Financial Criteria of Pepsi and Coca-Cola - Term Paper Example

Financial COMPARISON OF PEPSI AND COCA COLA] The comparison of Pepsi Cola Inc and Coca Cola Company is given and the investment option is analyzed. Table of Contents Current Ratio 2 Profitability Ratio 2 Cash flow and Investment Management 3 Investor Perspective 4 Non Financial Criteria of Investment 4 Appendix A 5 Appendix B 6 References 7 Financial comparison of Pepsi and Coca Cola An analysis of the two consumer based companies, i.e. Pepsi and Coca Cola is given where the liquidity, profitability, debt ratio etc are analyzed and compared. Based on the analysis, the companies are also compared from the investor’s point of view. Current Ratio A comparison of the company’s strength to pay the current liabilities, using the available current assets, is given. Pepsi Inc: The current ratio of the company is 1.44, with current Assets amounting to $12,571 and current liabilities $8,756. The company has a substantial cover over its current liabilities and has enough current assets to overcome the current liabilities. The industry’s average current ratio is 1.08, which gives an indication that Pepsi is well off compared to the other companies. The company carries $8,759 quick assets to cover current liabilities worth of $8,756 which gives a quick ratio of 1. (Co.) Coca cola: The current assets of the company amount to $17,551 while the current liabilities stand at $13,721. It makes the current ratio stand at 1.28. This specifies that the company has adequate current assets to pay off their current obligations. However, the quick assets make up $12,971 of the current assets which are less than the current liabilities. This may create difficulty for the company when it pays off its current liabilities. (Cola) Profitability The profitability ratios of both the companies are compared with each other along with the comparison of profits for the three years. Pepsi: The profitability ratios, i.e. the Return on Assets and the Return on Equity for the company amount to 14.92% and 35.38% respectively. The similar rations for the industry stand at 4.14% and 11.9% respectively which gives Pepsi Inc an upper hand as it has utilized its assets and equity very efficiently. The Net Profit for the current year is $5,946 which has improved from the last year by $800 and from the second last year by $300 approx. Coca Cola: The company generated a Return on Assets and Return on Equity equal to 14.72% and 27.52% respectively which is well over the industry norms. The company generated a profit of $6,824, which is $1,000 more than the profit of the company last year and $800 more than the profit of year ended 2007. The company has shown good increase in the profitability over the last three years but the Return on Equity is less than that of Pepsi Inc. Cash flow and Investment management ratio The cash flow indicator ratio of Pepsi Co for the year is 3% and that of Coca Cola Company is 0.56%. This indicates that Pepsi gave away a greater amount of dividend this year as compared to Coca Cola Company. The dividend given away by Pepsi Cola Company is $1.775 per share which is much greater than that given away by Coca Cola i.e. $0.3 per share. Pepsi has managed to satisfy the share holders far better compared to Coca Cola as it has given a greater amount of dividend, even though Coca Cola generated a greater amount of profit. The price to earnings ratio was better of Coca Cola but this fact should be highlighted that this is because of the share price of the company being lower than that of Pepsi; otherwise the market price of share of Pepsi Co is more than that of Coca Cola Company. Investor Perspective As an investor it would be preferable to invest more in Pepsi Co as the company has utilized its Assets and Equity much efficiently and has generated a good amount of profit in ratios to Assets and Equities. The company also has a better current ratio and has a better cover for their current liabilities compared to that of Coca Cola. The Pepsi Companys share price is much greater than that of Coca Cola Company and even though the Assets and Equity of Coca Cola is more than Pepsi but in ratio, Pepsi has shown a better utilization of its Assets and Equity as the Asset turnover ratio shows. The share price of Pepsi has risen more than Coca Cola which gives it an upper hand even if the shareholder does not wish to keep the shares for a longer period of time and can sell them quickly. Non financial criteria for investment The most important non financial criteria will be that of customer satisfaction which is the most important for any company and especially for a company pertaining to a consumer industry. The geographical availability and hold of the company all over the world will also serve as great motivations for the investor of the company. The improved supplier relationships as well as the advertisement techniques used by the company to enhance the sale of the company are all important non financial factors. Appendix A Computation of Ratios of Pepsi Cola Company The Ratios of Pepsi Co Inc are calculated which include the liquidity, profitability, debt, dividend yield and cash flow indicator ratios etc Liquidity measurement Ratio: Current Ratio = Current Assets = 12,571 = 1.44 Current Liabilities 8,756 Profitability Indicator ratios: Return on Assets = Net Income = 5,946 = 14.92% Average Total Assets 39,848 Return on Equity = Net Income = 5,946 = 35.38% Shareholder’s Equity 16,804 Debt Ratio: Debt Ratio = Total Liabilities = 22,406 = 56.22% Total Assets 39,848 Operating Performance Ratio: Fixed Asset turnover = Net Sales = 43,232 = 3.41 times Non Current Assets 12,671 Cash flow indicator: Dividend Yield = Annual Dividend per share = 1.775 = 3% Price per share 62.41 Investment Valuation Ratio: Price/Earnings Ratio = Market Value of Shares = 62.41 = 16.47 Earnings per share 3.79 Appendix B Computation of Ratios of Coca Cola Company Liquidity measurement Ratio: Current Ratio = Current Assets = 17,551 = 1.28 Current Liabilities 13,721 Profitability Indicator ratios: Return on Assets = Net Income = 6,824 = 14.02% Average Total Assets 48,671 Return on Equity = Net Income = 6,824 = 27.52% Shareholder’s Equity 24,799 Debt Ratio: Debt Ratio = Total Liabilities = 23,325 = 47.92% Total Assets 48,671 Operating Performance Ratio: Fixed Asset turnover = Net Sales = 30,990 = 3.24 times Total Non Current Assets 9,561 Cash flow indicator: Dividend Yield = Annual Dividend per share = 0.3 = 0.56% Price per share 53.72 Investment Valuation Ratio: Price/Earnings Ratio = Market Value of Shares = 52.72 = 17.81 Earnings per share 2.96 References Co., P. (2009). Financial Statement for year ended December. Cola, C. (2009). Financial Statement for the year ended December. Read More