Coca Cola, Pepsi Essay

This paper will examine Coca-cola and PepsiCo financial ratios and profit for the year 2007 and 2008 using the liquidity measurement ratio, profitability indicator’s ratio, debt Ratio, Operating performance ratio, cash flow ratio, and investment valuation ratio. It will explain both company’s liabilities, and a few personal opinions that could better both Coca-Cola and PepsiCo profits and stockholder’s investment. It will also discuss what non-financial criteria the company could consider when choosing between these two investment options. Using the current ratio, discuss what conclusions you can make about each company’s ability to pay current liabilities (debt). Financial ratios are used to compare the financial condition of a firm to that of similar firms for the purposes of building interests for shareholders, building the confidence of creditors, and for fostering competence among the firm’s own management. Liquidity ratios evaluate a firm’s ability to satisfy its short-term obligations as they come due. An important form of liquidity ratio is the current ratio, and it gives a general picture of the company’s financial health as it reflects the efficiency of the company to convert its products into liquid assets. A high current ratio implies the greater capability of a company to allocate its current finances into paying its current liabilities. The acceptable current ratio value for most industrial firms is 1. 5, while a value of 2. 0 indicates that a company has twice as many assets as its liabilities. A ratio under 1. 0 expresses the persistent inability of a company to meet its current liabilities. Albeit it shows a business’ general financial strength, this ratio is not a direct indicator of a company’s tendency into bankruptcy (Smart & Megginson, 2009). In the case of Coca-Cola Enterprises Inc. and PepsiCo, Inc. , the calculated current ratios based on a published formula shows that the PepsiCo, Inc. has increased its value from 1. 23 in 2008 to 1. 44 in 2009, while Coca-Cola Enterprises Inc. has also managed to increase its ratio from 0. 90 in 2008 to 1. 13 in 2009. There was a higher degree of increase for the current ratio of Coca-Cola Enterprises Inc. s compared to PepsiCo, Inc. : 26% and 17%, respectively. The consistently high values of current ratio for PepsiCo, Inc. for 2008 and 2009 shows the greater capability of the company to compensate losses due to its current liabilities. PepsiCo, Inc. ’s current liabilities for 2008-2009 remain almost constant, while its current assets increased by as much as 14%. Meanwhile, Coca-Cola Enterprises performance in 2008, where its current liabilities were greater than its current assets, placed weight into its financial stability for the 2009 year. Its increase for current assets and a slight degree of decrease in the current liabilities was not sufficient to put the company at par with its competitor in terms of company liquidity for the two-year period (Current Ratio Definition, 2010; Coca-Cola & PepsiCo annual report 2009). The efficiency of a firm’s utilization and management of resources and how well these assets are converted into profit and shareholder value is measured by Profitability Ratios. Among the crucial computations include Return on Assets and Return on Equity. To ensure the survivability of a company, as well as the benefits received by its shareholders, the profitability of a company should be sustained. The return on assets ratio measures the overall effectiveness of management in utilizing its assets to generate returns (Smart & Megginson, 2009 & Loth 2010). For Coca-Cola Enterprises, Inc. and PepsiCo, Inc. , the higher Return On Assets of the former, ~ 136% for a period of two years, implies the greater efficiency of the company in converting its assets into cash. PepsiCo, Inc. btained a 10% increase in total assets from 2008-2009, a two-fold increase compared to that of Coca-Cola Enterprises, Inc. In terms of net income, Coca-Cola Enterprises, Inc. had a higher decrease in value from 2008 to 2009, approximately a 0. 74% loss compared to PepsiCo, Inc. ’s 0. 04%. While Cola-Cola Enterprises Inc. ’s net income did not significantly increase, it has maintained its utilization of existing resources such that minimal cash-outs were necessary for the operation of the company for the two-year period, thus making the company more profitable than its competitor. To measure the returns earned on the common stockholders’ investments in a company, the Return on Equity ratio is obtained. It is computed by dividing the Net Income by the Average Shareholders’ Equity for a certain period. The ratio is expressed in percentage, and a higher value indicates a higher capability of a firm to use its base equity to provide better returns to its investors (Coca-Cola & Pepsi annual report 2009). The Coca-Cola Enterprises, Inc. manifest a higher percentage of Return on equity compared to its competitor for the two-year period of 2008-2009. The company’s $31 million dollar total shareowner’s deficit in 2008 rendered a low average shareowners’ equity for the two-year period, thus causing the Return of Equity to remain high. Analyzing Return of Assets and Return of Equity values for both companies suggest that, even after interest payments were given to creditors and dividend payments were made to preferred stockholders, Coca-Cola Enterprises Inc. managed to maintain its profitability in a quantitatively higher degree compared to its competitor. It could be concluded that Coca-Cola Enterprises Inc. s better in terms of earnings performance regardless of the source of finances, which will be taken into consideration in the next discussion (Coca-Cola annual report 2009). In addition to liquidity and profitability, it is also important to note a firm’s level of debt to assess the extent of leverage that a company is using. Since assets come from two broad sources, it is vital to measure the degree to which a company uses money from creditors rather than shareholders to finance its operations (Smart & Megginson, 2009). For the two-year period under consideration, the Coca-Cola Enterprises