Pepsico vs. Coca Cola

Pepsico vs. CocaCola

The purpose of this essay is to present the comparative analysis of two companies CocaCola and PepsiCo. The main objective of the essay is to compare and analyze financial performance of two companies in terms of ratios.

CocaCola is 126 years old company was created by Atlanta pharmacist John Pemberton in 1886. It has 3500 growing products available in 200+ countries. CocaCola receives 1,322,000 tweets per quarter, which is an obvious indicator of popularity (Our Company, 2011).

Pepsico is also a global company created in the late1890s by Caleb Bradham, North Carolina pharmacist. Company is a global food and beverage leader with net revenue of more than $65billion (Company, 2012).

They are direct competitors of each other over a century in the soft drink industry. We know that both companies have high degree of brand awareness and loyalty globally.

Ratio Analysis

Ratio analysis is used to compare relationships among finacial items. Ratios are used to compare company’s own performance with its past performnace or with the industry average or with competitors (Ratio Analysis, n.d.). According to Barringer & Ireland (2011) there are three types of ratios:

1. Liquidity Ratio: This ratio assess company’s ability to meet its short-term debts.

Current ratio, cash ratio, and quick ratio are types of liquidity ratio. These ratios show the financial position of the firm (Barringer & Ireland, 2011).

2. Profitability Ratio: It is a ratio of income earned vs. resources consumed to generate income. Return on assets (ROA), return on equity (ROE), and profit margin are types of profitability ratios.These ratios show the financial performance of the firm (Barringer & Ireland, 2011).

3. Overall Financial Stability Ratio: As the name indicates this ratio measures the overall financial stability of the company. With the help of this ratio we can see that whether the company is having sustainable growth or not (Barringer & Ireland, 2011).

Comparative Financial Analysis between PepsiCo and CocaCola

1. Liquidity Analysis

Table 1.1 (PepsiCo Inc., liquidity ratios)

Dec 29, 2012

Dec 31, 2011

Dec 25, 2010

Dec 26, 2009

Dec 27, 2008

Current ratio

1.10

0.96

1.11

1.44

1.23

Quick ratio

0.80

0.62

0.80

1.00

0.79

Cash ratio

0.39

0.24

0.40

0.47

0.26

(PepsiCo Inc. (PEP) | Liquidity Analysis, 2013)

Table 1.2 (Coca-Cola Co., liquidity ratios)

Dec 31, 2012

Dec 31, 2011

Dec 31, 2010

Dec 31, 2009

Dec 31, 2008

Current ratio

1.09

1.05

1.17

1.28

0.94

Quick ratio

0.77

0.78

0.85

0.95

0.62

Cash ratio

0.59

0.58

0.61

0.67

0.38

(Coca- Cola Co. (KO) | Liquidity Analysis, 2013)

Current Ratio: It is a ratio of current assets and current liabilities (Coca-Cola Co. (KO) | Liquidity Analysis, 2013).Higher current ratio is a healthy indicator for a company. Current ratio under 1 is not considered good as it indicates company is not sufficiently liquid enough to meet its short-term debt (Mathur, 2011). From table 1.1 and table 1.2 it is obvious that in 2012 Pepsico (C.R.=1.10)has slight edge over CocaCola (C.R. =1.09) but both the companies have ability to meet their short-term debt.

Quick Ratio: Also known as acid test ratio is calculated by dividing cash plus short-term marketable investement plus receivables from current liabilities (Coca- Cola Co. (KO) | Liquidity Analysis, 2013). A ratio of 2:1 shows that firm has 2 times as much cash as it owes, very healthy sign. On the other hand ratio of 1:2 shows that firms liabilities are double of its cash to pay liabilities.Ideal scenario is ratio of 1:1. Refer to table 1.1 and table 1.2 for quick ratios in 2012, we find that Pepsico (Q.R.=0.80) again has slight edge over CocaCola (Q.R. =0.77).

