Week 9 Final Assignment: Financial Analysis Korina Mitchell XACC280/Financial Accounting Concepts and Principles July 10, 2010 Tonya Brewer The Coca-Cola company has been in business since its inventor began selling it in drug stores in 1886 (The Coca-Cola Company, 2009). Pepsi-Cola was invented a short time later in 1898, but at the time it was called “Brad’s drink. ” It was later renamed Pepsi-Cola in 1902 (Butler, 2006). Since those early days when the sodas were invented, Coca-Cola and Pepsi have been in competition with each other for the domination of the world’s soda market.
Over the course of more than a century, sales have continued to rise for both companies, and they both consistently earn a profit. Both companies have expanded into new product markets in more recent years. They have chosen to invest their earnings in new ventures like bottled water, snack foods, and iced tea, and they each strive to continue increasing their profits in many ways. In order to maintain this continued growth in the coming years, these companies are both in need of investors who will fund their efforts.
Comparison of Current Assets and Current Liabilities Investors and potential investors in these companies will look at and consider a multitude of information before deciding which of these two companies would be a better investment. For instance, most investors will look at each company’s current assets and liabilities amounts. In 2004, Coca-Cola had more than 12 million dollars in current assets, while PepsiCo showed only 8. 6 million dollars in their current assets. In 2005, Coca-Cola faced a decrease while PepsiCo had an increase in current assets.
PepsiCo recorded 10. 4 million dollars in current assets, while Coca-Cola dropped to 10. 2 million dollars. Their current liabilities faced similar comparisons. In 2004, Coca-Cola had 11. 1 million dollars in current liabilities, and then dropped that number to 9. 8 million dollars in 2005. This drop in liabilities allowed Coca-Cola to retain a profit in spite of their lowered amount of current assets. PepsiCo, on the other hand, had 6. 7 million dollars in current liabilities in 2004, and they increased those liabilities in 2005 to 9. 4 million dollars.
However, by increasing their current assets during this time, they were able to balance out these liabilities to some degree, and PepsiCo was still able to retain a profit. Comparison of Total Assets and Total Liabilities through Horizontal Analysis In addition to considering each company’s current assets and liabilities, investors may also want to compare the total assets and liabilities of each company. Similar to the changes they had in current assets and liabilities, Pepsi was able to increase their total assets by 13. 4% between 2004 and 2005.
However, they also increased their total liabilities by 20. 8% during the same period. Because their liabilities were increased by more than their assets, PepsiCo actually lowered their working capital during this time. The Coca-Cola company, on the other hand, lowered their total assets by 6. 4% between 2004 and 2005. They were also able to lower their total liabilities by 16% during the same period. Because they were able to lower their debts by a higher percentage than the amount lost in their assets, they were able to retain a larger percentage of their earnings as working capital.
Comparison of Current Ratio and Liquidity The current ratios for Coca-Cola and PepsiCo also contain some figures that investors might be interested in reviewing. These ratios measure the liquidity of each of the two companies, which affects the companies’ ability to pay their respective short-term debts. Both PepsiCo and Coca-Cola were able to increase their current ratios from 2004 to 2005. PepsiCo had a ratio of 1. 11 to 1 in 2004, and increased that to 1. 28 to 1 in 2005. Coca-Cola had a slightly smaller change in this area, but they were still able to increase their current ratio from 1. 4 to 1 in 2004 to 1. 10 to 1 in 2005. The increase in these ratios would allow each of these companies to be able to pay off their short-term debts more quickly than if they had lower current ratios. This might make both of these companies more attractive to potential creditors and investors. Comparison of Solvency through Total Debt to Total Assets Calculations In addition to knowing the liquidity of the companies, investors may also want to know how solvent each of the companies will be for the long term.
The quickest way to measure their solvency is to divide the companies’ total assets by their total liabilities. In the case of PepsiCo, their debt to asset percentage in 2004 was 51. 68%, and in 2005 that number increased to 55. 08%. Coca-Cola had a similar debt to asset percentage of 50. 68% in 2004, and in 2005 their percentage was 55. 57%. This means that both companies were competitive in this comparison, although both actually increased their debt percentage slightly. Neither of the two companies had a drastic change, however, so investors may only be mildly concerned with this difference.
