Financial Statement Analysis for Coca-Cola and Pepsi - Essay Example

Financial ment Analysis for Coca-Cola and Pepsi Financial ments give the company’s assets and are used to manage the affairs of a firm by assessing its financial performance and position. Creditors and potential investors’ asses audit worthiness in a company before they buy shares or decide to invest. Owners use financial statements to compare their performance with rival firms to study and develop strategies to improve competitiveness. This report compares two dominating companies, Coca-cola and PepsiCo. These are two brands selling a similar product to very many market segments globally. Analysis of their financial statements will enable potential investors and creditors to familiarize themselves with the growth and potential growth of the companies. Introduction The beverage market is very broad and diverse. It can range from water, soda, juice or even milk. They can be hot or cold drinks or even alcoholic substances. However, not all products in the beverage world compete in the market as aggressively as carbonated soft drinks brands. These include Coca-cola and Pepsi. Coca-cola is a drink that requires no introduction. It is enjoyed by most countries all over the world with the exception of a few. It is almost the most available and unique brand all over the world currently. Coca-cola has more than one billion consumers per day. Nearly half of all soft drinks sold in the world are a product of Coca-cola. It’s most important soft drinks brands include Fanta, Coke, Sprite, Lilt, and Diet coke. Dr. John Styth Pemberton, a pharmacist in Atlanta, Georgia conceived Coca-cola in the year 1886. He produced the syrup used in the carbonated drink in a brass pot in his backyard. Superintendent Alex Samuelson, born in Sweden collected design ideas revolving around the contents of the drink. He researched and created designs which he then passed on to The Root Glass Company’s supervisor, Earl Dean who approved the shape of the bottle in 1916. The design was exclusive and thus an icon was created. The design was distinctive and thus could not be imitated as it was a copyright. Pepsi-Cola was founded in the summer of 1898 in New Bern, North Carolina by a youthful pharmacist named Caleb Bradham. Caleb drew customers to his drugstore by providing them with this refreshing drink that he created himself. He made major sales which led him to forming a company and to market the product globally. In 1902, Caleb launched Pepsi-Cola Company and received a government grant in the US on June 16, 1903. Two years later, he contracted two people to bottle the product to independent investors. By end of 1910, the company had sold more than a hundred thousand gallons of syrup per year. The outbreak of World War I changed the economy of The United States and the cost of doing business rose drastically. Prices hiked and by the year 1923, the company was bankrupt. Pepsi-Cola was sold to Craven Holdings Corporation, the first of its owners. During the 1930s, the brand expanded internationally. For the first 65 years of the company, it only sold one product- Pepsi Cola. A business phenomenon occurred as consumers observed Pepsi-Cola challenging the dominant Coca-Cola successfully. Currently, PepsiCo is a $29 billion company which has employed more than 150000 people speaking over 40 languages around the planet. The company has a corporate citizenship, benevolent efforts and varied programs. PepsiCo is the world’s fourth-largest food and beverage firm and is pursuing the position of the global leader in expediency foods and beverages. Its expansion stretches to increased food and drinks that provide great taste, nutrition and enjoyment. Profitability Ratios Profitability ratios calculate the company’s aptitude to produce profitable sales from its assets. The following profitability ratios are based on data from Coca-cola Annual Reports. Gross Profit Margin shows the percentage of proceeds required to cover in service and other expenses. Gross profit margin = 100 x Gross profit = 100 x 2,843 = 60.68% Net operating revenues 46854 Operating profit margin is calculated as operating income divided by revenue. Operating profit margin = 100 x Operating income = 100 x 10288 = 21.83% Net operating revenues 46854 Net Profit Margin shows profitability as calculated using net income divided by expenses. Net profit margin = 100 x Net income = 100 x 8584 = 18.32 % Net operating revenues 46, 854 The following profitability ratios are based on data from PepsiCo Inc. Annual Reports. Gross profit margin = 100 x Gross profit = 100 x 35,172 = 52.96 % Net Revenue 66,415 Operating profit margin = 100 x Operating Profit = 100 x 9,705 = 14.61 % Net Revenue 66,415 Net profit margin = 100 x Net Income = 100 x 6,740 = 10.15% Net Revenue 66,415 Report. Through these ratios, PepsiCo Inc.’s net profit margin decreased from the previous years but then improved from the year 2012 to 2013 exceedingly. This applies to the Gross profit margin and the Operating profit margin too. For Coca-Cola Co. ratios show that the margins also improve during the last financial year as compared to the previous years. Both companies could improve these current ratios by increasing current assets to current liabilities thus balancing the above ratios. Both PepsiCo and Coca-Cola’s profitability decreased previously when the economy had really taken a down-hill trend. The companies should decrease number of days to sell inventory, lower time’s interest ratio and other financial ratio changes. Current Events. Shares of Pepsi have been weak over the past year as a result of weak profits in the fourth quarter of last year. As a result, Pepsi decided to lay-off 8,700 employees so as to try and cut costs by $1.5 billion this year. Pepsi stock was sidelined in the subsequent market that harbored many important stocks, including Coca-Cola. However, as stability in the market does not seem to be returning soon, investors have shown new interest in Pepsi as it is a slow moving but steady income stock that can stay afloat even in