appendix A

Background of each Company

Coca Cola Co. was founded in 1886 by John Pemberton and it has become the global number one soft drinks manufacturer. The company products available in about 200 countries and these products consists of more than 400 brands which include bottled water, soft drinks, and energy drinks in addition to juice products (Buehler, 2018). However, the Coca Cola Company is best recognized for its soft beverage, Coke. Since it start, the company has invested extensively in diverse advertisement to boost the market share and this has made it the most familiar brands round the globe. In 2018, this company had 42.2% market share (Coca-Cola Company, 2019), however, despite the dominance, the company has experienced decline in sales of its products because of obesity and other health rated concerns. Because of the challenges in market sustainability and penetration, Coca-Cola has made long-term goals and one of its key objective is “double its revenue by 2020 and to acquire or develop scalable, innovative premium brands” (Buehler, 2018). During the past years, the company revenue has declined for instance in 2014, Coca Cola registered 15.5% net income and this was a big drop compared to 2013 when it made 18.3%. The company is dealing with health related challenges in the market and acquiring healthier drinks such as Vitamin Water.

Net sales

Background on the Industry and Market

Coca-Cola’s brands are the famous Coca-Cola brand, Fanta, Sprite, Minute Maid, Schweppes, and simply. The company have ventured in production of coffee and tea products under Costa brands and Fuze Tea which have received nice grown and popularity. The company makes water brands sold around the world. Despite this diversification efforts, 69% of the company soft drinks, they have lost popularity to healthier drinks. Coca-Cola has been experiencing revenue decline since 2014 when the health awareness and global growth issues started kicking in and hurting the carbonated drink business. In 2015, this company reported $44.2 billion in annual sales, however, this reduced to 41.9% in 2016, it went further down to $35.4 billion in the year 2017 and worse still in 2018, the company registered %31.9 billion in sales (Coca-Cola Company, 2019).

The company is expected to achieve a slight increase in 2019 as it transitions into water sales and healthier drinks. Even though Coca-Cola Company is expected to make higher sales in 2019, the comparisons from the past years shows disadvantaged firms considering the sharp drop in sales comparing this to Pepsi which experienced a drop only in 2016. It is expected that PepsiCo’s growth rates will increase whereas that of Coca-Cola is expected to drop by 2020.

Year	Revenue in mil. USD$
2012	48,017
2013	46,854
2014	45,998
2015	44,294
2016	41,863
2017	35,410

Financial ratios

Current ratio

Current ration “indicates the extent to which current liabilities are assets expected to convert to cash” (Wilkins, 2019). The current assets include account receivables, cash, marketable securities, and inventories. The current liabilities are account payable, accrued taxes, and short-term notes payable. Coca Cola Company (KO) has average of 0.98 current asset ratio in the last years. There is decreasing trend of current ratio in case of Coca Cola. The Current/quick ratio is “receivable current liability plus cash plus market securities” (Wilkins, 2019). The current ratios for the KO in 2014-2015 is 1.2 and this a decrease because in 2012-23 it was 1.09. The higher the current ratio of a company the greater the company abilities to offset the short term obligations (Wilkins, 2019). Comparing Pepsi Co. to Coca Cola Company, Pepsi has higher current ratio in the last five years and this means it has greater ability to pay its short terms expenditures.

Profitability Ratio

These are financial metrics used in evaluating the ability of a firm to resourcefully generate revenue in relevant costs experienced and its expenses. The profitability ratios are “return on capital, return on equity, and return on assets” (Wilkins, 2019).

Return on Capital

The return of capital employed for Coca Cola for 2013, 2014, and 2015 are 14.28, 12.57, and 9.87 respectively. The higher “return on capital” ratio shows that there are more profits on units of money spend. In this years, the return on capital for Pepsi were 13.85, 14.09, and 14.24 respectively. This information means that Coca Cola does not utilize each unit of capital amassed from the investment compared to Pepsi. Moreover, the efficiency in use of capital for KO is inconsistent and steadily declining.

Return of Assets

For the years, 2013, 2014, and 2015 for KO was 10.87, 9.53, and 7.81 respectively (Buehler, 2018). When this return of assets is positive, the company is making profit. Coca Cola is utilizing its assets effectively, however, the utilization of the assets is not consistent.

Return on Equity

This “ratio defines the ability of business to make profits from shareholders contribution in form of investments” (Agnese, 2014). It is generally agreeable that investors like putting their moneys in companies or business which have high return on the equity because it shows that their investment is being used rightly. From the data collected and analyzed from the two companies, people would prefer to invest in Pepsi compared to KO.

