Introduction
Comparative financial statement analysis is becoming a pivotal activity to businesses both nationally and even internationally. With the acceleration in the globalization, companies serve global providers, and they have recognized the need for comparative financial analysis. It is a tool that helps the business in making employments and stakeholders who wish to make investments ( Cherunilam, 2020). Hence, this paper provides a comparative economic analysis for two companies, PepsiCo and Coca-Cola. The analysis is conducted to determine and identify each given company’s financial strategy and performance while researching their risks and profitability.
PepsiCo. It is a company that was incorporated in Delaware in 1919 and reincorporated in North Carolina in 1986. It is the leading food and beverage company authorized and specialized in manufacturing and distributing products to more than 200 countries. The company has a complementary portfolio of brands that includes Frito Lay, Gatorade, Pepsi cola, Quaker and Tropicana. Products manufactured include chips, flavored snacks, cereals, pasta, rice and other dairy-based products. Beverage products include drinking tea and coffee, sports drinks, bottled water and carbonated soft drinks. The nine owned trademarks are among the forty most extensive packed food trademarks in the united states ( PepsiCo Home , n.d.). To enhance its effective and efficient operations, the company has around 274,000 people employed worldwide.
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Coca-Cola Company was incorporated in September 1919 under Delaware’s laws and is known to be the world’s largest nonalcoholic beverage company. The company is authorized and licensed to market more than 500 of their nonalcoholic beverage brands. They have grouped into sparkling soft drinks energy drinks, sports drinks and plant-based beverages. The company make branded products which they make available to consumers throughout the world through their network of independent bottling partners, distributors, wholesalers and retailers. The operation structure for Coca-Cola is based on internal financial reporting. By December 2018, the designs were operation in Europe, middle east and Africa, Latin America, Asia Pacific, North America, Bottling Investments ( Coca-Cola Company: Refresh the World. Make a Difference , 2018)
Comparison of Accounting Records
Analysts, investors and bankers use financial statements to learn more about the financial status of companies. The statements depend on the accounting conventions that are key in recording assets, liabilities, sales and expenses. For instance, direct write off method helps to charge automatically to an account which implies that any debts not paid by anyone are set on the same day while for Allowance method, an estimated future amount of bad debts is charged to an account the moment any purchases are made. For the case of Coca-Cola, the use of the direct write-off method to ensure that all their customer’s bad debts are automatically charged to the account. PepsiCo also uses Allowance method as a GAAP requirement that companies with large receivables use allowance method. Similarly, depreciation is another accounting method used to allocate the reduction in the value of an asset which occurs due to tear and wear, which occurs over its useful life. It is the company’s discretion to choose which different methods from depreciation as an alternative financial reporting.
Ratio Analysis
Ratio analysis is the financial tools used within different companies to determine their financial status and compare them. This paper focuses on the Current Ratio, Quick Ratio, gross profit percentage, inventory turnover, accounts receivable Turnover, and asset turnover ratios despite many rations. They are regarded as vital tools as they help develop the meaningful connection between specific elements or groups of components of a company balance sheet.
Current Ratio.
This compares the current assets to liabilities of a company that is arrived at by dividing existing assets by current liabilities. The Ratio is important to potential creditors who use it to determine its liquidity or its ability to pay off short term debts.
Therefore,
Current Ratio =
According to Accounting for Management (2018), a company with high current Ratio may sometimes be unable to pay its current liabilities especially when the large portion of its existing assets are made up of slow-moving or obsolete inventories. Similarly, a company with low current Ratio may be in a position to pay its current obligations due to its large portion of its existing assets.
Coca Cola:
For the year ending December 31 2018, the company had total current assets of $83,216 while in the previous year they had a total recent investment of $87,896 which was a decrease of $4,680. Liabilities for the same years were $64,158 and $68,919 for 2018 and 2017 respectively ( Coca-Cola Company: Refresh the World. Make a Difference , 2018). This implies that;
For 2018, Current Ratio = = 1.30,
For 2017, Current Ratio = = 1.28
The two ratios show that the current Ratio is increasing year after year, showing that it performs well in the market. The increasing current Ratio shows that the company has improved its ability to pay the current debts.
PepsiCo:
PepsiCo recorded Total Assets of $79,804 and $77,648 in 2017 and 2018, respectively, while the total liabilities are 68,823 and 63,046 for2017and 2018.
Therefore,
Current Ratio = = = 1.16 in 2017
And = = 1.23 in 2018
It shows that the current ratio increases from year after year, which indicates that PepsiCo company is performing well in the industry and can pay its current debts.
The varying ratios indicate that an index of liquidity could characterize the current Ratio. If a high ratio is recorded, the company could be in possible excess liquidity.