Additional information about the debt that was incurred might be requested for a potential investor to make an informed decision about which company would provide a better investment. Comparison of Retained Earnings through Vertical Analysis One last thing that investors might want to know about PepsiCo and Coca-Cola is what percentage of the income is being retained and reinvested in each company. This information is calculated by determining the percentage of each company’s total assets that is being claimed as retained earnings. In the case of PepsiCo, their retained earnings in 2004 were 66% of their total assets.
In 2005, their retained earnings remained steady at 66% again. This means that PepsiCo was reinvesting two-thirds of their profits back into the growth of the company. Coca-Cola, by comparison, had a much higher retained earnings amount at 92% of their total assets in 2004. In 2005, they actually reinvested more than their total assets at 106%. This high percentage of Coca-Cola’s retained earnings might tell the investors that Coca-Cola was planning to invest soon in an expansion, new equipment, or added products that might increase their future sales. Comparing Shareholders’ Equity
In addition to calculating the figures shown on the balance sheet, investors might find it beneficial to examine the consolidated statements of shareholders’ equity from each company. While PepsiCo’s numbers are smaller than Coca-Cola’s, the figures from both companies rise and fall consistently over the three year period that is shown. This might show the investors that the stock value would be likely to raise or lower at a fairly equal rate, no matter which company they chose to invest in. Reasons for Investing Both PepsiCo and Coca-Cola are well-known and well-established companies that consistently bring in a profit.
Therefore, it is unlikely that if a person made the decision to invest in either of the two companies, they would experience the result of a loss of their investment funds. In spite of this positive outlook, each company has its benefits and drawbacks for an investor to make an investment decision. In addition, every investor has his or her own reasons for investing, and those reasons can be very different from one person to the next. In many cases, the investment choice is based on a combination of both financial information and personal preferences.
Some people may even make an investment choice based purely on brand favoritism. Plans for Improvement of Financial Status Whatever investment choice those people decide upon, it would be important for the investor to know that company of their choice was investing their funds wisely to ensure the highest rate of return in their profits. In order to do this, each company must strive to lower their costs and eliminate their liabilities as much as possible while increasing their sales and other revenue. Both companies made great efforts to do just that during 2004 and 2005.
Although Coca-Cola actually decreased their revenue in 2005, they were also able to decrease their liabilities even more to compensate for this loss. And although PepsiCo had an increase in its liabilities in 2005, it also made a valiant effort to increase its assets to balance that loss. Both companies have implemented many marketing and advertising campaigns over the years that serve the purpose of increasing their sales with each campaign. Both companies have also actively sought out new product markets to expand into, which will also serve to increase their respective revenues in the long term.
However, making the expansions into those markets might temporarily create additional short-term liabilities for these companies, so investors should use caution and common sense when examining these types of costs. If the companies choose to reinvest their retained earnings back into their respective companies to pay down their debts and reduce their liabilities, this would also increase their profit margin and provide a better rate of return to their investors. Conclusion Both PepsiCo and The Coca-Cola Company are sound, financially stable companies, and either one could prove to be a wise investment choice for anyone.
Each of the two companies has had its ups and downs through the years, as with any company, based on company changes and economic climate. The two companies continue to fight for the domination of the soda market around the world. In spite of the continued growth of both companies during the past century, however, The Coca-Cola Company continues to outsell PepsiCo in annual sales. Nevertheless, there are many ways in which the financial statements of each company can be analyzed and dissected to show the information that is most important to the individual.
For instance, PepsiCo has a better current ratio and is able to pay its immediate debts more easily than Coca-Cola. However, Coca-Cola has a much higher retained earnings percentage, which means it has more funding available for further growth of the company. Depending on what information is most important to the individual investor, either company could be considered to be the better investment. Both PepsiCo and Coca-Cola can only hope that their financial statements will provide the better information over their competitor that will draw in more investors.
After all, investment in any company is truly a personal choice. References Axia College. (2010). Week 9 Reading Material: Appendixes A and B. Retrieved July 10, 2010 from Axia College, XACC/280—Financial Accounting Concepts and Principles course website. Butler, A. (2006). The History of Pepsi-Cola. Associated Content, Inc. Retrieved July 10, 2010 from http://www. associatedcontent. com/article/44579/the_history_of_pepsicola. html? cat=3 The Coca-Cola Company. (2009). The Chronicle of Coca-Cola. Retrieved July 10, 2010 from http://www. thecoca-colacompany. com/heritage/chronicle_birth_refreshing_idea. html