Working capital turnover

This is investment ratio “calculated by dividing revenue by the working capital” (Wilkins, 2019). Coca Cola Company working capital turnover has been deteriorating from 2016 to 2017, however, this trend changed slightly in 2018.

The average Inventory processing period is the ratio numbers of operating days in a certain financial years divided by the inventory turnover. Coca-Cola Company average inventory processing period sank between 2016- 2017 and 2017-2018. The “average receivable collection period” which is the ratio of number of days in a period divided by the receivable turnover was also not pleasing for this company. The company average receivable collection period was went down from 2016 to 2017 and it worsened from 2017 to 2018.

Dividend Payout Ratio

KO dividend payout ratio for the month end of March 2019 was 1.05. If firm dividend payout ratio is too high, it means that the dividend is not sustainable. The minimum ratio reported was 0.35 while maximum was 5.48. For dividend payout ratio for the past ten years is 0.96. This company has higher dividend yield compared to Pepsi. Its dividend yield combined with the retarding revenue growth is a point of concern to investors who question the safety of dividend payments (Kramer, 2019). Coca-Cola competitor has a payout ratio of around 0.65 which is good enough for a company with solid business because it does not need a lot of capital investment to sustain it. The company effort to refranchise bottling activities have caused asset-impairment charges and the restructuring costs have pushed down the earning. Upon adjusting these factors, the payout ratio can move to sustainable level of 0.7.

Price / Earnings ratio

High Price and Earning ration means that shareholder have to pay higher price for each dollar which the business has earned over the last financial year. Coca-Cola has high P/E ratio of average 27 in the beverage market. This ratio imply that market participants consider the company will perform better compared to Pepsi going forward. The market is optimistic about future, however, this does not guarantee future growth and, therefore, investors should consider other factors before making a move.

Conclusion

Both companies generate lots of profit and have healthy balance sheet, but the lack of growth is a major concern. The declining consumption of soda affect both PepsiCo and Coca Cola Company, but these companies are developing new products to replace the lost income. PepsiCo is ahead in innovation, but Coca Cola Company is catching up.

Rational for which company the group would choose

Adaptability

Coca-Cola is facing challenging moments, however, it have made changes to satisfy the needs of buyers. The KO has come up with “diet version of Coca-Cola” and this is the second most-selling drink in US. The company has created and developed marketing alternatives and some of its healthy alternatives are Minute Maid juice, Dasani water, and PowerAde. Dasani water has gained wide acceptance and Odwalla’s fruits are much acceptable by younger consumers.

Increasing scope

Coca-Cola revenue is likely to grow after consideration of healthy drinks. The company has global opportunities. Its plan to invest more in developing market all over the world shows the management drive to increase scope. The company initiatives is paying off, it recorded 8% growth in India, 18% in Thailand, and 3% growth in Brazil.

Non-financial criteria

There are several non-financial consideration in choosing a company to invest in. Some of these issues are company ability to meet the future and current legislation requirements, how the company match industrial standards and practice, ability of the company to improve staff morale through easy recruitment and retaining, the company reputations and relationship with shareholders, and the ability of the company to develop capacity and capabilities in the business through strengthening of management systems, building skills and dealing with intellectual properties.

References Agnese, J. (2014). Food and Non-Alcoholic Beverages. New York: McGraw Hill Financial. Buehler, N. (2018, Oct 13). How Does Coca-Cola Actually Make Money? (KO). Retrieved July 02, 2019, from Investopedia: https://www.investopedia.com/articles/markets/112515/how-does-cocacola-actually-make-money.asp Coca-Cola Company. (2019, Feb 14). Coca-Cola Reports Strong Results for Fourth Quarter and Full Year 2018. Retrieved July 2, 2019, from The Coca-Cola Company: https://www.coca-colacompany.com/press-center/press-releases/coca-cola-reports-strong-results-for-fourth-quarter-and-full-year-2018 Kramer, M. (2019, June 25). Why Coca-Cola Shares Are Overvalued. Retrieved July 02, 2019, from Investopedia: https://www.investopedia.com/news/why-cocacola-shares-are-overvalued/ Wilkins, G. (2019, June 25). 6 Basic Financial Ratios And What They Reveal. Retrieved July 02, 2019, from Investopedia: https://www.investopedia.com/financial-edge/0910/6-basic-financial-ratios-and-what-they-tell-you.aspx

Appendix

Coca-Cola Net income

Table 1 P/E Ratio for the two companies