Financial Analysis Coca-Cola and PepsiCo XACC/280 Financial Analysis An official financial analysis for a specific company needs two years of financial data from the company and from a competitor in the same industry. This financial analysis is between PepsiCo, Inc. and Coca-Cola. Pepsi and Coca-Cola dominate the beverage market worldwide. In addition to sodas, they also distribute a variety of water and energy drinks. Based on the analysis, the investor will be able to make a better investment choice. Liquidity, solvency, and profitability are the three characteristics that will be used to see a company’s success.
A simple financial statement will not demonstrate the company’s power because it is a general idea of the company’s position and does not display business developments. The company’s business developments are vital for potential investors because they determine vertical and horizontal analysis. These characteristics are also used to define the ratio analysis. Ratio analysis is dividing two numbers to get a number of percentages that can be used to compare companies in the same industry. Examining the entire company’s financial trends for a set period of time, an investor will see a factual description of the company’s financial condition.
This is the financial analysis an investor desires to review prior to spending money. Liquidity measures a company’s ability to pay their debts when they are due. It is identified as a ratio or percentage of the current liabilities and calculated by dividing the current cash by the current liabilities. It is a fast way to understand if the company’s future is appealing to the investor. If the company is not turning a profit quick enough, it may be a sign of liquidity problems. This is the primary reason why an investor should compare two competitors while looking at the liquidity ratio.
To define the current liquidity we use the formula: current ratio = current assets divided by current liabilities. The most vital measure of this situation is that the right information is used from the balance sheet. PepsiCo, Inc. ’s Liquidity Ratio: 2005 Current Ration = $10,454 (current assets) divided by $9. 406 (liabilities)=1. 11% 2004 Current Ration = $8,639 (current assets) divided by $6,752 (liabilities) =1. 28% Coca-Cola Liquidity Ratio: 2005 Current Ratio= $10,250 (Current Assets) divided by $9,836(Current Liabilities) = 1. 4 % 2004 Current Ratio= $12,281 (Current Assets) divided by $11,133(Current Liabilities) = 1. 10% The evaluation of current assets compared to the current liabilities is solvency. Divide the current assets by current liabilities to determine the solvency. It will show the company’s long-term responsibilities. When the ratio is higher the company is more likely to meet their obligations and have growth in their industry by expenditures. The lower the ratio the company is less likely to meet their obligations. The standard ratio for solvency is about 20% dependent upon the industry.
The measure a company’s ability to generate assets versus expenses in an allotted period of time is profitability. If the ratio is higher or equal to their competitors’ preceding time period the company is in good standing. Periods of time are used to determine profitability and it is common to see the profitability increase and decrease all through the year. This is reason profitability is examined on a full fiscal year. The examination of the trends is horizontal analysis. An income statement, retained earnings statement and balance sheet are ways to implement the horizontal analysis.
It will show the company’s financial data for a set period of time and a great instrument to know if the company is worth investing in. PepsiCo, Inc. ’s Horizontal Analysis: 2005 total current assets $10,454 divided by $8,639 total current assets 2005 = 21% 2004 total current liabilities $9,404 divided by $6,752 total current liabilities 2004 = 39%. PepsiCo, Inc. had an increase in total assets by making loans. Pepsi increased their debt over the previous years and this shows an unstable business. Coca-Colas Horizontal Analysis: 005 total current assets $10,250 / $12,281 = 83. 5% or a decrease from 2004 to 2005 2004 total current assets $9,836 / $11,133 = 88. 4% of an 11. 6% decrease. Coca-Cola had a decrease in their debt. This indicates that Coca-Cola has a more solid business plan during this time period. Coca-Cola is also in a better monetarily stable place to pay back their debt. Vertical Analysis or the common size analysis is calculated by dividing the Balance Sheet items by the company’s total assets. This number is then turned into a percentage for easier comparison.
This percentage represents the growth within the company. Positive retained earnings and debt retention are shown through positive and negative percentages. PepsiCo, Inc. ’s Vertical Analysis: 2005 - $1,716 (cash and cash equivalent) divided by $31,727 (total assets) =5. 4% 2004 - $1,280 (Cash and cash equivalent) divided by $27,987 (total assets) = 4. 6% The proper way to do vertical analysis for the PepsiCo. Inc. is to use the different line items from the balance sheet and divide each one by the company’s total assets. Both of these items are taken from the balance sheet.
The total cash percentage and the cash equivalent percentages are related to the total assets. Coca-Cola Vertical Analysis: 2005 - $4,701(Cash, and Cash Equivalent) divided by $29,427(Total Assets) = 1. 6 % 2004 - 6,707(Cash and Cash Equivalent) divided by $31,441(Total Assets) = 2. 1 % Observing all the facts, it is clear to see that Coca-Cola has lower assets. Lowering their assets means that Coca-Cola used their assets to pay down or payoff their debt. This is a fact that most investors would strongly look at while determining where to invest.
At this point Coca-Cola is able to spend more that will allow Coca-Cola to grow financially. After all of the factual numbers are observed, it is the time to decide which company is better to invest in. The only other elements that require examination is the personal choice and media influence. To look at which company has better advertising or taste is not the best way to decide but is a factor that is shared among un-educated investors. A financial investor would not encourage the investor to invest from his or her gut feelings.
They would try to persuade the investor to use facts and figures as well as the reputation of the company. Although Coca-Cola posted stronger numbers in the Vertical Analysis, PepsiCo, Inc. posted stronger numbers in the Liquidity category. The Horizontal Analysis was also not the strongest showing for the PepsiCo, Inc. were lower even though they weren’t decreasing at the rate of Coca-Cola. This is harder to pick a better investment. Although Coca-Cola is decreasing their percentage of liabilities their total percentage of liabilities was higher.
These facts and figures determine that Coca-Cola and PepsiCo. Inc, are both strong companies. They are also strong competitors. However, Coca-Cola seems to be handling their monies and financial investments in a more effective way. It seems that Coca-Cola is a stouter and more sensible investment. References: Principal of Financial Accounting 6th Edition. Weygandt,Kiesco, Kimmel www. pepsico. com/index. html#/flash/pepsico_slide. swf PepsiCo. com The Coca Cola Company. www. thecoca-colacompany. com/