PepsiCo, incorporated is a company that has been listed in the New York stock exchange as PEP. It was created as a merger between Pepsi-cola and Frito-Lay in 1945. It has also been listed in the fortune magazine as one of the five hundred companies that are doing well in the business field. It is centrally located in Purchase, New York. It is concerned in making, selling, and distributing snacks that are grain based, beverages that are either carbonated or non-carbonated. It is a company that has shown significant growth with ability to merge with other companies like Quaker Oats (2001) which has helped it to grow and to stabilize in the market. As per a recent report, PepsiCo has extended its services to over two hundred countries in the whole world. When classified on the basis of revenue generation, this company has been rated as the second in the line of food and beverages manufacturing company, in North America being the best. This company has been seen to employ over 285,000 people in the whole world at the present. In order to analyze the financial status of this company we must first understand that the company operates in four major fields. These fields include: PepsiCo Americas Beverages, PepsiCo Americas Foods, based in America PepsiCo Europe, and PepsiCo Asia, Middle East and Africa. Most of its revenue has been seen to be from its four major operating regions.
Coca Cola Company on the other hand has been listed in the New York stock exchange as KO; it is company that can be classified as a retailer, maker and marketer of beverages that are non alcoholic. It is located in Atlanta, Georgia. It is renown by one of its product brand: coca cola invented back in 1886 by Pemberton who was a pharmacist. It has also undergone some mergers in order to arrive at its current state. Like in the case of Asa Candler in 1892, it also offers over five hundred brands other than the Coca Cola one. It is known as the country which serves many servings in the whole world. It serves over 1600000 servings in just a single day. It covers approximately two hundred countries.
This paper attempts to compare these two key businesses which lead the market of soft drinks basing the arguments in 2004-2005 performance. I have used common size analysis (vertical analysis) which is a form of expressing each and every item in the financial statement as a percentage of the base amount. For assets in my analysis, the used base is Total assets and for liabilities, it is total liabilities; for shareholders' equity, it's the total shareholder's wealth in both businesses. In the analysis of income statements, I have used Net revenues or Net sales as the base amount. Also I have also performed financial trend analysis commonly known as horizontal analysis.
In our case the period is 200 to 2005. It aims at determining the increment or decrement that has taken place in the organization. I have also expressed the same in percentage form. In accordance to the two kind of analysis the following is my results in the period of one year (2004-2005). Both companies can be seen to have improved greatly as per both vertical and horizontal analysis. PepsiCo has improved its balance sheet, but on the same note its current ratio has fallen in the business year. This can be explained by the fact that the company's current assets and liabilities have increased in a varying manner. Coca cola on the other hand, have had an increase in the current assets by a margin of $2,031, while its current liabilities have reduced by a margin of 1297 in the course of one year.
Inventories for PepsiCo have increased by $167, this significantly shows that sales inventory have increased and consequently, the turnover ratio. In some other cases, an increase in inventory is not encouraged but in our scenario, it's favorable in the sense that, it is tailored to meet the demands of the company products which are on the rise. In the side of coca cola Company, inventories have increased with only $4; this implies that the expected demand of this company is extremely low compared to the demand expectation of PepsiCo.
There is a significant increase of cash and its equivalent in the side of PepsiCo of $426 which is a 34% increase. The accounts receivables of the same company have also increased at a rate of approximately 9% (an increase by $262). Its sales have also increased by 11% ($3301). This clearly outlines the significant increase in the inventory. The strictness measures of the company's management on policies concerning credit can be used to explain the difference between cash and its equivalents with the receivables. The increase in demand of the Pepsi products has triggered the management to pressure its customers to buy products only on cash basis.
For Coca-Cola, cash and its equivalents have gone down with a margin of about 30% (fall of $2006). Its receivables have increased with a margin of 8% which is an increase of $37. There has also been an increase in 6% of sales that is from $21,742 in 2004 to $23,104 in 2005. This company's management should strive to find a way of regaining its share in the market.
PepsiCo seems to be doing well form the comparison of the total sales of the two companies. It is therefore predictable that PepsiCo will soon dominate the market.
In the comparing retained earnings which have been expressed as percentage of total liabilities and shareholder's equity, Pepsi's have decreased with a margin of 0.36% in that period while that of Coca-Cola have increased with a margin of about 8%. This shows that Pepsi is able to maintain its dividend payout ratio, while coca cola is reducing its payout ratio in order to meet the need of expanding in future. In addition, to the analysis the following are ratio analysis of the two companies:
Considering acid test and current ratio, it is evident that the two companies realized a drop in the two ratios in the period 2004-2005. The following ratios have improved: the receivables turnover ratio, days' sales in receivables, inventory turnover, and days' sales in inventory. This implies that both companies are faring well in collecting back their money and consequently able to quickly turnover their receivables in 2005. For PepsiCo, there is a significant increase in the percentage of 2.08%. This shows that the company is investing more in current assets compared to noncurrent assets.
