Financial Ratios of Coca-Cola and PepsiCo - Assignment Example

Financial ratios of Coca-Cola and PepsiCo Introduction This work is an analysis of the performance of two soft drinks companies, Coca-Cola, and Pepsi. The study will review the financial ratios of the two corporations and determine which of them is better performing according to the market statistics. The outline of the paper will review the backgrounds of each firm, analyze the current ratios, the profitability ratios, and the cash flow indicators of each of the firm. The analysis will then proceed to determining the better company for investment based on the analysis developed. Such an analysis is useful to the investors because it provides an insight concerning the performance of the businesses from their financial perspectives and not what the customers perceive of them. Therefore, the recommendations made in this work will be a piece of advice to those who could be potential investors in each of the companies in the near future. Background of the Companies Coca-Cola Company The storyline of the company started in the May of 1886 and has since developed and established the company among the largest in the world presently. As by the late 1990s, the Corporation was among the most respected companies in its relation to brand building as well as the management layouts. According to the most current data, coca cola is the leading soft drinks company around the globe in terms of size and the subsequent market performance. The corporation runs stores in more than 200 nations across the world and at the same time, has the ownership of about 400 non-alcoholic drink brands. The company also enjoys one of the most valuable brands around the world. As such, the company enjoys a substantial performance in its market while facing a number of challenges especially in relation to competition, which developed from 1998. . Other challenges relate to the changes driven by the market trends, the socio-economic factors, and the challenges of regulation. PepsiCo The company established itself as a merger of Frito-Lay and Pepsi-Cola in 1965. The company grew to considerable levels of prominence and developed a number of brands that enabled it to compete the rest of the industry. The company has since grown and established itself as one of the leading multinational corporations running stores in about 150 nations of the world. It is of interest that the company has a diversified line of business because of its engagement in the snacks business. The latter business is the success of its acquisitions of a number of snacks companies such as Taco Bell, KFC, and Pizza Hut. In 1984, the company was the largest in its industry and had the influence of leading the brand management efforts. At the start of this century, the institution ventured into the exploration of the market in second world countries. A Comparison of the Current Ratios of the Companies The current ratio is a measure of the ability that a company has towards the meeting of short-term obligations. It a ratio that weighs the power that a business has in relation to paying its debts in the next 12 months (Investopedia Staff n.d). As such, the ratio is a computation of the current assets of a company divided by the current liabilities and is also the liquidity ratio of the company. If the ratio computed is high, then it means that the company is in a better position to pay off its debts than when it is low. Basically, if the companies ratio is below 1, it would mean that he business is in no position of settling its debts if required so in the next twelve months. The ratio also gives a sense of the efficiency of the company in terms of turning its items into cash. However, it is noteworthy that as much as the ratios would indicate a poor financial health status, it does not mean that the business is bankrupt (Loth n.d). Current ratio = Current assets/current liabilities. Current ratios of both Pepsi and Coca-Cola. Computed using data from (NASDAQ. (2015, May 1). PEP Company, Financials. Retrieved May 2, 2015 from http://www.nasdaq.com/symbol/pep/financials?query=cash-flow, NASDAQ. (2015, May 1). KO Company Financials. Retrieved May 2, 2015 from http://www.nasdaq.com/symbol/ko/financials?query=cash-flow). Coca-Cola has a current ratio of 102% (1.02) while PepsiCo has a ratio of 114% (1.14). Basically, the ratios indicate that the latter company is in a better position of paying its debts in the short-run than the former. Such a case also means that the Coca-Cola has a lower capability of turning its assets into cash in comparison to PepsiCo. Consequently, Coca-Cola has a quick ratio of 0.92 while it has a cash ratio of 0.67. Comparatively, Pepsi has a quick ratio of 0.97% and a cash ratio of 0.48% (NASDAQ 2015). The quick ratios, in this case, assess the abilities of the two companies to meet its obligations by use of the most liquid assets. On the other hand, the cash ratios are a measure of redefines the companies’ liquidity through its measurement of the invested cash as well as its equivalents in terms of the current assets that would offset the current liabilities. Therefore, the above analyzes indicate that Coca-Cola has more invested cash and its equivalent than