financial perspective of pepsico and coca cola
business 508: THE BUSINESS ENTERPRISE
Coke and Pepsi are the two major soft drink companies in the whole world; both companies have an international footprint. However, they also face substantial competition, as the market for non-alcoholic drinks is highly fragmented. In order to understand the investment characteristics of these two companies, it is worthwhile to take a look at these companies from the financial perspective, comparing their different financial ratios. Some of the important ratios that should be analyzed are the liquidity ratios, profitability ratios, cash ...view middle of the document...
8%, while for Coke it is $23,872 / $48,671 = 49%, indicating that Pepsi has a higher degree of leverage than does Coke.
2) Using the profitability ratios, discuss what conclusions you can make about each company’s profits over the past three years.
There are three main profitability ratios that can be calculated – the gross margin, operating margin and net margin. These ratios tell a story about the firm’s ability to make money from its revenues. In particular, the different elements of the company’s cost structure are illustrated with the profitability ratios. The gross margin reflects the firm’s pricing power by analyzing revenues and cost of goods sold. The gross margin is calculated as the gross profit / revenues. For Pepsi, the gross margin is $23,133 / $43,232 = 53.5%. For Coke it is $19,902 / $30,990 = 64.2% The operating margin is the operating profit / revenue. For Pepsi this is $8044 / $43,232 = 18.6%; for Coke it is $8231 / $30,990 = 26.5%. The net margin is the net profit / revenue. For Pepsi this is $5946 / $43,232 = 13.7% and for Coke it is $6824 / $30,990 = 22%. What these figures indicate is that Coca-Cola Company has better pricing power and cost structure that is under control. Its margins are higher across the board, and look to be sustainably higher than those of Pepsi because the difference is so large.
3) Using the cash flow indicator and investment valuation ratios, discuss which company is more likely to have satisfied stockholders.
4) The cash flow indicators help to understand the degree to which the company covers some of its obligations through its operating cash flow. This takes out the influence of non-operating flows to give a better picture of how the company is performing on an operational basis. The first is operating cash flow / sales. This ratio illustrates how well the company converts sales into cash, and is a complement to the profitability ratios. For Pepsi, OCF to sales is $6796 / $43,232 = 15.7%. For Coke this is $8186 / $30,990 = 26.4%.
4. Another cash flow indicator, which works as a complement to the liquidity ratios, is OCF / short-term debt. For Pepsi this is $6796 / $464 = 14.6 times. For Coke this is $8186 / $6749 = 1.2 times. Pepsi has a much lower rate of short-term debt and therefore covers this debt several times over with its cash flow. Pepsi also had the better current ratio, so the company appears to have a better debt situation than does Coke. The third cash flow indicator is the OCF / dividends, which measures the firm’s ability to pay out dividends to the shareholders. This is particularly useful for analyzing a company from an investors’ point of view. Investors need to feel comfortable that dividends will either be paid or increased, and this ratio tells a lot of about that likelihood. For Pepsi, the OCF / dividends are $6796 / $2768 = 2.45 times and for Coke this is $8186 / $3800 = 2.15 times. Pepsi is better able to pay out...