Xacc 280 Financial Analysis Paper
Financial Analysis
By
XACC 280
Professor
University of Phoenix
The objective of this paper is to compare the major players in the beverage/soft drink industry, Pepsi Co. & Coca Cola Co. This paper will give you sound information on which company to invest in as well as taking a deeper look at both companies over all. My analysis will be made based on the company’s income statements, horizontal, vertical analysis, balances sheets and financial statement ratios. This along with other information should give you a clear picture of which company is the best company to invest in.
Researching this analysis is needed …show more content…
find the soundest corporation for investment. Out of the myriad of sodas, Coca Cola and PepsiCo. are the most recognized name and the most known rivalry in the soft drink industry. Coca-Cola owns the somewhat disputed title as being the best cola brand worldwide. Some on the other hand know PepsiCo as the rival brand because Coca Cola has had such great marketing and advertising. In 2004, PepsiCo achieved marginally growth rate in net profit and sales, where Coca Cola has maintained profit margin. The PepsiCo. presented lower short-term liquidity risk to investors compared to Coca Cola. Coca Cola and PepsiCo. There was low long-term solvency risk with PepsiCo’s risk being marginally greater than Coca Cola’s. PepsiCo’s overall asset in my opinion was more proficient than Coca Cola. These and other companies help investor confidence and market share with their sales margins. PepsiCo stock is dividend-generating stock, but Coca Cola has had a higher yield and payout. Coca Cola has had a superior profit margin and dividends are lucrative to investors in this industry but PepsiCo’s diversification, low short-term liquidity risk, low long- term solvency risk, make it a proficient asset application for PepsiCo stock look like a better investment.
The competition between these two soda giants is strong.
Having said that, there is still a point where price is not the issue but taste. Some people swear by the taste in this loyal brand market. These two corporations have concentrated on cultivating brand management through applicable advertising, marketing campaigns. According to Bloomberg BusinessWeek, “Coca-Cola remains the best globally recognized brand across all industries for ages, while PepsiCo’s brand ranked number 26 in year 2008.” PepsiCo has been able differentiate itself from competitors by tapping into other markets like chips and healthy alternative foods. While PepsiCo is known for their soda, their expansion is clear in showing there is a need for other things being non-soda. The time for vitality comes with diversification because there are true signs of a shift in consumption. The decrease in soda consumption raises PepsiCo. has positioned it to continue to remain profitable for its shareholders.
The income statement of PepsiCo’s COS to sales percentage slightly rose from 43.31% in year 2004. Coca-Cola’s five-year average COS to sales percentage was only 35.26%, much lower than PepsiCo. Coca Cola was able to achieve a higher gross profit margin with lower COS to sales percentage. PepsiCo is the consequence of its tougher pricing …show more content…
structure.
“PepsiCo arguably has the most diverse set of distribution systems of any consumer product company, including direct store delivery (DSD) at Frito-Lay and our bottling partners, warehouse delivery for Quaker products, and warehouse delivery and chilled DSD at Tropicana.
The reach and scale of these systems provide considerable cost efficiency and system effectiveness in driving value.
Our systems deliver product freshness and quality for the consumer; generate cash flow for our retail customers, and pro- vide economic value for PepsiCo. Our products respond very well to merchandising, and need to be replenished often because they sell so quickly. By having our DSD associates deliver products and stock the shelves themselves, we save retailers money by doing this labor for them, and help make sure our products are fresh, available and displayed to our advantage.” http://www.pepsico.com/Download/2004-Annual-English.pdf
According to the Business Insider, Coca Cola has 42% of the market share while Pepsi Co. has 31%. The annual revenue for two companies is $35.2 billion and $57.8 billion respectively. Coca Cola spending roughly $2 billion on advertising while their rival spend around $1.1 billion. http://www.businessinsider.com/coca-cola-vs-pepsi-timeline-2013-1?op=1
“PepsiCo is the largest food-and-beverage company in the United States, and the second-largest in the world, after Nestlé.
