PepsiCo vs Coca Cola

The success of a business falls on the numbers. All financial figures play an important role in the success or failure of a business. Each transaction must be carefully documented and placed in the proper accounts to ensure that financial reports are accurate. These reports are a financial portrait of the company and its profitability. Balance sheets and income statements express the assets and liabilities of a company and help investors decide whether the company is a good potential investment. They are also important for management within the company to gauge what is helping to increase their profits and where adjustments should be made.

This analysis will be a comparison of financial reports for both Coca-Cola and PepsiCo for 2004 and 2005. A financial report is presented by each company for investors and stock holders to review, and in hopes of enticing new investors. The financial information contained in these reports is normally audited by an external accounting firm to ensure accurate financial reporting in the interest of the investors. The profitability of a company is expressed in these reports and aid in an investors’ decision to continue to invest or to pull out if the losses are too great. Tools needed for analysis

The analyzing tools used for this report are horizontal, vertical, and ratio analysis with both intracompany comparisons and intercompany comparisons. Each technique will help to show the liquidity, solvency, and profitability of the company from 2004 to 2005. The analysis from each company will then be compared to the other to determine which company had the higher profit value and would therefore be a better investment.

A horizontal analysis evaluates a series of financial statement data over a period of time. This type of analysis would be used to compare the monetary increase or decrease from one time frame to the next, in this case from 2004 to 2005, and express it in percentage value. This form of analysis is used in intracompany comparisons to aid management in increasing profitability. A trend can be seen using this type of analysis that can help management make decisions for adjustments needed. For example, in 2004 the net revenue for PepsiCo, in millions, was $29,261. In 2005 the net revenue was $32,562. Using horizontal analysis will show that there was an increase of $3,301 in net revenue from 2004 to 2005, which calculates to 11.3 percent (%). This information will be used later to determine trends and room for improvement.

A vertical analysis evaluates financial statement data by expressing each item in a financial statement as a percent of a base amount (Weygandt, Kimmel, & Kieso, 2008, p. 699). This analysis can be useful for both intercompany and intracompany comparisons. With vertical analysis the total current assets are broken down into cash and cash equivalents, short-term investments, accounts and notes receivable (net), inventories, and prepaid expenses and other current assets. Each of these current assets is equivalent to a percentage of the total current assets. By analyzing this information, the company is then able to determine where adjustments need to be made, and what is working in their favor. Using Coca-Cola as an example, in 2004 the total current assets were $12,281. Of that, $61 was cash and cash equivalents. This equaled to about 0.5% of the total current assets. This data will also be used later in comparison to PepsiCo.

A ratio analysis will express the relationship between selected data in a financial statement. For example, total assets compared to total liabilities. This ratio expresses how much current assets a company has, in terms of dollars, for every dollar of liabilities. This ratio is calculated by dividing the total current assets by the total current liabilities, and can be expressed in percentage, rate, or proportion. For this analysis all ratios will be presented in proportion. PepsiCo, for example, has a current ratio of 1.11:1 for 2005. This means that for every dollar of current liabilities, PepsiCo had $1.11 of current assets. This will be explained in further detail later.

These ratios are used to determine the liquidity, profitability and solvency of a company. The liquidity ratio measures the company’s short term debt-paying abilities. The profitability ratio measures the success of the company and its ability to produce income over a specific period of time. Solvency ratios express the company’s ability to survive over a long period of time. This will help potential investors and stockholders determine whether the company will be a good long term investment. PepsiCo and Coca-Cola analysis

The comparisons being made in this analysis are those of PepsiCo and Coca-Cola from 2004 through 2005 from data provided in a consolidated balance sheet. Vertical and ratio analysis will be done to determine which company would be a better investment. After which, a horizontal analysis will be done primarily on the company deemed the better investment to establish trends and determine any room for improvement. Vertical Analysis

To find the vertical analysis of both years I must first compute the current assets and divide them by the total assets of the year. For PepsiCo in 2005, I get $10,454/$31,727=0.32949=33%. For 2004 it was $8,639/$27,987=0.3867=39%. This shows a decrease in percentage of current assets in comparison to total assets from 2005 to 2004. For Coca-Cola in 2005, I got $10,250/$29,427=0.3483=35%. For 2004, it was $12,281/$31,441=0.3906=39.1%. There is also a decrease for Coca-Cola from 2004 to 2005. In comparison of both companies for 2005, PepsiCo has a lower percentage of current assets to total assets.

Current liabilities in comparison to total liabilities must also be calculated. In 2005, PepsiCo’s current liabilities equaled 54% ($9,406/$17,476=0.5382=54%). This was an increase from 47% in 2004 ($6,752/$14,464=0.4668=47%). Coca-Cola Company went from 72% ($11,133/$15,506=0.7179=72%) in 2004 to 75% ($9,836/$13,072=0.7524=75%) in 2005. PepsiCo also has a lower percentage of current liabilities to total liabilities.

