Financial Analysis of PepsiCo and Coca Cola Company Professor Jana Howie
The financial analyses of both PepsiCo and the Coca Cola Company are made from the figures provided in both Appendices A and B. This paper will explain the current financial conditions of both the Coca Cola Company and PepsiCo, and it will offer suggestions for the improvement in the financial states of both organizations. The Coca Cola Company and PepsiCo are the two biggest beverage companies on the globe. Comparing and contrasting both the financial situations and the operational modalities of these two corporations will make for an interesting and enlightening exercise.
In this paper I will show how the Coca Cola Company and PepsiCo are different, and also the ways in which they are alike, especially their similarities with respect to marketing their products to very similar target markets. The Coca Cola Company is the older of the two organizations, and is the leader in the beverage market, while PepsiCo is striving to grow and take some of Coca Cola’s market share. For comparison of financial condition I have chosen the standard vertical analysis, also known as common size analysis.
The financial analysis includes equations that involve the assets account and its corresponding base account, whose base account is total assets,
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Between the years 2004 and 2005 PepsiCo’s balance sheet showed marked growth, and the balance sheet also showed a significant reduction in the current ratio. Sales for both PepsiCo and Coca Cola decreased in 2005: the figures were 18% and 18. 9% for PepsiCo, and Coca Cola’s figures decreased from 26. 34% in 2004 to 26% in 2005. PepsiCo showed a reduction in liabilities from 2004 to 2005 from $12,281 to $10,250; Coca Cola also showed a reduction in liabilities from 2004 to 2005, from $11,133 to $9,386. PepsiCo’s inventories account showed growth from 2004 to 2005 from $1,541 to $1,693.
The explanation for this increase in the inventories account is that PepsiCo was not accumulating assets, but reinvesting revenues into the company for the purchase of capital goods in anticipation of future growth. Coca Cola also showed growth in their inventories account over the same period, but growth that was smaller than PepsiCo’s growth. PepsiCo’s cash and cash flow increased by 36. 06%. PepsiCo’s accounts payable account increased by 11. 28%. PepsiCo broadened its target market and thus the market need for their products grew along with it.
PepsiCo dealt with the expanded market for their products by greater capital investment. Coca Cola’s cash accounts showed an appreciable decrease of 29. 91% from 2004 to 2005. Coca Cola’s sales, however, grew by 6. 26%, and Coca Cola’s accounts receivable increased by 8. 2%. This growth shows that Coca Cola should reinvest some of their revenue to meet the burgeoning demand for their products. PepsiCo’s retained earnings, total liabilities, and shareholder equity fell from 66. 92% in 2004 to 66. 56% in 2005. This drop was trivial, but it was a decrease nonetheless.
Coca Cola, by way of contrast, showed growth in retained earnings, total liabilities, and shareholder equity from 92. 57% to 106. 36%. Asset turnover for PepsiCo decreased from 1. 05 in 2004 to 1. 03 in 2005, while the Coca Cola Company’s asset turnover grew from . 69 in 2004 to . 79 in 2005. Return assets for PepsiCo fell from 15. 05% in 2004 to 12. 85% in 2005. The Coca Cola Company also experienced growth in return assets from 2004 to 2005, from 15. 42% to 16. 56%. Coca Cola obviously had better success in the field of asset turnover than did PepsiCo.
One possible explanation for Coca Cola’s success in this area could be its market expansion and more successful market research than their competitor PepsiCo. Both companies reported a drop in return on equity, and this information is PepsiCo’s return assets have also decreased from 15. 05% in year 2004 to 12. 85% in 2005. Coca Cola yet again did have growth in this area from 15. 42% in 2004 to 16. 56% in 2005. Clearly, the Coca Cola did a better job with their assets turnover than PepsiCo, which might have come from their market expansion and better market research.
However, they both in 2004 and 2005 show the drop in he return on equity which for the stockholders is important information. Ratio analysis for the Coca Cola Company and for PepsiCo shows each company’s ability to pay its short term debt. Both companies showed growth in the areas of receivables turnover ratio, sales in a day ratio, and also in their overall sales ratios. By contrast, however, both companies showed decreases in current ratios. Inventory turnovers were higher n 2005 than in 2004 as incoming capital and turnover proceeded more swiftly during that period of time.
