Financial Analysis is very important to present how well a company is being managed. Keeping track of financial statements, taxes, audits, and various other areas of financials show how well a company is doing, or better yet has done in these years, and the probability of improvement in the future. Having data on how a company will do in the future is important so that management, investors, and creditors can see if there are areas that need improvement and work on them they become an issue and hinder the growth of the company. In this essay I will compare financial data from Coca Cola Company and PepsiCo. This essay briefly describes what vertical and horizontal analysis is, and then it goes over the vertical analysis from both companies, comparing one to the other. The same is done with the horizontal analysis of both companies, comparing both as well. The description of the ratio analysis and the ratio analysis of both companies is shown, including the liquidity ratio, solvency ratio, and profitability ratio. It concludes with this writer’s own opinion which company is more financially healthy with examples; using comparison of the data acquired from the appendixes A & B. Also, three recommendations to improve each company financial health for the future.
The most used tools of financial analysis are horizontal analysis, vertical analysis, and ratio analysis (all will be shown later). Vertical analysis, also called common-size analysis, expresses each financial statement item as a percentage of an original base amount. The vertical analysis shows how much assets, liabilities, or stockholders equity have improved or declined from the year before. I am providing two examples of vertical analysis, one for Coca-Cola Company, and the other, for PepsiCo. To show by comparison which company has improved, or declined in assets and liabilities. Measures of Vertical Analysis for Coca Cola Company
2005 Current Assets $10,250 divided by 2005 Total Assets: $29,427 =0.348 = 34.8% 2005 Current Liabilities $9,836 divided by 2005 Total Assets: $29,427 = 0.334 = 33.4% Measures of Vertical Analysis for PepsiCo
2005 Current Assets $10,454 divided by 2005 Total Assets: $31,727 = 0.329= 32.9% 2005 Current Liabilities $9,406 divided by 2005 Total Assets: $31,727 = 0.296 = 29.6%
Horizontal analysis assesses a series of financial statement data over a period of time; this technique is also called trend analysis. The purpose of the horizontal analysis is defining the increase or decrease that has taken place in a company’s financial statement; the Horizontal Analysis can be shown either as an amount or a percentage. This essay provides two examples of Horizontal Analysis, one for Coca-Cola, and one for PepsiCo that illustrates the change in assets, and liabilities in percentages, from the year 2004 to 2005. Measures of Horizontal Analysis for Coca Cola Company
2005 Total Assets $29,427 minus 2004 Total Assets $31,441 divided by 2004 Total Assets $31,441= ($29,427 - $31,441) / $31,441 = -0.064 = -6.4% 2005 Total Liabilities $13,072 minus 2004 Total Liabilities $15,506 divided by 2004 Total Liabilities $15,506 = ($13,072 - $15,506) / $15,506 = -0.156 = -16% Measures of Horizontal Analysis for PepsiCo.
2005 Total Assets $31,727 minus 2004 Total Assets $27,987 divided by 2004 Total Assets $27,987 = ($31,727 - $27,987) / $27,987 = 0.1336 = 13.4% 2005 Total Liabilities $17,476 minus 2004 Total Liabilities $14,464 divided by 2004 Total Liabilities $14,464 = ($17,476 - $14,464) / $14,464 = 0.208 = 20.8%
The ratio analysis expresses the connection among selected items of financial statement data (1). A ratio expresses the mathematical relationship among one quantity and another (1).The relationship is shown in the form of a percentage, a rate, or a simple proportion. The three ratios that will be used; Liquidity Ratio, Profitability Ratio, and...