Benchmark - Executive Summary Presentation BUS-317
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Benchmark-InterpretingFinancialStatements1.docx5
Interpreting Financial Statements
Coca-Cola v. Pepsi
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Interpreting Financial Statements
Coca-Cola v. Pepsi
The multinational food, snack and beverage market in the U.S. is estimated at US$269.6 Billion in the year 2020. The country now accounts for a 27.1% share in the global market. China, the world second largest economy, is forecast to reach an estimated market size of US$284.6 Billion in the year 2027 trailing a CAGR of 7.5% through 2027 (Globe Newswire, 2020). The numbers show that despite a pandemic, snack and beverage market still dominate the world. Coca-Cola and PepsiCo are two major competitors, both are a global explosion with their hundreds of brands and thousands of products. The most current financial statement of each company will allow a look into just how much liquidity, solvency, and profitability are. Looking at the liquidity, solvency, and profitability relative to each other, we can determine which of the two has less debt. Interpreting the statements of both will give you the facts on where they stand in the industry averages. The report was developed for the year ending in 2019, using money section of MSN.com.
Liquidity is measuring a company’s ability to pay maturing obligations in the short-term as well any unexpected necessity for cash Kimmel & Weygandt, (2017). According to MSN Money, under the income statement, Coca-Cola reported total current asset of $20,411 and $26,973 in current liabilities. After using the formula. The ratio for Coca-Cola is .076.
According to the income statement, Pepsi ended the year with an amount of $17,645 in total current assets, while liabilities it was reported $20,461. The liquidity ratio for Pepsi is .086. Pepsi receives .086 in asset for every dollar in liability, while 1.13 is the industry percentage.
Coca-Cola and Pepsi are below the industry average. Comparing both Pepsi and Coca-Cola, Pepsi has a better liquidity at .86. According to Credit Finance Institute (CFI), When analyzing a company, investors and creditors want to see a company with liquidity ratios above 1.0 (2020).
Solvency
Solvency can be described as survival mode; it measures a company’s ability to meet long-term obligations. To see how solvent a company is, one can use solvency formulas that will interpret debt ratio, debt-to-equity ratio, or quick ratio. The purpose knowing the debt ratio is to prove (or disprove) that entities can pay their debt obligations.
The debt ratio for Coca-Cola’s debt is at .75 ($86,381/$65,283=.75). While Pepsi comes in at .84 ($75,547/$63,679=.84). Both companies show that they are below the industry standard of .87. By using both solvency ratios and liquidity ratios, analysts can determine how well a company can meet any sudden cash needs without sacrificing its long-term stability (Carlson, 2020). Coca-Cola has the least solid solvency for the long-term, compared to Pepsi and the industry ratio, which means will have more difficult time trying to pay back debt obligations.
Profitability
Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific period of time (Credit Finance Institute, 2020). To analyze how profitable a company is, many various profitability ratios can be utilized to provide insight in the financial well-being and performance a company. A company needs to operate at a higher ratio, a higher ratio means the company or entity is generating cash flow, profit or revenue.
Common stockholders want to see ROE, it measures the profitability. According to MSN Money and after the formulating the figures, the ROE for Coca-Cola is at 45%, Pepsi at 51%. While the standard industry at 15%. By analyzing the ROE, Pepsi is slightly higher. Both are higher than the industry standard of 15%. Pepsi demonstrates better financial decisions due to the highest ROE; it suggest profit generation without needing as much capital.
Return on assets (ROA) measures overall profitability of every dollar earned. Analyzing the data of ROA, Coca-Cola at 9.06% had the highest profitability of every dollar earned. Compared to Pepsi coming second at 8.4%. Coca- Cola has the Highest ROA, which we can safely assume, it is earning more income on less investment. While Pepsi may demonstrate better financial decisions, Coca-Cola is earning more on less investments. Both Coca-Cola and Pepsi are doing better than the industry standard of 7.81%.
The probability of each company can also be analyzed by the gross profit rate. The gross profit rate will demonstrate sales compared to cost. The formula to attain gross profit gross: gross profit divided by net sales. Again, Coca-Cola had the highest gross profit rate at 36.67%. compared to its competition standing on 19.76%, coming in second. Coca-Cola is above both Pepsi and the industry standard of 21.9%
Summary
Interpreting financial statements consists of analyzing several financial sections can be found in the income statements, cash flow and balance sheet. While we may find the figures in the financial statements, formulas will take play into figuring out the ratios, percentages, and profitability.
References
Globe Newswire. (2020). Global Soft Drinks Industry. https://www.globenewswire.com/news-release/2020/07/08/2059404/0/en/Global-Soft-Drinks-Industry.html#:~:text=The%20Soft%20Drinks%20market%20in,CAGR%20of%207.5%25%20through%202027.
Kimmel, P. D., & Weygandt, J. J. (2017). Survey of accounting. Hoboken, NJ: John Wiley & Sons, Inc.The Coca-Cola Company. (2018). Career areas. Retrieved from https://www.coca-colacompany.com/careers/career-areas
According to Credit Finance Institute. (2020). Liquidity Ratio. https://corporatefinanceinstitute.com/resources/knowledge/finance/liquidity-ratio/
Carlson, R. (2020). Business Finance. How to Calculate Solvency Ratios. https://www.thebalancesmb.com/what-are-solvency-ratios-and-what-do-they-measure-393211
