21 Jul 2022

178

How to Do Financial Statement Analysis

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Academic level: College

Paper type: Case Study

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Coca-Cola, PepsiCo, and Keurig Dr Pepper are among the fiercest competitors in the food and beverages market across the world. From their financial statements, one could conclude that the three companies are financially healthy. However, it would be essential to conduct a critical financial statement analysis if a choice was to be made by a new investor on which company to inject his or her money amongst the three. Juxtaposing the financial highlights of the three competitors will enable the investor to choose on the company with stronger long-term debt to networking capital ratio, higher income, a steady improvement on net income for every common share, and a rising and high solvency ratio. Financial statement analysis is also an important tool for measuring or evaluating the liquidity of a company and its short-term debt-paying ability. Besides critically analyzing the financial statement of the Coca-Cola, PepsiCo, and Keurig Dr Pepper, this paper have also evaluated their financial strengths and weaknesses. As such, an investor may use the information herein to make an ultimate decision on the best company to invest in. 

A summary of each of the company 

Pepsi Company 

Pepsi is a multinational food and beverage company trading in over 200 companies. The company manufactures such goods as snacks, cereals, pasta and other dairy-based products. Besides, it deals with beverage products including tea and coffee, carbonated drinks and juices. Pepsi Company is headquartered in New York but has other numerous subsidiary companies situated in other countries from which it operates. Pepsi operates in the competitive beverage industry. A list of its major competitors includes other multinational companies like Coca Cola, Dabar Real juice, Dr Pepper Snapples, Red Bull and Mondelez. Pepsi fosters effective financial and administrative management to maintain excellent financial performance within such a competitive business environment. 

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Keurig Dr Pepper (KDP) 

KDP is a multinational beverage company located in North America. The company produces beverages like coffee and other drinking products, including soft drinks and juices. The company is located within New York City and provides its products to the global markets. KDP also experiences competition within the international beverage market like any other company. Its major competitors include Coca Cola Company, Pepsi Company and other companies dealing with beverages and soft drinks. Its current financial performance has ranked the company as one of the top-performing in New York Stock Exchange market. 

Coca Cola Company 

Coca Cola is a multinational beverage company, which produces over 500 nonalcoholic brands of beverages, including soft drinks, water, sports drinks, and juices and other dairy beverages (Travaglini, 2005). The company produces independent bottles for wholesale and retail purchases. The company operates within the global market of Europe, America, Asia and Africa. The company operates in a competitive beverage market with its major competitors, including Pepsi, Red Bull, Diet Pepsi, Gatorade, Keurig Dr Pepper and Mountain Dew (Ayoob, 2018). The Coca Cola Company has its headquarters in Georgia North America. 

Comparison of accounting ratio analysis 

Comparison of accounting ratio analysis 

Pepsi Company 

Current ratio =  

=  

= 2.1 6 times 

The current ratio measures short term financial position by showing the number of times the current assets can pay for the liabilities of a company (Accounting verse, 2020). The 2.16 value shows that Pepsi Company is capable of meeting its current obligations twice the number of times of its current assets. However, relying on this ratio alone as a measure of a company's liquidity position is tantamount to other challenges (Travaglini, 2005). For instance, the ratio is solely insufficient as it gives little information on the working capital. 

Quick ratio = 

=  

= 1.47 times 

The quick ratio measures the liquidity of a company after deducting the inventory. A company with such a satisfying liquidity position may be in a poor financial state when its liquidity comprises more of inventory. Pepsi can, therefore, pay one time its current liabilities when its stocks are not factored in as part of current assets. 

Gross profit percentage =  X 100% 

=  X 100% 

= 52.16% 

But the gross margin is 5.0598 

The ratio measures the efficiency in which the costs of a company can be controlled in generating profits. Pepsi is averagely efficient in generating its profits. The gross profit, however, presents misleading information in comparing the profits of companies operating from different industries. 

Inventory turnover = 

= 0.26 times 

The ratio measures the number of times a company's stocks can be converted into sales within a given financial year. Pepsi Company can, therefore, hardly turn its stocks into sales once a year. This ratio is insufficient as it only presents a turnover rate for every financial year disregarding the stocks that may present high turnover rate like 20 times stock sales. 

