In order for a company to be financially healthy, it is of most importance that the company must analyze, interpret, and review the business’s annual financial reports. The financial analyses of the annual reports provide insights and information regarding the performances of the business. In this paper, I will be disclosing financial evaluations and comparisons between Coca-Coca and PepsiCo Incorporation. The visualizations used in this paper were designed to provide the analyses performed utilizing three financial analyses methods: vertical analysis, horizontal analysis, and ratios analysis.
There will also be recommendations made on how Coke and Pepsi could improve their financial status. Vertical Analysis-Pepsi and Coke The vertical analysis of the financial statements compares financial data including assets, liabilities, and equity on a yearly basis. A vertical analysis is used most frequently to monitor annual changes. One of the biggest benefits of a vertical analysis is if gives a company the ability to evaluate the comparison between the total net sales and the cost of goods sold. Illustration 1 shows vertical analyses for 2004 and 2005 (select financial data) for Coca-Cola and PepsiCo, Inc. erformances. Illustration 1-Vertical Analyses of Coca-Cola and PepsiCo, Inc. for 2004 and 2005 Coca-Cola Consolidated Balance Sheets 2005Percent 2004Percent Current Assets 10,250 34. 83% 12,281 39. 06% Inventory 1,424 4. 84% 1,420 4. 52% Accounts Receivable 2,281 7. 75% 2,244 7. 14% Non-current Assets 15,517 52. 73% 15,496 49. 29% Total Assets 29,427 100. 00% 31,441 100. 00% Current Liabilities 9,836 33. 43% 11,133 35. 41% Non-current Liabilities 3,236 11. 0% 4,373 13. 91% Total Liabilities 13,072 44. 42% 15,506 49. 32% Total Stockholders’ Equity 16,355 55. 58% 15,935 50. 68% Total Liabilities & Stockholders’ Equity 29,427 100. 00% 31,441 100. 00% PepsiCo, Inc. Consolidated Balance Sheets 2005Percent2004Percent Current Assets 10,454 32. 95% 8,639 30. 87% Inventory 1,693 5. 34% 1,541 5. 51% Accounts Receivable 3,261 10. 28% 2,999 10. 72% Non-current Assets 16,319 51. 44% 14,808 52. 1% Total Assets 31,727 100. 00% 27,987 100. 00% Current Liabilities 9,406 29. 65% 6,752 24. 13% Non-current Liabilities 8,070 25. 44% 7,712 27. 56% Total Liabilities 17,476 55. 08% 14,464 51. 68% Total Stockholders’ Equity 14,320 45. 14% 13,572 48. 49% Total Liabilities & Stockholders’ Equity 31,727 100. 00% 27,987 100. 00% Coca-Cola Consolidated Income statements 2005Percent2004Percent Sales 23,104 100. 00% 21,742 100. 00%
Cost of Goods Sold 8,195 35. 47% 7,674 35. 30% Operating Income 6,085 26. 34% 5,698 26. 21% Interest 1,085 4. 70% 916 4. 21% Net Income 4,872 21. 09% 4,847 22. 29% PepsiCo, Inc. Consolidated Income Statements 2005Percent2004Percent Sales 32,562 100. 00% 29,261 100. 00% Cost of Goods Sold 14,176 43. 54% 12,674 43. 31% Operating Income 5,922 18. 19% 5,259 17. 97% Interest 460 1. 41% 287 0. 98% Net Income 4,078 12. 2% 4,212 14. 39% Horizontal analyses for Coca-Cola and PepsiCo. If there are significant changes in a company over a given time period, the changes can be determined using the company’s financial statements to compare ratios. This type of analysis is called a horizontal analysis. The horizontal analysis compares most current ratio to the past performances (ratios) and future ratios (estimated). A horizontal analysis can also aid in determining if the financial health of the company is strong or weak. Illustration 2 shows two years horizontal analyses for Coca-Cola and
