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Financial Statement Analysis, for Coca cola Co and PepsiCo Inc.

Bright Investments consultancy

[Student name]
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EXECUTIVE SUMMARY

Pepsi whose official name as PepsiCo Inc. is an American soft drink and fast food producer and

among the leading beverages producers in the world, its main headquarters in Purchase, New

York. PepsiCo Inc. was founded back in 1965 after Frito-Lay Inc. merged with Pepsi-Cola

Company hence widening the range of products in food and beverages. Among the main product

brands of the company, include Pepsi, Quaker Oats and Tropicana. This company is the biggest

competitor of Coca cola Co, its fiscal year-end for the last three years were December 26 2015,

December 27 2014 and December 28 2013. Furthermore, the PepsiCo Company is listed on the

NYSE with its stock symbol being PEP, stocks price stand ant about around $100 by the end of

2016 fiscal.

On the other hand, Coca-Cola has its headquarters located in Atlanta of the state of Georgia and

it is an American beverage corporation. Coca-Cola is a multinational marketer, retailer and

manufacturer of soft, nonalcoholic beverages and syrups. For many instances, the company

operates as a franchise, producing the syrup, which is the bottled by other companies worldwide.

Some of the products produced by the Coca-Cola Company include Coke, which is the

bestselling soft drink, Fanta, Diet Coke, Dasani, Minute Maid, vitamin water, Coca-Cola zero

and Coca-Cola Life among others. The fiscal end-year for the Coca-Cola Company end on the

last day of December (31). Coca cola Co stock symbol is KO and it is listed in the NYSE. Ernst

and Young LLC is the independent firm that is tasked with auditing and providing financial

statements for Coca-Cola Company.

HORIZONTAL ANALYSIS FOR PEPSICO INC. AND COCA COLA CO.

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Horizontal analysis is specific items comparison, used to determine the company growth increase

or decrease, expressed in percentage, the increase or decrease in growth here is based on the

previous fiscal year.

Comparative balance sheet

Net revenue for coca cola co for 2015, 2014 and 2013 are (millions) $44,294, $45,998 and

46,852 respectively, the company revenue has dropped by 3.7% from the year 2014 the base year

for analysis is 2014. In the previous year fiscal year, the company made a loss of 1.8% in 2014,

with 2013 base year for analysis. PepsiCo Inc. net revenue for year 2015, 2014 and 2013 are

$63,053, $66,683 and $65,415 respectively the company made an average loss of 5.3% in 2015

but had a profit of 0.4% in 2014. Total net revenue growth for PepsiCo Inc. is lower compared to

net revenue growth for coca cola co, revenue decrease for PepsiCo Inc. and coca cola co

companies and at -3.7% and -5.3% respectively.

Comparative income statements

Coca cola co operating income for 2015, 2014 and 2013 is $8,728, $9,709 and $10,228 in the

order. The company operating income growth has reduced by 10% in 2015 and 5% decrease in

2014. PepsiCo Inc. operating profit for 2015, 2014 and 2013 are $5,452, $6,513 and $6,740 in

the order, the company net operating profit growth went down to 16% in 2015 and 3% decrease

in 2014. PepsiCo Inc. total assets for 2015 and 2014 are at $69,667 and $70,509 asset growth

reduction of 1.1%, coca cola total assets for 2015 and 2014 are $90,093 and $92,023. Coca cola

interest expense for the 205, 2014 and 2013 are $856, $ 483 and $463 PepsiCo Inc. interest

expense for 2015, 2014 and 2013 are at $970, $909 and $911

Comparative retained earnings for PepsiCo Inc. and Coca cola Co.
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This is the remainder of earnings left after paying dividends, reported as the sum of all retained

earnings for each over the business life. The company with higher retained earning means that

they have made consistent profits over their business life. If a company makes a yearly loss it is

deducted from the retained amount. Coca cola co has made a cumulative retained earnings of

$65.02 billion by the end of 2015 fiscal year. PepsiCo Inc. started in 2004 has accumulated a

retained earnings of $50.47 billion by the end of 2015 fiscal year.

