assgn 3

The success of a company is attributed to its financial health. If a company’s financial health is good, then it means that the company is generating enough income from its business activities. With adequate income, the company is able to take care of its obligations thus does not fall into debt. Therefore, the company will be eligible to creditors and investors. Coca Cola is one of the beverage companies that has been in existence for long. It is among the highly ranked companies in the beverage industry. The company faces much competition from its rivals Pepsi. However, Coca Cola has been able to maintain its competitive advantage over Pepsi due to its good financial health (Fatima & Nobanee, 2019). This paper will focus on the financial analysis of Coca Cola, comparing it with that of Pepsi through financial statement analysis.

Financial Analysis

The financial analysis of a company is the general examination of the company’s financial statements, through financial ratios. Financial analysis determines whether the company is eligible for loans from creditors and whether it is safe for investors to invest in the company. It also gives an overview of the yield of business activities in the company. Coca Cola is the top beverage company globally (Li, 2019). The company’s financials have been promising over the years thus attracting more investors into the business. The following is a financial analysis of Coca Cola in comparison to its competitor Pepsi. This includes computing the liquidity, solvency and profitability ratios. The objective of this assignment is to analyze the financial performance of the Coca Cola. This aligns with the course objective of determining the financial health of the company.

Liquidity Ratios

Liquidity ratios determine the ability of a company to pay off its debts without getting external capital. A company’s liquidity is the ability to quickly convert assets to cash in a cheap way. The common liquidity ratios include current ratio, quick ratio and day sales outstanding ratio.

Current Ratio

The current ratio shows the ability of a company to pay its current liabilities using its total current assets. The current ratio= current assets/ current liabilities. Coca Cola’s current ratio in the economic year ending June 2021 was 1.47 while that of Pepsi is 0.98. This means that Coca Cola is at a better liquidity position than Pepsi since its current ratio is higher (Fatima & Nobanee, 2019). Therefore, Coca Cola is able to pay off its short term obligations through converting its current assets to cash easily (Li, 2019).

Quick Ratio

This ratio is a measure of a company’s ability to take care of its short term debts with the available assets without including its inventories. It only considers the current assets available for the company. The quick ratio = (current assets- inventory-prepaid expenses)/ current liabilities. Coca Cola’s quick ratio as of 2020 was 1.26 while that of Pepsi was 0.77. This means that Coca Cola is in a better place to pay for its short term obligations using its current assets than Pepsi (Li, 2019).

Cash Ratio

The cash ratio is defined as the measure of the ability of a company to pay off its obligations using the available cash and cash equivalents. The cash ratio= (cash + cash equivalents)/ current liabilities. Coca Cola’s cash ratio is 1.32 while Pepsi’s cash ratio is 0.41 (Fatima & Nobanee, 2019). This means that Coca Cola is at a better position than Pepsi to take care of its short term obligations using its cash and cash equivalents available.

Solvency Ratios

The solvency ratios are a measure of the ability of a company to take care of its long term debt using its cash flow. These ratios determine the likelihood of a company to default on long term debts. The difference of liquidity and solvency ratios is that liquidity ratios focus on short term debts while solvency ratios focus on long term obligations. Examples of these ratios include equity ratio, and debt to equity ratio.

Equity Ratio

The equity ratio shows the level of a company is funded by equity and not debt. This means that most of its business activities is funded by shareholder’s equity or investment and the company does not rely debts to run its activities. The equity ratio= total shareholders’ equity/ total assets. Coca Cola’s shareholders’ equity ratio is 0.257 while that of Pepsi is 0.195. This is an indication that Coca-Cola is funded mostly by its equity while Pepsi is funded by debt from creditors. Therefore, Coca Cola is more likely to settle its long term obligations than Pepsi (Fatima & Nobanee, 2019).

Debt to Equity Ratio

The ratio is a measure of how a company is funded by debt. This ratio shows how much of a company’s debt can be paid off by its equity in a case when the company requires liquidation. The debt to equity ratio= debt outstanding/ equity. Coca-Cola’s debt to equity ratio is 2.22 while that of Pepsi is 5.03. This means that Pepsi is at a higher position to default on loans from creditors than Coca Cola. Therefore, Coca-Cola is more eligible for loans as it does not have much debts like Pepsi (Li, 2019).

Profitability Ratios

Profitability ratios are financial metrics that show the ability of a business to generate income. The most common profitability ratios are return on assets and the profit margin ratios.

Profit margin ratio

This ratio indicates the company’s profitability on different levels of cost such as the gross margin, net profit margin and the pretax margin. The profit margin= (total revenue- total expenses)/ total revenue. Coca-Cola’s profit margin is 30.2% as of 2020 while that of Pepsi is 13.9% (Fatima & Nobanee, 2019). This means that Coca Cola is making more profits from business than Pepsi. Therefore, Coca Cola proves to be more profitable than Pepsi (Li, 2019).

Return on Assets ratio

This ratio is an indication of the ability of a company to generate profits from its assets. The return on assets ratio shows the efficiency of a company to utilize its assets to make profits for the company. Return on asset= net income/ average total assets. Coca-Cola’s profit margin ratio measured as a percentage is 10.3% while that of Pepsi is 9.1% (Li, 2019). This is an indication that Coca Cola utilizes its assets more than Pepsi. While Pepsi’s outcome from assets is 9.1%, that of Coca-Cola is 10.3%. Therefore, investing in Coca Cola is more profitable than Pepsi.

Conclusion

The beverage industry is a competitive industry. Customers always value quality and health benefits over the cost of beverages. It is clear that Coca-Cola is more profitable and in a better financial health than Pepsi. Therefore, it is important for Pepsi to find loopholes in its business activities such as weaknesses and threats and work on them to gain a competitive advantage over Coca cola.

References

Li, X. (2019). Financial Analysis of Coca-Cola Company.

Fatima, M., & Nobanee, H. (2019). Ratio Analysis of PepsiCo. Ratio, 2018(2017), 2016.

Appendix

Current ratio.

Coca Cola= 22.48/ 15.30= 1.47

Pepsi= 23001/ 23372= 0.98

Quick ratio

Coca Cola= 19.2/ 16.49= 1.26

Pepsi= 17955/ 23372= 0.77

Cash ratio

Coca Cola= 87296/ 66012= 1.32

Pepsi= 9551/ 23372= 0.41

Equity ratio

Coca Cola= 22.25/ 86.381= 0.257

Pepsi= 15.3/ 78.55= 0.195

Debt to equity ratio

Coca Cola= 42793/ 19299= 2.22

Pepsi= 76.99/ 15.30= 5.03

Profit margin

Coca Cola= (33.014-23.057)/33.014= 0.302

Pepsi= (70.01-60.292)/ 70.01= 0.139

Return on assets

Coca cola= 8920/ 86412= 0.103

Pepsi= 7120/78097.5= 0.091