Using the Income Statements of each company for continued vertical analysis, it would appear that both companies had a similarly productive year in comparison to the previous year. In 2004, PepsiCo’s percentage of cost of sales in comparison to total net revenue was 43% ($12,674/$29,261=0.4331=43%) and 44% in 2005 ($14,176/$32,562=0.4353=44%). While the cost of sales did increase, total revenue increased as well leaving the percentage with only a slight increase from 2004 to 2005. Coca Cola’s percentage of costs of goods sold in comparison to net operating revenues was 35% ($7,674/$21,742=0.3529=35%) in 2004 and 35% ($8,195/$23,104=0.3547=35%) in 2005. Just like PepsiCo, the cost of sales increased with the total revenues. Ratio Analysis

Vertical analysis alone is not enough to determine which of the two companies would be a better investment opportunity. Both companies had a similarly productive year in comparison of cost of sales to net revenues, yet PepsiCo had a lower percentage of both current assets to total assets, and current liabilities to total liabilities. To determine which company would be a better investment, we must also determine its liquidity, profitability, and solvency through ratio analysis. To calculate the current ratio, I will need to look at the total current assets, total current liabilities and total assets for each year. As mentioned before, the current ratio for 2005 for PepsiCo is $10,454/$9,406=1.11:1 and the current ratio for 2004 was $8,639/$6,752=1.28:1, each expressed in terms of millions. This shows that the current ratio decreased from 2004 to 2005; however, it would still need to be compared to that of Coca-Cola to determine its investment quality.

Coca-Cola’s consolidated balance sheet shows the current assets for 2005 as $10,250 and current liabilities as $9,836, also expressed in millions. In using the same formula, the current ratio would be $10,250/$9,836=1.04:1. In 2004, the ratio was $12,281/$11,133=1.1:1. The ratio for Coca-Cola dropped as well from 2004 to 2005, same as PepsiCo; however, in comparison, PepsiCo appears to have a higher current ratio than Coca-Cola. This would be one basis for comparison in favor of PepsiCo for potential investors.

To determine the companies’ profitability, let’s look at its profit margin. In 2004 PepsiCo’s profit margin was 14 % ($4,212/$29,261=0.1439=14%). This decreased to 13% in 2005 ($4078/$32562=01252=13%). Coca Cola had a profit margin of 22% ($4,847/$21,742=0.2229=22%) in 2004 and 21% in 2005 ($4,872/$23,104=0.2108=21%). Both show a decrease in profit margin from 2004 to 2005 by 1%.

To determine the companies’ solvency we will compare the debt to total assets ratio. The formula for this is total debt divided by total assets. In 2004, PepsiCo had a total debt of $14,464 and total assets of $27,987. This equals to a percentage of 52% ($14,464/$27,987=0.5168=52%). In 2005 this increased to 55% ($17,476/$31,727=0.5508=55%). Coca-Cola went from 49% in 2004 ($15,506/$31,441=0.4931=49%) to 44% ($13,072/$29,427=0.4442=44%) in 2005. Long term investors look for lower debt to total asset ratios as more desirable. By these comparisons of profitability and solvency, I would determine that Coca-Cola would be the better investment. Horizontal Analysis

The horizontal analysis for each, while still beneficial within the company, is not as important when comparing with a competitor. This analysis is more for internal use to make improvements where necessary. Still this analysis is important once comparisons have been made with a competitor as well. The formula to determine the change from one time frame to the next is current year amount minus base year amount divided by base year amount. In 2005 PepsiCo had $31,727 in total assets compared to $27,987 in 2004. Assuming that 2004 is the base year, I got $31,727-$27,987/$27,987=0.1336 which equaled to a 13.3% increase in assets. Total liabilities for 2005 were $17,476. This was a $3,012 increase from 2004 when total liabilities were $14,464. Using the formula to determine the change percentage, $17,476-$14,464/$14,464, there was an increase in total liabilities of 0.2082 or 21% from 2004 to 2005. In 2004 Coca-Cola’s total assets equaled $31,441.

This decreased in 2005 to $29,427 showing a change of 6.4% less in 2005 than in 2004 [$29,427-$31,441/$31,441=(0.06405)=(6.4%)]. Total liabilities also decreased from 2004 to 2005. In 2004 Coca-Cola’s total liabilities equaled $15,506, then dropped to $13,072 in 2005. This shows a decrease of 15.7% [$13,072-$15,506/$15,506= (-.1570)=(15.7%)] for liabilities. Based solely on the information presented thus far, I would determine that each company would be a safe investment; however, I see PepsiCo as the better current investment. During the vertical analysis, Coca-Cola did appear to be the better investment in comparison because of the higher percentage of profit margin and lower percentage of debt to total asset. In the ratio analysis, however, PepsiCo returned better results in comparison of total liabilities to total assets. Both companies showed an upward trend in sales yet I believe that PepsiCo shows higher potential. I would still determine each to be a safe investment.

Resources
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008). Financial accounting (6th ed.). Hoboken, NJ: Wiley.