After examining the data pertaining to the financial analysis of PepsiCo and Coca-Cola in the period 2004 to 2005, it is evident that profit margin ratios have dropped in both companies thereby representing a drop in the percentage of net income which had been generated by each per dollar sales. This can be attributed to several factors. First, the level of competition for the existing market share has increased between the two industry giants. Secondly, the cost of goods sold, depicted as the cost of doing business, has increased in the 2004/2005 period.
Further, the asset turnover rate dropped from 1.05 in 2004 to 1.03 in 2005 in PepsiCo. However, Coca-Cola's asset turnover rate increased from 0.69 in 2004 to 0.79 in 2005. This rate serves as an indicator of how well any company's management is handling the available asset base so as to generate sales and as such, serves to indicate that in the 2004/2005 period, the Coca-Cola Company was better in its asset base management. This was further reflected in the overall measure of profitability in assets depicted by the return on assets ratio. In PepsiCo Inc, a decline from 15.05% in 2004 return on assets ratio to 12.85% in 2005 can be observed while in Coca-Cola, the return on assets ratio increased from 15.42% in 2004 to 16.56% 2005.
Another key ratio that provides a comparison for these two companies is the return on equity which can easily measure the profitability of the investor's ventures. In 2004/2005, the returns on equity for both companies have been observed. This can be attributed to the decline in profit margins in this period for both PepsiCo and Coca-Cola. The earnings per share determine the net income that can be attributed as to have been generated by each share of stock. In PepsiCo, the earnings per share dropped from a high of $2.48 in 2004 to a low of $2.44 in 2005. Further, the price earnings ratio, which depicts the market price per every share to EPS (earnings per share) and serves to determine investor confidence in the operations of the company, increased in PepsiCo from 25.15 to 25.57 in 2004/2005. This will inspire higher investor confidence as to the future performance of PepsiCo. However, a reverse case scenario is evident in the Coca-Cola Company. Even with an increased earnings per share from $2.0 to $2.04 in 2004/2005, this was not reflected in the price earnings ratio which dropped by 0.51 from 26.39 to 25.88 in this period. This reflects that the investors are not optimistic as to the future conduct of the Coca-Cola Company's operations. However, these drops and increases are not significant and are within a suitable control range. Nevertheless, the management of these two companies should look at the reasons behind such increases or decreases as they build company policies.
An important solvency ratio is the debt to asset ratio which represents a percentage of the finance emanating from creditors as contrasted to the finance provided by investors. In PepsiCo, the debt to asset ratio increased from 0.52 to 0.54 in 2004/2005. This increase is not favorable to the company and therefore the management should review the firm's capital structure. This increase in the debt to asset ratio depicts an increased reliance on debt so as to finance the operations of the company and as such it ties down the company into paying any interest accruing from such financing with the success or failure of the company's operations notwithstanding. In 2004/2005, this increase was not as significant but an ongoing trend would highly expose the company to bankruptcy if the debt obligations are not met. This is further supported by the decrease in the times interest earned ratio from 34.21 to 25.93 in the 2004/2005 period. This is since the times interest ratio is crucial in indicating whether the company shall be able to meet its interest obligations when such arise or are due. The case for the Coca-Cola company is however favorable since the debt to asset ratio has been observed as declining from 0.49 in 2004 to 0.44 in 2005.
This shows a decreasing reliability on debt financing and a larger reliability on investor funding. However, this has not been reflected in the interest earned ratio which has declined from 32.74 in 2004 to 28.88 in 2005. This can be attributed to the increase in the cost of debt as exemplified in the increased interest paid from 2004's $ 196 to 2005's $ 240. Therefore, management should conduct an in-depth analysis as to the increased cost of debt and come up with ways as on how to lower costs attributed to the interest payments or seek alternative channels of financing if need be.
In conclusion, the rivalry in the soft drinks industry has existed for long time between the two industry giants who control the largest share in the market. These two arte almost as successful, however, it is evident that PepsiCo has an edge over Coca-Cola and has relatively more customers. This may be due to its advertising plans and marketing campaign. The earnings per share in both companies are bound to rise since both PepsiCo and Coca-Cola have invested in stock repurchase plans. This will ultimately result in fewer shares with a higher value. In 2004/ 2005, the stock market was not faring well; therefore, to keep investors confident, it was imperative to repurchase stock in order to ensure their value remained stable or higher.
In this period, inclusive of the 2004/2005 trading year, the soft drink industry was relatively stable and was affected by the economy at the time. However, it is vital that both PepsiCo and Coca-Cola be very cautious on how they treat debt. An increase in debt shall have a negative effect on their capital structure which would not serve the interests of the stockholders if the company was to be highly exposed to bankruptcy. Although the financial ratios used here-in may be deemed as narrow and it is vital to not only relate them to the industry statistics and also to other trading years, the management should examine the basis of their current assets and increase their current and acid test ratios to an acceptable 1:00 to 1:00 which ensures that there is sufficient liquidity available in meeting any short-term financial obligations.