Dr. Pepper

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Financial Analysis: Dr. Pepper Snapple Group vs. Coca-Cola

Analyzing and comparing the financial statements of Coca-Cola (KO) and Dr. Pepper Snapple Group (DPS) for the year 2010 will expose the strengths and weaknesses of Dr. Pepper Snapple group compared to Coca-Cola. Liquidity ratios are used to determine a business’s ability to pay off its short-term debt obligations. The first liquidity ratio I used in my analysis is the current ratio. Coca-Cola has a current ratio of 1.17 and DPS has a current ratio of 0.98. Coca-Cola is more able to cover its short-term debt obligations than DPS. DPS’s current ratio indicates that the company is in a bad financial position because it is not able to meet its current debt obligations using only its current assets. The quick ratio indicates a company’s ability to pay off its current debt obligations using only its most liquid assets. This differs from the current ratio in that it does not include inventory as an asset. With KO’s quick ratio of 1.0227, it is in a better financial position compared to DPS’s 0.7960. I speculate that DPS is less liquid because it has a shorter operating cycle. A company with a long operating cycle may have a greater need for liquid assets than a company with a short operating cycle. That’s because a long operating cycle indicates that money is tied up in inventory for a longer length of time. Leverage ratios are used to calculate the financial leverage of a company to get an idea of the company’s methods of financing or to measure its ability to meet financial obligations. DPS’s long-term-debt-to-equity ratio is 0.6861 and KO’s is 0.4529. These values indicate that DPS has greater leverage and, thus, it is considered to be more risky because they have more liabilities and less equity. The debt-to-total-assets ratio indicates the percentage of total assets that were financed by debt. 57.05% of Coca-Cola is financed by debt as compared to 72.24% of Dr. Pepper. Coca-Cola is more favorable in this category because it is less risky. Debt-to-equity ratio tells us what proportion of equity and debt the company is using to finance its assets. A high debt to equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. DPS’s debt to equity ratio of 2.6027 is nearly double the KO debt to equity ratio of 1.3419. These ratios collectively indicate that DPS is financed more heavily with debt than KO. Although this debt financing results in higher potential returns compared to the potential returns without acquiring this debt, it may appear unattractive to investors because the cost of this debt may outweigh the returns that the company generates on the debt through investment and business activities. This could potentially lead to bankruptcy, which would leave the shareholders with nothing. DPS is more highly leveraged than KO mainly because of its size. It simply does not have the amount of financial resources available for growth and expansion that KO does. DPS is forced to finance its activities with a greater percentage of debt than the larger KO. Activity ratios refer to a set of accounting ratios that measure a firm’s ability to convert different accounts within their balance sheets into cash or sales. The inventory turnover ratio shows the rate at which a firm’s inventory is sold and replaced over a given period. DPS’s inventory turnover ratio is 23.0984 and KO’s is 13.25, indicating that KO holds more inventory than DPS. DPS’s inventory is sold or replaced at a faster rate than KO’s. Fixed asset turnover ratio indicates how well the business is using its fixed assets to generate sales. DPS’s fixed asset turnover ratio of 4.8253 compared to KO’s 2.3847 indicates that DPS is more effective than KO at using fixed assets to generate sales. The higher ratio indicates that DPS has less money tied up in fixed assets for each dollar of sales...
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