PepsiCo, but the latter’s bills turn in less rapidly in comparison to its ability to pay. An Analysis of the Profitability Ratios Profitability ratios are a measure of a company’s ability to make profits. For this case, there are a number of such ratios, which range from the gross profit margins, the profit margins, and others. This work will review two the ratios in their comparison of the two companies, the gross margin, and the profit margin. The gross margin measures the ratio of a company’s gross profit to the revenues generated from the sales and is the excess of the gross profit over the costs of production as a percentage. Such a ratio will, therefore, reveal how much a company makes in comparison to its expenditures on the factors of production. A percentage below 100% means that the company spends more on the factors of production than it generates from the sales. Additionally, if the ratio is above 100%, then the company makes more sales than it spends on the factor inputs. Therefore, a company that has a higher gross profit margin generates more from its sales than it spends on the production process. It, therefore, means that investors will always desire a company that has a high turnover in comparison to the production costs. On the other hand, the profit margin (Net profit margin) is a measure of the net profit of a company against the revenues, or merely the net profits against the sales. The ratio is a measure how much the company keeps out of a single unit of the sale of products made. Such a ratio forms a useful basis for comparing firms in one industry for which case, a higher ratio implies that the company is more profitable and has good control of its production costs. The gross margin= Gross Profit/Net sales*100 Net profit margin= Net profit/sales*100 Coca Cola PepsiCo Gross profit 28,109,000 35,799,000 Net profit 7,098,000 6,513,000 sales 45,998,000 66,683,000 Gross profit margin 61.10% 53.77% Net profit margin 15.43% 9.97% Gross and profit ratio margins of Pepsi and Coca-Cola. Source: (NASDAQ. (2015, May 1). PEP Company, Financials. Retrieved May 2, 2015 from http://www.nasdaq.com/symbol/pep/financials?query=cash-flow, NASDAQ. (2015, May 1). KO Company Financials. Retrieved May 2, 2015 from http://www.nasdaq.com/symbol/ko/financials?query=cash-flow). A commentary of the above data indicates that Coca-Cola has both higher net and gross profit margins. It means that PepsiCo is less profitable than Coca Cola because it has more expenses than its competitor. An Analysis of Cash Flow Indicators Cash flow indicator ratios are a measure of how much cash a firm generates in terms of cash. Such ratios give analyzers an opportunity of reconsidering the financial position of a company and the satisfaction of its stakeholders. For instance, there are situations when a company could be having attractive profitability ratios, but are at a risk of bankruptcy as the case of too much credit sales. Cash flow indicator ratio= [Free (operating) cash flow-Capital expenditure]/operating cash flow Coca Cola PepsiCo Operating cash flow 10,615,000 10, 506,000 Capital expenditure 2,406,000 2,859,000 Cash flow indicator 77.33% 72.77% Cash flow indicator ratios of Pepsi and Coca-Cola computed using data from Source: (NASDAQ. (2015, May 1). PEP Company, Financials. Retrieved May 2, 2015 from http://www.nasdaq.com/symbol/pep/financials?query=cash-flow, NASDAQ. (2015, May 1). KO Company Financials. Retrieved May 2, 2015 from http://www.nasdaq.com/symbol/ko/financials?query=cash-flow). The above analysis indicates that Coca-Cola has a higher cash flow indicator than PepsiCo, which indicates that it has a greater capability of satisfying its stakeholders than its competitor. It could also mean that the company generates 77.33% cash out of its sales while PepsiCo gets 72.77% of the sales as cash (NASDAQ 2015). Conclusion, Investment Decision, and Its Rationale Coca-Cola is a better investment opportunity because of a number of factors. First, the company has better profitability tendencies than its competitor. For this case, Coca-Cola is more than 5% more profitable than PepsiCo and more than 4% more likely to satisfy its stakeholders. However, the company has a weaker position of meeting its obligations in the short run, which means that the investors should find the best approaches for meeting such deficits. Another consideration for the choice of investment is the brand popularity of the two companies. Such a factor is the non-financial consideration for the choice of investment. As such, Coca-Cola has a better-developed brand than PepsiCo, which means that he former company will have to spend more on brand building than Coca-Cola. References Loth, R. (n.d). Understanding the Income Statement. Retrieved May 2, 2015 from http://www.investopedia.com/articles/04/022504.asp Investopedia Staff. (n.d). Reading the Balance Sheet. Retrieved May 2, 2015 from http://www.investopedia.com/articles/04/031004.asp NASDAQ. (2015, May 1). PEP Company Financials. Retrieved May 2, 2015 from http://www.nasdaq.com/symbol/pep/financials?query=cash-flow. NASDAQ. (2015, May 1). KO Company Financials. Retrieved May 2, 2015 from http://www.nasdaq.com/symbol/ko/financials?query=cash-flow Read More