If PepsiCo were a country, the size of its economy—sixty billion dollars in revenues in 2010—would put it sixty-sixth in gross national product, between Ecuador and Croatia. Many studies point to the ubiquity of high-calorie, low-cost processed foods and drinks as one of the major drivers of this condition. Snacks, in particular, play a role in childhood obesity, which is growing even faster than obesity in adults. Americans consume about fifty gallons of soda a year, more than four times the average per-capita consumption sixty years ago. Americans also ingest about thirty-four hundred milligrams of sodium per day, twice the recommended amount; sodium has long been linked to high blood pressure. almost half of PepsiCo’s business is overseas (thirty per cent of it in developing countries), foreign markets eventually tend to follow U.S. trends. The markets of the future may well be in “packaged nutrition”—in enriched products like PepsiCo’s SoBe Lifewater, which contains vitamins, and in its pricey Naked line of fruit juices and smoothies, which contain antioxidants. Another growing category is “functional” foods and beverages, like varieties of the sports drink Gatorade, which PepsiCo markets for specific physiological or metabolic attributes. (Thanks to Gatorade’s new “fit series,” you can drink G1 Prime before you work out, G2 Perform during your
workout, and G3 Recover when you’re cooling down.” http://www.newyorker.com/reporting/2011/05/16/110516fa_fact_seabrook?currentPage=2
The above quote taken from the New Yorker shows that diversity in such a highly competitive beverage market, diversity is needed. Coke depends on the consumption of their product. That is still their main source of revenue for the company. It could be said that maybe PepsiCo is too diverse. I would say I see this as an example of ensuring a proper return to the investor and keeping the integrity of the company.
PepsiCo displayed advanced long-term affluence risk due to its higher debt to equity ratio of 1.24 and higher long-term debt to equity ratio of 0.68 on average, compared to Coca-Cola’s 0.90 and 0.29. The soda industry is wide and there are always new players but PepsiCo has managed its debt obligations more so than Coca-Cola by the measure of times interest earned ratio.
PepsiCo had a better average return on common equity of 33.92% than Coca-Cola’s 30.29%, whereas both companies had similar return on assets with Coca-Cola’s 16.54% average only being slightly better. PepsiCo and Coca Cola are the leaders in the caramel color soda market. There earning regardless of the company you select show the investor that their staying power is evident.
The current ratio for any company is calculated with the use of the following mathematical equation. Current Ratio = Current Assets
Current Liabilities
PepsiCo. Inc. 2005 PepsiCo. Inc. 2004
$10454 $8639
----------- =1.28:1 ----------- =1.11:1
$9406 $6752
Vertical Analysis = Item on B/S Total Assets=Percentage or Item on B/S Total Liabilities with Shareholders ' Equity
=
Percentage
Two measures of vertical analysis:
Current Assets
Total Assets
=
10454
31727
= 33%
Short -term Obligations
Total Liabilities with Shareholders Equity
=
2889
31727
= 9%
Horizontal Analysis
Current Year Amount Base Year Amount
= Current Results in relation to Base Period
Two measures of horizontal analysis:
Current Assets
2005
Current Assets
2004
=10454
-----------
8639
=
121% or a 21% increase in assets from 2004 to 2005.
Current Liabilities
2005
Current Liabilities
2004
= 9406
------------
6752
= 139% or a 39% increase in liabilities from 2004 to 2005.
The Coca-Cola Company used the same formula….
Current Ratio for 2005
10250 assets
-------------- = 1.042> 1.042:1 9836 liabilities
Current Ratio for 2004
12,281 assets
-------------------- = 1.103 > 1.103:1
11133 liabilities
’05 cash & equivalents
4701 cash+ cash equivalents
-------------------------------------= 0.1598 > 15.98% in total assets 29427 total assets
’04 cash & equivalents
6707 cash & equivalents
------------------------------- = .2133 > 21.33% in total assets
31441 assets
10250 current assets
---------------------------= .348 >34.8% current assets
29427 assets
’04 current assets
12281 current assets
----------------------------- = .391 >39.1% current assets
31441 total assets
Liquidity ratios deal with the company’s ability to deal with its short-term obligations. As far as the current ratio is concerned both the companies have improved with an increase in current assets and liabilities. Similar is the case with quick ratio; both the companies have shown an increased trend in this ratio, which is a respectable sign. The inventory for Coca Cola is leaving a lot faster than the inventory for Pepsi. The inventory for PepsiCo. lags in that aspect. Coca Cola appears to handle their inventory better because there is less of it on hand. Division net revenues
Divested businesses
Total net revenue
Division operating profit
Corporate unallocated Merger-related costs
Impairment & restructuring charges Divested businesses
Total operating profit
Division operating profit margin Total operating profit margin
2004
$29,261
–
$29,261
$6,098 (689)
– (150)
–
$5,259
20.8% 18.0%
2003
$26,969 2 $26,971
$5,463 (502) (59) (147)
26 $4,781
20.3% 17.7%
Change
2002 2004 2003 $24,978 8% 8%
134
$25,112 8% 7%
$4,934 12% 11% (438) 38% 14% (224)
– 23
$4,295 10% 11%
19.8% 0.5 17.1% 0.3
0.5 0.6 http://www.pepsico.com/Download/2004-Annual-English.pdf There are great points that could be made for both companies. The sales numbers and overall product is very valuable. My final recommendation would be for Pepsi Co. because they are very diverse. There is so much potential and room to grow in this ever evolving market. Debt reduction is a major factor for both companies but, more so for Coca Cola.
