It is the duty of every company to arrange its programs so that at any particular time it is able to repay its debts. The capability to pay off debts relies on the liquidity of the company and it establishes if a specific company has some ready cash thus terming it liquid. In trying to determine whether an organization can pay back its debts, accountants rely on current ratios, quick ratios, cash ratios, and cash conversion ratios. In trying to determine which of the two companies between PepsiCo and Coca Cola is highly liquid and is able to repay its debt more efficiently we use the current ratio.
A firm calculates its current ratio by division of its current assets by current liabilities. Brigham stated that “In general, creditors like to see a high current ratio” (Brigham & Ehrhardt, 2005). For the past five years the current ratio of Coca-Cola has been moving between 0.9 and 1.3. When the current ratio lies below one, the company’s ability to settle it’s debts as, and when they fall due, is low. In the year 2009, PepsiCo had a current ratio of 1.4 compared to Coca-Cola’s 1.3 and the average industry’s 1.26. At this point in time, both companies were better off, compared to the industry’s average. Both Coca-Cola and PepsiCo were able to settle their financial obligations. But PepsiCo in general was better placed compared to Coca-Cola. In the year 2009, PepsiCo had the highest current ratio and indication that they had more solid investments and increase in their current assets. This however does not indicate that PepsiCo is doing better than Coca-Cola and some financial experts might argue that PepsiCo might be hoarding its assets instead of using them to improve the business.
Return on assets, measures how efficiently a company uses it’s assets to generate income. This ratio is determined by isolating net earnings from total average assets. Because resources are limited, companies are under pressure to put them into productive use. This therefore, allows the ratio to be used to make a decision on whether a project should be initiated or not. Every company initiates a new project with an aim of generating income. Between the years 2005 and 2009, the return on assets for Coca-Cola Company has ranged from 13.8% to 17%. In the same year, 2009, Pepsi had a return on assets ration of 14.9% compared to Coca-Cola’s 14%. This is an indication that PepsiCo seems to be using its assets more efficiently compared to Coca-Cola thus translating this into more money. Both companies are doing better than the industry’s average ROA which is given at -6.6%. It shows they are investing in viable projects.
Return on equity is a profitability ratio used to indicate how much shareholders earn from their shares. With this ratio we get an idea of how management is balancing its acts on profitability, financial leverage and asset management. Siciliano talked about the “measurement of the rate of return of the stockholders’ investment in a publicly owned company” (Siciliano, 2003). Between the years 2005 and 2009 Coca-Cola has had a return on equity, ranging from 26.9% to 30% being a great indication of how they are generating value from each unit of investment. PepsiCo is generating a higher return on equity than Coca-Cola, standing at 34.9% at 2009 versus 26.9% of Coca-Cola. Both companies’ are doing better than their competitors in the industry because the industry’s average ROE in 2009 was -2.7%. This shows that the two companies are very attractive to investors in the industry but in comparison, PepsiCo is more attractive to investors because of its higher ROE.
It is companies that are doing well in the industry that will attract investors. After investors buy their shares of that particular company, their part remains satisfaction of higher expectations from the company. Shareholders should be rewarded with high returns for putting their money in the company. One of the most efficient ways to keep the shareholders satisfied is to pay them high dividends and sometimes even at shorter intervals. For a company to pay high dividends it should have made high profits and it should simply be doing well in that particular industry. It is this situation that calls for the use of dividend payout ratio in trying to determine which stockholders of the two companies are more satisfied. Excess (dividend) disbursement ratio is computed by division of dividend per ordinary share by earnings per share. According to previous research, Coca-Cola has a larger stake, with a ratio of 53% compared to PepsiCo’s 47%. This therefore indicates that the stockholders of Coca-Cola are more satisfied when this ratio is used to measure that satisfaction aspect. Bragg puts forward that “The dividend pay out ratio, tells an investor what proportions of earnings are being paid back in the form of dividends” (Bragg, 2007).
Price earnings ratios are well known to measure the investment valuation. Though this ratio suffers its setbacks, it is the most used by both the public and investment professionals. The companies apply the figure of basic income per share alienated by the present stock price, into the computation of Price Earnings. Coca-Cola has a higher price earnings ratio of 19.7 compared to PepsiCo’s 16.3. It therefore stands that Coca-Cola as a company has more satisfied stockholders compared its closest rival PepsiCo.
