Analysis for the Best Investment

Introduction 

Every investor has the goal of optimizing their returns with very minimal threats to their capital. Therefore, it is paramount that the investors conduct an in-depth analysis of the financial statements of the companies that would make up their investment portfolios. For the selection of the best investment option, the paper will conduct a ratio analysis of three organizations; Dr. Pepper Snapple group, PepsiCo, and Coca Cola. Additionally, this paper will conduct a comparison of the accounting method to come up with a recommendation for the best investment out of the three. The study has been propelled by the objective of finding out whether any of the three companies can maximize the returns of an investor with minimal risks involved. 

Overview of the Companies 

The Coca Cola Bottling Company Consolidated 

Inclusive of the District of Columba, Coca Cola produces, markets, and supplies nonalcoholic drinks to fourteen states within the US. Since 1902 when the company was established, it has been producing and supplying nonalcoholic drinks until 1980 when it was incorporated into a company ( Investor.cokeconsolidated.com, 2017) . In comparison with all other Coca Cola bottlers within the US, the company is the biggest independent bottler with over 93 percent of the total can and bottle volumes of sales to retail consumers. The company located in Charlotte, North Carolina, also supplies other nonalcoholic drinks for different brands such as Monster Energy, Dr Pepper, and Sundrop. 

Nearly 35% of the remaining common stock for the firm is owned by Coca Cola Company since 31 st December 2017. The company provides a variety of nonalcoholic drinks and flavors meant to meet the requirements of the consumer ( Serôdio, McKee, & Stuckler, 2018)) . The beverage products range from still to sparkling drinks, where the still drinks comprise noncarbonated and energy products. Some of the noncarbonated drinks are sports drinks, bottled water, juices, tea, enhanced water, and ready to drink coffee while the carbonated drinks include Coca Cola, which is the most popular sparkling beverage. 

There is a stiff competition in the nonalcoholic drink market, especially the still and sparkling drinks categories. The competition comprises of distributors and bottlers both regionally and nationally of private label drinks together with the distributors and bottlers of marketed and advertised drinks ( Investor.cokeconsolidated.com, 2017) . The chief competitors comprise native bottlers of PepsiCo products and, in other areas, native bottlers of Royal Crown, Dr Pepper, and 7-Up products. As much as the company is competitive enough, the competitors are effective in the introduction of new products, pricing, POS merchandising, changing packages, management of retail space, and price promotions. Additionally, the competition is also proficient in the use of new vending and dispensing equipment, price promotions, frequency of advertising and distribution, and customer service. 

PepsiCo Inc. 

The company is located within North Carolina and is among the principal international food and beverage firm that has a diversified portfolio of renowned brands such as Tropicana, Frito-Lay, Quaker, Pepsi-Cola, and Gatorade. The company covers a large market exceeding 200 countries where they manufacture, supply, sell, and market different appropriate snacks, drinks and foods through operations that comprise third parties, contract manufacturers, and authorized dealers. 

The company utilizes water in the production of their products with the major ingredients for the drinks ranging from corn, apples, aspartame, potatoes, pineapple and orange juice, grapefruit, raw milk, other juice concentrates, and corn sweeteners. More ingredients used by the company comprise of sugar, essential and vegetable oil, seasonings, sucralose, rice, oats, and wheat ( Pepsico.com, 2017) . The products are packaged using different materials such as aluminum for cans, film packaging for snack foods, polypropylene resins, and plastic resins for drink bottles, glass bottles, paperboard, and cardboard cartons, and closures. 

The company faces serious competition from companies that operate in multiple geographies. Additionally, private and native label producers, regional, and economy brands also pose competition. The chief beverage competitor in both the US and international markets is Coca Cola Company. Other competitors comprise Monster Beverage Corporation, Kraft Heinz, DPSG, Nestlé S.A., Kellogg Company, and Red Bull in the production and distribution of food, beverage and snack products ( Pepsico.com, 2017) . Information Resources, Inc. indicates that in 2017, controlled 43 percent of the US market with Coca Cola representing 20 percent. 

Dr Pepper Snapple Group, Inc. 

This company leads in the production and supply of nonalcoholic drinks within Mexico, Canada, and the US. Dr Pepper has a varied product range from non-carbonated to carbonated beverages such as mixers and water, teas that are ready-to-drink, juice beverages, and juices ( Investor.drpeppersnapplegroup.com, 2016) . The company has not only been ranked as the first among CSD companies within the US, but it also has nearly 83 percent volume sales from some of their products that are either categorized as number one or two in their respective classes. 