PepsiCo, Inc. in the area of company performances. Illustration 2-Horizontal Analyses of Coca-Cola and PepsiCo. For 2004 and 2005 Coca-Cola Net Sales (in millions) 20052004 2003 23,10421,74221,044 109. 79%103. 32% 100. 00% PepsiCoNet Sales (in millions) 20052004 2003 32,56229,261 26,971 120. 73%108. 49% 100. 00% Coca-ColaConsolidated Balance Sheets (Increase or (Decrease) in 2005) 20052004 AmountPercent Current Assets10,25012,281(2,031)-16. 54% Inventory1,4241,42040. 28% Accounts Receivable2,2812,244371. 65% Non-current Assets15,51715,496210. 14% Total Assets29,42731,441(2,014)-6. 1% Current Liabilities9,83611,133(1,297)-11. 65% Non-current Liabilities3,2364,373(1,137)-26. 00% Total Liabilities13,07215,506(2,434)-15. 70% Total Stockholders’ Equity16,35515,9354202. 64% Total Liabilities & Stockholders’ Equity 29,42731,441(2,014)-6. 41% PepsiCoConsolidated Balance Sheets (Increase or (Decrease) in 2005) 20052004AmountPercent Current Assets10,4548,6391,81521. 01% Inventory1,6931,5411529. 86% Accounts Receivable3,2612,9992628. 74% Non-current Assets16,31914,8081,51110. 20% Total Assets31,72727,9873,74013. 36% Current Liabilities9,4066,7522,65439. 31%
Non-current Liabilities8,0707,7123584. 64% Total Liabilities17,47614,4643,01220. 82% Total Stockholders’ Equity14,32013,5727485. 51% Total Liabilities & Stockholders’ Equity 31,72727,9873,74013. 36% Coca-ColaConsolidated Income Statements (Increase or (Decrease) in 2005) 20052004AmountPercent Sales23,10421,7421,3626. 26% Cost of Goods Sold8,1957,6745216. 79% Operating Income6,0855,6983876. 79% Interest1,08591616918. 45% Net Income4,8724,847250. 52% PepsiCoConsolidated Income Statements (Increase or (Decrease) in 2005) 20052004AmountPercent Sales32,56229,2613,30111. 28%
Cost of Goods Sold14,17612,6741,50211. 85% Operating Income5,9225,25966312. 61% Interest46028717360. 28% Net Income4,0784,212(134)-3. 18% The Ratios Analyses for both companies: Liquidity, Profitability, and Solvency The ratios analysis of the financial statement gives companies the ability to show the link between the financial statement data that is needed. The data selected expresses the relationships in mathematical terms such as percentage or number of times. There are three analyses which evaluate the links to show ratio expressions-liquidity, profitability, and solvency ratios.
Illustration 3, 4, and 5 show ratio analyses for PepsiCo, Inc. and Coca-Cola. Illustration 3-Ratio Analyses of PepsiCo-2004 and 2005 RatioNameFormulas 2005 2004 2003 LiquidityCurrent ratioCurrent assets10,4548,639 RatiosCurrent liabilities9,4066,752 Industry avg. : 1. 11 1. 111. 28 Working CapitalCurrent Assets – Current Liabilities1,0481,887 Acid-test (quick)Cash + Short-term investments + Receivables (net)8,1436,444 ratioCurrent liabilities9,4066,752 Industry avg. : 0. 8 0. 870. 95 ReceivablesNet credit sales32,56229,26126,971 turnoverAverage net receivables3,130 Industry avg. : 10. 0 InventoryCost of goods sold14,17612,67411,691 turnoverAverage inventory1,617 Industry avg. : 8. 77 ProfitabilityProfit marginNet income4,0784,2123,568 RatiosNet sales32,56229,26126,971 Industry avg. : 11. 29%12. 5%14. 4%13. 2% Asset turnoverNet sales32,56229,26126,971 Average assets29,857 Industry avg. : 1. 09 Return on assetsNet income4,0784,2123,568 Average assets29,857 Industry avg. : 13. 66 % Return on commonNet income4,0784,2123,568 stockholders’ equityAverage common stockholders’ equity13,94612,734 Industry avg. : 29. 2%33. 1% SolvencyDebt to total assetsTotal debt17,47614,464