There are several financial guidelines to be followed before deciding which company to invest money. Based on the financial risk the companies are facing, we have learnt that PepsiCo is in a better position to extinguish its financial obligations compared to Coca-Cola, even though both companies have a current ratio of more than one. In case the industry is caught up in an uncertain occurrence, PepsiCo will be in a better position to sort itself out with ease, compared to Coca-Cola whose whole ratio is lower and closer to 1.
Both PepsiCo and Coca-Cola have positioned themselves to benefit from the recovery in consumer spending. In this case, PepsiCo seems to have a stronger origin, and for investors looking for safe dividend stock with a pronounced and strong growth potential they should opt for PepsiCo.
While Coca-cola has more appealing figures in terms of fundamentals, PepsiCo has better margins. These limitations are in terms of the working margins, proceeds and the profits which particularly, are most essential for budding companies. In terms of investment reservoirs, PepsiCo has more original sentiments as it has been advanced more often for the past few months in comparison to Coca-Cola. Both the companies look set to handle emerging markets and that even though they might not give favorable results immediately, with time they will settle and make benefits due to the economies of scale that they have. Mankiw stated that “when long-run average total cost declines as output increases, there are said to be economies of scale” (Mankiw, 1998).
Recently, PepsiCo has had an improvement in its Earnings per Share statements and this sounded better than Coca-Cola whose quarterly results seemed to be stagnant with no significant improvements.
It is significant to get to know the technological scrutiny concerned before trying to make a decision on which one of the entities to opt for. In the last year Coca-Cola has exhibited miniature oscillation for depositors and entrepreneurs alike at a five dollar array. These statistics are heartening for predetermined income backers but in actuality, in the precedent 10 years Coca-Cola has by no means varied in its 20 point range. Such results depict lack of growth. With Coca Cola appearing to have reached its limits of expansion, it appears regrettable because what remains is a drop in share value, commonly referred to as diseconomies of scale
Consequently, PepsiCo has been on a growth path since its formation which is a good indication of a company doing well. Speculators do not view PepsiCo as their ‘thing’ because of the slow appreciation of stock but it is rather good news for the long term investors because so far PepsiCo has not hit its peak, thus better is to come. It is still in its career and should carry on with these high stocks. Investing in PepsiCo presently, gives the investor an opportunity to observe it expand in future. Although the wait is tiresome, shareholders will be unperturbed and can see their investment appreciate over time. It is also encouraging with its dividend inducement which increases growth by permitting for reinvestment.
The appointment of a new CEO to PepsiCo given that he has an Indian background, piles pressure on Coca-Cola in terms of emerging markets which includes moving to Indian and Asia in general. Coca-Cola may step forward to curb the piling pressure by going for advertising as a way to open the new markets and gain a market share in those unpredicted markets. As many may view Coca-Cola to be the giant in this beverage industry, times seem to be changing and truly Pepsi is now gaining ground and Coca-Cola is apparently finding the playing field more unfavorable.
In stock analysis observations, Pepsi has plenty more coverage to merchandise that includes Frito-Lays and Quaker Oats, in case the product prices plummet. It should give more room in the bottom line. At this point, the commodity prices will increase in the next one and a half years. This will open doors for Coca-Cola and will allow it to expand given that it has the biggest market share in the U.S. As for smart strategies, Pepsi has taken over and issued a great threat on Coke’s existence in America. There has been a decline in the consumption of carbonated drinks in the past few years and this gives room for the introduction of alternative beverages that now roll into the market.
In conclusion, the analysis of these companies has revealed the strength and weaknesses of every company and with that it is the duty of every person and investor to keenly look at these factors before determining which firm he or she should invest his/her money in. This is because any misunderstanding of the financial position and progress of the company can lead to wrong investments. It is also vital for every company to analyze the kind of investments it is engaging itself in so as to keep poor investment decisions at bay.
References
Brigham, E. F., & Ehrhardt, M. C. (2005). Financial management: theory and practice: study guide (11th ed.). Mason, Ohio: Thomson/South-Western.
Siciliano, G. (2003). Finance for the non-financial manager. New York: McGraw-Hill.
Bragg, S. M. (2007). Business ratios and formulas: a comprehensive guide (2nd ed.). Hoboken, N.J.: Wiley.
