Free Essay Sampe: Coke and Pepsi Financial Analysis

Published: 2022-02-18
Free Essay Sampe: Coke and Pepsi Financial Analysis
Type of paper:  Essay
Categories:  Coca-Cola Pepsi Financial analysis
Pages: 7
Wordcount: 1856 words
16 min read

The Coca Cola Company is an American corporation that was founded in 1892. The company at the moment engages primarily in the manufacture of concentrates and syrup for Coca Cola. It produces and sells other soft drinks and citrus beverages. The company is the largest beverage manufacturer and distributor globally with more than 2800 available products in more than 200 countries. Its product portfolio includes non-alcoholic beverages that include soft drinks, sports, and energy drinks and bottled water ("Coca Cola Co.", 2019). The company operates in the soft drink industry and has maintained its market share in the industry over the years. The company controls 48.6% of the carbonated beverage industry global market. The company's net operating revenues for the financial year 2018 amount to about $31.86 billion ("Coca Cola Co.", 2019).

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PepsiCo is a leading food and beverage company that produces and distributes its products to more than 200 countries. Some of its food products include chips, cereals, flavored snacks, pasta, rice, and dairy-based products. Moreover, its beverage portfolio includes carbonated soft drinks that include juices, coffee and ready-to-drink tea, bottled water, and soft drinks ("PepsiCo", 2019). It also operates in the non-alcoholic beverage industry with Coca Cola Company being its closest rival. Its global market share stands at 20.5%. The company's net revenue for the financial year 2018 amounted to about $64 billion ("PepsiCo", 2019).

The changes in the non-alcoholic beverage industry can be attributed to the changing tastes and preferences of consumers to provide an inclination towards the consumption of convenience foods and beverages that lead to the rise in the demand for non-alcoholic beverages over the years. The global nonalcoholic beverage market size is, therefore, expected to grow due to factors such as rising disposable incomes, population growth and changing consumer lifestyles among others. The increasing concerns about obesity and health awareness are expected to trigger the increase in functional beverage and bottled water market segments.

The current ratio is a liquidity ratio that measures a company's ability to pay its short-term obligations. Coca Cola records a current ratio of 1.05 and Pepsi 0.99. This means that Pepsi has more current liabilities compared to its current assets, while Coca Cola has more current assets compared to its current liabilities. This means that Coca Cola has more has enough capital at hand to meet its short-term obligations if they were all due at once, i.e., it has the financial resources to remain solvent in the short-term.

The debt ratio indicates the extent of a company's leverage. It highlights the proportion of a company's assets that are financed by debt. PepsiCo records a debt ratio of 81.19% while Coca Cola records a debt ratio of 77%. Both companies record a debt ratio of less than 1 meaning that a greater proportion of their assets is funded by equity. The higher the debt ratio, the greater the financial risk. Therefore, PepsiCo, with a debt ratio of 81.19% is at a greater financial risk compared to Coca Cola with 77%. It means that most of PepsiCo's assets are financed by debt which puts the company at risk of default on its loans if the interest rates were to suddenly increase.

From the analysis, Coca Cola is doing better as indicated by its high current ratio and low debt ratio. This is because it has enough financial resources to remain solvent over the short-term and has less of its assets funded by debt hence limited risk of default on loans in the event of a sudden rise in its interest rates.

Profitability ratios indicate a company's ability to generate earnings with reference to its revenue, balance sheet assets, operational costs, and shareholder's equity. The return on assets and return on equity ratios will be applicable in this case. Coca Cola's return on assets (ROA) from 2016 to 2018 was 7.48%, 1.42%, and 7.73% respectively while PepsiCo's ROA from 2016 to 2018 was 8.54%, 6.09%, and 16.12% respectively. PepsiCo records higher returns on assets over the last three years compared to Coca Cola. This is the net income or the amount of earnings from its sales after all the costs, taxes and expenses. This means that PepsiCo may have amassed more assets, therefore more sales and generates more profits compared to Coca Cola.

Coca Cola's return on equity (ROE) from 2016 to 2018 was 28.30%, 7.31%, and 37.89% respectively while PepsiCo's ROE from 2016 to 2018 was 57.04%, 44.60%, and 86.20% respectively. The ratio indicates a company's ability to earn a return on their equity investments. PepsiCo records higher ROE compared to Coca Cola over the past three years. This means that the company earns more than Coca Cola on its equity investments. This may be attributed to its large asset base.

The operating performance ratios measure the various aspects of the companies' core operations. They indicate their efficiency in the use of resources to generate sales and how the assets are appropriately converted to cash. Pepsi records a higher fixed asset turnover ratio (1.16 times) compared to Coca Cola (0.61 times). This means that Pepsi generates a large amount of sales from a relatively small fixed asset base compared to Coca Cola. Pepsi also records a higher total assets turnover (0.83) compared to Coca Cola (0.38). These results show that Pepsi has a higher ability than Coca Cola to efficiently produce sales revenue or sales income. From the analysis, Pepsi is doing better as observed from its profitability and performance ratios. The company records a higher return on assets, return on equity, fixed assets, and total asset turnovers.