RatiosratioTotal assets31,72727,987 Industry avg. : 55. 1%51. 7% Times interest Income before income taxes & interest expense earnedInterest expense Illustration 4-Ratio Analyses of Coca-Cola RatioNameFormulas 2005 2004 2003 LiquidityCurrent ratioCurrent assets10,25012,281 RatiosCurrent liabilities9,83611,133 Industry avg. : 1. 111. 041. 10 Working CapitalCurrent Assets – Current Liabilities 414 1,148 500 Acid-test (quick)Cash + Short-term investments + Receivables (net)8,82610,861 ratioCurrent liabilities9,83611,133
Industry avg. : 0. 80. 900. 98 ReceivablesNet credit sales23,10421,742 turnoverAverage net receivables2,2632,168 Industry avg. : 10. 2110. 03 InventoryCost of goods sold8,1957,674 turnoverAverage inventory1,4221,336 Industry avg. : 5. 765. 74 ProfitabilityProfit marginNet income4,8724,8474,347 RatiosNet sales23,10421,74220,857 Industry avg. : 11. 29%21. 1%22. 3%20. 8% Asset turnoverNet sales23,10421,74220,857 Average assets30,45731,384 Industry avg. : 0. 760. 69 Return on assetsNet income4,8724,8474,347 Average assets30,45731,384 Industry avg. : 16. 0 %15. 4 %
Return on commonNet income4,8724,8474,347 stockholders’ equityAverage common stockholders’ equity16,14515,013 Industry avg. : 30. 2%32. 3% Earnings per shareNet income4,8724,8474,347 (EPS)Weighted average common shares outstanding2,3892,4262,457 Industry avg. : $ 2. 04 $ 2. 00 $ 1. 77 SolvencyDebt to total assetsTotal debt13,07215,506 RatiosratioTotal assets29,42731,441 Industry avg. : 44. 4%49. 3% Times interest Income before income taxes & interest expense5,9575,763 earnedInterest expense1,085916 Industry avg. : 5. 496. 29
Illustration 5 A Comparison of Financial Analysis for Coca-Cola and PepsiCo, Inc. Ratio ‘2005 ‘2004 AnalysisCoca-ColaPepsiCoCoca-ColaPepsiCo LIQUIDITY RATIOS: Current Ratio1. 04 : 11. 11 : 11. 10 : 11. 28 : 1 Working Capital (in millions)4141,148 Quick Ratio0. 98 : 10. 87 : 10. 9 : 10. 95 : 1 Receivables Turnover Ratio10. 21 times10. 03 times Inventory Turnover Ratio5. 76 times8. 77 times5. 74 times PROFITABILITY RATIOS: Profit Margin21. 1%12. 5%22. 3%14. 4% Asset Turnover0. 76 times1. 09 times0. 69 times Return on Assets 16. 0%13. 7%15. 4%
Return on Common Stockholders’ Equity30. 2%29. 2%32. 3%33. 1% Earnings Per Share (EPS)$ 2. 04 $ 2. 00 SOLVENCY RATIOS: Debt to Total Assets Ratio44. 4%55. 1%49. 3%51. 7% Times Interest Earned5. 49 times 6. 29 times Financial Health comparison between Coca-Cola and PepsiCo One major comparison between Pepsi and Coke is that Coke had almost double the profit margain for both 2004 and 2005. Coca-Cola’s sales were so strong that they generated 20% of a dollar. Due to the fact that Coca-cola had a higher amount of profitability, the solvency ratio decreased Coke’s level of debt by 5%.
Coca-Cola appears to run its business more proficiently that of PepsiCo. The inventory turnover ratio of PepsiCo. indicates that the company does not have a large amount of money invested in inventory like Coca-Cola does. On the other hand, PepsiCo. put their money into generating more sales than that of Coca-Cola. Recommendations for Pepsi and Coca-Cola After reviewing and analyzing the financial information available, it is evident that there are several areas where both companies can improve their business.
