The beverage industry is one of the fastest growing and most popular industries in the world. This is owed to the fat that almost everyone in the world consumes beverages. The most famous beverages are the carbonated drinks which are popular in almost every part of the world. There are different brands or companies dealing with the production and sale of carbonated drinks but none match the ability to transcend and transverse their brands as the Coca-Cola and PepsiCo companies. The two companies dominate the carbonated drinks market. While much is known about the manner in which the two companies promote their brands, there is little that is information about how the two companies have been fairing from within. Using their financial statements such as balance sheets and income statements, it will be possible to identify their financial health in the industry.
Ever since its inception and incorporation as a limited company, the Coca-Cola Company has grown on to become the largest manufacturer and supplier of carbonated beverage drinks. The company is headquartered in the city of Atlanta found in the American State of Georgia. The companys brand has grown on to become a global multinational company thus earning a place in the NYSE stick index list where real time analysis of stocks is carried out. Under its brand, the company stocks and distributes over 500 brands with the Coca-Cola brand being the worlds most valuable brand (Baker et al, 2016). With over 1.9 billion serves enjoyed in over 200 countries, Coca-Cola boasted revenue of $44.294 billion as at 2015 and an operating income of $8.728 billion and total assets and equity of $90.093 and 7.351 billion.
Just like the Coca-Cola Company, PepsiCo Company is one of the worlds largest beverage corporations headquartered in Purchase found in the State of New York, America. Despite being formed in the year 1965, PepsiCo has grown over to become the biggest rival to Coca-Cola Company in the beverage industry (Rahman & Kumar, 2016). As at the end of 2015, the company had revenue of $63.056 billion and an operation income and total equity amounting to $8.353 and 11.923 billion respectively.
The following is an analysis of the financial position of Coca-Cola Company and PepsiCo based on information obtained from their financial statements such as balance sheet and income statements. The financial statements used will focus on the financial years 2014 and 2015 to ascertain which company did well financially.
Financial Analysis of Coca-Cola Company and PepsiCo Company
In any given venture, information on the financial performance of a company is important in helping stakeholders to know whether the company is faring well or not. There are different ways in which companies are analyzed. One of them is the use of financial statements such as balance sheets and income statements. The two statements help one to know the financial position of the company as at a given period. The following is an analysis of Coca-Cola Company and PepsiCo Company using their balance sheet and income statements as at the end of the financial years, 2014 and 2015:
A balance sheet is a financial statement by a company showing its financial position as at a given period of time (George & Lydia, 2016). It focuses on the assets, the liabilities and the owners equity as at that period. The assets must balance with the sum of the owners equity and the total liabilities as at that time. Most of the information on major companies is listed in the NSE index where real time data on their financial statements is presented (Taulli, 2004).
For the case of Coca-Cola Company, the company had a total asset base of $90,093,000 in the year 2014 and $92,023,000 as at the financial year 2015. In comparison, PepsiCo had an asset base of $69,667,000 in the year 2014 and $70,509,000 as at 2015. The information shows that Coca-Cola had a higher asset base in both years compared to PepsiCo Company.
The total liabilities section of the two companies reflected a similar pattern as that of the total assets segment. Coca-Colas liabilities for the year 2014 stood at $64,539,000 and $61,703,000 in the year 2015 while that of PepsiCo Company reflected $57,744,000 in 2014 and $53,071,000 in 2015 (NYSE, n.d). Both companies recorded decreases in the total liabilities in the period 2015 compared to that of the year 2014 thus showing signs of improvement in their owners equity positions over the two year period.
As part of analyzing the financial position of a company, the calculation of the owners equity is an important factor. The owners equity represents the difference between the assets and the liabilities as at a given period. The following are the calculations of the owners equity for the Coca Cola Company for the two periods based on the information reflected in the balance sheet:
Total Owners Equity=Total Assets-Total Liabilities.
For the case of Coca-Cola Company, the owners equity for the year 2014 was found to be $25,554,000 while that of PepsiCo Company was found to be $11,923,000 in the same year (NYSE, n.d). The year 2015 saw the total owners equity for Coca-Cola Company to be $30,320,000 while that of PepsiCo Company was $17,438,000. The comparative owners equity for the two years shows that both companies recorded an increase in their owners equities due to the decrease in the total liabilities in the two periods. It was however prudent to note that Coca-Cola Company had better owners equity in the two years compared to that of PepsiCo Company.
