Assignment 2: Submission—Course Project

Best Investment

In order to make an investment that would be profitable, an individual requires an in-depth look at the financial structure of the potential investment companies and make a conclusion. Therefore, one of the best ways to analyze the companies’ financial health and speculate how it might move in the future is by having a close look at its financial ratios. These ratios will help an investor to draw differences and compare different aspects of the company’s performance as well as comparing its performance with other firms within the industry. In determining these financial ratios, an investor will require the company’s balance sheet which describes what the firm owns or is owed as well as what it owes. An investor will also require income statement for the year ended that describes the firms profit or loss, and expenses incurred. For this assignment, am going to choose an investment between three companies, that is, Coca Cola company, Apple Inc. and PepsiCo Inc. and the main focus is on profitability ratios since I want to determine the most profitable investment.

Profitability ratios are ratios that evaluate the financial viability of the company as well as comparing its performance with other businesses across and within the industry. There are a variety of financial indicators under profitability ratios; they include gross profit margin, net profit margin, return on equity, return on assets, asset turnover and tax rate (Williams et al., 2008). Gross profit margin evaluates how effectively the business is pricing its goods or services; net profit margin describes the percentage of sales revenue that is earned as profits. Return on equity measures the performance of the business in terms of shareholders’ investments; return on assets determines how efficiently the company’s resources are utilized by the management. Asset turnover is the rate at which the company’s stock and inventory are converted into sales and tax rate is the part of business profit that is paid out in the name of taxes (Williams et al., 2008).

According to Zane et al. (2004), in order to choose between the three companies, we have to compare their average financial indicators between 2014, 2015 and 2016.

	Gross Margin	Net Margin	Return on Equity	Return on Assets	Tax rate
PepsiCo	54.22%	9.49%	41.05%	8.45%	25.54%
Apple Inc.	39.27%	21.88%	38.92%	17.80%	26.02%
Coca Cola	61%	16%	34.67%	5.67%	22.13%

Source: Morningstar and Nasdaq (2017).

From the above information, Coca Cola has the highest gross margin but after paying its expenses, the company achieves the smallest profit margin and pays the least tax rates, lowest returns on equity and lowest return on assets as compared to the other two companies. On the other hand, PepsiCo attains a gross margin higher than Apple Inc. but slightly lower than Coca Cola with the lowest net margin. However, it pays the highest returns on equity with very low returns on asset. High return on equity accompanied with low profit margin equals to minimal payouts to the company’s investors, therefore, this is not the best company to invest in.

Apple Inc. achieved a gross margin that is relatively below the other companies. But since the net profit is the bottom line for every organization, Apple Inc. achieved a net profit margin much higher than the other companies, that means, a bigger percentage of its revenues are profits as compared to the other companies. In addition, Apple also maximizes on the use of its assets hence a higher return on assets and pays more profits which indicates high incomes. Apple also earns more than the other companies on every dollar invested by the shareholders, thus, with respect to the profit margin, investing in Apple Inc. would yield an investor more profits as compared to Coca Cola and PepsiCo Inc.

References

Williams, J.R., Haka, S.F., Bettner, M.S. & Carcello, J.B. (2008). Financial & Managerial

Accounting. McGraw-Hill Irwin.

Zane, B., Kane, A. & Marcus, J.A. (2004). Essentials of Investments (5th Ed.). McGraw-Hill

Irwin.