1Financial Statement Analysis

2Financial Statement Analysis

Financial Statement Analysis for PepsiCo and the Coca-Cola Company

Introduction

Investment analysts play the important role of advising investors and creditor on which

assets and company to channel their funds. Investment analysts have to analyze the fundamentals

of the a given company in order to provide sound advice concerning the suitability of the firm as

an investment option. This paper presents the financial statement analysis of PepsiCo and Coca-

Cola. The paper presents a description of the companies and an analysis of the firms’

performance using profitability ratios. The paper also scrutinizes news events that have impacted

the performance of the firm, as well as, the firm income statements, and presents a vertical

analysis of the firm’s balance sheets.

Descriptions of Companies

PepsiCo is an American corporation that manufactures and sells beverages and foods in

the global market. The corporation has a broad assortment of products including several

hundreds of beverage brands such as Pepsi, 7 Up, Walkers, and Cheetos. Food brands contribute

63% of PepsiCo’s revenues while beverages contribute the remaining 37%. The company was

founded in 1902 when Caleb Bradham registered the company but the first product, Pepsi, was

made earlier in 1880. Caleb decided to register the firm and a patent for his recipe after the

product gained popularity. The firm went bankrupt in 1931 leading to the purchase of syrup

recipe and the company’s trademark by Charles Guth, who was the president of Loft

Incorporated. In 9135, Loft shareholders sued Guth for his 91% stake because of using Loft

resources to produce and market Pepsi-Cola products. The shareholders won the case leading to

the transfer of the company’s ownership. The company grew using various strategies including

product development, acquisitions and divestments, and internationalization.

3Financial Statement Analysis

Coca-Cola is also an American company that manufactures and sells beverages. The

corporation also has a broad assortment of products including coke, Cola Turka, Evoka Cola and

Fanta. Unlike Pepsi, Coca-Cola only focuses on the production and sale of beverages. In 2013,

Coca-Cola distributed its products in over two hundred nations around the globe with the

company selling over 1.8 billion beverage servings every day. Coca-Cola Company began in

1885 when John Pemberton registered French Wine. Pemberton, then, developed Coca-Cola as

an alcohol-free version of French Wine Coca, which that company sold as medicine. In 1888,

Asa Candler purchased the rights to Coca-Cola Company and its product becoming the sole

proprietor. The first bottling plant was established in 1891 followed by a series of expansion

through a licensing strategy.

Profitability Ratios

Profitability ratios are metrics that weigh the firm’s ability to generate profits. Creditors

are often interested in the profitability of firms because profitability gives them a good indication

about the company’s ability to repay debt. Profit margin is one of the profitability ratios that

would be of interest to creditors. Profit margin weighs the firm’s capacity to convert sales into

net income. It gives a hint of the corporation’s ability to manage costs and expenses. The ratio is

computed by dividing the value of the firm’s net profits with the value of sales.

Creditors are also interested in the return on assets (ROA). The ROA gauges the

corporation’s efficiency in using assets to generate profits. A higher ROA connotes greater

efficiency in the management of company’s assets. The ratio is computed by dividing the value

of net income with that of total assets.

The third profitability ratio that would interest creditors is the return-on-capital-employed

(ROCE). ROCE measures the corporation’s efficiency is using capital to generate profits. A

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large ROCE connotes a high level of efficiency in the utilization of the company’s capital.

ROCE is computed by dividing Earnings Before Interest and Tax (EBIT) by the value of capital

employed. Capital employed is given by the sum of debt liabilities and shareholders’ equity.

Company PepsiCo Coca-Cola

Year 2013 2012 2013 2012Profit Margin 0.1015 0.0943 0.1832 0.1878ROA 0.0870 0.0828 0.0953 0.1047ROCE 0.1644 0.1599 0.1918 0.2092

The analysis show that the Coca-Cola Company in more profitable than PepsiCo. Coca-

Cola exhibits superior performance in all the three ratios. This trend implies that the Coca-Cola

is more efficient that PepsiCo in terms of utilizing sales, assets, and capital to create profits.

However, Coco Cola exhibits a declining trend in all the three ratios while PepsiCo exhibits

improvements in all the three ratios, in the past two years. These trends imply that while the

efficiency of PepsiCo in managing assets, costs, and capital is increasing, Coca-Cola efficiency

in these areas is declining. PepsiCo and Coca-Cola can improve their gross margin by

establishing strategies for managing their expenses and costs. These strategies may entail

increasing economies of scale or enhancing the efficiency of their operations. The companies can

enhance their ROA by managing asset costs. For instance, the companies can reduce inventory

costs by maintaining levels of inventory that reflect sales expectations. The firm can also reduce

equipment costs by leasing and renting equipment. ROA can also be increased by increasing

revenues without adding the cost of capital. For instance, the company can make optimal use of

production equipments by organizing optimal work schedules. Coca-Cola and PepsiCo can

increase ROCE by establish an appropriate pricing strategy (Dawson, 2013).

