PepsiCo and Coca-Cola Companies’ Analysis

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PepsiCo and Coca-Cola are leading beverage companies in the world. The two companies share a long history of competition against one another in the desire to dominate the global beverage industry. PepsiCo was founded in 1919 in Delaware, USA and later reestablished in North Carolina in 1986. The company has operations in over 200 countries but derives over 60 percent of the sales revenue from the USA. It has numerous products including Pepsi, Aquafina Water, Tropicana, Gatorade, and Mountain Dew (PEPSICO, INC. n.d.). The company has two main subsidiaries, Quaker Foods and Frito-Lay-maker.

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Coca-Cola Company is a renowned global brand and leads in the production of nonalcoholic beverages, with over 500 different brands. The leading products include the soft drinks, including Sprite, Coke, Fanta, Krest and Stoney. Other brands include water, tea, juices, and energy drinks, such as Powerade, Honest Tea, Dasani, and Minute Maid. The Coca-Cola Company also operates in over 200 countries (THE COCA-COLA COMPANY, n.d.). As opposed to PepsiCo, Coca-Cola derives over 70 percent of the revenue from out of the USA.

This report is aimed at comparing the financial performance of the two companies for the year 2020. The analysis covers three main areas: liquidity, solvency, and profitability for each company and the overall industry performance.

Liquidity

The users of financial statements evaluate a company’s capacity to honor its short-term obligations using the liquidity ratios. The ratios offer a basic tool through which the users can evaluate whether a company is expected to survive as a going concern (Bazley and Hancock, 2018). Appendix 1 shows the main ratios used to assess the solvency of both PepsiCo and Coca-Cola for the year 2020.

The current ratio and the quick ratio indicate whether the current assets can be able to pay off the short-term liabilities. PepsiCo had a current ratio of 0.93 and a quick ratio of 0.81. Coca-Cola had a current ratio of 1.33 and a quick ratio of 1.09. The industry average were 1.26 and 0.93, respectively. Both companies had a current ratio of less than 2 which is the ideal for the company to show strong short-term liquidity (Ryan, 2017). Overall, Coca-Cola shows stronger liquidity than PepsiCo. The company’s liquidity measures beat the industry average whereas PepsiCo measures are below the industry average.

Solvency

The solvency of a company involves comparison of what the company owes to its debt or borrowings. It is fundamental in showing whether the company has a positive net worth or whether it can manage the debt burden. Solvency ratios come in handy when assessing a company’s long-term financial stability (Bazley and Hancock, 2018). Appendix 2 shows the main ratios used to assess the solvency of both PepsiCo and Coca-Cola for the year 2020.

The debt/equity ratio measures the relative proportion of debt over the shareholder’s equity. The leverage ratio indicates the debt component in the overall capital structure of an organization. PepsiCo reported a debt/equity and leverage ratio of 2.80 and 6.54, respectively. Coca-Cola reported a debt/equity and leverage ratio of 1.97 and 4.42, respectively. The industry measures were 0.87 and 2.61, respectively. The results indicate that both companies rely heavily on debt to finance their operations compared to the overall industry (Ryan, 2017). This is a reflection of the debt capital the two companies have acquired to finance their manufacturing and distribution networks. In addition, PepsiCo has a higher debt component in the capital mix than Coca-Cola since the company’s debt/equity and leverage ratios were higher.

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Profitability

Profitability ratios review earnings performance relative to the capital investment or revenue. They measure the capability of the company to create wealth and are an assessment of whether the business is doing a good job of making profit (Bazley and Hancock, 2018). Appendix 1 shows the main ratios used to assess the solvency of both PepsiCo and Coca-Cola for the year 2020.

PepsiCo gross margin, net margin, and return on capital were 54.90, 10.20, and 8.56, respectively. For Coca-Cola, the gross margin, net margin, and return on capital were 59.31, 23.53, and 7.86, respectively. Coca-Cola reported higher profitability than PepsiCo for the period under consideration apart for a marginal difference of 0.7 on the return on capital. PepsiCo generated more than the double amount of revenue posted by Coca-Cola at 70.37B and 33.01B, respectively (Peel, 2021). However, Coca-Cola reported higher net income than PepsiCo at 11.36B and 7.12B, respectively. The difference shows that PepsiCo revenues are reduced by higher operating expenses. PepsiCo and Coca-Cola reported higher margins to the industry average. The industry gross and net margins were 49.26 and 8.43, respectively.

Conclusion

The financial analysis of PepsiCo and Coca-Cola help in comparing the feat of the two rival companies to the industry average. In general, Coca-Cola posted an impressive performance than PepsiCo. Coca-Cola had a stronger liquidity, solvency, and profitability. The performance shows better management effectiveness in running the company’s operations. PepsiCo should take advantage of the higher revenues generated by the company to improve its financial performance. The company needs to streamline its operations so as to keep reducing operating costs, which have an apparent negative effect on profitability.

References

Bazley, M. and Hancock, P. (2018). Contemporary Accounting. 7th ed. Cengage Learning.

Peel, A.G. (2021). PepsiCo posts net revenue growth of 4.8% for 2020 after a strong end to year. Web.

PEPSICO, INC. (n.d.). Msn.Com. Retrieved June 26, 2021, from https://www.msn.com/en-us/money/stockdetails/analysis/nas-pep/fi-axyhnm

Ryan, R. (2017). Corporate Finance and Valuation. Thomson Learning, London.

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THE COCA-COLA COMPANY. (n.d.). Msn.Com. Retrieved June 26, 2021, from https://www.msn.com/en-us/money/stockdetails/analysis/nys-ko/fi-a1wljc

Appendices

Appendix 1

Liquidity PepsiCo Coca-Cola Industry
Current ratio 0.93 1.33 1.26
Quick ratio 0.81 1.09 0.93

Appendix 2

Solvency PepsiCo Coca-Cola Industry
Debt/Equity Ratio 2.80 1.97 0.87
Leverage ratio 6.54 4.42 2.61

Appendix 3

Profitability PepsiCo Coca-Cola Industry
Gross margin 54.90 59.31 49.26
Net margin 10.20 23.53 8.43
Return on capital 8.56 7.86
Company revenue 70.37B 33.01B
Company net income 7.12B 11.36B

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BusinessEssay. 2022. "PepsiCo and Coca-Cola Companies' Analysis." July 31, 2022. https://business-essay.com/pepsico-and-coca-cola-companies-analysis/.

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