Financial Accounting
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Computations of the 2014 liquidity ratios for Coca-Cola and PepsiCo
The computations of the 2014 liquidity ratios for Coca-Cola and PepsiCo, including the current ratio, accounts receivable turnover, average collection period, inventory turnover, days in inventory and current cash debt coverage, are provided below.
The 2014 liquidity ratios for Coca-Cola and PepsiCo
According to the above-performed analysis, PepsiCo had better liquidity ratios in 2014 comparing to Coca-Cola’s financial performance in this regard.
Thus, PepsiCo’s liquidity ratios, such as the current ratio, inventory turnover and current cash debt coverage, are significantly larger than Coca-Cola’s similar financial figures.
As a result, PepsiCo’s average collection period, as well as the days in inventory ratio are shorter in time than Coca-Cola’s ratios (39.20 days and 46.67 days comparing to 40.33 days and 74.76 days correspondingly).
Computations of the 2014 solvency ratios for Coca-Cola and PepsiCo
In terms of the 2014 solvency ratios for Coca-Cola and PepsiCo, including the debt to asset ratio, times interest earned, cash debt coverage and free cash flow, their computations are as follows.
The 2014 solvency ratios for Coca-Cola and PepsiCo
Thus, the analysis demonstrates that Coca-Cola’s and PepsiCo’s solvency ratios notably differed in 2014. In fact, Coca-Cola had more favorable solvency ratios than its worldwide rival – PepsiCo.
In terms of the debt to asset ratio, Coca-Cola’s financial figure was smaller than PepsiCo’s ratio being 0.49 comparing to 0.58.
As per the times interest earned ratio, Coca-Cola also demonstrated better results than its rival arriving at 25.97 in comparison with PepsiCo’s figure of 21.27.
Furthermore, Coca-Cola managed to have a better cash debt coverage ratio than PepsiCo (0.37 versus 0.29 correspondingly).
In addition, the 2014 financial performance of Coca-Cola indicates that the company had more free cash flow to form back-ups (provisions) for its future business activities than PepsiCo. Thus, the latter only had the free cash flow equaling to $1,936 million, while Coca-Cola freed cash in the amount of $2,393 million.
Computations of the 2014 profitability ratios for Coca-Cola and PepsiCo
According to the performed calculations, the companies’ profitability ratios, including the profit margin, asset turnover, return on assets and return on common stockholders’ equity, are as follows:
The 2014 profitability ratios for Coca-Cola and PepsiCo
The performed computations of Coca-Cola’s and PepsiCo’s financial performance showed that the 2014 companies’ profitability ratios significantly differed.
Indeed, Coca-Cola had a better profit margin than its rival (0.22 comparing to 0.14).
Nevertheless, PepsiCo’s other analyzed profitability ratios of 2014 looked more attractive for its stockholders, creditors and potential investors than Coca-Cola’s figures.
Thus, PepsiCo’s asset turnover stood at 0.69 comparing to Coca-Cola’s similar figure of 1.14. Furthermore, PepsiCo demonstrated a higher return on assets (0.16) and a higher return on common stockholders’ equity (0.41) comparing to Coca-Cola’s 2014 figures of 0.15 and 0.30 respectively.
Interpretation of findings of the ratio comparative analysis for Coca-Cola and PepsiCo
As it has already been mentioned, Coca-Cola and PepsiCo had demonstrated different financial performance in terms of the liquidity, solvency and profitability ratios in 2014. As a result, deep insight into these financial figures is definitely needed to understand the key drivers contributing to such companies’ financial performance and to assess presence of any options to improve efficiency of Coca-Cola’s and PepsiCo’s financial activities.
As per the liquidity ratios, it has been already identified that PepsiCo had had better figures in 2014 comparing to its rival.
Given that the liquidity ratios help to understand a company’s short-time ability “to pay its maturing obligations and to meet unexpected needs for cash”, it is possible to say that Pepsi looked more attractive in this regard in 2014 (Kimmel, Weygandt, & Kieso, 2013).
In fact, PepsiCo’s current ratio was larger than 1.00 meaning that the company possessed more current assets having an ability to convert into cash quickly than current liabilities. Moreover, the company had a larger current cash debt coverage (0.77 comparing to Coca-Cola’s figure of 0.61) showing that Pepsi actually on average generated 77 cents to cover every dollar of its maturing liabilities from its operational activities in 2014. In other words, PepsiCo’s did not experience any lack of funds to cover its maturing liabilities and unexpected needs for cash in 2014.