Cash Ratio: Calculated by dividing Cash plus short-term marketable investments from current liabilities (PepsiCo Inc. (PEP) | Liquidity Analysis, 2013). Refer to table 1.1 and table 1.2 for cash ratios in 2012, we find that Pepsico (Ca.R.=0.39) is low in comparison to CocaCola (Ca.R. =0.59). Usually businesses keep their cash ratio slightly below 1 as they use their idle cash for profit generation. However creditor prefer business with high cash ratio. A cash ratio of 1 or above means that business is able to pay its short-term liabilities immediately (Cash Ratio, 2011).

2. Profitabiliy Analysis

Gross Profit Margin: This ratio shows the gross profit as proportion of sales. Higher gross profit margins are better and healthy indicator for businesses. Low gross profit margin indicates that either cost of production and inventory is high or price charge is low (Profit Margin Ratio’s and Break Even Analysis, 2012). Now compare Pepsico and CocaCola gross profit margins of 2012 from table 2.1 and table 2.2, we find that Pepsico (G.P.F.=52.22%) is low in comparison to CocaCola (G.P.F. =60.32%). Gross profit margin of 52.22% means that company makes 52.22p in gross profit for every 1$ of sales.Similarly gross profit margin of 60.32% means that for every 1 $ sale company make 60.32p in gross profit. Higher percentages also suggest that company have more money to reinvest in business or to pay its expenses (Vitez, n.d.)

Table 2.1 (PepsiCo Inc., profitability ratios)

Dec 29, 2012

Dec 31, 2011

Dec 25, 2010

Dec 26, 2009

Dec 27, 2008

Return on Sales

Gross profit margin

52.22%

52.49%

54.05%

53.51%

52.95%

Operating profit margin

13.91%

14.48%

14.41%

18.61%

16.09%

Net profit margin

9.43%

9.69%

10.93%

13.75%

11.89%

Return on Investment

Return on equity (ROE)

27.71%

31.29%

29.86%

35.38%

42.47%

Return on assets (ROA)

8.28%

8.84%

9.27%

14.92%

14.29%

(PepsiCo Inc. (PEP) | Profitability Analysis, 2013)

Table 2.2 (Coca-Cola Co., profitability ratios)

Dec 31, 2012

Dec 31, 2011

Dec 31, 2010

Dec 31, 2009

Dec 31, 2008

Return on Sales

Gross profit margin

60.32%

60.86%

63.86%

64.22%

64.39%

Operating profit margin

22.45%

21.82%

24.06%

26.56%

26.44%

Net profit margin

18.78%

18.42%

33.63%

22.02%

18.18%

Return on Investment

Return on equity (ROE)

27.51%

27.10%

38.09%

27.52%

28.37%

Return on assets (ROA)

10.47%

10.72%

16.19%

14.02%

14.33%

(Coca-Cola Co. (KO) | Profitability Analysis, 2013)

Operating Profit Margin: This ratio shows operating income (earnings before interest and tax) as a percentage of revenue (Operating Margin Ratio, 2011). If we compare Pepsico and CocaCola operating profit margins of 2012 from table 2.1 and table 2.2, we find that Pepsico (O.P.M.=13.91%) is low in comparison to CocaCola (O.P.M. =22.4%). CocaCola is efficeint and able to make more operating profit out of 1$ sale than PepsiCo. However, for both companies it is obvious from table 2.1 and 2.2 that profitability has decreased over the period of time.

Net Profit Margin: It is defined as net profit as a proportion of sales (Profit Margin Ratio’s and Break Even Analysis, 2012). Refer to table 2.1 and table 2.2 for net profit margin in 2012, we find that Pepsico (N.P.M.=9.43%) is also low as compare to CocaCola (N.P.M. =18.78%).

Return on Equity (ROE): The amount of net income return as a percentage of shareholders equity (Mathur, 2011). It is ratio of net income to equity (Brigham & Ehrhardt, 2001). Based on data obtained from financial statements of CocaCola and Pepsico in table 2.1 and 2.2 we can say that Pepsico (ROE=27.71%) is performing slightly better than CocaCola (ROE =27.51%),generating more profit with the shareholders money and delivering more value to its share holders .