Coca cola which has been dominating the beverage industry is experiencing a lower growth as

compared to PepsiCo Inc. which emerged into the beverage industry for barely 15 years. Coca

cola Co retained earnings stand higher than PepsiCo Inc. $65.02 compared to $50.47 but the

rates at which the earning accumulate for PepsiCo Inc. is higher than Coca cola, an increase from

$ 42 billion to $ 50 billion in in a span of two years compared to an increase from $ 61 billion to

$ 65 billion in the same period. This shows that PepsiCo Inc. the closest competitor of Coca cola

co is growing at a rapid rate compared to Coca cola Co.

PepsiCo Inc. has seen a great growth in the industry because of several reasons first, it sells more

healthy foods and therefore it does not suffer much to the rising trend in dislike for carbonated

and sugary and unhealthy foods, also in addition to this it produces diversified products from fast

foods to soft drinks. PepsiCo Inc. has better strategies for revenue managements, such as it used

$621 million on buybacks compared to $150 million for Coca cola. Also, PepsiCo Inc. has a

much higher price to earning to growth ratio. This makes its stocks better compared to coca cola

co stocks, in the near future PepsiCo, Inc. stocks will perform better.

VERTICAL ANALYSIS BETWEEN PEPSICO INC. AND COCA COLA CO.

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The principle of conducting vertical is in comparison of assets, the cost of their merchandise,

liabilities and reports of liability against assets among many others for two companies.

Comparative income statement.

Product or services cost control.

Product and or service control is reducing a company expense so as to improve its profits. This

occurs by evaluating and identifying actual results to the company’s expectations whereby if the

actual cost are higher than the planned budget it reconsiders its plans and strategies. Coca cola

has higher cost control strategies which mainly aim at reducing the fixed assets, unlike PepsiCo

Inc. which spends a lot on salary to its high-density employees considering that it is smaller

compared to coca cola co, also PepsiCo Inc.

Operating cost control

This are strategies towards reducing financial obligations incurred by a business during its daily

operations. It is achieved by increasing revenue dollar or percentage revenue increase, PepsiCo

Inc. has a higher operating cost control mechanism compared to coca cola co. it has recorded a

revenue of $15.9 about 6% lower compared to the second quarter 2015 a reduction from the first

quarter, this has also brought the increase in shares prices to $1.33 from $1.29 in the second

quarter.

Debt servicing

This is the money required to settle loans and debts, having more long-term debts is more likely

to help in servicing them as compared to short-term debts. PepsiCo Inc. has more long term debts

compared to Coca cola Co. $29,213 long debts compared to $4,071 short-term debts
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Tax burden.

As a result of imposing of heavy task of sugary drinks, both companies stand to suffer

negatively, the effect felt by the individual company will depend on how much revenue sugary

drinks profits the company. For Coca cola, its biggest profit comes from selling soda, followed

by juice, vitamin-water falls third, PepsiCo Inc., on the other hand, has diversified products its

investment on more healthy products and food stuff, which makes it partially evade the wrath of

high taxation. This makes it less tax-burdened.

Through the above analysis, PepsiCo Inc. has batter strategies to secure its future business

operations, with the incoming taxation of carbonated drinks and sugary products it will be less

affected because of its more diversified. With high operation cost control strategies, PepsiCo Inc.

its shares prices will increase, this will encourage more investors to buy more shares in the

company.

Vertical analysis through balance sheet by expressing amounts in the percentage of total

assets and compared with the percentage of other company.

