Dr. Tressa Shavers
Coca-Cola vs. PepsiCo: Financial Management
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. as 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. obtained a 10%...