Return on Assets (ROA): Return on asset is a profitability ratio that determines how efficiently a company is generating earnings by utilizing its assets. It is a ratio of net income to total assets (Mathur, 2011). Based on data obtained from financial statements of CocaCola and Pepsico in table 2.1 and 2.2 we can say that Pepsico (ROA=8.28%) is low in comparison to CocaCola (ROA =10.47%).

Here the question arises which ratio is the most important indicator of company’s financial performance? In case of small business net profit margin is the most important indicator of profitability but in this case when business is large the investors are interested in growth of their investment hence, ROE is very important measure of profitabilty here (Peavler, 2010).

3.Overall Financial Stability Analysis

Debt to Equity Ratio: It is calculated by dividing debt to equity and have different meanings for owners and lenders. Higher debt to equity ratio shows there is higher risk to money for lenders. Whereas low ratio indicates that lenders enjoy greater margin of safety (Financial Analysis, nd) .PepsiCo (DER=1.266) for Dec 31, 2012 (Ycharts, 2013) in comparison to CocaCola (DER=0.9832) for Dec 31, 2012 (Ycharts, 2013).

Interest Coverage Ratio: This ratio is calculated by dividing EBIT by interest expense (Investopedia, 2013).An interest coverage ratio below 1 means that company is unable to meet its interest expense and is not generating enough revenue. Ideal ratio should be above 1.5. PepsiCo (ICR=10.24) in 2012 (wikinvest, 2013) in comparison to CocaCola (ICR=30.75) in 2012 (wikinvest, 2013).

4. Cash Flow and Investment valuation ratio

Dividend Yield: PepsiCo dividend yield is 3.10% (Ycharts, 2013) whereas, CocaCola offers dividend yields of 2.90% (Ycharts, 2013). Dividend yield can be calculated by dividing the annual dividends per share by price per share. Company that gives higher dividend yield is considered as good by investors (Investopedia, 2013)

Dividend Payout Ratio: Pepsi’s dividend payout ratio (54%) (YahooFinance, 2013) is slightly higher than Coca Cola’s (52%) (YahooFinance, 2013). Dividend Payout Ratio is defined as the dividends received by shareholders as percentage of earnings. More mature companies usually have higher payout ratio. This ratio is calculated as Dividends per share / Earnings per share (Mathur, 2011).

The price/earnings ratio (P/E) is one of the best indicators of investment valuation. It is calculated by dividing market value per share by earning per share (EPS). Higher P/E ratio suggests high demand as investors expect growth in earnings in the future (Mathur, 2011). The price/earnings ratio for Coca Cola is 19.90 (YahooFinance, 2013) and PepsiCo is 19.65(YahooFinance, 2013).

How to make decision for an investment

Investors who are looking for secure dividend stocks with sturdy growth potential, Pepsi would be a better option in terms of return on equity, dividend yield, and dividend payout ratio. Coca-Cola has the higher profit margins and seems more efficient. By looking at profitability ratios we can say that Coca-Cola has financial performance is better than PepsiCo, except for ROE.

PepsiCo:

Coca Cola

Winner

29-Dec-12

31-Dec-12

Current ratio

1.1

1.09

PEP

Quick ratio

0.8

0.77

PEP

Cash ratio

0.39

0.59

KO

Gross profit margin

52.22%

60.32%

KO

Operating profit margin

13.91%

22.45%

KO

Net profit margin

9.43%

18.78%

KO

Return on equity (ROE)

27.71%

27.51%

PEP

Return on assets (ROA)

8.28%

10.47%

KO

Debt to Equity ratio

1.266

o.98

KO

Interest coverage ratio

10.24

30.75

KO

Dividend Yield

3.10%

2.90%

PEP

Dividend payout ratio

54%

52%

PEP

P/E

19.5

19.9

KO

On the other side, Pepsi has seen steady growth pattern. The investing now, investors had the opportunity to enjoyed Pepsi rise to near 80-100 points by 2010 and possibly even further by 2015 (Mathur, 2011).However at the end we can say that both the brands are strong and winning brands.

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