News Events

5Financial Statement Analysis

The political, social, physical, competitive, and economic environments have a

momentous effect on the financial performance of corporations. Therefore, it is imperative for

investors to consider these environments. Two contemporary events have affected the operations

of Coca-Cola and PepsiCo. These events include the planned introduction of nutritional labeling

laws and the wet weather conditions. The Food and Drug Administration has put forward

changes to the labeling laws (Wilson & Christensen, 2014). These changes are going to affect the

labels of packages of all beverages and foods. The new laws place emphasis on the disclosure of

total calories, sugar, and certain nutrients contained in the product. These changes target to

provide consumers with additional information about what they consume in products. The main

intent of the changes is to enable consumers to maintain healthy dietary practices.

The changes to the labeling requirements are bound to add to the pressure exerted on both

Coca-Cola and PepsiCo by the increased levels of health consciousness among consumers.

PepsiCo and Coca-Cola specialize in the production of carbonated drinks that have by high sugar

and calorie content. PepsiCo also has a broad array of snack brands that have high fat and calorie

content. Therefore, the changes to the labeling laws are bound to reduce the consumption of

these products by making consumers more aware of the content of the products.

In recent months, the U.S. has experienced wet and cold weather conditions in most of its

regions. The cold and wet weather is attributed to various factors including climate change

(Bohrer, 2014). The cold weather is also having an adverse effect on the operations of both

Coca-Cola and PepsiCo. Cold beverages are the core products for the Coca-Cola Company and

account for a significant portion of PepsiCo’s revenues. However, the cold weather has reduced

the consumption of these beverages in the U.S market. In August 2014, the consumption of

6Financial Statement Analysis

beverages declined by 3.8% from the same period last year (Fusion Research, 2014). The

downturn also reflects in the overall sales of Coca-Cola and PepsiCo.

The two events have had an impact on the financial performance of the company.

However, these events have not had a severe effect on the perception of investors and creditors

of both companies. The surging share prices of both companies give a sign that shareholders still

have confidence in the financial performance of the firms. The credit ratings for both firms also

exhibit creditor’s confidence. A significant factor that has shielded the companies from suffering

severe implication is the high level of product differentiation. The two companies have already

noted this threat and have begun to shift towards the production of relatively health products

such as smoothies, coffee, and others.

Companies’ Income

The income statement informs investors about the ability of the company to generate

income. A high performing firm should have high profits in relations to revenues or low

expenses in relations to revenues. A noteworthy item in an income statement is the company

revenues. This item represents all the money that the firm earns in a given period. High revenues

increase the profitability of the firm. Another significant section of the income statement is the

expense section. Expenses are significant entries into an income statement as they have an effect

on the firm’s income. A company may have high revenues but fail to survive because on an

inability to control expenses. The most appropriate way of analyzing the income of a given firm

is by using the profit margin. This ratio points out the capacity of the corporation to generate

revenues and manage expenses.

An analysis of the income statement reveals that PepsiCo had higher revenues that Coca-

Cola in 2013 and 2012. However, PepsiCo had lower net income that Coca-Cola over the same

7Financial Statement Analysis

period. Therefore, Coca-Cola is the better performer of the two companies because it has a

higher income. Investors are interested in the company’s income and not revenues. The trend

suggests a problem in the operations of PepsiCo. The firm is unable to manage its expenses

effectively. In 2013, PepsiCo had a gross margin of 0.1014 as compared to 0.1832 for Coca-

Cola. These figures are an indication that out of one dollar of sales PepsiCo was only able to

convert $0.1014 into profits while Coca-Cola was able to convert $0.1832.

Year 2013 2012PepsiCo 0.1014 0.0943Coca-Cola 0.1832 0.1878

Therefore, the best way for PepsiCo to improve its financial performance is by reducing

its expenses. The income statement demonstrates that PepsiCo has no problem in generating

revenues. In fact, the firm had more revenues than Coca-Cola. The problem is, therefore, in the

management of expenses. Wal-Mart can reduce expenses by reevaluating it value chain and

eliminating non-essential activities. The firm can also introduce efficient ways of running its

operations. Specifically, PepsiCo needs to find ways of reducing its selling general and

administrative costs, interest expenses, and tax expenses.

Companies’ Balance Sheet

Vertical Analysis of PepsiCo's Balance SheetPeriod Ending 2013 Percent

AssetsCurrent Assets

Cash And Cash Equivalents 9375000 12%Short Term Investments 303000 0%Net Receivables 6954000 9%Inventory 3409000 4%

Other Current Assets 2162000 3%

 

Total Current Assets 22203000 29%

Long-Term Investments 1841000 2%

8Financial Statement Analysis

Property Plant and Equipment 18575000 24%Goodwill 16613000 21%Intangible Assets 16039000 21%

Other Assets 2207000 3%

 Total Assets 77478000 100%

LiabilitiesCurrent Liabilities

Accounts Payable 12533000 16%

Short/Current Long-Term Debt 5306000 7%

 

Total Current Liabilities 17839000 23%Long-Term Debt 24333000 31%Other Liabilities 4931000 6%

Deferred Long-Term Liability Charges 5986000 8%Minority Interest 110000 0%

 Total Liabilities 53199000 69%

Stockholders' EquityMisc Stocks Options Warrants -130,000 0%Common Stock 25000 0%