The company participates in the CSD group while in Canada it is in the flavored carbonated soft drink category. Apart from selling smaller niche and regional brands, the company boasts of major brands like Squirt, Schweppes, Crush, Sunkist soda, and 7UP among others. Moreover, the company manufactures fountain syrups and beverage concentrates, and supplies finished drinks within the carbonated soft drink market ( Investor.drpeppersnapplegroup.com, 2016) . Finished beverages and syrup are made by the proprietary flavors that are highly concentrated from beverage concentrate manufactured by the company. 

With its headquarters in Plano, Texas, the company’s competition is founded on convenience and selection, brand recognition, availability, taste, price, and the quality of the products. In the liquid refreshment beverage industry, the competition is extremely high, with constant changes due to the ever-changing customer tastes ( Investor.drpeppersnapplegroup.com, 2016) . A chart of the liquid refreshment beverage market share by retail sales as presented by Information Resources, Inc. is attached in the Appendix A. The company competes with corporations like PepsiCo and Coca Cola which are multinational with considerable financial muscles. Other noteworthy competitors comprise The Campbell Soup Company, Nestlé, S.A., and Kraft Foods Group, Inc. 

Ratio Analysis 

Current Ratio 

The Metrics can be computed as; 

CR = CA/CL 

Hence, 

Coca Cola = 577,771,000,000/147,412,000,000 = 3.92 

PepsiCo = 79,804,000,000/33,796,000,000 = 2.36 

Dr Pepper = 9,791,000,000/2,138,000,000 = 4.58 

From the above computations, it is evident that Dr Pepper utilizes its assets more efficient compared to both Coca Cola and PepsiCo. The company has four and a half times more current assets than its liabilities while Coca Cola comes second with nearly four times assets to liabilities while PepsiCo has only two times more assets than its liabilities. 

Quick Ratio 

This liquidity ratio can best be analyzed as; 

QR = (CA-Inv.-PPE)/CL 

Thus, 

Coca Cola = (577,771,000,000 – 56,309,000 – 15,094,000)/147,412,000,000 = 3.92 

PepsiCo = (79,804,000,000 – 168,000,000 – 20,000,000)/33,796,000,000 = 2.36 

Dr Pepper = (9,791,000,000 – 202,000,000 – 101,000,000)/2,138,000,000 = 4.42 

All the companies are in good position to clear their liabilities within 90 days as indicated by the quick ratios. Dr Pepper takes the top most position with $4.42 of disposable assets present to insure each dollar of its present liabilities while Coca Cola comes second with $3.92 and PepsiCo $2.36 to cover every dollar owed. 

Gross Profit Percent 

The percentage gross profit can be computed by the formula; 

GP% = GP/TS x 100% 

Hence, 

Coca Cola = 1,540,947,000/4,323,668,000 x 100% = 35.64% 

PepsiCo = 34,740,000,000/63,525,000,000 x 100% = 54.69% 

Dr Pepper = 3,858,000,000/6,440,000,000 x 100% = 59.91% 

Dr Pepper has the greatest profit percentage compared to the others while PepsiCo follows with a gross profit percentage of nearly 55% while Coca Cola seems to have the lowest percentage profits. 

Inventory Turnover 

In quantifying each of the company’s inventories sold within the time of evaluation of the financial statements, the formula; 

IT = COGS/Av. Inv 

Therefore, 

Coca Cola = 2,782,721,000/56,309,000 = 49.42 

PepsiCo = 28,785,000,000/168,000,000 = 171.34 

Dr Pepper = 2,582,000,000/202,000,000 = 12.79 

PepsiCo has the highest Inventory Turnover ratio suggesting that the company has a higher demand for its products as it sells its products faster than the other two companies. 

Accounts Receivable Turnover 

The computation shall be done using the formula; 

ART = NCS/Av. AR 

Since there were no credit sales in all the three companies, the accounts receivable turnover ratio is assumed to be zero. 