In 20 15, the two companies total assets, liabilities and stockholder’s stocks were as follows, a

total assets are $90,093 for Coca cola Co compared to PepsiCo Inc. has total assets of 69, 667,

the two produces nearly the same profit, this indicate low level of management strategies for

Coca cola Co to improve its profitability. Coca cola Co total liabilities are at $27, 792 and $66,

960 stockholders stock compared to $57,599 and a $25,000 stockholder stocks. Despite the fact

that higher liabilities reduces its profitability, but the company has sustained a close range

competition with coca cola despite its high assets and low liabilities.
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RATIO ANALYSIS

Liquidity Ratios

Liquidity is basically the ease with which assets can be converted to cash by a given entity in

investment. When applied to business, it is the ability of a firm or company to clear off its short-

term debts on time. In most cases, it is expressed as a percentage of the liabilities, as a current

ratio or as a liquidity ratio. Therefore, it is of importance to short-term creditors since it lets them

know how soon a particular business will pay them. In general, the basic concept behind it is that

the higher the liquidity ratio the bigger the safer a company is in paying its bills.

Current/Quick ration= Receivable Current Liability + Cash+ Marketable Securities. The current

ratios for Coca-Cola Company is the years 2012-13, 2013-14 and 2014-15 were 1.09, 1.13 and

1.02 respectively. On the same note, the current ratios for the Pepsi Company in the same years

were 1.10, 1.24 and 1.14 respectively. These current ratios imply that both Coca-Cola and

PepsiCo companies have sufficient current assets to meet the payments of their current liabilities

in each business cycle for the last three years.

Solvency Ratios

Unlike Liquidity, ratios that measure the ability of a company to pay off its short-term debts in

time, Solvency ratios determine the company’s ability to pay long-term debts as well as interest

on the debts. For this reason, solvency ratios are very important to shareholders and long-term

creditors who are interested in the long-term survival and health of the firm. In order to keep an

eye on the company’s downtrend, the owner of the business has to be keen on solvency ratios.

The likelihood of a company to get bankrupt is influenced by the debt or asset ratio and the more

it increases the more the company is on the verge of bankruptcy.

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The Debt-Equity Ratio for Pepsi in the years 2013, 2014 and 2015 were 1.06, 1.00 and 1.37

respectively. On the other hand, Coca-Cola registered the following ratios for the same period;

0.45, 0.58 and 0.63. Another essential factor regarding the debt to equity ratio is that the lower

the debt to equity ratio the more financially stable a business is meaning that companies with a

higher debt-equity ratio will attract less investors and creditors since they are considered risky.

From our data on debt-equity ratio it is apparent that Coca-Cola has maintained a stable and

healthy debt-equity ratio in comparison to Pepsi. The share capital for Coca-Cola is more than

sufficient to pay off available debts. Pepsi on the other hand must have paid some of its debts

using current assets since in 2014 its debts are more than the share capital.

Profitability Ratios

These are financial metrics are essential in assessing the ability of a business to efficiently

generate earnings in relevant costs incurred as well as its expenses. Some of the profitability

ratios include return on equity, return on assets and return on capital.

Return on Capital

Return on capital employed for Pepsi in the years 2013, 2014 and 2015 were 13.85, 14.09 and

14.24 respectively. As for Coca-Cola company, the return on capital employed for the same

period was as follows; 14.27, 12.58 and 9.86. A higher return on capital ratio implies that there

are more returns on each unit of capital employed. Thus, according to our data on return on
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capital ratios, Pepsi efficiently utilized every unit of capital raised from share capital compared to

Coca Cola. On the same note, efficiency in utilization of money for Pepsi is more consistent

while that for Coca-Cola is gradually declining.

Return on Assets

Return on asset ratio measures net income accrued on total assets for a certain period while

comparing average total assets to net income. For the years 2013, 2014 and 2015; the return on

assets for Coca-Cola was 10.47, 9.53 and 7.71 respectively while that of Pepsi was 8.38, 8.86

and 8.80 for the same time interval. When the return on assets is positive, it implies that a

company or business is making profit continuously. In this case, both companies are utilizing

their assets effectively. However, Pepsi has a more consistent trend in utilization of its assets for

the last three years compared to Coca-Cola.