Financial Ratios based on Income Statement Elements
In addition to the elements of the balance sheet, there are other ratios that can help in analyzing the financial position of any given company. These ratios serve as indicators that show whether the company is heading in the right direction or not as far as investment is concerned. Some of the ratios commonly used include the debt ratio, profit margin, debt to equity ratio, return on assets and return on equity. The following is a comparison of the financial position of Coca-Cola Company and PepsiCo based on the financial ratios:
Debt Ratio (D.R) refers to the ratio of total liabilities of a given company to that of the total assets as at a given period of time (Schlegelmilch, 2016). It is calculated based on the information from the balance sheet. The formula below is used in the calculation of the debt ratio:
Debt ratio=Total Liabilities/Total Assets
For the case of Coca-Cola, the debt ratio as a percentage for the year 2014 and 2015 can be calculated as follows:
D.R for 2014= (61,703,000/92,023,000)*100%
D.R for 2015= (64,539,000/90,093,000)*100%
It is evident that the year 2015 Coca-Cola Company recorded a low debt ratio compared to that in the year 2014 thus showing an improvement in the performance of the company.
The debt ratio of PepsiCo can be compared to that of Coca-Cola Company based on the balance sheet information for the two periods. The following are the calculations of the debt ratios for PepsiCo during the period of 2014 and 2015:
D.R for 2015= (57,744,000/69,667,000)*100%
D.R for 2014= (53,071,000/70,509,000)*100%
It is evident that there is also an improvement in the companys financial performance based on the reduction of the debt ratio calculated for the company. Despite the drop in debt ratio for both companies, it is evident that the Coca-Cola Company had a lower debt ratio compared to PepsiCo hence an indication that it was doing well.
Another ratio used in the comparison of the financial positions of companies is the aspect of the profit margin. It measures the amount by which the revenue accrued by the company exceeds the costs incurred over the same period of time (Wahlen et al, 2010). It is mostly given in percentage. The following formula is used in the calculation of the profit margin for any company:
Profit margin (P.M) = (Revenue accrued/Total Cost)*100%
For the case of Coca-Cola Company, the following are the profit margin ratios for the years 2014 and 2015:
P.M for 2014= (7,351,000/44,294,000)*100%
In the same year, the P.M for PepsiCo Company was obtained using the same formula and found to be 8.65%. The low value of the profit margin shows that there was much revenue in the case of the PepsiCo Company as compared to that of Coca-Cola Company.
The return in assets (R.O.A) is another ratio that is used in the analysis of the financial position and performance of a given company. It gives the measure of the revenue in relation to that of the total assets owned by a given company. The following are the returns on assets for Coca-Cola Company and PepsiCo Company:
R.O.A for Coca-Cola 2015= (7,351,000/90,093,000)*100%
R.O.A for PepsiCo 2015= (5,452,000/69,667,000)*100%
It is thus evident that Coca-Cola had a better return on assets ratio compared to that of PepsiCo. This is based on the fact that Coca-Cola has a higher asset base compared to that of PepsiCo Company.
It is also evident that using the debt to equity ratio can serve an important purpose in the estimation of the financial performance of any given company (Dickie, 2006). The debt to equity ratio is thus a measure of the leverage used by firms to create revenue. The following calculations show the debt to equity ratio for both Coca-Cola Company and PepsiCo Company as at the year 2014:
Coca-Cola debt to equity ratio 2015 = (64,539,000/25,554,000)
PepsiCo debt to equity ratio 2015 = (57,744,000/12,068,000)
The calculations above show that there is the use of less leverage in the case of Coca-Cola as compared to PepsiCo Company. This shows that Coca-Cola was more financially health compared to PepsiCo due to its better debt-equity position.
In addition to the above ratio, the return on equity (R.O.E) is another ratio that makes use of the elements in the income statement to check on whether the company is doing well or not. It provides the shareholders and other stakeholders with information whether the company will give them a better return for their shares. Using the information on the R.O.E shareholders get to know the amount of profit that they will obtain for every dollar of the companys equity. It is obtained by the formula below:
R.O.E=Net income/Shareholders Equity
Since the R.O.E is a probability measure of the amount of profit that shareholders earn for the number of shares they hold, it is commonly referred to as the return on the net worth. For the case of the two companies, the following are the R.O.E calculated for the year 2015:
Coca-Cola Company R.O.E for 2105= (7,351,000/25,554,000)*100%
PepsiCo Company R.O.E for 2015= (5,452,000/12,068,000)*100%
It is evident from the calculations that PepsiCo Company had a better return on equity since it generated 0.45 unit of profit for every $1 of its shareholders equity in comparison to Coca-Cola Company which had a return of 0.28 for every $1 of shareholders equity.
It is thus evident that based on the information from the balance sheets and the income statements of the two companies that one can ascertain how they are faring. The information from the balance sheets of the two Companies shows that Coca-Cola Company is at a better financial position than PepsiCo Company. This is due to the fact that it has a better asset portfolio compared to that of PepsiCo. The total owners equity of Coca-Cola Company is also financially better in comparison to PepsiCo.
The ratios that combine elements of the balance sheet also show that Coca-Cola Company has a better leverage than PepsiCo despite the fact that shareholders are able to earn more profit per unit $1 of their equity.
Baker, P., Friel, S., Schram, A., & Labonte, R. (2016). Trade and investment liberalizat...
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