In conclusion, these two soft drink giants are going to be around for years to come. I will invest in PepsiCo. because of the diversity but I do not see any reason why someone would not invest in Coca Cola. When selecting which company to make the investment overall then I would say PepsiCo.
References
Books
Brigham, E, F, Erhhardth, M, C (2005). Financial Management Theory and Practice. Eleventh Edition. South Western Publishers
Thomas, A, (2002). Introduction to Financial Accounting. Fourth Edition. McGraw Hill.
Websites
Kulawik, A (2009), The development of Coca Cola Advertising Campaigns, retrieved on November 29th, 2010 from, http://images.nexto.pl/upload/publisher/All%20Free%20Media/public/the_development_of_coca-cola_advertising_campaigns_(1886-2007)_demo.pdf Andrew (2002), A brief Pepsi History retrieved on November 29th 2010 from,
Day, J (2008), Theme: Analyzing Financial Statements, retrieved on 30th November 2010 from
Gattis ,C,G.(2009).Using Financial Ratios
< http://bluepointstrategies.com/uploads/White_Paper_-_Using_Financial_Ratios.pdf> [30th November 2010]
Investopedia (n.d.). Retrieved from http:// www.investopedia.com http://www.businessinsider.com/coca-cola-vs-pepsi-timeline-2013-1?op=1
http://www.pepsico.com/Download/2004-Annual-English.pdf
By
XACC 280
Professor
University of Phoenix
The objective of this paper is to compare the major players in the beverage/soft drink industry, Pepsi Co. & Coca Cola Co. This paper will give you sound information on which company to invest in as well as taking a deeper look at both companies over all. My analysis will be made based on the company’s income statements, horizontal, vertical analysis, balances sheets and financial statement ratios. This along with other information should give you a clear picture of which company is the best company to invest in.
Researching this analysis is needed …show more content…
find the soundest corporation for investment. Out of the myriad of sodas, Coca Cola and PepsiCo. are the most recognized name and the most known rivalry in the soft drink industry. Coca-Cola owns the somewhat disputed title as being the best cola brand worldwide. Some on the other hand know PepsiCo as the rival brand because Coca Cola has had such great marketing and advertising. In 2004, PepsiCo achieved marginally growth rate in net profit and sales, where Coca Cola has maintained profit margin. The PepsiCo. presented lower short-term liquidity risk to investors compared to Coca Cola. Coca Cola and PepsiCo. There was low long-term solvency risk with PepsiCo’s risk being marginally greater than Coca Cola’s. PepsiCo’s overall asset in my opinion was more proficient than Coca Cola. These and other companies help investor confidence and market share with their sales margins. PepsiCo stock is dividend-generating stock, but Coca Cola has had a higher yield and payout. Coca Cola has had a superior profit margin and dividends are lucrative to investors in this industry but PepsiCo’s diversification, low short-term liquidity risk, low long- term solvency risk, make it a proficient asset application for PepsiCo stock look like a better investment.
The competition between these two soda giants is strong.
Having said that, there is still a point where price is not the issue but taste. Some people swear by the taste in this loyal brand market. These two corporations have concentrated on cultivating brand management through applicable advertising, marketing campaigns. According to Bloomberg BusinessWeek, “Coca-Cola remains the best globally recognized brand across all industries for ages, while PepsiCo’s brand ranked number 26 in year 2008.” PepsiCo has been able differentiate itself from competitors by tapping into other markets like chips and healthy alternative foods. While PepsiCo is known for their soda, their expansion is clear in showing there is a need for other things being non-soda. The time for vitality comes with diversification because there are true signs of a shift in consumption. The decrease in soda consumption raises PepsiCo. has positioned it to continue to remain profitable for its shareholders.