Accounts receivable turnover = 

= 16.43 times 

This ratio quantifies the effectiveness of a company to collect its receivables from the clients. Moreover, it shows the quickness of collecting the debts of a company. Pepsi Company presents a quick response in collecting its debts. The accounts receivables turnover, however, may present a risk of inflating the turnover rates when the total of sales are adopted (Accounting verse, 2020). It is also not a guarantee of effectively managing credits as it is independent of influential factors emanating from the clients. 

Asset turnover ratios = 

= 0.02 times 

The ratio measures the efficiency of the assets of a company to generate revenue. Pepsi Company's asset turnover ratio presents inefficiency in generating its revenue. The ratio, however, fails to illustrate the efficiency of a company to generate profits and not sales. 

KDP’s accounting ratios 

Current Ratio = 

= 0.93 times 

The current assets of DDP hardly pay for the company’s liabilities as presented by the low value of current ratio. 

Quick ratio = 

= 1.02 times 

This quick ratio value measures a low ability of the company’s current assets to pay for the current liability after deducting the available stocks. 

Gross profit percentage =  X 100% 

=  X 100% 

= 37.76% 

The low percentage denotes the ability of KDP Company to generate its revenue from the assets. 

Inventory turnover = 

= 0.19 times 

This ratio indicates that the company can turn its average stocks into sales by nearly once in a year. 

Accounts receivable turnover = 

=  

= 18.54 times 

This ratio denotes KDP’s effectiveness in collecting its receivables from the clients. 

Asset turnover ratios = 

= 0.92 times 

The ratio shows low ability of the assets of KDP to generate its revenue by nearly once in a year. 

Accounting ratios for the company of Coca Cola 

Current Ratio =  

=  

= 1.38 times 

The value denote that Coca Cola Company can pay its current liabilities from the current assets only once within every financial year. 

Quick ratio =  

=  

= 0.0052 times 

The ratio presents the liquidity of Coca cola Company after deducting the inventory. It denotes that the company hardly pays for its current liabilities with its current assets when the value of stocks is excluded from such payments (Travaglini, 2005). 

Gross profit percentage =  X 100% 

=  X 100% 

= 25.60% 

The percentage denotes a low ability of the company to generate its profits from the sale of its products. 

Inventory turnover = 

= 4.95x 

The ratio measures the number of times the stocks of Coca cola Company can be converted into sales within a given financial year. 

The ratio denotes an average level of turning the company’s stocks into sales to attract a large profit margin. 

Accounts receivable turnover = 

= 10.00 times 

This ratio quantifies a high ability for Coca cola Company to pay its collect its debts expedite. 

Asset turnover ratios = 

= 0.092 times 

The ratio measures the efficiency of the assets of Coca-cola to generate revenue. The low value, therefore, denotes its inefficiency in generating profits. 

In general, liquidity ratios play an active role in measuring the financial capabilities of a firm throughout its operations. However, such ratios present potential liquidity issues like erroneous calculations influencing the results of the ratios (Accounting verse, 2020). Ratios present historical figures in analyzing financial information. It is, therefore, difficult to make future decisions based on those values. Qualitative aspects like experience and motivation may be ignored in accounting for ratio analysis. Finally, ratios change with time thereby limiting their useful over short periods in decision making. 

The difference between allowance method and direct write off method of accounting for receivable 

The allowance method of treating accounts receivables involves the estimation of the future amounts of bad debts chargeable to the reserves accounts for all the sales made. In contrast, a direct off method considers bad debts chargeable as an expense only once it is certain that payments to an invoice will not be honored (Travaglini, 2005). Coca Cola, KDP and Pepsi conform to the direct method of allocating bad debts as an expense. For instance, the bad debts are classified as notes receivables and reported as sources of revenues shortly. An occurrence of a default in honoring an invoice is, therefore, only possible shortly. 

The difference between the straight line, double declining balance and the unit of production depreciation method 

Straight-line method approach depreciates an equal asset amount for each financial year. Unit of production approach, on the other hand, depreciates assets based on a specific amount of output. That is miles per year for any driven car (Velez-Pareja & Davila, 2009). Double declining method of depreciation charges accelerating amounts of depreciation similar to the unit of production approach. Double declining and unit production methods present negative implications of making the profits of a company to fluctuate in the subsequent years as a resulting of charging more depreciation in those years. A straight-line method, however, charges a consistent depreciation value (Velez-Pareja & Davila, 2009). Coca-cola Company, as well as KDP, uses both straight line and unit of production depreciation in managing the production as well as the operational costs related to wear and tear. The wear and tear assume a given percentage of depreciation on a straight-line basis. Pepsi, on the other hand, maintains a straight-line method of accounting for depreciation. The losses associated with such depreciation are charged on a pro-rata basis for each financial year. 

