## Introduction

This paper evaluates PepsiCo, Inc., and Coca Cola Company by performing ratio analysis, vertical analysis and horizontal analysis of both companies.

## Ratio Analysis

Ratios can be divided into several categories as follows: (Block & Hirt, 2007).

## Profitability Ratios

There are several ratios under this category.

## Profit Margin

This is gross profit divided by sales. This ratio determines the proportion of each dollar of sales that contributes to other operating expenses and retained profit (Weygandt, Kimmel, & Kieso, 2008). A gross profit margin of 0.08, for instance, shows that 8% of sales revenue is contributed to other operating expenses and retained profit.

For PepsiCo, Inc., profit margin can be calculated as follows:

2005 2004

Profit Margin 18,386 / 32,562 = 0.56 16,587 / 29,261 = 0.57

Looking at the above ratios, we can see that 57 % of the company’s revenue in 2004 contributed to other operating expenses and retained profit while in 2005, 56 % of revenue contributed to other operating expenses and retained profit. This means that in 2005, PepsiCo, Inc. was able to slightly reduce the proportion of sales revenue that is spent on cost of goods sold as compared to 2004.

For Coca Cola Co., profit margin can be calculated as follows:

2005 2004

Profit Margin 14,909 / 23,104 = 0.645 14,068 / 21,742 = 0.647

Looking at the above ratios, we can see that 64.7% of the company’s revenue in 2004 contributed to other operating expenses and retained profit while in 2005, 64.5 % of revenue contributed to other operating expenses and retained profit. This means that in 2005, Coca Cola Co. was able to slightly reduce the proportion of sales revenue that is spent on cost of goods sold as compared to 2004.

## Operating Profit Margin

The operating profit margin is operating profit divided by sales. This ratio measures the company’s effectiveness in minimizing its production costs, and it shows the proportion of sales revenue that the company is left with after meeting all operating costs. When this ratio is high, it shows that the company is effective in minimizing its production costs and vice versa.

For PepsiCo, Inc., operating profit margin can be calculated as follows:

2005 2004

Operating Profit Margin 5,922 / 32,562= 0.18 5,259 / 29,261= 0.18

These ratios mean that in both years, 18 % of the company’s revenue contributed to net income before interest and taxes.

For Coca Cola Co, operating profit margin can be calculated as follows:

2005 2004

Operating Profit Margin 6,085 / 23,104= 0.26 5,698 / 21,742= 0.26

These ratios mean that in both years, 26 % of the company’s revenue contributed to net income before interest and taxes.

## Net profit margin

This ratio finds out the proportion of sales revenue that is left with the company after meeting all expenses are paid, and is found by dividing the net income by sales revenue. For instance, a net profit margin of 0.13 means that out of each dollar of sales, $ 0.13 remains with the company after all expenses are paid.

For PepsiCo, Inc., net profit margin can be calculated as follows:

2005 2004

Net Profit Margin 4,078 / 32,562= 0.13 4,212 / 29,261= 0.14

For Coca Cola Co, net profit margin can be calculated as follows:

2005 2004

Net Profit Margin 4,872 / 23,104= 0.21 4,847 / 21,742= 0.22

## Return on Total Assets (ROTA)

This ratio measures the amount of net income that is produced by funds invested in assets. For example, a ROTA of 0.15 means that $ 0.15 is earned from every $1that is invested in company assets.

For PepsiCo, Inc., ROTA can be calculated as follows:

2005 2004

ROTA 4,078 / 31,727= 0.13 4,212 / 27,987= 0.15

from the above ratios, we can see that PepsiCo, Inc. earned less from the amount invested in assets in 2005 as compared to 2004 meaning that in 2004, the company was able to utilize its assets better for generation of income.

For Coca Cola Co, ROTA can be calculated as follows:

2005 2004

ROTA 4,872 / 29,427= 0.17 4,847 / 31,441= 0.15

## Return On Equity (ROE)

This ratio shows the amount of income that common stockholders’ realize from their investment in the firm. The higher this ratio is, the higher the return realized by common stockholders on their investment.

For PepsiCo, Inc., ROE can be calculated as follows:

2005 2004

ROE 4,078 / 14,320 = 0.2848 4,212 / 13,572 = 0.3103

These ratios show that the amount of return realized by common stock holders declined in 2005 as compared to 2004.

For Coca Cola Co, ROE can be calculated as follows:

2005 2004

ROE 4,872 / 16,355 = 0.298 4,847 / 15,935= 0.30

These ratios show that the common stock holders of Coca Cola co realized lower returns on their investment 2005 as compared to 2004.

PepsiCo offered its common stock holders a higher return on investment than was realized by the common stockholders of Coca Cola co in 2004 but in 2005, the reverse was true.

## Liquidity Ratios

these ratios can be divided into the following:

## Current ratio

For PepsiCo, Inc., current ratio can be calculated as follows:

2005 2004

Current ratio 10,454 / 9,406 = 1.11 8,639 / 6752 = 1.28

The above ratios show that PepsiCo had more current assets to pay off its short term liabilities in 2004 than it had in 2005.

