Introduction 3
Comparative Financial Performance Analysis of Pepsi and Coca Cola for the Last Two Years (2014 and 2015) through Ratios and their Interpretations 3
Analysis of Profitability Ratios 4
Gross Profit MarginW 4
Net Profit margin 5
Return on Assets 6
Analysis of Solvency Ratios 7
Current Ratio 8
Quick Ratio 9
Analysis of Capital Structure Ratios 10
Debt-to-Equity Ratio 11
Interest Coverage Ratio 12
Examination of Efficiency Ratios 14
Days Sales are Outstanding 14
Days in Inventory 15
Payables Period 16
Findings and Recommendations 17
References 20
Comparative Financial Performance Analysis of Pepsi and Coca Cola
Introduction
Because of their global operations, PepsiCo and Coca-Cola stand as the major competitors or business rivals to one another in the worldwide beverage industry. They not only compete in selling products but also in gaining sports sponsorships and agreements as well. Therefore, this research is aimed at making comparative financial performance analysis of these two companies so that it could be determined which company is performing better than its counterpart with the help of different ratios.
Comparative Financial Performance Analysis of Pepsi and Coca Cola for the Last Two Years (2014 and 2015) through Ratios and their Interpretations
This section aims to perform comparative assessments of financial performance of PepsiCo and Coca-Cola over a two-year period, from 2014 to 2015. Additionally, financial data for the year 2013 is also considered for a more comprehensive and concise analysis. Apart from comparing the financial ratios of PepsiCo and Coca-Cola, they are also compared to averages of the global beverage industry that were obtained from the website of CSI-Market. The financial ratios are not only presented in a table form but are also supported by graphical representations as well. Different categories of ratios such as profitability, solvency, capital structure and management efficiency are examined in this report.
Analysis of Profitability Ratios
These ratios are aimed at assessing the profit generation capabilities of PepsiCo and Coca-Cola while comparing the analysis to industry averages. Number of ratios such as gross profit margin, net profit margin and return on assets are analysed in this sub-section by considering the following tabular representation:
Gross Profit Margin
This ratio examines how much margin PepsiCo and Coca-Cola have saved in revenue after paying all costs of generating sales revenue from their products . The below mentioned graphs makes it prominent that the global beverage industry has earned less gross profit margin compared to PepsiCo and Coca-Cola.
If financial performance of PepsiCo and Coca-Cola from 2014 to 2015 is compared, it could be observed that Coca-Cola has outperformed PepsiCo in generation of gross profit margin. But, this is not an impressive trend because if PepsiCo’s gross profit margin is lower than that of Coca-Cola; it is just because PepsiCo’s sales revenue and the volume of costs of sales are higher than that of Coca-Cola. Due to this, Coca-Cola has managed to outperform PepsiCo, concerning gross profit margin, only in percentage terms. The gross profit margin for Coca-Cola declined from 2014 to 2015 whereas for PepsiCo, it increased during the same one-year period. It reveals that PepsiCo is more sensible than Coca-Cola in not only generating enough sales revenue but also in controlling its cost of revenue.
Net Profit margin
This ratio assesses the ability of PepsiCo and Coca-Cola to generate net income after paying all operating expenses, repaying interest as well as fulfilling corporate tax liability . The following graph clarifies that PepsiCo has been generating fewer net income and is out performed by all of its competitors in the global beverage industry, including Coca-Cola. As stated earlier, PepsiCo has been sensible to manage its cost of revenue and operating expenses. Its business rivals can only outperform in percentage terms. The financial data, presented in the Appendix could be observed for evidence.
Return on Assets
This ratio is examined to highlight the ability of PepsiCo and Coca-Cola to generate net income, not sales revenue, against every $1 invested in the acquisition and maintenance of the total asset mix . From 2014 to 2015, all the competitors in global beverage industry are outperformed by PepsiCo and Coca-Cola in efficiently and effectively utilising total asset mix to generate net income. This is because these two companies enjoy industry leadership on a worldwide scale. From 2014 to 2015, both the PepsiCo and Coca-Cola are operating closely. They seem to generate similar net income by investing $1 in acquisition and maintenance of the total asset mix.
Analysis of Solvency Ratios
This sub-section aims to gauge the liquidity management practices/strength of both the Pepsi-Co and Coca-Cola over a two-year period from 2014 to 2015 . For this purpose, the current and quick ratios are analysed by considering the following ratios calculated from financial data:
Current Ratio
This ratio is examined to measure the ability of PepsiCo and Coca-Cola to cover or repay their obligations or liabilities of up to one year . The analysis is performed with the help of following graphical representation:
Analysis of the financial data and its comparison has made it apparent that the industry standard for liquidity management is declining since 2013. It portrays that the global beverage industry is facing weaknesses or problems in liquidity or solvency management since 2013. If the liquidity strength of PepsiCo and Coca-Cola is compared, it will be found that PepsiCo tends to outperform its counterpart, Coca-Cola, in all three years (from 2013 to 2015). Still, both the companies are underperforming the global beverage industry standard of current ratio from 2013 to 2015.