The income statement of PepsiCo’s COS to sales percentage slightly rose from 43.31% in year 2004. Coca-Cola’s five-year average COS to sales percentage was only 35.26%, much lower than PepsiCo. Coca Cola was able to achieve a higher gross profit margin with lower COS to sales percentage. PepsiCo is the consequence of its tougher pricing …show more content…
structure.
“PepsiCo arguably has the most diverse set of distribution systems of any consumer product company, including direct store delivery (DSD) at Frito-Lay and our bottling partners, warehouse delivery for Quaker products, and warehouse delivery and chilled DSD at Tropicana.
The reach and scale of these systems provide considerable cost efficiency and system effectiveness in driving value.
Our systems deliver product freshness and quality for the consumer; generate cash flow for our retail customers, and pro- vide economic value for PepsiCo. Our products respond very well to merchandising, and need to be replenished often because they sell so quickly. By having our DSD associates deliver products and stock the shelves themselves, we save retailers money by doing this labor for them, and help make sure our products are fresh, available and displayed to our advantage.” http://www.pepsico.com/Download/2004-Annual-English.pdf
According to the Business Insider, Coca Cola has 42% of the market share while Pepsi Co. has 31%. The annual revenue for two companies is $35.2 billion and $57.8 billion respectively. Coca Cola spending roughly $2 billion on advertising while their rival spend around $1.1 billion. http://www.businessinsider.com/coca-cola-vs-pepsi-timeline-2013-1?op=1
“PepsiCo is the largest food-and-beverage company in the United States, and the second-largest in the world, after Nestlé.
If PepsiCo were a country, the size of its economy—sixty billion dollars in revenues in 2010—would put it sixty-sixth in gross national product, between Ecuador and Croatia. Many studies point to the ubiquity of high-calorie, low-cost processed foods and drinks as one of the major drivers of this condition. Snacks, in particular, play a role in childhood obesity, which is growing even faster than obesity in adults. Americans consume about fifty gallons of soda a year, more than four times the average per-capita consumption sixty years ago. Americans also ingest about thirty-four hundred milligrams of sodium per day, twice the recommended amount; sodium has long been linked to high blood pressure. almost half of PepsiCo’s business is overseas (thirty per cent of it in developing countries), foreign markets eventually tend to follow U.S. trends. The markets of the future may well be in “packaged nutrition”—in enriched products like PepsiCo’s SoBe Lifewater, which contains vitamins, and in its pricey Naked line of fruit juices and smoothies, which contain antioxidants. Another growing category is “functional” foods and beverages, like varieties of the sports drink Gatorade, which PepsiCo markets for specific physiological or metabolic attributes. (Thanks to Gatorade’s new “fit series,” you can drink G1 Prime before you work out, G2 Perform during your
workout, and G3 Recover when you’re cooling down.” http://www.newyorker.com/reporting/2011/05/16/110516fa_fact_seabrook?currentPage=2
The above quote taken from the New Yorker shows that diversity in such a highly competitive beverage market, diversity is needed. Coke depends on the consumption of their product. That is still their main source of revenue for the company. It could be said that maybe PepsiCo is too diverse. I would say I see this as an example of ensuring a proper return to the investor and keeping the integrity of the company.
PepsiCo displayed advanced long-term affluence risk due to its higher debt to equity ratio of 1.24 and higher long-term debt to equity ratio of 0.68 on average, compared to Coca-Cola’s 0.90 and 0.29. The soda industry is wide and there are always new players but PepsiCo has managed its debt obligations more so than Coca-Cola by the measure of times interest earned ratio.
PepsiCo had a better average return on common equity of 33.92% than Coca-Cola’s 30.29%, whereas both companies had similar return on assets with Coca-Cola’s 16.54% average only being slightly better. PepsiCo and Coca Cola are the leaders in the caramel color soda market. There earning regardless of the company you select show the investor that their staying power is evident.
