Coca-Cola: Company Background
Coca-Cola Company is the world's largest beverage corporation with its operations being available in around 200 nations globally. The most important markets for the company include Europe, Asia, and Latin America which in 2015 30 % of the total revenue of the firm came from these regions. The company has partnered with independent bottling companies such as Arca Continental and wire beverages to bottle the drinks so that the company reduces the cost of production. Regarding sales, the company is recognized as the most valuable soft drink brand in the world. The corporation works with independent distributors who are either wholesalers or retailers worldwide and spends massive amounts of money on advertising its products (Pendergrast, 2013).
Over the past few years, the company's sales and turnovers have declined due to changing trends in tastes and preferences by the consumers, especially in developed markets. For instance, in 2015 the maker's sales of the soft drink fell to $ 44.5 a decline equivalent to 4 % with the total sales falling in all its markets except in North America. Despite the declining unit of sales the same year, the company realized an increase in the net income that increases to $ 7.35 billion equivalent to a 4 % increase (Pendergrast, 2013).
Pepsi: Company Background
Pepsi is one of the leading beverage companies in the world with retail sales of nearly $ 20 billion worldwide. The company produces a variety of products including Diet Pepsi, Pepsi- Cola, Mountain Dew, and Pepsi Max, etc. the company's biggest competitor in the market is Coca-Cola. The company thus uses the brand name "Pepsi" for product differentiation and Pepsi is regarded as a middle-class soft drink by most people. The company's products are considered to be of high quality by the public thus building its corporate image and maintaining the loyalty of the customers (Bailey, 2014). Among its most recognizable product promotion strategies include the use of commercial adverts and marketing campaigns globally. Pepsi Company has rights to ownerships of nine trademarks of packaged food in the United States and several brands such as Pepsi and Lays. The beverage business in 2013 generated 48 % billion income for the company while the food business generated 52 % of the total revenue. The company has three channels of product distribution that include the customer warehouse, direct store delivery, and networks consisting of a third-party distributor. The distribution channel to be used is dependent on the features of the product, customer needs, and local trade (Bailey, 2014).
The beverage and food industry is growing at a high rate which is resulting in the entry of new competitors and substitute goods. Coca-Cola and Pepsi companies being the leading corporations in the market are experiencing increased competition due to the entry of alternative products into the market. The industry is growing, and the two businesses are investing most of their revenues in product promotion through advertising and market campaigns while the other part of the income is being directed towards innovation to develop new products that will meet the diverse needs of the customers (Bailey, 2014).
The current ratio measures the company's ability to repay existing liabilities through the use of the current assets. In this case, the current assets are those assets that the business expects to convert into cash within a year (Polo, 2014). For example, the current assets in coca-cola and Pepsi companies will include cash equivalents, inventories, and short-term payments. On the other hand, current liabilities are categories by the obligations that the business must settle within a year. Examples of the current liabilities for the two firms include employee's wages and salaries, accrued expenses, current payable tax, and payable accounts (Delen, Kuzey, & Uyar, 2013).
Current Ratio formula
Current ratio = current assets current liabilities
The current ratio tells whether the company's current assets can settle all the current liabilities (Delen, Kuzey, & Uyar, 2013). For instance, if a business has a current ratio of 1 or more, the current assets of the company exceed the current liabilities which means the firm will not face any problem with its liquidity (Brigham & Ehrhardt, 2013). Consequently, if the current ratio is less than one, then the business has more current liabilities than its current assets which may result in liquidity problems (Chheda, 2015).
Adopted from: (Chheda, 2015)
From the table above it can be concluded that both Coke and Pepsi Company possess sufficient current assets for repaying all the current liabilities. The table illustrates that it was only in 2012 that Pepsi Company could not afford to repay all its current liabilities, but overall the two corporations had adequate current assets required for settling their dues (Chheda, 2015).
Debt Equity Ratio
The debt ratio of any company is the measure of the extent of the consumer's or company's leverage. Debt ratio defines the ratio of the total short-term and long-term liabilities to the total assets of the enterprise. The rate is expressed as a percentage or a decimal and can be understood as the fraction of the business's assets financed by debts (Delen, Kuzey, & Uyar, 2013).