Inc. obtained an average of 97% debt ratio compared to PepsiCo Inc. ’s 67%, putting their company in a stronger equity position. This translates to a high degree of leverage that the Coca-Cola Enterprises Inc. is utilizing for gaining profit, financing all of its assets with debt. The higher amount of total assets, concomitant with a diminished value for total liabilities in 2009 gave PepsiCo, Inc. an apparent advantage over Coca-Cola Enterprises Inc. n terms of risks and expected returns on the firm’s securities during the period under consideration. However, the debt ratio does not strictly define the company’s debt situation. Operational liabilities are also covered in this ratio, including accounts and taxes payable, which are strictly not regarded as a form of leverage . Coca-Cola Enterprises Inc. is still able to generate returns above their cost of capital. However, possessing debt impe rils a firm when revenues plummet and the company is not able to gain profit above the cost of its capital. Operating performance ratios measure how well a firm converts assets into cash as well as the rate at which the form converts various accounts into sales or cash. A form of Operating Performance Ratio is the Fixed Assets Turnover or FATR ratio. This ratio roughly measures the efficiency of a company’s fixed assets, property, plant, and equipment, with respect to generating sales. Fixed assets turnover ratios for Coca-Cola Enterprises Inc. and PepsiCo, Inc. do not significantly differ from each other over the period under consideration, 3. 8 and 3. 6 for each of the firms, respectively. Since both firms belong to the manufacturing realm, and are both heavy on fixed assets, comparison of their Fixed Assets Turnover Rate is noteworthy. It could be inferred that both companies are on the same rate and efficacy of utilizing their PP&E in generating profit (Loth, 2010a; Smart & Megginson, 2009). As an investor, discuss which company you would choose to invest in and provide a rationale for your decision. PepsiCo Inc. ’s steadily increasing Dividend Payout ratio signifies the capability of the company to provide dividend payments through a forecasted period of time. This fact paralleled with a relatively cheaper stocks cost in the company should be able to satisfy value investors more its competitor. Meanwhile, the high P/E ratios of Coca-Cola Enterprises Inc. , provide growth investors high expectations of augmented earnings over a predicted period of time. Also as an investor interested in growth investing, opting to invest money in Coca-Cola Enterprises Inc. is an extremely great idea. Its ability to generate revenues higher than capital cost despite a high Debt Ratio implies a promised continued increase in its  ROA and ROE in the succeeding years. Coca-Cola Enterprises Inc. exhibits high profitability, and this will eventually translate into more contingency finances for dividend payouts. In terms of the valuation of investment, profit would truly be gained from stocks that continue to have good growth potential (Pepsi Co and Coca-Cola annual report 2009). One form of Cash Flow Indicator ratio is the Dividend Payout Ratio. This ratio measures the amount of cash that is paid out in the form of dividends by the company to its shareholders. This is calculated by dividing the firm’s cash dividend per share by its earnings per share, and this indicates the percentage of each dollar earned that is distributed to the stockholders. In the computation of Dividend Payout ratios for the two companies under consideration, the values for diluted earnings per common share were used to be able to take into account the possible effects of stock options. A steadily increasing dividend payout ratio for a firm is favorable for stockholders. In the case of Coca-Cola Enterprises, Inc. , a $ 9. 5 million dollar diluted loss per common share caused the dividend payout ratio to drop from 0. 16 to -0. 03 from 2007 to 2008. In 2009, the earnings per share value were able to recover for the company. The PepsiCo Inc. , meanwhile, exhibited a rather steady trend for its dividend payout ratio, with the highest point during 2008, which is coincidental with its competitor’s most pronounced diluted loss per common share. Generally, in terms of the dividend payout ratio for 2007 to 2009, PepsiCo, Inc. manifested well-supported dividend payments to its shareholders through its earnings. This is supported by a separate calculation involving Free Cash Flow/Operating Cash ratio, wherein PepsiCo Inc. also exhibited a gradually increasing measure of the amount of cash flow available to investors (Smart & Megginson, 2009; PepsiCo Annual report 2009). Investment Valuation ratios take a look at the appeal of a potential or existing investment and get a prediction of its valuation. The Price/Earnings ratio or P/E compares the current price of a company’s shares to the amount of earnings it makes. The P/E ratio is computed by the closing stock price per share by the basic Earnings per Share or EPS. The values for the closing stock price per share in the computation of the P/E ratios for both companies in consideration were obtained from their respective annual reports. The Basic Earnings per Share values were also used as the denominator to reflect the trailing twelve-month or TTM period of the companies. For Coca-Cola Enterprises, Inc. , a $ 9. 05 million dollar basic loss per share in 2008 caused a disturbance in the rather decreasing trend of P/E for the company from 2007-2009. The year 2007 reflects the highest P/E ratio for Coca-Cola Enterprises Inc. with a value of 41. Meanwhile, the P/E ratio of PepsiCo, Inc. gradually decreased from 2007 to 2009, from a value of 22 to 16. Higher P/E ratios generally provide investors a basis for higher earnings in the succeeding periods compared with firms with lower P/E. Consequently, companies with high P/E ratios are more often regarded as high-risk investments than those with low P/E ratios, since a high P/E ratio signifies high expectations. Shares in Coca-Cola Enterprises Inc. are then said to be more â€Å"expensive† than that from PepsiCo, Inc (Loth, 2010d).