Financial Analysis
Vertical and horizontal analyses are methods used to examine financial statements. These statements refer to the records of an organization’s financial activities, and include balance sheets, income statements, cash flows, and trading profit and loss accounts. Internal and external users such as managers, creditors, and investors utilize information gathered from financial statements for decision-making. The analysis in the sections below is based on the method of operation otherwise known as modus operandi since the vertical and horizontal analyses are utilized. The report aims at enhancing the meaning of financial statements for users to ease the decision making process. The users will also be able to measure the financial status and performance level of the two organizations by analyzing the balance sheets and income statements. Evaluation will be done within each company using financial statements for two or more consecutive years. This will reveal the trend of the organization, which can be utilized to predict the future. The financial statements between the two companies will be compared to show the status of each company (Capparell, 2007).
Vertical Analysis
Common Size Comparative Balance Sheet
Common Size Comparative Balance Sheet
Coca Cola Common Size Comparative Income Statement
PEPSI Co. Comparative Income Statement
Horizontal Analysis
Revenue
Coca Cola had made sales of $20,857 in 2003; the figure increased to $ 21,742 in 2004. This shows an increase in revenue by 885 units representing a 4.24% increase. In the year 2005, the company sold $23,104 units; this represents an increase in sales units by $1,362 and 6.26 percent.
Pepsi Company made sales of $26,971 units in 2003; the figure rose to $29,261 in 2004 and $32,562 in 2005 (Capparell, 2007). The increase in sales units in 2004 was $2,290 while in 2005 it was $ 1,362; the percentage increase in sales in the two years was 8.5% and 6.3% respectively.
The analysis shows that Coca Cola performed better than Pepsi Co. in 2004 and 2005; the percentage increase in sales for Coca Cola is higher in the two years. Coca Cola Company, therefore, sold more units of soft drinks than Pepsi Co. since 2003. This could result from the fact that people prefer products of Coca Cola because they are of higher quality than Pepsi. People may prefer drinks from Coca Cola because the company charges affordable prices for its products.
Net Income
The analysis above shows that, in 2004, Pepsi Co. performed better than Coca Cola in terms of net income; net income of Pepsi Co. increased by 18% from 2003 while Coca Cola increased its income by 11.5 percent (Coca Cola, 2013). This difference may result from the fact that Pepsi has economies of scale in reducing costs than Coca Cola. In 2005, the net income of Pepsi decreased by 3.2% while that of Coca Cola increased by 0.5 percent (Capparell, 2007). The losses could have resulted from harsh economic conditions such as high rates of inflation. This shows that Coca Cola is still the giant in the soft drinks industry because it makes profits despite the harsh economic times.
Current Ratio
Current Ratio = Current Assets/Current Liabilities
In 2004, the current ratio for Coca Cola was 1.1:1 while that of Pepsi Co. was 1.3:1. Pepsi Co. had more assets than liabilities compared to Pepsi Co.; this means that Pepsi could pay for urgent debts faster than Coca Cola. This could also mean that the stock of Pepsi was slow moving compared to Coca Cola because coca- cola made higher sales than Pepsi in 2004.
In 2005, the current ratio for Coca Cola was 1:1 while that of Pepsi was 1.1:1; Pepsi sells slow moving products compared to its competitor. Despite of the slow moving stock, Pepsi can settle quick debts using its current asset and remain with 0.1 of its assets. Coca Cola can settle its current liabilities using current assets. The two companies, however, met the required standard ratio of 1:1 in the two years; this shows that firms are liquid, and they can settle their debts from assets.
Profit Margin
Profit Margin = (Net income/sales)*100
The profit margin of the two companies increased in 2004 while it decreased in 2005; however, the earnings margin for Coca Cola was higher than Pepsi Co. Coca Cola maintained a profit margin higher than 20% in the three years while Pepsi Co. made returns less than 15% in the same period (Coca Cola, 2013). This shows that the returns of Coca Cola were higher than Pepsi Co. by 5% in the three years. The analysis shows that Coca Cola has higher economies of scale than Pepsi Co. and consumers prefer Coca Cola products. This could result from the fact that Coca Cola is older than Pepsi Co. in the soft drink industry; the company has scooped a larger market share than Pepsi Company.
The fundamental objective of this paper was to compare the performance of Pepsi Co. and Coca Cola using horizontal and the vertical analysis. The analyses above show that Coca Cola is better than Pepsi in terms of assets and profitability. The high percentage of the value of assets of Coca Cola to total assets compared to Pepsi Co. shows this phenomenon. The percent of cash and cash equivalents can emphasize this fact; for example, in 2005, the value of these items for Coca Cola was higher than Pepsi by 10.57 percent. The vertical analysis, therefore, shows that Coca Cola has acquired assets twice as much as Pepsi Co. The horizontal analysis shows that Coca Cola is better than Pepsi Co. in terms of profitability. On the other hand, Pepsi Co. is better than Coca Cola in terms of liquidity. This means that Pepsi Co. can pay its short-term debts faster than Coca Cola despite the low profitability. This occurrence also indicates that Pepsi Co. sells slow moving products; consumers prefer drinks from Coca Cola. Coca Cola sells high quality products compared to Pepsi Co. hence; the company has a large market share in the industry. The large market share of Coca Cola results to higher profitability of the company compared to Pepsi Company.
References
Capparell, S. (2007). The real Pepsi challenge: The inspirational story of breaking the color
barrier in American business. New York: Free Press.
Coca Cola (2013). Coca cola. S.l.: Spruce Books