In terms of Coca-Cola, the company had worse liquidity in 2014. Indeed, the company did not have a sufficient amount of current assets to cover all its maturing (current) liabilities given that Coca-Cola’s current ratio equaled to 0.91 in 2014.
Moreover, Coca-Cola, unlike PepsiCo, did not generate too much cash from its operational activities (only 61 cents were on average generated from the company’s operational activities to cover Coca-Cola’s every dollar of the maturing liabilities in 2014).
Such a conclusion is strongly supported by the fact that Coca-Cola was not as successful in managing its credit sales and ensuring an optimal amount of inventories as PepsiCo was in 2014. Thus, Coca-Cola demonstrated smaller accounts receivable turnover and inventory turnover in the analyzed period meaning that the company’s average collection period was larger than PepsiCo (40.33 days comparing to 39.20 days).
Furthermore, Coca-Cola showed an abundant number of inventories resulting in “slower moving” inventories in 2014 (on average Coca-Cola’s inventories were in stock for 74.76 days while PepsiCo’s managed to keep its inventories in stock only for 46.67 days) (Candor, n.d.).
In terms of the solvency ratios identifying a company’s ability “to survive over a long period of time” (Kimmel et al., 2013), Coca-Cola’s ratios were relatively better than PepsiCo’s meaning that Coca-Cola’s business was less risky from the financial standpoint for a potential lender than PepsiCo’s business (Investopedia, LLC, n.d.).
This should be taken into account by the companies’ management, as not only potential creditors fall under the category of the potential lenders. Indeed, there are also potential investors (stockholders) who are usually more willing to invest their money into the company with better solvency figures.
In fact, Coca-Cola received only 49 cents of every dollar in the assets from its lenders and 51 cents – from its stockholders, as Coca-Cola’s debt to asset ratios equaled to 0.49 in 2014. To the contrary, PepsiCo’s lenders and stockholders financed 58 cents and 42 cents correspondingly of the company’s every dollar in the assets.
In addition, Coca-Cola demonstrated a better ability to service loans than PepsiCo (the companies’ times interest earned ratios were 25.97 and 21.27 respectively).
Coca-Cola also had a better cash coverage of its total liabilities in 2014 and generated more free cash in nominal figures than its rival – PepsiCo.
With regard to the profitability ratios measuring “the income or operating success of a company for a given period of time”, Coca-Cola demonstrated a higher profit margin in 2014 than PepsiCo (22% comparing to 14% correspondingly) (Kimmel et al., 2013).
Nevertheless, it did not help Coca-Cola in terms of the operating success. Thus, Coca-Cola’s every dollar in the assets provided only 69 cents of the sales, while PepsiCo’s every dollar in the assets brought the company 114 cents of the sales.
As a result, PepsiCo had better returns on assets and on common stockholders’ equity than Coca-Cola. Indeed, PepsiCo’s investors (stockholders) received 41 cents out of every invested dollar, while Coca-Cola provided only 30 cents for every invested dollar in 2014.
Options to improve the companies’ financial performance
The performed analysis showed that each company had certain issues in 2014 and that their financial performance may be improved if such issues are resolved. Indeed, Coca-Cola should consider improving performance of its supply and collection departments to enhance its liquidity. Consequently, the company will improve its usage of the assets resulting in increasing profitability ratios.
As per PepsiCo, the company’s management may consider attracting more financing from its stockholders. In this way, PepsiCo will improve its solvency figures and will make the company look more attractive for potential investors. Another option for PepsiCo to improve its financial performance is to cut some expenses. Thus, PepsiCo will be able to lower its interest expenses by attracting additional funds from the stockholders. The company should also work on optimizing its cost of goods sold to improve PepsiCo’s profit margin.
References
Candor. (N.d.). Types of financial ratios. Retrieved from http://cel.candor-holdings.com/wp-content/uploads/2013/10/types_of_financial_ratios_19mar_2012.pdf
Investopedia, LLC. (N.d.). Total debt to total assets. Retrieved from http://www.investopedia.com/terms/t/totaldebttototalassets.asp
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2013). Accounting: Tools for business decision making (5 ed.). Hoboken, NJ: John Wiley & Sons