Retained Earnings 46420000 60%Treasury Stock -21,004,000 -27%

Capital Surplus 4095000 5%

Other Stockholder Equity 5,127,000 7%Total Stockholder Equity 24409000 32%

 Net Tangible Assets -8,243,000 -11%

Vertical Analysis of Coca-Cola’s Balance SheetPeriod Ending 2,013.00 Percent

AssetsCurrent Assets

Cash And Cash Equivalents 10,414,100.00 12%

Short Term Investments 9,854,000.00 11%

Net Receivables 4,873,000.00 5%

9Financial Statement Analysis

Inventory 3,277,000.00 4%

Other Current Assets 2,886,000.00 3%

 

Total Current Assets 31,304,000.00 35%

Long-term Investments 11,512,000.00 13%

Property Plant and Equipment 14,967,000.00 17%

Goodwill 12,312,000.00 14%Intangible Assets 15,299,000.00 17%

Other Assets 4,661,000.00 5%

 

Total Assets 90,055,000.00 100%

LiabilitiesCurrent Liabilities

Accounts Payable 9,886,000.00 11%

Short/Current Long-term Debt 17,925,000.00 20%

 

Total Current Liabilities 27,811,000.00 31%

Long-term Debt 19,154,000.00 21%

Other Liabilities 3,498,000.00 4%

Deferred Long-term Liability Charges 6,152,000.00 7%Minority Interest 267,000.00 0%

 Total Liabilities 56,882,000.00 63%

Stockholders' EquityCommon Stock 1,760,000.00 2%Retained Earnings 61,660,000.00 68%Treasury Stock (391,091,000.00) -434%

Capital Surplus 12,276,000.00 14%

Other Stockholder Equity (3,432,000.00) -4%

 

Total Stockholder Equity 33,173,000.00 37%

 

Net Tangible Assets 5,562,000.00 6%

10Financial Statement Analysis

The vertical analysis of the balance sheet reveals several issues about the firms. The

analysis reveals that PepsiCo is doing badly in term of managing it credit sales. According to the

analysis, PepsiCo receivables are 9% of the firm’s total assets while Coca-Cola receives accounts

for only 5% of the total asset value. PepsiCo also has relatively low liquidity as the value of

current assets is 29% of the total asset value as compared to Coca-Cola’s 35%. This percentage

indicates that PepsiCo is a higher risk of experiencing liquidity problems than Coca-Cola. The

figures suggest that most of PepsiCo’s assets are in the form of long-term assets. In fact, PepsiCo

value of plants and equipments is 24% of total asset value as compared to Coca-Cola’s 17%. The

analysis also reveals challenges in the management of liabilities within PepsiCo. PepsiCo total

liabilities are 69% of the value of total assets while Coca-Cola liabilities are 63% of the firm’s

asset value. These figures suggest that Coca-Cola is better placed to meet its debt obligations

than PepsiCo. PepsiCo high liabilities are attributed to company’s reliance on debt finance.

PepsiCo’s long-term debt is 31% of the firm’s asset value as compared to Coca-Cola’s 10%.

From the vertical analysis, it is clear that PepsiCo is the lagging company.

PepsiCo can improve its financial performance in various ways. First, PepsiCo should

revise its credit policies so as to enhance the management of assets. The credit policies are

affecting the company’s income and cash position by holding too much of the company’s assets

in the form of receivables. PepsiCo should revise its credit policies so as to ensure that debts pay

their dues within the shortest time. PepsiCo can use strategies such as cash discount to enhance

its debtor management capacity. PepsiCo should also reduce asset costs through leasing and

hiring of equipments. The firm’s value of plants and equipments is relatively high, which means

that the firm spends a lot of resources in the purchase and maintenance of plants and equipment.

This trend reduces the returns of the company. PepsiCo can enhance its debt management

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capacity by reducing its financial leverage level. The firm has a high debt level which means that

it finances the purchase of company assets using debt. The firm needs to revise its capital

structure so as to reduce bankruptcy risks. PepsiCo should consider exploring more of the equity

option so as to reduce the company’s debt level.

Conclusion

The analyses reveal that both companies are in a good financial position. However, Coca-

Cola is the best investment option for creditors and investors as it outperforms PepsiCo in many

financial indicators. PepsiCo can enhance its financial performance by improving its

management of expenses, debtors, assets, and debts.

12Financial Statement Analysis

References

Dawson, T., (2013). How Starbucks utilizes its pricing strategy to maximize profit. Retrieved

from http://wlligently.com/ 51/How-Star -Pricing-Strategy-for-Profit-Maximization

Wilson, J., & Christensen, J., (2014). Nutritional labels are getting a makeover. Retrieved from

http://edition.cnn.com/2014/02/27/health/nutrition-labels-changes/

Fusion Research (2014). PepsiCo and Coca-Cola. Retrieved from

http://seeha.com/article/1673862-copsico-despite-rage-stocks-smells-like-money

Bohrer, B., (2014). Freezing cold weather hit U.S. Retrieved from

http://www.huffingtonpost.com/2014/11/09/us-cold-weather_n_6129836.html