Valuation ratios help to determine a company's worth. They provide insights into the context of a company's share price and serve as tools to evaluate the investment potential. The price to earnings ratio highlights the expected price of a share based on its earnings. From the financial year 2018 annual report, Coca Cola records a higher price to earnings ratio of 30.62 compared to PepsiCo's 14.85. Coca Cola, with the high price to earnings ratio, indicates positive future performance compared to PepsiCo, hence investors would be willing to pay more for the company's shares.

The market-to-book ratio is also considered in this case to enable investors to understand the market's perception of the value of a particular stock. Both companies record a market-to-book ratio greater than 1 meaning that their stocks are overvalued, i.e., have performed well. However, PepsiCo records a slightly higher market-to-book ratio (10.71) compared to Coca Cola (10.34) meaning that its stock may have performed slightly better than Coca Cola.

The dividend payout ratio is the ratio of the total amount of dividend that is paid out to stockholders relative to their net income of the company. It represents the percentage of earnings that are paid to shareholders in form of dividends (Kenton & Hayes, 2019). Coca Cola records a dividend payout ratio of 0.99 for financial year 2018 while PepsiCo records 0.41. This means that Coca Cola pays more dividends (99%) compared to PepsiCo (41%) per share of its annual dividends. The company returns 99% of its money to shareholders and keeps the remaining 1% to reinvest in growth, pay off debt, or add to retained earnings. This is not the case for PepsiCo, as the company keeps 59% of its earnings to be reinvested, to pay off debt or to add cash reserves.

From the analysis of cash flow indicator and investment valuation ratios, Coca Cola's stockholders seem to be more satisfied compared to PepsiCo's investors. This is due to the fact that Coca Cola provides a higher price to earnings ratio, which indicates a positive future performance of the company. The company also records a market-to-book ratio greater than 1, showing that it is overvalued hence performs well. It also records a very high dividend payout ratio of 99% meaning that the investors are assured of a return of 99% on the company's earnings. However, while this may sound good for the investors, they got to be worried since a very low percentage is held by the company on hand to be reinvested for growth, to pay off debt or added to cash reserves in form of retained earnings.

As an investor, I would invest in Coca Cola because of the following reasons:

The company has a current ratio greater than 1, i.e., 1.05 which indicates a company that has more current assets than current liabilities. The company is, therefore, able to cater to its current liabilities with its current assets whenever they are due. Chances of insolvency are, therefore, limited.

Coca Cola has a low debt ratio compared to PepsiCo, hence has a limited chance of defaulting its loans in the event of a sudden increase in the interest rates. Moreover, most of its assets are funded by equity as opposed to debt, hence stands a low chance of being affected by interest increments.

Despite its low asset turnover, the company enjoys large economies of scale brought about by its over 40% global market capitalization, making it possible to realize its revenues.

The company has a high price to earnings ratio of 30.62, indicating a better positive future performance compared to PepsiCo. I would, therefore, be willing to pay more for Coca Cola's shares.

Despite having a slightly lower market-to-book ratio compared to PepsiCo, Coca Cola's market-to-book ratio is greater than 1 meaning that its stocks are overvalued or have performed well.

Coca Cola records a dividend payout ratio of 99%. Therefore, as an investor, I'm assured of a return of 99% per share. While this may portray the risks of low reinvestment for growth and payment of debt, Coca Cola has grown its global brand to international levels. Moreover, the company has a low debt ratio that can be catered for by its large economies of scale. The high payout ratio can also be attributed to the fact that Coca Cola is less focused on reinvesting their income to grow their business.

Non-financial criteria

Non-financial criteria are based on scores on organizational priorities that include employee satisfaction, customer retention and other dimensions that are not easily quantified financially. Different firms may provide different weights basing on the various non-financial parameters that vary depending on their operational sectors, type of business, investment scale, global market capitalization, and level of competition among others. Some of the non-financial parameters that I would use in this investment analysis include:

SWOT analysis to fit the corporate strategy and objectives. I would conduct a SWOT analysis of the company's investment projects to select the one whose projects align with the company's corporate strategies and objectives. In most cases, good projects may be turned down for short-term or limited financial reasons but corporate objectives may overtake the financial information and figures.

The necessity to maintain the existing product lines. Many times, investments are undertaken to aid in reducing the manufacturing, and operation lead time, enhance manufacturing flexibility, enhance product and service delivery, reduce product failures, enhance product delivery, and quality, and reducing product design, and development times of existing product lines. While all these may be vital for PepsiCo due to its variety of product lines, Coca Cola grows would be preferred because of its concentration, and necessity of maintaining its existing limited product lines.

Entry into a new customer market or product line: This is the case for investments undertaken by a company to enter a new product line or enter a new customer market event though it may not be financially viable. This is the case of Coca Cola when it launched "Coke...

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