Debt Ratio= Total Debt/ Total Assets
Adopted from: (Chheda, 2015)
The higher the debt ratio, the greater the financial ratio the company faces (Brigham & Ehrhardt, 2013). If the debt ratio for a company is lower that, it is an illustration of a business that is more fiscally stable. Those firms that have higher debt ratios are usually regarded to be riskier to invest in by investors and creditors will be reluctant to lend them money (Delen, Kuzey, & Uyar, 2013). From table 2 above, it is clear that Coca-Cola Company has managed to maintain a healthy debt ratio for the period of five years as compared to Pepsi Co. until the year 2013, Pepsi was only managing to settle their debts through equity but in 2014 the figures show that the company's debts are more than the share capital. The overall analysis of the current and debt ratios of the two firms shows that coca-cola performance is better than that of Pepsi (Chheda, 2015). However, it can be argued that Pepsi has maintained consistency over the years but will require more time to present stiff competition to coca-cola.
Profitability and Operating Performance Ratios
Profitability ratios assess the capacity of the company to generate income when compared to its total expenses and other costs that are incurred with a particular duration. When a firm has a higher profitability value as compared to the previous fiscal year or in comparison with its competitors, this is an indication that the performance of the business is better. A company's profitability is measured by the use of distinguished profit margins such as operating margin, gross margin, net profit margin, and pretax margin (Delen, Kuzey, & Uyar, 2013).
Profit Margin= Net Income/ Net Sales
Gross Margin (%) = (Revenue- Cost of Goods)/ Revenue
Operating Margin = Operating Income/ Net Sales
Gross Profit Ratio
Adopted from: (Chheda, 2015)
Any firm should have sufficient gross profit that will ensure all the expenses are covered, and net gain is still recorded. A higher gross profit ratio is preferred since it shows the company is performing better (Delen, Kuzey, & Uyar, 2013). Continuous improvement by a business can be illustrated by the consistent growth in the profit margin over the years. From the table above, it is seen that the gross profit for Coca-cola is higher than for Pepsi which implies that coca-cola used lesser costs to produce goods than Pepsi. Therefore, for Pepsi to increase its profits, the company needs to reduce production costs for its products (Chheda, 2015).
Net Profit Ratio
Adopted from: (Chheda, 2015)
The net profit ratio measures the profitability of the firm in which case a higher ratio is an indication of efficient management and better returns by the company. As illustrated by the above table, coca cola enjoys higher profits margins than Pepsi which is due to the reason that Coca-cola has a higher gross profit with similar expenses as Pepsi (Chheda, 2015). To improve its net profit margins, Pepsi should either reduce its costs or increase its gross profits.
Operating Expense Ratio
Adopted from: (Chheda, 2015)
Low operating cost is an indication of high net profit margins that is above the operating profits. For instance, an operating profit ratio of 80 % means a company would use 80 % of its sales to cover the operating expenses and the cost of goods sold. From the table above it is clear that Pepsi is doing well since the company's operating expenses are lower than those of coca-cola. Both businesses can improve their net profits by reducing costs such as those of sponsorship and advertisement (Chheda, 2015).
Cash Flow Indicators and Investment Valuation Ratio
Cash flow indicators concentrate on the cash the company generates and how important the money is to the business regarding risk safety (Brigham & Ehrhardt, 2013). The investment valuation ratios give investors a view of the performance of their firm and also illustrate the financial health of the company (Delen, Kuzey, & Uyar, 2013). Over the past few years, investors in Pepsi Company have accrued 3.58 per share on average while those in Coca-cola have earned on average 20.15 per share an indication that shareholders at Coca-Cola have collected higher values for their dividends. Therefore, it can be concluded that Coca-Cola has satisfied its stockholders over the years more than Pepsi. However, their inability to settle their debts due to their current assets and liabilities can be a probable cause for alarm since it is projected shareholders will start to experience loss (Polo, 2014).
Recommendation on Which Company is better for an Investment
Though both companies have been a big success in their operations, I would choose to invest with Pepsi. Considering the current financial figures, Coca-Cola is above but Pepsi, on the other hand, has better operating margins, incomes, and net profit. Additionally, Pepsi has been upgraded several times more than Coca-Cola in the last couple of months which signals favorable conditions for investors. Over the recent years, Pepsi surprised everyone with its quarterly results in the EPS statement where the outcomes in Pepsi are much better to the shareholders compared to those at Pepsi (Polo, 2014). Moreover, Pepsi has overseen continued growth patterns and the price of its prices peaked which is appealing to investors. Investors investing their money with Pepsi today have an opportunity to realize higher returns shortly.
Non-monetary Standards to Consider
Pepsi is considered to have more exposure to products when Quaker Oats and Frito- Lays are analyzed. The global use of carbonated soft beverages has declined over the last decade where people are opting for substitute drinks such as th...
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