Financial Comparison of Coca-Cola and Pepsi - Case Study Example

Name: Tutor: Course: Date: Financial Comparison of Coca cola and Pepsi Introduction The research paper aims to establish the financial comparison of the two companies. This report analyses two business establishments in the soft drink industry i.e. Coca Cola and Pepsi. The financial comparison of the two companies will be useful to various stakeholders like managers, investors, creditors, lenders, consumers and employees. With this in mind, I intend to do a comparison of the annual reports for the three years i.e. 2010, 2011 and 2012 Coca Cola It is a multinational beverage company based in the United States. The company was established in 1892 by Asa Candler. It headquarters are based in Atlanta, in the United States. It sells products in over 200 countries in the world. The company sells beverages, concentrates to bottling operations and renowned brands in the world market. Its main top worldwide non-alcoholic drinks are Fanta, Coke, Sprite among others (Coca Cola Company 15). Pepsi It is a multinational Non-alcoholic beverage company. The company was established in 1965 in the 'New York'. The company manufactures Pepsi drink, which is sold in retail stores, restaurants and vending machines. The brand is sold in over 200 countries in the world. It sells Pepsi- Cola, Diet Pepsi and Mountain Dew which are the leading soft brands in the United States market (Pepsi Company 20). Ratio Analysis Coca coca Summary of the Ratios 2012 2011 2010 Information needed: 000 000 000 Gross profit IS 2,522,500 2,569,600 2,718,900 Sales IS 7,044,700 6,824,300 6,761,600 Net profit before interest and taxation IS 349,300 459,700 644,400 Net profit before tax IS 258,600 364,500 568,500 Interest expense IS 90,700 95,200 75,900 Total Assets at end BS 7,250,100 7,243,500 7,185,000 Average Total Assets 3,625,050 3,621,750 3,592,500 Inventory at end BS 458,000 447,700 477,400 Average inventory 229,000 223,850 238,700 Cost of goods sold (cost of sales) IS 4,522,200 4,254,700 4,042,700 Trade debtors at end BS 801,300 854,700 870,500 Average trade debtors 400,650 427,350 435,250 Credit sales IS 801,300 854,700 870,500 Current assets BS 1,970,800 2,015,100 1,907,500 Current liabilities BS 2,222,300 1,911,100 2,030,500 Operating cash flows CFS 753,600 828,300 970,400 Long term (non-current) liabilities BS 2,021,300 2,412,200 2,123,400 Share capital BS 370,200 549,800 183,100 Reserves BS 376,600 380,000 366,400 Retained profits BS 1,895,000 1,660,600 1,465,000 Dividends announced (declared) S of E 187,000 162,000 40,000 Number of shares on issue BS 348,760 343,394 341,216 Earnings available to ordinary shareholders (net profit after tax) IS 193,400 265,700 430,700 Number of ordinary shares on issue BS 348,760 343,394 341,216 Number of shares on issue (in millions) 349 343 341 Net Income for the Year IS 193,400 265,000 430,700 Ratios to calculate: Gross profit margin (Gross profit / sales) x 100 % 35.81 37.65 40.21 Net profit margin (Net profit before interest and tax / sales) x 100 % 4.96 9.44 9.53 Return on total assets (NPBIT / Average total assets) x 100 % 9.64 12.69 17.94 Average inventory turnover period (Average inventory held / Cost of sales) x 365 days 18.48 19.20 21.55 Average settlement period for debtors (Average trade debtors / Credit sales) x 365 days 182.50 182.50 182.50 Asset turnover period (Average total assets employed / sales) x 365 days 187.82 193.71 193.93 Current ratio Current assets / current liabilities proportion 0.89 1.05 0.94 Cash flow from operations Operating cash flows / current liabilities times 0.34 0.43 0.48 Gearing Long term liabilities / (share capital + reserves + retained profits + LTL) % 43.35 48.22 51.32 Interest cover NPBIT / interest expense times 5.07 3.67 8.49 Dividends per share Dividends announced during period / number of shares on issue cents / share 536.19 471.76 117.23 Earnings per share Earnings available to ordinary shareholders / number of ordinary shares cents / share 554.54 773.75 1262.25 Return on Equity % 52.24203133 48.19934522 235.226652 Net income for the Year/ Average shareholders equity Basi Earnings power % 4.817864581 6.346379513 8.96868476 Earnings before Interest and Taxes/ Total