Financial Management Coca-Cola Company - Research Paper Example

?Financial Management Contents Contents 2 Introduction 3 Current liabilities 3 Overall performance 4 Investments 5 Pepsi Overall Satisfaction 6 Coke Overall Satisfaction 7 Stockholder Satisfaction 7 Financial Based Guidelines 8 Invest or Not Invest 8 Reference 9 Appendix 11 Introduction Investment is a vital activity which requires various types of analysis to be done. To choose the right company is a very important decision. If the investor chooses the wrong stock then he or she could have to bear loss. In this project the financial conditions of PepsiCo and the Coca cola Company has been analyzed from the point of view of the investor. Various ratios have been calculated to analyze the financial strength of the company. The overall performance of the companies during the year 2009 has also been analyzed. The nonfinancial parameters which are important to judge the company from the point of view of an investor has also been discussed in this project. Current liabilities Current liabilities can be defined as the liabilities which have to be met during the year or in other words those obligations which have to be met in a year are termed as current liabilities (Bragg, 2011, p.39). Therefore the current liabilities have to be managed properly by every company. The current liabilities are met by current assets. Current assets are those assets which can be transformed into cash within one year. These are the short term assets which are held by the company to meet its short term obligations. The liquidity position of the company is determined by the current assets and the current liabilities. To determine the liquidity position of the Coca-Cola Company and PepsiCo, the current ratio and the quick ratio has been calculated. Current ratio signifies that the current liabilities of the company are backed by how many current assets. It is calculated by dividing the current assets be the current liabilities (Investopedia-a, n.d.). The current ratio of Coca-Cola Company is 1.12 while the current ratio of PepsiCo is 1.43. This signifies that each dollar of current liability of Cocacola Company is backed by $1.12 of current assets where as each dollar of current liability of PepsiCo is backed by $1.43 of current assets. To assess the capacity of the companies for meeting the day to day expenses the quick ratio has been calculated. The quick ratio of PepsiCo is 1.19 while that of Coca-Cola Company is 0.93. The PepsiCo had more working capital that is $3815 million than the Coca-Cola Company which has only $582 million in 2009. Therefore it can be said that the liquidity potion of PepsiCo is stronger than that of the Coca-Cola Company. Hence the PepsiCo is in a better position to meet its current liabilities that the Coca-Cola Company. Overall performance The overall performance of the Coca-Cola Company and the PepsiCo has been analyzed by using the financial ratios and studying the income statement and the balance sheet of both the companies for the year 2009. For judging any company through its financial statements, three types of statements are very important. One is the cash flow statement, second one is the balance sheet and the third one is the balance sheet. Income statement shows the various revenues earned by a company and the related expenses incurred during a financial year. The net income which is used to judge the profitability of the organization is also assed in the income statement (Loth, 2010). The balance sheet of the company shows the financial position of that company on a given date. It also reveals the way in which the company is levered (Investopedia-b, 2010). The operating profit of PepsiCo has increased by 15% in 2009 where that of Coca-Cola Company has increased by 124%. The net profit of the former has also increased by 15% where as that of the latter increased by 116%. Investments The profitability position of the company is very important to be assessed by the investor before making any investment in the company. By analyzing the profitability position the investor can judge the financial performance of the company. To assess the profitability position of the company many types of ratios are calculated. The most common ratios which are generally calculated to judge the profitability position of the company are gross profit ratio, operating ratio, operating profit ratio, expense ratio and net profit ratio. Gross profit ratio signifies how much gross profit has been earned from selling the goods. It shows the general profitability of the firm. The operating ratio shows the company’s operational efficiency. It indicates how revenue has been absorbed by the operational expenses. The operating profit ratio shows how much profit has been incurred from the core operations of the business by selling the goods. It is a better indicator of profitability than the gross profit ratio. An expense ratio shows the relation of the various expenses with the net sales. To assess the overall profitability of the company, two ratios are generally measured they are return on assets and return on equity. Return on assets and return on equity shows how efficiently the assets and the shareholders’ fund has been used in the business for generating profit (Rao, 2006, p.99). If the profitability ratios of the company is not favorable that means if the return on assets and return on equity of any company is less than the other companies operating in that industry than the investor will not invest in that company as its performance is not at