Benchmark- Interpreting Financial Statements PDF

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BUS 317- Financial decision making Week 3...

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Benchmark- Interpreting Financial Statements

Interpreting Financial Statements for Pepsi Cola and Coca Cola Grand Canyon University: BUS 317 January 10, 2021

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Benchmark- Interpreting Financial Statements

Financial analyst, business owners, lenders and stakeholders use financial statements to determine a company’s financial health to decide if the company is worth investing in. This financial information can help investors and any other stakeholder make sound financial decisions. Analyzing a company’s financial records paints a picture of the overall status of the company. In this document I will be comparing the liquidity, solvency and the profitability of two of the biggest soft drink giants, Pepsi Cola and Coca Cola. Both companies have been at war since the early 1890’s. They have spent a lot of money on advertising to create a solid brand for themselves and both have succeeded. Coca Cola has focused on a family, wholesome brand in contrast to Pepsi, who has focused on being a youthful brand keeping up with new trends (Paracha, 2017). In the first part, I will compare both companies’ liquidity ratios. Starting with the current ratio, as defined by Kimmel & Weygandt (2017), it means that for every dollar of current liabilities, PepsiCo has .93:1 and Coca Cola has 1.13:1 of current assets. the industry’s current ratio average is 1.20:1. In addition, PepsiCo accounts receivables turnover is 8.59 and Coca Cola’s is 9.39 (THE COCA-COLA COMPANY, 2020). This measures how quickly a company can convert certain assets to cash (Hayes, 2020). The inventory turnover is 9.27 for PepsiCo and 4.43 for Coca Cola. (PEPSICO, INC. 2020). This measures the number of times average inventory was sold during a reported period. In this case Pepsi had a higher ratio, which indicates sold product more frequently. Lastly, the current cash to debt ratio for Pepsi is .28 and 4.43 for Coca Cola. (Kimmel, P. D. & Weygandt, J. J. 2017). Liquidity Ratios Current Ratio Accounts Receivable Turnover Inventory Turnover

PepsiCo

Coca Cola .93 8.59 9.27

1.13 9.39 4.43

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Benchmark- Interpreting Financial Statements

Next, I will be comparing the solvency ratios. As defined by Kimmel & Weygandt (2017), solvency ratios “measure the ability of a company to survive over a long period of time.” PepsiCo debt to assets ratio is .41 and Coca Cola’s is .50. Debt to asset ratio measures the percentage of total financing provided by creditors. This is determined by dividing the total liabilities both current and long term by the total assets. Times interest earned ratio for Pepsi is 11.41 and Coca Cola is 9.3. Times interest earned ratio also known as interest coverage indicates the company’s ability to meet interest payments when they are due. Lastly for this section is the free cash flow available which is 6,362 million for PepsiCo and 5,617 Million for Coca Cola. This number determines the company’s solvency, and also the ability to expand operations and amount of excess cash available. Comparing both companies shows that PepsiCo has a higher free cash flow.

Solvency Ratios Debt to Total Assets Ratio Times interest earned Free Cash Flow

PepsiCo .41 11.41 6,362 mil

Coca Cola .50 9.3 5,617 mil

The last comparison will be the profitability ratios. Starting with the profit margin, PepsiCo is 10.94 and Coca Cola is 24.11. Profit margin is the rate of return on sales which is a measure of the percentage of each dollar of sales that turns into net income (Kimmel, P. D. & Weygandt, J. J., 2017). PepsiCo Asset turnover is .75 and Coca Cola is .41. The asset turnover measures how effectively both PepsiCo and Coca Cola used their assets to generate sales. Next, is the return on assets ratio, which is 8.40 for PepsiCo and 9.06 for Coca Cola. The return on assets ratio measures the profitability of assets in terms of the income earned on each dollar

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Benchmark- Interpreting Financial Statements invested in assets (Kimmel, P. D. & Weygandt, J. J. 2017). Lastly is the return on common stockholders’ equity (ROE). ROE is used to show how many dollars of net income PepsiCo and Coca Cola earned for each dollar invested by the owners. PepsiCo ROE is 51% as compared to Coca Cola which is 44.7%. (Kimmel, P. D. & Weygandt, J. J., 2017). Profitability Ratios Profit Margin Asset Turnover Return on assets Return on common stockholders’

PepsiCo 10.94 0.75 8.40 51%

Coca Cola 24.11 0.41 9.06 44.7%

Based on both comparisons, PepsiCo appears to be doing better overall. Both companies have a very strong presence in the soft drink industry. Coca Cola appear to have had the lead in the industry in prior years, but recently according to Mourdoukoutas (2018), PepsiCo has beat Coca Cola. My first impression upon seeing both companies was that Coca Cola would be in a better standing, but after reviewing the financial statements, it is easy to see the areas where PepsiCo is doing better than Coca Cola. But, like everything else in the stock market, things change form one day to the other, these numbers only represent a period and not a final result.

Benchmark- Interpreting Financial Statements

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References

Hayes, A. (2020). What Everyone Needs to Know About Liquidity Ratios. Retrieved January 11, 2021, from https://www.investopedia.com/terms/l/liquidityratios.asp Kimmel, P. D. & Weygandt, J. J. (2017). Survey of Accounting. Madison, Wisconsin, USA: Wiley. Retrieved January 09, 2021from: http://www.gcumedia.com/digitalresources/wiley-and-sons/2016/survey-of-accounting_ebook_1e.php Mourdoukoutas, P. (2018). Pepsi Beats Coke. Retrieved January 11, 2021, from https://www.forbes.com/sites/panosmourdoukoutas/2018/07/14/pepsi-beats-coke/? sh=63cacacc11d0

Paracha, N. (2017). Cola wars: A social and political history. Retrieved January 11, 2021, from https://www.dawn.com/news/1329368

PEPSICO, INC. (2020). Retrieved January 11, 2021, from https://www.msn.com/enus/money/stockdetails/analysis/nas-pep/fi-axyhnm

THE COCA-COLA COMPANY. (2020). Retrieved January 11, 2021, from https://www.msn.com/en-us/money/stockdetails/analysis/nys-ko/fi-a1wljc...