Assets Source ( Coca cola Company Website) Pepsi Company Summary of Ratios 2012 2011 2010 Information needed: 000 000 000 Gross profit IS 34,201,000 34,911,000 31,263,000 Sales IS 65,492,000 66,504,000 57,838,000 Net profit before interest and taxation IS 9,203,000 7,978,000 7,329,000 Net profit before tax IS 8,304,000 8,834,000 8,232,000 Interest expense IS 899,000 856,000 903,000 Total Assets at end BS 74,638,000 72,882,000 68,150,000 Average Total Assets 37,319,000 36,441,000 34,075,000 Inventory at end BS 3,581,000 3,827,000 3,370,000 Average inventory 1,790,500 1,913,500 1,685,000 Cost of goods sold (cost of sales) IS 31,291,000 31,593,000 26,575,000 Trade debtors at end BS 7,041,000 6,912,000 6,320,000 Average trade debtors 3,520,500 3,456,000 3,160,000 Credit sales IS 7,041,000 6,912,000 17,351,400 Current assets BS 18,630,000 17,280,000 17,410,000 Current liabilities BS 17,090,000 18,150,000 15,890,000 Operating cash flows CFS 8,479,000 8,944,000 8,448,000 Long term (non-current) liabilities BS 15,327,000 12,852,000 13,731,000 Share capital BS 22,420,000 20,700,000 21,270,000 Reserves BS 40,000 40,000 40,000 Retained profits BS 43,160,000 40,320,000 37,090,000 Dividends announced (declared) S of E 2,903,877 3,181,728 3,343,915 Number of shares on issue BS 2,760,000 4,590,000 1,400,000 Earnings available to ordinary shareholders (net profit after tax) IS 6,214,000 6,462,000 6,338,000 Number of ordinary shares on issue BS 2,760,000 4,590,000 1,400,000 Number of shares on issue (in millions) 2,760 4,590 1,400 Net income for the year IS 6,214,000 6,462,000 6,338,000 Ratios to calculate: Gross profit margin (Gross profit / sales) x 100 % 52.22 52.49 54.05 Net profit margin (Net profit before interest and tax / sales) x 100 % 14.05 11.02 12.67 Return on total assets (NPBIT / Average total assets) x 100 % 24.66 21.89 21.51 Average inventory turnover period (Average inventory held / Cost of sales) x 365 days 20.89 22.11 23.14 Average settlement period for debtors (Average trade debtors / Credit sales) x 365 days 182.50 182.50 66.47 Asset turnover period (Average total assets employed / sales) x 365 days 207.99 200.00 215.04 Current ratio Current assets / current liabilities proportion 1.09 0.95 1.10 Cashflow from operations Operating cashflows / current liabilities times 0.50 0.49 0.53 Gearing Long term liabilities / (share capital + reserves + retained profits + LTL) % 18.93 17.39 19.04 Interest cover NPBIT / interest expense times 8.87 10.75 8.12 Dividends per share Dividends announced during period / number of shares on issue cents / share 1052.13 693.19 2388.51 Earnings per share Earnings available to ordinary shareholders / number of ordinary shares cents / share 2251.45 1407.84 4527.14 Return on Equity % 27.71632471 31.2173913 29.79783733 Net income for the year/Average shareholders equity Basi Earnings power % 12.33018034 10.9464614 10.75421864 Earnings before Interest and Taxes/ Total Assets Source ( Pepsi Company Website) Current Ratio It is a liquidity ratio, which measures the ability of the company to pay short-term obligations (Bull and Richard 15). The current ratio of Pepsi company decreases from 2010 to 2011 and then increases to 2012.The ratio deteriorated in 2010 than in 2011, but in2012 it improves well above 2010. This indicates poor operating efficiency thus the company may be compromised in meeting short term obligations in the near future. Pepsi company is more favorable than Coca cola in meeting short term obligations. The low values of current ratio are a critical problem in the operations of the company. Quick ratio . Quick ratio is a liquidity ratio that measures the ability of the company to meet it short-term obligations from the liquid assets i.e. cash and cash equivalent. The quick ratio of Pepsi company shows a deteriorating trend from 2010 to 2011. However, it improves from 2011 to 2012. The quick ratio of Coca cola shows a negative trend in the three years. This is an indication of insufficient cash flow to meet the operating expenses of the company. The two companies should strive to improve the liquidity ratios. This will involve reducing credit purchases and increasing the current liabilities. Inventory turnover ratio It is an indication of the