In 2014, PepsiCo had $1.14 in its current assets to repay or cover every $1 of its current liabilities or short-term obligations. In contrast, $1.02 in current assets to repay $1 of short-term liabilities. Comparatively, by the end of 2014, the global beverage industry had $1.37 in current assets to cover obligations with maturity of up to one year or less. In 2015, PepsiCo had $1.31 in its current assets to repay every $1 of short-term creditors. This is the year when PepsiCo’s liquidity management strength outperformed not only its business rival, Coca-Cola, but the global beverage industry average as well.
Quick Ratio
This ratio is also known as acid-test ratio because it includes only the most liquid current assets into the equation. Generally, inventories and prepayments are considered less liquid assets as they can never be sold without decline in their financial worth or discount . Cash, marketable securities and receivables are highly liquid current assets as they can be sold easily without any discount or loss of financial value . To perform acidity test for PepsiCo and Coca-Cola, the following graph is taken into consideration:
Analysis of the above graphical presentation emphasizes that both the PepsiCo and Coca-Cola are outperforming the industry averages of beverage sector in all three years from 2013 to 2015. However, PepsiCo is the winner in this case as acidity test also reveals that PepsiCo tends to carry fewer ending inventory levels and prepayments compared to the beverage industry as well as Coca-Cola. It is also apparent that PepsiCo is an industry player because it is able to sell its inventories (products) as the demand for its products/items is very high. Because PepsiCo has also managed to gain sports sponsorships of various teams and leagues, its beverages and other products appeal more to the general public compared to Coca-Cola and other competitors. As the global benchmark for quick or acid-test ratio is 1:1, it is evident that PepsiCo is operating more closely and meeting the global benchmark compared to Coca-Cola and other business rivals in the industry.
Analysis of Capital Structure Ratios
In this area, the extent to which PepsiCo and Coca-Cola have been employed debt and common equity in their capital structure are analysed. Not only the debt-to-equity ratio but the interest coverage ratio is also examined with the help of following calculated ratios :
Debt-to-Equity Ratio
Interest Coverage Ratio
This capital structure ratio is also known as “Times Interest Earned (TIE)”. It examines the capability of PepsiCo and Coca-Cola to service debt payments in the form of regular interest payments to lenders. For detailed analysis in this ratio, consider the following graph that reflects the ability of these companies in the beverage industry to cover or repay their interest payments to lenders of debt.
The above graph specifies that the ability to cover interest expense is declining from 2013 to 2015 for the whole beverage industry all over the world. Despite this, both the PepsiCo and Coca-Cola tend to outperform all industry players when it comes to repaying interest and the principal amount to lenders. However, as PepsiCo employs much higher debt in its capital structure compared to Coca-Cola, the debt servicing capacity of the former is lower than that of the latter.
If the financial performance for 2014 and 2015 in this area is compared, it will be found that even though the debt servicing capacity for PepsiCo and Coca-Cola declined in one year period, yet such decrease was more intense for Coca-Cola than for PepsiCo. From 2014 to 2015, the interest coverage ability declined by a small margin for PepsiCo but for Coca-Cola, such a decrease was substantial which can be observed from the above graph. Despite, PepsiCo employs more debt than Coca-Cola, yet it is capable enough to cover or repay it than Coca-Cola. This is because the liquidity strength of PepsiCo is higher than that for Coca-Cola.
Examination of Efficiency Ratios
Ratios examined in this area measure the capabilities of PepsiCo and Coca-Cola to generate cash by selling inventories, making cash collections from customers against credit sales as well as the time these two business rivals take to repay trade creditors or suppliers. The following table is considered for analysis which reflects ratios calculated from the given financial data:
Days Sales are Outstanding
This ratio highlights the time within which PepsiCo and Coca-Cola could make cash collections from customers against credit sales. Analysis reveals that though PepsiCo and Coca-Cola are global industry leaders, yet they are outperformed by other industry participants in making earlier cash collections. This is so because their volume of business transaction is low and clients of other players in the global beverage industry take less time in repaying credit.
