Coke and Pepsi Companies’ Financial Analysis

Subject: Case Studies
Pages: 3
Words: 942
Reading time:
4 min
Study level: College

For the year 2016, the current ratios for Coke and Pepsi are 1.28 and 1.25, respectively. Similarly, for 2017 the current ratios for Coke and Pepsi are 1.34 and 1.51, respectively. The ideal current ratio is 2:1. For 2016, the quick ratios for Coke and Pepsi are 0.98 and 1.08, respectively, and 0.90 and 1.29 for 2017, respectively. The ideal quick ratio is 1:1 (Farooq, 2019). It is indicated that Coke’s current ratio has increased from 1.28 to 1.34 from 2016 to 2017, and its quick ratio slightly decreased from 0.98 to 0.90 from 2016 to 2017. The decrease in the quick ratio shows that Coke lacks enough liquid resources to pay off its short-term obligations as it is below the ideal ratio for both years.

Moreover, Pepsi’s current ratio has increased from 1.25 to 1.51 from 2016 to 2017, and its quick ratio has improved from 1.08 to 1.29 from 2016 to 2017. The improvement in the quick ratio indicates a better liquidity position as Pepsi can pay off its immediate liabilities with the available liquid assets. Therefore, Pepsi is more fluid than coke, and thus it is in a better financial position. The advantage of being liquid by a firm is that it ensures that a firm has enough resources to pay off its short-term obligations, but the resources are not ideal.

Furthermore, for 2016, accounts receivable turnover ratios for Coke and Pepsi are 10.86 and 9.38, respectively. Similarly, for 2017 the ratios for Coke and Pepsi are 9.66 and 9.04, respectively. In addition, for 2016, days of collection for Coke and Pepsi 2016 are 34 and 39, respectively. On the other hand, for 2017, the days of collection for Coke and Pepsi are 38 days and 40 days, respectively. Since the collection process is weakened by the more collection days taken, Coke had more collection days than Pepsi from 2016 to 2017. Coke’s collection days increased by four days from 2016 to 2017, but an increase by one day was seen in Pepsi. Pepsi has a more substantial collection process than Coke. There is an indication of more working capital required by more time taken for collection and also an indication of more funds being blocked in the collection cycle. Therefore, a prompt collection is critical for the success of a business.

Equally, for 2016, inventory turnover ratios for Coke and Pepsi are 6.16 and 10.36, respectively. Similarly, for 2017 inventory turnover ratios for Coke and Pepsi are 4.99 and 9.77, respectively. Furthermore, for 2016 the days in inventory for Coke and Pepsi are 59 and 35 days respectively, and 73 and 37 days respectively for 2017 from 2016 to 2017. It is a clear indication of an increment in the inventory days for Coke from 59 to 73 days from 2016 to 2017, translating to the blockage of more funds in the production process for more days (Kwak, 2019). Similarly, for Pepsi, there was an increment in the inventory days from 35 in 2016 to 37 days in 2017, increasing by two days. This indicates that Coke calls for grave concern, and closer monitoring is needed to slow the production process by 14 days.

Similarly, for 2016, the gross profits for Coke and Pepsi are $25,398 and $34,590, respectively. Moreover, profit margins for Coke and Pepsi for 2016 are 60.7% and 55.1%, respectively. Conversely, the return on investment for Coke and Pepsi for 2016 are 15% and 20%, respectively, and 13% and 19% for 2017, respectively. Therefore, it is evident that Coke’s gross and profit margins are better than Pepsi’s. However, the return on investment for Pepsi is better than that of Coke (Amanda, 2019). Thus, Pepsi can generate better returns on the investments it makes.

Moreover, horizontal analysis for both Coke and Pepsi indicates that the revenues for Pepsi have had an increase while the revenues for Coke decreased considerably. Moreover, the same case is evident in the operating income. There is an increase in the operating income for Pepsi and a substantial increase in the same for Pepsi. Additionally, earnings per share for Coke and Pepsi have decreased, although Coke has seen a more significant decrease in the earnings per share compared to Pepsi. Conversely, horizontal and vertical analysis of balance sheets for Coke and Pepsi can be done and inferences done based on the liquidity, solvency, and profitability ratios.

In addition, the net profit before taxes for Pepsi increased by 12% in 2017 compared to 2016. This is because selling, general and administrative expenses have decreased by more than 2%, and non-operating income has increased by more than 100%. Thus generally, we can deduce that the gross margin of Pepsi is less or more the same. Still, it has initiated cost savings in other costs and used their idle funds better, leading to an increase in non-operating income (Štofová & Kopčáková, 2020). There is evidenced deterioration in Coke’s performance in 2017 compared to 2016, as seen in the decline in the profit before tax by approximately 17%. This is because the demand for products has decreased, as seen in the decrease in revenue by 15%, of which the products less absorb the fixed costs.

In conclusion, based on the year-on-year comparison and company versus company comparison, Pepsi is much better than Coke. Most of the financial reports favor Pepsi as compared to Coke. In addition, Pepsi has a more substantial collection process than Coke. Equally, Pepsi is much more dynamic than Coca-Cola, and as a result, it is in a stronger financial position, since Coke lacks enough liquid resources to pay off its short-term obligations as it is below the ideal ratio for both years.

References

Amanda, R. I. (2019). The Impact of cash turnover, receivable turnover, inventory turnover, current ratio and debt to equity ratio on profitability. Journal of Research in Management, 2(2). Web.

Farooq, U. (2019). Impact of inventory turnover on the profitability of non-financial sector firms in Pakistan. Journal of Finance and Accounting Research, 1(1), 34-51. Web.

Kwak, J. K. (2019). Analysis of inventory turnover as a performance measure in manufacturing industry. Processes, 7(10), 760. Web.

Štofová, L., & Kopčáková, J. (2020). The Competition strategy between Coca-Cola vs. Pepsi Company. Calitatea, 21(179), 40-46. Web.