Mankiw, N. G. (1998). Principles of economics. Fort Worth, TX: Dryden Press.
Appendix A
Current Ratio
Current is calculated as current assets divided by current liabilities and is one of the ratios used to determine a company’s liquidity position. Is the company really able to pay it’s debts as and when they fall due? If the current ratio is greater than one it is favorable and it indicates that the current assets are more than the liabilities and truly the company can repay its debt when they are due. But in situations where the current ratio is greater than 1.5, experts seem to hold an assumption that the company might be hoarding its assets instead of using them to make business. Thus it is about the ability to pay short term debts.
The current ratio for Coca-Cola and PepsiCo for a certain year can be calculated as below:
- Current Ratio = Current Assets / Current Liabilities
- The current ratio for PepsiCo was given as; 4081 / 3555
- = 1.148
- Consequently, Coca-Cola’s current ratio was given as follows; = 6454 / 4744
- = 1.360
Appendix B
Return on assets
This is the profitability of a company in relation to its total assets. It illustrates the management efficiency in using the assets to generate income or simply profit. The higher the value the better and it indicates that management is efficiently utilizing it’s assets by using small amounts of assets to generate high incomes. This value is always expressed in terms of percentage and is given as:
In the year 2004, the return on assets for Coca-Cola and PepsiCo was compared as follows;
Coca-Cola = ($5,981 ÷ $36,616) = 16.3% and Pepsi’s is given as ($5,658 ÷ $32,279) =17.5%.
Appendix C
Return on equity
It indicates the company’s profitability by comparing the profit it gains with the average shareholder’s equity. It indicates what the shareholders get from the company for their investment in it and being given as a percentage, it indicates how best management is using its equity base to make profit. It is calculated as:
In the year, the ROE of Coca-cola and PepsiCo was found to be given as below;
Coca-cola = ($5,981 ÷ $19,332) PepsiCo= ($5,658 ÷ $16,386) = 30.9% = 34.5%
Appendix D
Debt ratio
Debt ratio relates to the amount of debt to the total assets of the company. It hints on the amount of leverage of the company at that time. A company that is less dependent on leverage has a smaller percentage and it indicates that the company is strong on the equity position. That therefore shows that the higher the percentage of debt ratio, the riskier the company. It is mathematically calculated with the formula below;
The debt ratio for the two companies was given as;
Coca-cola = ($5,981 ÷ $19,332) PepsiCo= ($5,658 ÷ $16,386)
= 30.9% = 34.5%
Here, PepsiCo is considered to be riskier given that it has a higher debt ratio compared to its closest industry rival Coca-Cola.
Appendix E
Fixed asset turnover ratio
It is a rough estimate of the productivity of the fixed assets that any particular company has in its books and uses them to generate sales. In most circumstances the fixed assets of a company reflects the greatest proportion of assets a company has in its possession. This annual ratio is meant to indicate how efficiently any particular company uses its fixed assets. It’s given as a ratio and the better the turnover the better for the company. This ratio for Coca-Cola and PepsiCo was given as;
Coca-cola = ($28,857 ÷ $36,616) PepsiCo = ($39,474 ÷ $32,279)
=.79 times = 1.22 times
Here PepsiCo has the highest Fixed asset turnover and it’s therefore the better company compared to Coca-Cola.
Appendix F
Dividend payout ratio
The ratio indicates the percentage net income per common share that is allocated in the process of paying dividends. It clearly shows how well the earnings by the company are in support of dividend payment. It is responsible for the reduction of cash in the company but in the same instance the dividends payment liability is eliminated and upon payment it is recorded in the statement of cash flows. The ratio is calculated using the following mathematical formula;
This ratio for the year 2009 was given as 53% for Coca-Cola and 47% for PepsiCo.
Appendix G
Price / Earnings ratio
This ratio is an investment valuation ratio and is in fact the best know up to now. Despite having several imperfections it is the most used ratio by professionals and people in the investment field. This ratio varies depending on the industry and sometimes from company to company. It is calculated by the formula below.
For the past five years the price earnings ratio for Coca-Cola have been fluctuating between the highs of 24.56 and a minimum of 12.78, with the company’s average standing at 19.22. Currently it stands at 12.81. For PepsiCo the price earnings ratio currently is given as 18.87.