Differences between LIFO and FIFO 

FIFO method of valuing inventory assumes that the oldest products are sold first at their costs. In contrast, LIFO assumes that most recent inventory products are sold first and therefore adopting their costs (Velez-Pareja & Davila, 2009). All three companies value inventory on LIFO approaches. Their valuations for the stocks of the following financial years assume the last in stock prices in reported financial statements. 

Categories of intangible assets 

There are three categories of intangible assets, including goodwill, trademarks as well as franchise agreements. Goodwill is the extra value on the net assets purchased by another, commonly attributed to the good reputations associated with that asset. A franchise agreement grants a business entity to operate with the legal names of the other in producing products or services. Trademarks like patent rights and copyrights grant a business to trade on some rights. A patent right gives a business an exclusive right to trade while copyright grants a business an extensive legal right to trade (Velez-Pareja & Davila, 2009). Both of the companies recognize goodwill, intellectual rights, copyrights and patent rights as assets of the company presented within the balance sheet information. KDP maintains patent rights on the mining of its coffee products. The other companies equally own patent rights legalizing their productions and sale of their products. And the method used for each of the three. 

Final recommendations 

Ratio Analysis  Pepsi Company  KDP Company  Coca cola Company 
Current Ratio  2.16X  0.95X  1.38X 
Quick Ratio  1.47X  1.02X  0.0052X 
Gross Profit Percentage  52.16%  37.76%  25.60% 
Inventory Turnover  0.26X  0.19X  4.95X 
Accounts Receivables Turnover  16.43X  18.54X  10.00X 
Asset Turnover Ratio  0.02X  0.92X  0.092X 

A summary of the financial ratios 

I would recommend an individual to invest in the Pepsi Company. This company manifests a financial ability to pay for its current liabilities from its lucrative current ratio liquidity. The company also manifests a profitable Gross Profit Percentage enhancing its ability to generate more profits. Finally, the company portrays a quick ability to collect its debts which is crucial for its success. On the contrary, the company manifest low turnover ratio and inventory turnover factor as well. This may hinder its profitability in the delayed turning of stocks into sales. I would not recommend an investor to consider investing in Coca-cola and KDP; such investors may consider Pepsi Company as an alternative investment option. The two companies portray low liquidity ratios contributing to their low profitability. For instance, their profit percentage is below the average level. They, therefore, may not generate sufficient incomes that the investors so desire. These companies also project low asset turnover ratios, delaying the promptness for these companies to sell more for profits. Their low current ratios also mean that their current assets may not be sufficient to pay up for the current liabilities which discourage the interests of an investor for better gains. Pepsi Company, therefore, stands out as more profitable to invest in. 

Conclusions 

The companies of Coca Cola, Keurig Dr Pepper and Pepsi present different financial liquidity measures. Based on the calculated ratios, Pepsi Company appears as profitable to invest on. It presents positive and high liquidity measures of current ratio, percentage profit margin, turnover ratios, as well as accounts receivables turnover. An investor's wise decision would be to consider the company over KDP and Coca-Cola Company (Velez-Pareja & Davila, 2009). Their choice must also consider other factors to better their decision as relying on liquidity ratios alone may give a wrong impression of profits associated with the inefficiencies of accounting ratios. 

References 

Ayoob, N. (2018). Liquidity Risk, Macroeconomics Variables, and Firm Performances: A Study of the Coca-Cola Company. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3302455 

Travaglini, C. (2005). Financial Statement Analysis in Nonprofit Organizations. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1079380 

Velez-Pareja, I., & Davila, M. (2009). Financial Analysis and Control - Financial Ratio Analysis (In Spanish). SSRN Electronic Journal. https://doi.org/10.2139/ssrn.136652 

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StudyBounty. (2023, September 14). How to Do Financial Statement Analysis.
https://studybounty.com/how-to-do-financial-statement-analysis-case-study

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