However, if the financial performance of PepsiCo and Coca-Cola is compared, it will be found that Coca-Cola is taking more time than PepsiCo to collect cash from its customers. In all three years, from 2013 to 2015, PepsiCo is taking an average of thirty two business days to collect cash from its customers due to which its liquidity strength has outperformed Coca-Cola, as evident in solvency ratios. Comparatively, Coca-Cola is taking on an average of thirty four to thirty seven business days in making cash collections and gets outperformed by two to five days by PepsiCo.
Days in Inventory
This ratios measures the time-frame within which PepsiCo and Coca-Cola could turn their finished products to sales. In other words, the time within which these two entities could generate sales is measured by this ratio. Analysis reveals that though PepsiCo and Coca-Cola are global industry leaders, yet they are outperformed by other industry participants. The major reason behind is that other players in the global beverage industry possessing low market share and demand for their products is limited. Therefore, it is easier for them to generate sales as they only operate at a domestic level.
Comparative analysis of PepsiCo and Coca-Cola makes it prominent that Coca-Cola is taking less time to generate sales than PepsiCo. In other words, PepsiCo is taking more time, average of thirty eight business days, to generate sales whereas Coca-Cola turns inventories to sales within an average of twenty one days. Here, though it seems that Coca-Cola outperforms PepsiCo, yet one must remember that when PepsiCo generate sales, it does so in bulk. PepsiCo mostly wins sports sponsorships and wait for the sport events to take place so that it could make sales to wide group of fans and general public.
Payables Period
Because PepsiCo is taking more time to generate sales by selling its inventories compared to Coca-Cola, the former tends to pay its trade creditors or suppliers very lately than its counterpart. Unfortunately, the industry averages for this ratio are not found but the comparative analysis will clarify the situation.
In 2014, PepsiCo repaid its trade creditors, suppliers or vendors within fifty nine business days where Coca-Cola made payments in forty one days. For both the companies, this comparative situation improved in 2015 when PepsiCo took nine days more to repay suppliers in sixty eight days. Comparatively, Coca-Cola also took nine more days but repaid its vendors, against raw material purchases, within fifty business days.
PepsiCo is taking more time to repay vendors which reveals that it is able to get credit from suppliers with relaxed credit terms than Coca-Cola. It also reflects that suppliers tend to have more confidence in PepsiCo due to its strong liquidity management practices. Suppliers are confident that they will surely be repaid by the PepsiCo.
Findings and Recommendations
After performing the comparative analysis for 2014 and 2015, it is found that both the PepsiCo and Coca-Cola are outperforming industry averages pertaining to solvency ratios. PepsiCo seems to have more sound and strong liquidity management practices than Coca-Cola. This is evident from the fact that when these two companies generate credit sales, PepsiCo is quicker in collecting cash from customers than its counterpart, Coca-Cola. In addition to this, though PepsiCo generates sales lately than Coca-Cola but when it does, PepsiCo sells products through sports events that usually take a little more time. Also, PepsiCo is paying its suppliers with more relaxed credit terms whereas Coca-Cola repays its creditors faster than PepsiCo which is not a sensible decision. Coca-Cola might not be getting relaxed credit terms from its suppliers compared to PepsiCo.
In light of situation, one may say that the Coca-Cola is providing less safety margin to short-term creditors against their investments compared to PepsiCo. A slight decline in value of current assets will greatly harm Coca-Cola’s ability to meet short-term obligations and retain investors’ as well as suppliers’ confidence. Therefore, it is recommended for Coca-Cola that it should make efforts to collect cash earlier from its customers for improving its solvency. It is also recommended for Coca-Cola to retain investors’ confidence that will help the company to get more sponsorship and advertising agreements to reach more target market for sales generation.
As Pepsi is employing more debt in its capital structure compared to Coca-Cola and other industry participants, its ability to service debt or fixed interest payments on regular intervals is quite lower. Because of depending more on debt, the financial flexibility of PepsiCo has also been declining since 2013. This dictates that, in the event of financial distress, PepsiCo would find it difficult to raise debt capital from banking and financial institutions. As the interest rate risk of PepsiCo is also high, lenders may extend financial support with strict credit terms and higher interest rate as compensation to underlying uncertainty. Therefore, it is recommended for PepsiCo to reduce its dependence over debt and should consider other alternatives to raise capital. Apart from equity shares, the existing management of PepsiCo may raise capital through Private Placements without losing the management control. Retention of earnings to raise capital through internal sources is also recommended for the management of PepsiCo.
Apart from this, it is also found that though PepsiCo’s interest rate risk is high, yet it can sensibly manage its interest payments to lenders. However, for Coca-Cola, its debt servicing capability declined by a substantial margin. Coca-Cola is already weak in liquidity/solvency management compared to PepsiCo, therefore, whatever plan of action was suggested for PepsiCo in previous paragraph is also recommended for Coca-Cola to escape the risk of financial distress.
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