For Coca Cola Co, current ratio can be calculated as follows:

2005 2004

Current ratio 10,250 / 9,836 = 1.042 12,281 / 11,133 = 1.103

The above ratios show that Coca Cola Co had more current assets to pay off its short term liabilities in 2004 than it had in 2005.

Comparing the two companies, we can see that over the two years, PepsiCo has had more current assets to pay off its short term liabilities than Coca Cola Co.

## Quick ratio

For PepsiCo, Inc., quick ratio can be calculated as follows:

2005 2004

Quick ratio 10,454 – 1693 / 9,406 = 0.93 8,639 – 1541 / 6752 = 1.05

these ratios show that in 2004, PepsiCo could pay off its current liabilities without selling its inventories more comfortably than it could in 2005.

For Coca Cola Co, quick ratio can be calculated as follows:

2005 2004

Quick ratio 10,250 – 1,424 / 9,836 = 0.897 12,281 – 1,420 / 11,133 = 0.976

These ratios show that Coca Cola Co could more comfortably pay off its current liabilities without selling its inventories in 2004 than it could in 2005.

Comparing the two companies, we can see that in both years, PepsiCo could more comfortably pay off its current liabilities without selling its inventories than Coca Cola Co.

## Debt Ratios

these ratios can be divided as follows:

## Debt to total assets ratio

For PepsiCo, Inc., debt to total assets ratio can be calculated as follows:

2005 2004

Debt to total assets ratio 4,078 / 31,727= 0.13 4,212 / 27,987= 0.15

These ratios show that in 2005, PepsiCo had a lower proportion of its operations financed by borrowed funds as compared to 2004.

For Coca Cola Co, debt to total assets ratio can be calculated as follows:

2005 2004

Debt to total assets ratio 13,072 / 29,427= 0.44 15,506 / 31,441= 0.49

These ratios show that Coca Cola Co had a lower proportion of its operations financed by borrowed funds in 2005 as compared to 2004.

Comparing the two companies, we can see that Coca Cola Co uses a higher proportion of borrowed funds to finance its operations than is used by PepsiCo.

## Evaluation of PepsiCo, Inc

### Vertical Analysis

Percentage of cash and cash equivalents to total assets:

2005 2004

1,716 / 31,727 = 0.054 1,280 / 27,987 = 0.0457

According to ratios, cash and cash equivalents accounted for 5.4 % of PepsiCo’s total assets in 2005 while in 2004, cash and cash equivalents formed 4.57 % of Pepsi’s total assets.

Percentage of current assets to total assets:

2005 2004

10,454 / 31,727 = 0.3295 8,639 / 27,987 = 0.3087

This equation means that in 2005, 32.95 % of PepsiCo, Inc’s total assets were in the form of current assets. For 2004, 30.87 % of PepsiCo, Inc’s total assets were in the form of current assets.

### Horizontal Analysis

To perform a horizontal analysis of PepsiCo, Inc., we need to determine changes that occurred between 2004 and 2005. We also need to determine the percentage change in assets. We achieve this by dividing 2005 current assets by 2004 current assets as follows:

Percentage change in current assets = 10454 / 8639 = 1.2101

This shows a 21.01% increase in total current assets in 2005 as compared to 2004. Percentage change in current liabilities = 9404 / 6752 = 1.393

The above equation demonstrates a 39.3 % increase in current liabilities in 2005 as compared to 2004.

## Evaluation of Coco-Cola Company

### Vertical Analysis

To perform a vertical analysis of Coco-Cola Company, we have to divide individual items on the consolidated balance sheet by the total assets of the company, for example to ascertain the percentage of cash and cash equivalents to total assets, we divide the cash and cash equivalents by the total assets as follows:

Percentage of cash and cash equivalents to total assets:

2005 2004

4,701 / 29,427 = 0.16 6,707 / 31,441 = 0.2133

These ratios mean that in 2005, cash and cash equivalents formed 16 % of Coco-Cola Company’s total assets while in 2004, 21.33 % of the Company’s total assets were in the form of cash and cash equivalents.

Percentage of current assets to total assets:

2005 2004

10,250 / 29,427 = 0.3483 12,281 / 31,441 = 0.3906

This equation means that in 2005, 34.83 % of Coco-Cola Company’s total assets were in the form of current assets. For 2004, 39.06 % of Coco-Cola Company’s total assets were in the form of current assets.

## Horizontal Analysis

To perform a horizontal analysis of Coco-Cola Company, we need to determine changes that occurred between 2004 and 2005. We also need to determine the percentage change in assets. We achieve this by dividing 2005 current assets by 2004 current assets as follows:

- Percentage change in current assets = 10,250 / 12,281 = 0.8346
- This shows a 16.54% (1-0.8346) decrease in total current assets in 2005 as compared to 2004.
- Percentage change in current liabilities = 9,836 / 11,133 = 0.8835
- The above equation demonstrates a 11.653 % i.e (1-0.8835) decrease in current liabilities in 2005 as compared to 2004.

## References

Block, S., & Hirt G. (2007). *Foundations of Financial Management*. New York: McGraw Hill/Irwin.

Weygandt, J., Kimmel P., & Kieso D. (2008). *Financial accounting*. New Jersey: Wiley.