company efficiency of converting inventory into sales thus indicating the liquidity of the inventory (Brigham, F and C. Gapenski). The inventory turnover for Pepsi shows a slight increase from 2010 to 2012. Similarly, the turnover ratio for Coca Cola improves slightly over the three years. However, Pepsi has a higher turnover ratio compared to Coca Cola. This indicates that Coca Cola is more efficient in converting stock into sales in its operations than Pepsi. The companies can improve the turnover ratio by engaging aggressive marketing of their products. This will be done by focus advertisements and promotions at the selling points (Brigham, F and C. Gapenski 99). Fixed asset turnover ratio The ratio measures the level of efficiency on how a company uses it assets to generate sales (Brigham, F and C. Gapenski). The asset turnover for Pepsi decreases from 2010 to 2011 but then improves from 2011 to 2012. However, the ratio for Coca Cola company decreases across the three periods. The turnover ratio measured using a number of days for Coca Cola is lesser than that for Pepsi. The company should compare the usage of the assets in times when good performance was recorded and employ those strategies to improve the turnover period. Profit margin ratio The profit margin on sales is an indicator of financial health of the business. Furthermore, it indicates the ability of the business to control production and inventory costs (Bull and Richard 38). The gross margin for Pepsi slightly decreases from 2010 to 2011 and then improves from 2011 to 2012.. It is above the recommended rate of 2.0. The profit margin for Coca Cola slightly decreases from 2010 to 2011 and rapidly drops from 2011 to 2012. Pepsi has a better ratio compared to Coca Cola. Return on total Assets The ratio measures the efficiency of the business in using assets to generate income. It indicates the amount earned on the assets. The higher the ratio the more business is profitable. The ratio for Pepsi slightly increases from 2010 to 2011, then improves at a higher rate from 2011 to 2012. The return on fixed assets rapidly drops from 2010 to 2011 and then slightly drops from 2011 to 2012. The return on fixed assets for Pepsi is much higher than for Coca Cola. Furthermore, the Pepsi company improves compared to Coca Cola. The Coca cola company should consider the use of sensitive assets, which in overall improves the performance of the company. Return on Equity This is a profitability ratio that measures the amount of profit the company generates from money invested by common stock owners (Bull and Richard 29). The return on equity for Pepsi increases rapidly from 2010 to 2011 then slightly decreases from 2011 to 2012. The return on equity for Coca Cola rapidly decreases from 2010 to 2011, then slightly decreases from 2011 to 2012. The return on equity for Coca Cola is higher than that for Pepsi. Therefore, Coca Cola is more efficient in converting the shareholders money into profit. Pepsi should consider changing the investment strategies in the long run in order to improve on the profit levels (Pepsi Company 56). Basic earning power The ratio measures the operating power of the business (Brigham, F and C. Gapenski). The earning power is evaluated before the effect of taxes and financial leverage. The ratio for Coca cola decreases at a near rate from 2010 to 2011 and from 2011 to 2012. However, the ratio for Pepsi increases slightly from 2010 to 2011 then a higher increase from 2011 to 2012. This indicates that operating power of Pepsi is more efficient than that for Coca cola. The Coca cola company should thus consider financing the business using equity to reduce the interest on debt. This will improve the earnings before interest and tax in the long run (Coca Cola Company 35). Works Cited Brigham, Eugene F and Louis C. Gapenski. Financial Management: Theory and Practice. Chicago: Dryden Press, 1988. Bull and Richard. Financial Ratios: How to Use Financial Ratios to Maximise Value and Financial Ratios: How to Use Financial Ratios to Maximise Value and Success for Your Business. Amsterdam: Elsevier/CIMA , 2008. Coca Cola Company . http://www.coca-colacompany.com/investors/annual-other-reports. n.d. 8 November 2013 Read More