If the companies want to improve the health of their finances, both companies will need to improve their liquidity ratios. If both companies want to ensure that their short-term liabilities are covered, liquidity ratios, both current and quick, will need to be higher than they are currently. For PepsiCo alone, I would suggest that they improve their profitability. Through the sale of their products, PepsiCo needs to increase their profit margin. There has been a high rate of turnover for PepsiCo inventory wise opposed to Coca-Cola, but they would still benefit from improving their profitability.
Although the net sales amount of PepsiCo, Incorporation in 2005 increased by 11. 28% from year 2004, the net income decreased by 3. 18%. Thus, PepsiCo, Inc. needs to concentrate on the proper allocations of its operating expenditures and re-examine its business strategy. Conclusion To find out financial conditions of the two dominant soft drinks companies in the world, a thorough financially analysis was performed utilizing three different financial analysis tools: vertical analysis, horizontal analysis, and ratios analysis.
According to the vertical analysis of Coca-Cola had decreased its assets and liabilities in 2005 compared to 2004 while its sales increased satisfactorily. On the other hand, PepsiCo, Inc. increased its sales in 2005; however, its net income rate was reduced by close to 2%. Also, PepsiCo, Inc. has incurred its short-term and long-term liabilities dramatically which indicated that the company did not operate its internal business operations efficiently. The horizontal analyses of the two soft drinks giants again showed steady increase in sales from 2004 to 2005.
This trend analysis confirmed that Coca-Cola had reduced its assets and liabilities by the average of 15% while the total stockholders’ equity increased by 2. 62%. This is a good indication that the company is profiting and is performing satisfactorily in the eyes of its stockholders. Even though PepsiCo, Inc’s sales increased by the average of 10% in 2004 and 2005, the horizontal analysis confirms that PepsiCo, Inc. is leveraging its resources by incurring more short-term and long-term debts. The weakened net income rate may cause some concern to its stockholders.
PepsiCo, Inc. may need to review its financial performances in depth and look for ways to reorganize its business strategy. Furthermore, PepsiCo, Inc. may need to re-examine its internal operations and identify the cause of increase in the cost of goods sold. According to the ratios analysis, both Coca-Cola and PepsiCo, Inc. need to improve their abilities to pay their short-term obligations. Both companies may want to consider selling some of their inventories to improve their current ratios and bring up their working capitals.
The current ratios of the companies may cause some concerns to their stockholders and their creditors because they may not have sufficient funds to cover their immediate obligations. Similarly, the acid-test (quick) ratios showed consistent effect of the current ratios. When the profitability ratios analyses were performed, Coca-Cola has earned its profits almost twice as much as PepsiCo, Inc. did in 2004 and 2005. According to the solvency ratios, Coca-Cola has greater ability (by 10%) to cover its long-term liabilities and to sustain business operation longer than PepsiCo, Inc.
After reviewing two years of financial analyses of Coca-Cola and PepsiCo, Inc, the two soft drinks leaders should take immediate consideration of improving their abilities to increase their current assets while decreasing their current liabilities. To become adequately liquid, both companies should concentrate seriously in strengthening and doubling-up their current assets. Coca-Col may want to consider leveraging its resources and concentrate in global expansion with other new product lines. On the other hand, PepsiCo, Inc. should pay closer ttention to the cost of goods sold and look for opportunities to deflect and allocate its expenditures prudently. Reference Accounting For Management. (2009). Financial statement analysis. Retrieved August 12, 2010, from http://www. accountingformanagement. com/about_us. htm Axia College of University of Phoenix. (2009). The annual reports for PepsiCo, Inc. and The Coca-Cola Company in Appendixes A & B. Retrieved on August 12, 2010 from Axia College, Week One reading, aXcess, XACC 280-Financial Accounting Concepts and Principles Course Web site.