The total assets ratio for PepsiCo grew from 20. 87% in 2004 to 32. 5% in 2005. PepsiCo’s investments fell, so the total asset ratio increased as a result. Both the Coca Cola Company and PepsiCo experienced drops in their profit margin ratios which were probably caused by stiffer competition in the beverage market. Many new, small companies entered the market and these startups offered a wide variety of products similar to Coca Cola’s and PepsiCo’s at relatively low prices. Furthermore, the cost of raw materials for Coca Cola’s and PepsiCo’s products increased, as did operational costs. These cost increases put a tighter squeeze on profits for both companies.
The income from stock owned by shareholders, earnings per share, grew for Coca Cola’s stock, but decreased for PepsiCo’s stock. Earnings per share for Coca Cola’s stock grew from 2004 to 2005: In 2004 shareholders were paying $2. 00 per share, while in 2005 they were paying $2. 04 per share. At the same time Coca Cola’s earnings ratio fell from 26. 39 in 2004 to 25. 88 in 2005. This could be distressing information for Coca Cola’s shareholders. PepsiCo’s earnings per share ratio decreased as well. PepsiCo’s share price in 2004 was $2. 48, while in 2005 the share price was $2. 44.
The earnings ratio for PepsiCo increased from 25. 15 in 2004 to 25. 57 in 2005. This growth should pacify shareholders and calm their worries about the stability of the company. Management at both companies should work to stabilize these ratios, and work toward solid and sustainable growth. Coca Cola’s debt to asset ratio fell from . 49 in 2004 to . 44 in 2005. The Coca Cola Company’s interest ratio fell, and this reduction could be the cause of, or at the very least contribute to the rising cost of borrowing. Their interest ratio decreased from 32. 74 in 2004 to 28. 88 in 2005.
Interest paid in 2004 was $196, while in 2005 the interest Coca Cola was paying increased to $240. Contrariwise, PepsiCo’s asset ratio grew from . 52 in 2004 to . 55 in 2005. Management at both PepsiCo and at the Coca Cola Company has a daunting task ahead of them. Management at Coca Cola must determine ways to both management teams must determine ways that they can improve their debt asset ratio. At PepsiCo a chief goal of management should be to significantly pay down the company’s debt while maintaining a healthy level of capital investment so PepsiCo does not experience contraction due to decreased capital expenditure.
In conclusion, both PepsiCo and the Coca Cola Company have important work to do with respect to their financial conditions. PepsiCo has seen more robust growth in their customer base, and it seems to me that PepsiCo has greater potential for growth and to meet the demands of their customers despite the fact that the Coca Cola Company is older and probably slightly more established in its market than PepsiCo. One important recommendation for PepsiCo is to invest in capital to put more money back into the corporation for the purposes of research and development so that PepsiCo can develop products that better meet the needs of their customers.
Research and development should ultimately lead to a broadening of PepsiCo’s target market. Coca Cola has been the leader in the beverage market for many years, but PepsiCo is in a strong position to challenge the Coca Cola Company’s position as the industry leader. Coca Cola has done a better job than PepsiCo at marketing their products, and Coca Cola also has a wider selection of products than PepsiCo. Both companies need to be very cautious about how they manage their debt, while continuing to inject money back into their corporations and make significant capital investment.
Looking at the situation from the point of an investor or potential shareholder, I believe that both companies are good investments. Both PepsiCo and the Coca Cola Company have brands that are universally recognized, both companies have well established customer bases, both companies have experienced and able management, and both companies are in strong financial positions. The soft drink market has remained strong even during the recent recession and the torpid stock market. The key to long term success of both PepsiCo and the Coca Cola Company is the management of debt.
Incurring some debt is essential to invest in capital and in research, but management in both organizations must work to make sure that the debt earns a significant return. Both companies are very large and very well established in the soft drink market, and for this reason they have a definite advantage over newer, smaller companies with less recognizable brands. Another way to ensure the long term success of Coca Cola and PepsiCo is to acquire other companies, even companies outside the soft drink industry, that can add to the company’s profitability.
Inventory turnover is an important metric that both companies should watch closely so that inventories are not staying in warehouses, but are moved out to the market for consumption. Stock repurchasing plans that have been put into place in recent years could be reexamined. Such programs drain the companies of cash which is much needed especially during transitional periods such as exist at this moment. Both companies out to consider issuing more stock to gain access to cash that could be used to a variety of projects and to shore up their market positions.