Quick Ratio
A quick Ratio is a financial tool used as an indicator for short term liquidity or an organization’s ability to raise cash to help them pay bills that are due in the next 90 days.
Quick Ratio = (Current Assets – Inventories – Prepaid)/current Liabilities
It is always advisable for a company to have a high quick ratio result which is an indication that the company has more assets than liabilities, a sign of strong liquidity which is an essential component to investors. According to Accounting for management, a quick ratio is a reliable test of a company’s short-term solvency compared to Current Ratio since it can immediately show its capability to offset short-term debts.
Coca Cola:
For the financial year ending December 31, 2018,
Quick Ratio = (Current Assets – Inventories – Prepaid)/current Liabilities
= $(83,216-2,766-1,962) / $64,158
= 1.22
This indicates that PepsiCo company has $1.22 to pay for Quick Assets for every $1.00 of the current liabilities ( Coca-Cola Company: Refresh the World. Make a Difference , 2018)
PepsiCo:
For December 31, 2018, the Current Asset is $77648, Inventories $3128 while Prepaid expenses are 633 and a total liability of $63,046
Quick Ratio = (Current Assets – Inventories – Prepaid)/current Liabilities
= (77,648-3,128-633)/63,046
= 1.17
This indicates that PepsiCo company has $1.17 to pay for Quick Assets for every $1.00 of the current liabilities.
Gross Profit Percentage:
This is a tool used to measure the profits realized by a company on each sale above the cost of goods. It helps potential investors tell whether the company gaining profit from their merchandise sold.
Gross Profit Percentage = (Net Sales – Cost of Goods sold)/Net Sales
Coca-Cola:
For the period ending December 31 2018, the company’s net operating revenues were $31,856 while the cost of goods was $11,770. Therefore,
Gross Profit Percentage = (Net Sales – Cost of Goods sold)/Net Sales
= (($31856-$11770)/$31856) x 100
= 63 percent.
Also, for Period Ended December, 2017, Gross Profit = ((35,410-13,255)/35,410) x 100
= 62 percent.
The comparison between the two financial years shows an increment in the profit realized for the sale of revenues.
PepsiCo:
For 2018;
Gross Profit Percentage = (Net Sales – Cost of Goods sold)/Net Sales
= (64,661-29,381)/64,661 = 0.55
= 55 percent
For 2017;
Gross Percentage Profit = (63,525 – 28,796)/63,525 = 0.55
= 55 percent.
This indicates that the company has not improved from the previous year since it has made the same profit amount in 2018 similar to that of 2017.
Accounts Receivable Turnover:
This is the Ratio of a company’s net credit sales concerning its average accounts receivable during a given period, in most cases a year. It helps the business, and its potential investors estimate the number of times that a business collects its average accounts receivable balance during a period. Hence, the Ratio measures how effective the company use its assets.
Accounts receivable Turnover = Credit Sales/Average accounts Receivable.
Coca Cola Company:
The average trade account receivables = (3396+3667)/2 = 3532
Hence, Accounts receivable Turnover = 31856/3532 = 9 times an indication that they are lower than the normal turnover rate.
PepsiCo.
The company recorded $466 and $477 in credit sales in 2017 and 2018 respectively. This implies that the average accounts receivables for the two years are $472 ( PepsiCo Home , n.d.).
Therefore;
Accounts Receivable turnover = $64,661/472 = 137
This is an indication that the company is running more than an average of 137 times.
Recommendations
These two companies are two well-known beverage and food companies based in the united states. Their products have a wide range of varieties attracting many investors. Given an opportunity, it one area that the paper recommends one to make investments. The ratio analysis results show that the two companies have a strong base as they seem to make profit yearly. For instance, Coca Cola is a big company. From the two companies’ financial analysis, it is therefore wise enough to recommend any investments to the business, same to PepsiCo.
Conclusion
The paper has sufficiently discussed financial analysis for the two world-known food and beverage companies, PepsiCo and Coco-Cola. The document has also elaborately discussed the four main ratios determining the business’s status in terms of future investments in the company. From the ratio analysis, it is evident that any investments in the previous year can accrue profit.
References
Cherunilam, F. (2020). International business . PHI Learning Pvt. Ltd.
PepsiCo Home (n.d). https://www.pepsico.com/docs/album/annual-reports/2018-annual-report.pdf?sfvrsn=35d1d2bc_2
The Coca-Cola Company. (n.d). Refresh the World. Make a Difference. https://www.coca-colacompany.com/content/dam/journey/us/en/policies/pdf/shareowner-services/2018-annual-report-on-form-10-K.pdf
The Coca-Cola Company. (n.d). Refresh the World. Make a Difference. https://www.coca-colacompany.com/