par with that of the industry standards. Table 1: Profitability Ratios From the table given above it can be said that the assets of the PepsiCo were managed well than that of Coca-Cola Company shareholders’ equity has been exceptionally efficiently utilized for generating income than that of the PepsiCo. Pepsi Overall Satisfaction An investor or a stockholder is primarily interested on the profitability of the company, its financial leverage, performance of the operations, cash flows and the share price to value the investment on shares. Companies, whose ratios are more favorable than the other, have more satisfied shareholders than the other companies. The debt ratio of PepsiCo is 0.562287. The debt ratio signifies the amount of debt a company has compared to the assets of the company. This ratio indicates the financial health of the organization. As the debt ratio of PepsiCo is less than 1 therefore it can be said that company’s level of risk is low. PepsiCo has $.56228 of debt against each dollar of total assets. The fixed assets turnover of PepsiCo is 1.21. Fixed assets turnover signifies that how efficiently the company has utilized its fixed assets to generate revenue from sales. Hence the company has utilized $1 of fixed assets to generate $1.21 of sales which is a commendable figure. Moreover the PepsiCo has given $.46 as dividend for every dollar of income it earned. This gives an idea of the cash flows of the company. The price earnings ratio is 16.64. Coke Overall Satisfaction After analyzing all the ratios of the Coca-Cola Company which are relevant for any, the following things can be located from the analysis: The debt ratio of the company is 0.94. This signifies that the company has $0.924 of debt for every dollar of total assets. As the ratio is less than one therefore it can be said that the risk profile of the company is low. To assess the operating performance of the company the fixed asset turnover of the company has been calculated. The fixed asset turnover ratio is 1.92 which signifies that the company has generated $1.92 by using $1 of fixed assets. Hence the fixed assets were well utilized. The shareholder has got $0.201 as dividend for every dollar of the earning of the company. For every dollar of the earning of the shareholder the market price of the share is $46.80. Stockholder Satisfaction As discussed earlier the shareholder is mainly interested on the profitability of the company, risk profile of the company, its cash flows and the investment valuation. The profitability of the company shows how the company is performing and also an idea about its growth. The cash flows and the financial risk profile of the company assessment enable the investor to assess the probability of bankruptcy. Considering the dividend payout ratio, debt ratio, profitability ratios and the price earnings ratio it can be said that the PepsiCo has more satisfied shareholders’ compared to the Coca-Cola. Financial Based Guidelines The main theme of this project is to choose the company for investment. A financial based guideline is given below for choosing a company for investment: Liquidity: The liquidity position has to be analyzed in order to assess the company’s capacity in meeting short term obligations. As the current ratio and quick ratio of PepsiCo is greater than the Coca-Cola therefore the liquidity position of the former is better than the latter. Financial risk: This parameter is important to judge the possibility of the bankruptcy of the company. As the debt ratio of Coca-Cola is greater than the PepsiCo therefore it can be said that the former is more risky than the latter. Stock performance: The stock performance is generally measured by the P/E ratio and dividend payout ratio. As the P/E ratio of PepsiCo is less than Coca-Cola therefore the shareholders can earn more profit than the latter. Profitability: This parameter should be analyzed by computing the various profitability ratios to assess the profitability of the company. Invest or Not Invest Other than the financial data the investor should also consider the nonfinancial parameters like corporate governance practices of the company. Corporate governance includes the different ethical codes and the transparency of information which are relevant for the shareholders. Absence of proper corporate governance could lead to major corporate scandals for which the shareholder will have to suffer loss. After analyzing the financial performance of both the companies it can be said that investing in PepsiCo will be more beneficial for the investor than Coca-Cola Company but before investing the nonfinancial parameters should also be analyzed properly. Reference Bragg, S. M. (2011). Wiley GAAP 2012: Interpretation and Application of Generally Accepted Accounting Principles 10th ed. USA: John Wiley and Sons. Investopedia-a. (No Date). Current Ratio. Retrieved on September 06, 2011. from http://www.investopedia.com/terms/c/currentratio.asp#axzz1X9yXKyNS. Investopedia-b. (2010). Reading The Balance Sheet. Retrieved on September 06, 2011. from http://www.investopedia.com/articles/04/031004.asp#axzz1X9yXKyNS. Loth, R. (2010). Understanding The Income Statement. Retrieved on September 06, 2011. from http://www.investopedia.com/articles/04/022504.asp#axzz1X9yXKyNS. Rao, M. E. T. (2006). Management Accounting. India: New Age International. Appendix Table 2: Comparative Analysis of Income Statement of PepsiCo Table 3: Comparative Analysis of Income Statement of Coca Cola Table 4: Comparative Analysis of Balance Sheet of Coca Cola Read More