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INTRODUCTION The scope of this paper is to compute the financial ratios of long term rivals of soft drink industry;

Pepsi and Coca Cola. In order to calculate the financial position and performance of these companies various ratios for the year 2009 were calculated. These ratios includes debt ratio, liquidity ratios like current ratio, profitability indicators like return on assets, return on equity, operating performance indicators like fixed asset turnover ratio and price/earnings ratio for the investment valuation. Moreover, this paper explained list of financial ratios which can be used to measure the value given to the shareholders and their level of satisfaction and proposed guidelines to be followed when selecting any of these companies to invest in. Apart from financial ratios and performance of these two companies, this paper also discussed the non-financial elements that are important when one considers to invest in a company.


DEBT RATIO Debt ratio is a type of financial ratio which indicates the proportion of debt a company has to pay against its assets.If the debt ratio of a company is greater than 1 than it means it has to pay more debt than its assets. On the other hand, if the debt ratio is less than 1 then the company is better able to pay its debts. It determines to the investors the level of risk involved in doing business with company (investopedia). The debt ratio of Pepsi Co., for the year 2009, is 0.33 which is higher than the debt ratio of Coca Cola company i-e 0.10 for the year 2009. Pepsi Co. has met the industry requirement, which is 1, of debt management but if we compare its debt to assets ratio, and then we can clearly find that the company is not the market leader in terms of finance. The higher debt ratio of Pepsi Co. relates that the greater risk is associated with the companys operations.Coca Cola, in contrast, shows low debt ratio which means that the firm has met its debt requirements effectively Based on the analysis of financial statements and balance sheets of both the companies, it is found that Coca Cola is better able to meet its debt requirements with the debt ratio of 0.10 respectively.

PERFORMANCE ANALYSIS PROFITABILITY RATIOS The profitability ratios are used to measure the profitability of a firm with reference to the expenses over a period of time. These ratios measure the overall efficiency and performance of

the company (Powell, 2005). Following are the list of profitability ratio that is useful to find out how profitable and organization is: GROSS PROFIT RATIO Gross profit ratio is ideal to find the sales performance of the company. Itindicates the level of reduction in the prices of goods to be sold without incurring any losses on the current operations. Higher gross profit ratio shows the high efficiency of a company in domain of production (Powell, 2005).It can be computed with the help of following formula: Gross Profit Ratio = (Gross profit / Net sales) 100

NET PROFIT RATIO (NPR) NPR is helpful to find out the overall profitability of a company. It the net profit is not up to the mark then the company shall not be able to achieve its milestones. It indicates the ability of a company to face economic downfalls.This ratio can be computed with the help of following formula: Net Profit Ratio = (Net profit / Net sales) 100 RETURN ON TOTAL ASSETS (ROA) ROA help the managers or owners to decide whether to engage into new project or not. It tells the investors how effectively the company is able to convert the investments into its net income.If the ROA is high, the earning of a company is high.This ratio can be computed with the help of following formula: ROA= Net Profit after Taxes Total Assets TOTAL ASSET TURNOVER (TAT)

Total Asset Turnover rate measures the relationship between the revenue and assets of a company. The companies which show low profitability tend to have high asset turnover rate. The following formula can be used to compute the total asset turnover ratio: TAT=Sales Total Assets

FIXED ASSETS TURNOVER RATIO Fixed Assets Turnover Ratio measures the productivity of a company in domains of its fixed assets, with respect to its sales. This ratio reflects how efficiently company is managing these significant assets. This ratio can be calculated with the help of following formula: Fixed Assets Turnover Ratio = Cost of Sales / Net Fixed Assets

RETURN ON EQUITY (ROE) This ratio measures the firms ability to generate profit on the investments of shareholders. This ratio can be calculated with the following formula:

Net income (after taxes) Stockholder's Equity

SHAREHOLDERS VALUE Satisfied shareholders mean giving value to them. There are several factors that affect and have impact on the shareholders satisfaction level. There are 7 widely used drivers that are used to measure the shareholders value (Bender, 2008):

y y y y

Revenue Operating Margin Cash Tax Rate Incremental Capital Expenditure

y y y

Investment in Working Capital Cost of Capital Competitive Advantage Period

In order to measure the shareholders satisfaction level with the help of financial ratios, following ratios will be helpful (Powell, 2005): y y Cash Flow Indicator Ratios: Dividend Payout Ratio Profitability Ratios

Dividend payout ratio helps to measure the earnings of a firm and how well they are paying to their shareholders. Low ratio shows the less earning by firm which means little or no payment of the dividend. Profitability Ratio as discussed in the preceding question maps the overall performance and profit generation practices of a company. Higher the rate of profitability, more dividends are paid to the stockholders.