tentative times. Recently, 1.6 million-member American Federation of Teachers banned Coca-Cola products citing child labor and human rights record. The federation highlights Coca-Cola’s bleak human rights record and accused the company of violence against union leaders in Colombia and Guatemala. The company was also accused of child labor in its companies especially the sugar processors and also outsourcing jobs to ‘poverty-wage contractors’. This will cause a financial crisis in these regions as the demand for Coca-Cola products will decrease drastically. Moreover, the company is acquiring equity stake in other growing companies. Coca- Cola plans to purchase a 16.7% stake in the energy drink producer, Monster Beverage Corp. for $2.15 billion. This new partnership will enhance margin ratios and draw investors in a big way. Income Statements of both companies. PepsiCo’s profit margin over the past few years has decreased by 9% compared to its rival Coca-Cola, attributed to its higher cost of sales to sales percentage. According to their income statements, PepsiCo’s average cost of sales was 44.89%, which was higher than the 35.26% average cost of sales to sales percentage for Coca-Cola. Coca-Cola changed its syrup quality thus the lower cost of sales. The company was also able to lower the cost of its raw ingredients by buying from local suppliers and hedging their prices effectively. PepsiCo’s diverse products also had low gross profit thus the low gross profit. PepsiCo’s slightly lower selling and administrative expenses and other miscellaneous expenses to sales percentage brought its profit margin closer to Coca- Cola’s, from 9.63% lagging behind in gross profit margin to 6.83% lagging behind in net profit margin on average. Over years, PepsiCo’s gross profit margin decreased from 56.69% to 52.95%, attributed to the increase of cost of sales to sales percentage from 43.31% to 47.05% over a period of years. Concerns have been raised about the arrest of this trend in future times. In contrast, Coca-Cola’s gross profit margin has recorded relative stability with well-maintained cost of sales to sales percentage as a result of successful commodity hedging. Coca-Cola was able to maintain its gross profit margin in a relatively steady level year after year as well as operating profit margin, pretax profit margin and net profit margin which were flat and steady with the exception of lower pretax profit margin and net profit margin. Balance Sheet analysis for both companies PepsiCo’s average total current assets growth rate was 10.13%, higher than its short-term liabilities growth rate of 8.77% unswerving with the company’s ability to cover short term liabilities with its current assets. Coca-Cola’s average short-term liabilities growth rate was 13.38%, higher than its average current assets growth rate of 11.22% steady with the company’s short-term liabilities coverage. PepsiCo’s accounts and assets grew 10.69% on average every year, more rapidly than its average sales growth rate of 9.92%. This could be attributed to an increase in the time in which the company takes to collect from its consumers. The company grew faster than its sales with an average growth rate of 12.36% annually. This is as a result of an increase in the number of times the company needed to sell its inventories. The average current ratio of Coca-Cola was approximately 1.This was a decrease from the previous years. Concerns were therefore raised as to whether the company was stable financially to pay off its short-term debts. Coca-Cola as a stable company with a 9.05% average sales growth rate and a 6.22% average net income growth rate each year would have made an effort to improve its financial ratio to above 1. This is as a way to reduce its short-term liquidity risk. The company had experienced some complexity in selling some of its inventories and also collecting cash from accounts receivable. However, the company is currently increasing its current assets to current liabilities in a bid to improve its financial health. Conclusion and recommendation for investors. Coca-cola and PepsiCo are key players in the beverage industry. As the beverage market segment matures and increases producers, the fast rate of its growth and potential strengths in the global market improve profits in both companies. Both companies agreed to protect profitability by curbing price competition thus concentrating on ways to boost their brand images locally and globally. Advertisements and marketing strategies have over time improved technologically and as a result business has improved for the companies. Coca-Cola displayed higher net profit margin than PepsiCo due to its low cost of sales to sales percentage. However, PepsiCo stabilized its profit margin over the years due to decrease of selling and administrative expenses to sales percentage. Coca-cola was the company to invest in due to its high net profit margin. Nevertheless, both companies were highly profitable even when the economy was on a downward trend. The analysis shows that both companies are stable economically and are highly profitable in the beverage industry. PepsiCo is quite a better investment choice according to the financial statements for both companies in terms of growth, diversity, operating performance, liquidity, capital structure and solvency, return on investment, asset utilization and market measures. References Clyde P. Stickney, Paul Brown and James M. Wahlen (2006). Financial Reporting, Financial Statement Analysis and Valuation. South-Western. PepsiCo, Inc. and Subsidiaries. (February 19, 2012). Form 10-K. PepsiCo, Inc. and Subsidiaries. (February 15, 2012). Form 10-K. PepsiCo, Inc. and Subsidiaries. (February 20, 2012). Form 10-K. PepsiCo, Inc. and Subsidiaries. (February 27, 2012). Form 10-K. PepsiCo, Inc. and Subsidiaries. (February 28, 2012). Form 10-K. The Coca-Cola Company and Subsidiaries. (February 26, 2012). Form 10 30. Prof. Alex Molnar, No Student Left Unsold: The Sixth Annual Report on Schoolhouse Commercialism Trend 2002-2003, Commercialism in Education 30. Read More