Return on Equity

Return on Equity ratio defines the ability of a business to make profits from its shareholders

contribution to the company in terms of investment. Investors prefer to invest more in a firm that

has a high return on equity ratio because it is an indication that their money is being properly

used. For this case, investors would rather invest more in Pepsi than in the Coca-Cola Company.

CONCLUSION AND RECOMMENDATION

The coca cola company has been in the beverage industry for quite some time, facing little

competition, its profit has been steady for the last ten or more years, on the other PepsiCo Inc. is

an emergent company that started its operation nearly 15 years ago. For the time PepsiCo Inc.
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has been in business it has built its capacity enough to pose enough competition to Coca cola Co,

the company future stocks assures its investors of better returns compared to Coca cola Co

stocks. The operational cost control, service and products cost control and diversity in products

they offer have provided the company a favorable environment. In the near future, PepsiCo Inc.

shares will be better to invest in compared to Coca cola Co. shares, a company has less

managerial strategies to ensure its profitability and continued relevance in the industry, it has low

liabilities compared to its assets but still does not outsmart PepsiCo Inc. which has a higher

liability compared to its assets.

Coca cola co has weakness in managerial strategies, in investing and resources allocation, they

are not strategic to ensure that they optimize in their operation cost. Never the less, the company

has sustained an increase in retained earnings over their whole business life.

PepsiCo Inc. has high risks involved in its operation, it invests high amount of money which can

result in sudden bankruptcy, but its strength are in making future profitability and sustainability,

its ability to create diversified products and improvement its PEG makes it more competitive for

investor.

It would be profitable to invest in a long term in PepsiCo Inc. it shows high signs of out-

shadowing coca-cola in the near future.

I would therefore advise the Coca cola Co to come up with more diversified products, work on

its operational cost, give that it has established fully it should not concentrate much on

advertisement but rather product modification.

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Given that the two companies provide similar working conditions for its employees, it would be

advantageous to work for PepsiCo Inc. because soon it will be bigger many companies will

partner with it also therefore, more promotions chances to current employees.

References

SEC Square. (2016, December). Retrieved from

https://www.sec.gov/Archives/edgar/data/1512673/000119312515343733/d937622ds1.htm#to

c.

Sec.gov. (2016, December). Retrieved from

http://www.sec.gov/Archives/edgar/data/1103415/000091205702009834/a2073071z10-

k405.htm:

http://www.sec.gov/Archives/edgar/data/1103415/000091205702009834/a2073071z10-

k405.htm
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APPENDIX

Horizontal analysis

PepsiCo Inc.
2015 2014 2015 2014
revenue
Total revenue 63,056 66,68 96.3 100

3 % %
Retained 50.47 42.03 120% 100

earnings %
Operating 8,709 9,786 111% 100

income %

Coca cola Co
2015 2014 2015 2014
Net operating 44,294 45,998 97% 100%

revenue
Retained 65.23 62.05 105.1% 100%

earnings
Operating 8,728 9,708 90% 100%

income

Vertical analysis

PepsiCo Inc. 2015 2014 2015 2014

Quarterly Gross 10,205 10584 96.2% 100%

profit
Restructuring 117 160 74.2 100%
Per share cost 0.04 0.04 100% 100%
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debt servicing 29,213 23821 122.6% 100%

Coca cola Co
2015 2014 2015 2014
Gross profit 26,812 28109 95.4 100%

%
Operational 1,657 1,183 104% 100%

charges
Income taxes 2,239 2,201 98.3 100%

PepsiCo selected data.

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Coca cola co selected data

PepsiCo Revenue trend

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Coca cola stock rise.

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Net revenues growth

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0
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pepsico retained earnings

52
49
46
43
40
38
35 36
32
29
25
22
17

1 2 3 4 5 6 7 8 9 10 11 12 13

Coca cola Co retained revenue

64 65
62
59 60
53 54
52
48 49
45 46
44

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