WHICH COMPANY HAS MOST SATISFIED SHAREHOLDERS The analysis of profitability ratios of Coca Cola and Pepsi indicates that the later one had earned the profit of $43,232 million(NYSE: PEP) and its dividend payout ratio was45.7% in the year 2009 (see Appendix A). The profitability ratio of Coca Cola indicates that it had gained a profit of $30,990 million (Coca Cola, KO) andits dividend payout ratio was 55% in 2009 (see Appendix B). This indicates that Pepsi had earned more profits but due to its long term commitments (debts, account payables), the company had to pay less amount of dividends to its stockholders as compared to Coca Colas 55% payout to the stockholders; giving value and satisfaction to them.

FINANCE BASED GUIDELINES Following steps should be taken before finalizing the decisions pertaining to investment in a company: To make investments in any company, it is desirable to study the financial statements of that company. The financial statements are great source of information about the company. These statements are indicative of the performance of the company in terms of money, liabilities, profits etc. (Bender, 2008). One should pay attention to the Profitability ratios in particular to find out the level of performance and the revenue generated by the company. The past five years record of financial performance of the company is deemed to be the best available measure which serves as an indicator of the companys performance, growth and consistency. Decisions can be made on the basis of comparison between the two companies competing in the same industry to justify the reasons of investments. The comparison will explain the market worth of a company in relation to its competition.Apart from financial ratios, one should keep a track of the companys other profit and loss statements and its involvement in various business units as well as the CSR strategies adopted by the company.

BRAND IMAGE When making decisions about whether to invest in a company or not, one should understand the performance of a company in terms of its brand equity, brand image and corporate social responsibility. If the company has weak brand image in the market, the customers will not likely to purchase its items. If the company fails to maintain its brand image it will fail to attract the large

number of customers which will result into little market share and profitability. If the company has negative brand image then it will likely to lose money, market share and trust of the consumer.

CONCLUSION This paper served as a measure to understand the financial performance of Pepsi and Coca Cola. The analysis of their financial performance for the year 2009 indicated that the Pepsi had earned more profit than Coca Cola. But Coca Cola was better able to serve its stockholders in terms of dividend payments.

The debt ratio for the year 2009 indicated that the Coca Cola Company has less amount of burden as Compared to Pepsi Co. Coca Cola, as per the financial analysis, is better able to meet its long term commitments. For deciding which company to choose for investment, guidelines were proposed. The guidelines asserted that the performance and profitability of a company can be of great importance for finalizing the investment decisions. The investment decisions can be influenced by the Corporate Social Responsibility (CSR) used by the company and the brand image it inculcates in the minds of its customers.

APPENDIX A- PEPSI CO. INC (FY: 2009)* 1. Current Ratio = current assets/ current liabilities = 12571M/8756M = 1.44 2. Return on Equity = Net profit after tax/ stockholders equity = 5979M/16908M x 100 = 35% or 0.35 3. Return on Assets = Net profit after tax/ total assets = 5979M/39848M x 100 = 15% or 0.15 4. Debt Ratio = Debt/ Assets = 7400/22406 = 0.33 or 33% 5. Fixed Asset Turnover Ratio = cost of sales/ net fixed assets = 20099M/12471M = 1.62 6. Price/Earnings Ratio = Price per share/ earnings per share = $ 64.48/$3.71 = $ 17.38 7. Dividend Payout Ratio = Dividents/ Net income = 2732/5979 = 45.7% or 0.457 *Pepsi Inc. (NYSE:PEP); Forbes.com

APPENDIX B- Coca Cola (FY: 2009)* 1. Current Ratio = current assets/ current liabilities = 17551M/13721M = 1.28 2. Return on Equity = Net profit after tax/ stockholders equity = 6906M/16908M x 100 = 41% or 0.41 3. Return on Assets = Net profit after tax/ total assets = 6906M/48671M x 100 = 14% or 0.14 4. Debt Ratio = Debt/ Assets = 5059/48671 = 0.10 or 10% 5. Fixed Asset Turnover Ratio = cost of sales/ net fixed assets = 20099M/9561M = 2.10 6. Price/Earnings Ratio = Price per share/ earnings per share = $ 52.72/$2.95 = $ 17.87 7. Dividend Payout Ratio = Dividends/ Net income = 3800/6909 = 55% or 0.55 *Coca Cola Co (KO); Forbes.com


Bender, R. and Ward, K. (2008).Corporate Financial Strategy, 3rd edition, Oxford: ButterworthHeinemann COCA COLA CO (NYSE: KO), forbes.com, Retrieved on May 26, 2011 from http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=KO Debt Ratio, investopedia, Retrieved on May 26, 2011 from http://www.investopedia.com/terms/d/debtratio.asp NYSE:PEP, PEPSI CO INC, money.central.msn.com, Retrieved on May 26, 2011 from http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=pep Powell, Gary N. (2005). Understanding financial management: a practical guide. Cambridge, MA: Blackwell Pub. P. 59.ISBN 0-631-23100-5