The current ratio for any company is calculated with the use of the following mathematical equation. Current Ratio = Current Assets
Current Liabilities
PepsiCo. Inc. 2005 PepsiCo. Inc. 2004
$10454 $8639
----------- =1.28:1 ----------- =1.11:1
$9406 $6752
Vertical Analysis = Item on B/S Total Assets=Percentage or Item on B/S Total Liabilities with Shareholders ' Equity
=
Percentage
Two measures of vertical analysis:
Current Assets
Total Assets
=
10454
31727
= 33%
Short -term Obligations
Total Liabilities with Shareholders Equity
=
2889
31727
= 9%
Horizontal Analysis
Current Year Amount Base Year Amount
= Current Results in relation to Base Period
Two measures of horizontal analysis:
Current Assets
2005
Current Assets
2004
=10454
-----------
8639
=
121% or a 21% increase in assets from 2004 to 2005.
Current Liabilities
2005
Current Liabilities
2004
= 9406
------------
6752
= 139% or a 39% increase in liabilities from 2004 to 2005.
The Coca-Cola Company used the same formula….
Current Ratio for 2005
10250 assets
-------------- = 1.042> 1.042:1 9836 liabilities
Current Ratio for 2004
12,281 assets
-------------------- = 1.103 > 1.103:1
11133 liabilities
’05 cash & equivalents
4701 cash+ cash equivalents
-------------------------------------= 0.1598 > 15.98% in total assets 29427 total assets
’04 cash & equivalents
6707 cash & equivalents
------------------------------- = .2133 > 21.33% in total assets
31441 assets
10250 current assets
---------------------------= .348 >34.8% current assets
29427 assets
’04 current assets
12281 current assets
----------------------------- = .391 >39.1% current assets
31441 total assets
Liquidity ratios deal with the company’s ability to deal with its short-term obligations. As far as the current ratio is concerned both the companies have improved with an increase in current assets and liabilities. Similar is the case with quick ratio; both the companies have shown an increased trend in this ratio, which is a respectable sign. The inventory for Coca Cola is leaving a lot faster than the inventory for Pepsi. The inventory for PepsiCo. lags in that aspect. Coca Cola appears to handle their inventory better because there is less of it on hand. Division net revenues
Divested businesses
Total net revenue
Division operating profit
Corporate unallocated Merger-related costs
Impairment & restructuring charges Divested businesses
Total operating profit
Division operating profit margin Total operating profit margin
2004
$29,261
–
$29,261
$6,098 (689)
– (150)
–
$5,259
20.8% 18.0%
2003
$26,969 2 $26,971
$5,463 (502) (59) (147)
26 $4,781
20.3% 17.7%
Change
2002 2004 2003 $24,978 8% 8%
134
$25,112 8% 7%
$4,934 12% 11% (438) 38% 14% (224)
– 23
$4,295 10% 11%
19.8% 0.5 17.1% 0.3
0.5 0.6 http://www.pepsico.com/Download/2004-Annual-English.pdf There are great points that could be made for both companies. The sales numbers and overall product is very valuable. My final recommendation would be for Pepsi Co. because they are very diverse. There is so much potential and room to grow in this ever evolving market. Debt reduction is a major factor for both companies but, more so for Coca Cola.
In conclusion, these two soft drink giants are going to be around for years to come. I will invest in PepsiCo. because of the diversity but I do not see any reason why someone would not invest in Coca Cola. When selecting which company to make the investment overall then I would say PepsiCo.
References
Books
Brigham, E, F, Erhhardth, M, C (2005). Financial Management Theory and Practice. Eleventh Edition. South Western Publishers
Thomas, A, (2002). Introduction to Financial Accounting. Fourth Edition. McGraw Hill.
Websites
Kulawik, A (2009), The development of Coca Cola Advertising Campaigns, retrieved on November 29th, 2010 from, http://images.nexto.pl/upload/publisher/All%20Free%20Media/public/the_development_of_coca-cola_advertising_campaigns_(1886-2007)_demo.pdf Andrew (2002), A brief Pepsi History retrieved on November 29th 2010 from,
Day, J (2008), Theme: Analyzing Financial Statements, retrieved on 30th November 2010 from
Gattis ,C,G.(2009).Using Financial Ratios
< http://bluepointstrategies.com/uploads/White_Paper_-_Using_Financial_Ratios.pdf> [30th November 2010]
Investopedia (n.d.). Retrieved from http:// www.investopedia.com http://www.businessinsider.com/coca-cola-vs-pepsi-timeline-2013-1?op=1
http://www.pepsico.com/Download/2004-Annual-English.pdf