Asset Turnover Ratio 

The formula for computing the ratio is; 

ATR = NS/TA 

Therefore, 

Coca Cola = 4,323,668,000/3,072,960,000 = 1.41 

PepsiCo = 63,525,000,000/79,804,000,000 = 0.80 

Dr Pepper = 6,440,000,000/2,736,000,000 = 2.35 

From the computation above, Dr. Pepper is efficient in utilizing its assets to convert to sales as shown with every dollar of the company’s asset generating $2.35. 

Factors that could erroneously influence the Results : Coca Cola has indicated the amount in thousands of dollars unlike PepsiCo and Dr Pepper that have indicated their data to be in millions. Hence, this can easily bring in confusion and lead to inaccurate conclusions. 

Liquidity Issues of the Companies : the three companies are all in a good position to convert their liquid assets into cash within days as indicated by their liquidity ratios. Dr Pepper has the highest liquidity ratio followed by Coca Cola and lastly PepsiCo with $4.42, $3.92, and $2.36 disposable assets present to insure each dollar of their respective existing liabilities. 

Contrasting the Accounting Methods 

Direct Write off and Allowance Methods 

In the allowance approach of identifying losses through sales made on credit, an entry is entered in the balance sheet to reflect the doubtful accounts while the direct write off involves the entries of doubtful accounts being obliterated ( Kieso, Weygandt, & Warfield, 2016) . For each of the three companies, the direct write off technique was employed. 

Straight Line and Double Declining Depreciation 

The straight line depreciation involves the computation of the depreciation rate using the Value of salvage, the initial cost of the asset, and the lifespan of the asset when it was beneficial. Declining depreciation, on the other hand, utilizes the asset’s present value in percentage ( Pratt, 2016) . Each of the three companies used the straight line method as the initial cost of the equipment is given. 

Difference between LIFO and FIFO 

FIFO involves the addition of goods into the inventory, and when they remain unsold, they are referred to as First In First Out while in LIFO, the products that are Last In are the First Out of the inventory ( Alamri & Syntetos, 2018) . Coca Cola and PepsiCo both applied the FIFO method while Dr Pepper used the LIFO method. 

Categories of Intangible Assets 

The three companies all have goodwill, patents, and copyrights as their form of intangible assets. Goodwill is normally caused by an enterprise acquiring additional assets or absorbing another company while patents are the entitlements to creative innovations and their solutions. Copyrights, on the other hand, involve claims to cognitive and innovative works. 

Recommendation 

The best company to invest in would be Dr Pepper Snapple Group, Inc. since its current ratio indicates that it has four and a half times more assets than liabilities which is enough security to investors as it reduces the risk of investment. Furthermore, the company’s quick ratio also indicates the firm’s having $4.42 of liquid assets to cover every dollar of the current liability, making it very stable and strong. Additionally, the beverage manufacturer has a higher gross profit percentage, even though there is an obvious risk as the demand for their product is far much less compared to the competition. 

Conclusion 

All three companies are competing effectively in their respective categories of production. However, PepsiCo and Coca Cola seem to have a more significant global market share for their products. All the same, Dr Pepper, which might look like an underdog in the beverage industry about the two other companies, but the company has managed to effectively utilize its resources to generate a higher yield. 

References  

Alamri, A. A., & Syntetos, A. A. (2018). Beyond LIFO and FIFO: Exploring an Allocation-In-Fraction-Out (AIFO) policy in a two-warehouse inventory model. International Journal of Production Economics, 206, 33-45. 

Investor.cokeconsolidated.com. (2017). Annual Report. Retrieved June 2, 2019, from http://investor.cokeconsolidated.com/static-files/e04a4211-5283-4ffe-923c-a87703dcaa31 

Investor.drpeppersnapplegroup.com. (2016). Annual Reports. Retrieved June 2, 2019, from http://investor.drpeppersnapplegroup.com/annual-reports 

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate Accounting, Binder Ready Version. New Jersey: John Wiley & Sons. 

Pepsico.com. (2017). Annual Reports and Proxy Information. Retrieved June 2, 2019, from https://www.pepsico.com/investors/financial-information/annual-reports-and-proxy-information 

Pratt, J. (2016). Financial accounting in an economic context. New Jersey: John Wiley & Sons. 

Serôdio, P. M., McKee, M., & Stuckler, D. (2018). Coca-Cola–a model of transparency in research partnerships? A network analysis of Coca-Cola’s research funding (2008–2016). Public health nutrition, 21(9), 1594-1607. 

Appendix A