the net receivables, the sum of cash, and the short-term investments are divided by the liabilities. Together in 2005, these sums were at $8143. With the current liabilities and all calculations, in 2004 the net receivables were at $6,444, making the final ratio increase in 2005 much over the average.
When using the current ratio, the current assets should be divided by the liabilities. In 2005, PepsiCo has assets at $10,454. In 2004, the assets were $8,639 and the current liabilities were at $6,752. After calculating, PepsiCo was not very good in 2005, falling under the average of production.
After collecting data that showed receivables for PepsiCo with the cash and net sales, and the receivables, it shows that 2005 was a better year for PepsiCo which as far as receivables.
I think that it could be a good idea to invest in PepsiCo. The information shows that the amount of debt that had to be paid was able to be paid in a short amount of time making them an excellent company as far as payment periods go.