Pepsi vs. Coca Cola Free Essays

As a result, the company has no difficulty in borrowing money since creditors prefer lending money to liquid firms. Long Term Solvency * The total debt ratio has decreased by 12. 863% because total assets have increased more than total debt. We will write a custom essay sample on Pepsi vs. Coca Cola or any similar topic only for you Order Now * The debt-equity ratio has decreased by 31. 25% since the company’s total equity has increased. * The Equity Multiplier has decreased by 20. 202% as a result of the increase in total assets. * Overall, the company has become less solvent, and its leverage has decreased as a result of the increase in total assets and equity.In this regard, the company is in a good position and can pay off its long-term debt as it becomes due. Asset Management * The inventory turnover has decreased by 4. 839% because the inventory increased and the cost of goods sold decreased. * The day’s sales in inventory have increased by 5. 080 % since the inventory turnover rate has decreased. This is an indicator that extra inventory is lying around and that more unnecessary expenses may occur. * The receivable turnover ratio has increased by 1. 192% because of the decrease in sales and the decrease in account receivable.The company collected more sales in 2009 than in the previous year. * Therefore, in order to further improve Pepsi’s management of assets, the company can increase its sales, thereby increasing its receivables turnover, as well as minimize the cost of goods sold. Profitability * The company’s profit margin has increased by 18. 182% due to the increase in net income and the decrease in sales. * Return on assets has also increased by 7. 143% due to the increase in total assets being larger than the increase in net income. * The 16. 67% decrease in the company’s return on equity was caused by the rise of total equity which was larger than the increase in net income. * Overall, the company has increasing in profitability due to increased sales and thus higher revenue. However, equity increased more than net income, resulting in a negative ROE between 2008 and 2009 Valuation * The earnings per share have increased by 17. 445%, meaning that the market value of the stock has increased between 2008 and 2009. * The price earnings ratio has dropped by 5. 510%, meaning that investors in 2009 were willing to pay slightly less per dollar of earnings than in 2008. The price sales ratio has increased slightly by 0. 8% between 2008 and 2009, meaning that the Pepsi’s stock has improved slightly based on its own past performance. * Overall, despite the drop in price earnings ratio, Pepsi has increased the value of its stock. By increasing investor incentives and demand, Pepsi can also regain positive numbers in its future price earnings ratios Part Two: Coca Cola Coca Cola was chosen as the benchmark company because not only is it categorized within the same food and beverage industry segment as Pepsi, it is also a leading company in this industry. Ratio Analysis: Coca Cola COCA COLA RATIOS:| | 2009| 2008| Percent Change (%)| Liquidity| Current Ratio| 1. 27| 0. 93| 36. 559| | Cash Ratio| 0. 67| 0. 38| 76. 316| | NWC to Total Assets| 0. 078| -0. 02| -490. 000| | | | | | Solvency| Total Debt Ratio | 0. 490477| 0. 494756| -0. 865| | Debt Equity Ratio| 0. 092| 0. 135| -31. 852| | Equity Multiplier| 1. 96| 1. 97| -0. 508| | | | | | Asset Management| Inventory turnover| 4. 71| 5. 2| -9. 423| | Days’ Sales in Inventory| 77. 49| 70. 19| 10. 400| | Receivables Turnover| 8. 24| 10. 33| -20. 232| | | | | |Profitability| Profit Margin (PM)| 0. 22| 0. 18| 22. 222| | Return on Assets (ROA)| 0. 14| 0. 143| -2. 098| | Return on Equity (ROE)| 0. 27| 0. 28| -3. 571| | | | | | Valuation| Earnings Per Share (EPS)| 2. 95| 2. 51| 17. 530| | Price-Earnings (PE) Ratio| 19. 32| 24. 30| -20. 494| | Price-Sales Ratio| 4. 85725| 4. 729334| 2. 705| Short Term Liquidity * The current ratio increased by about 36. 5% because the increase in current assets is significantly larger than the increase in current liabilities. * The NWC to total assets has increased as a result of the increase in total assets. The cash ratio has increased in 2009 by 76. 316% since the increase in cash was larger than the increase in current liabilities. * The increase in cash and current assets has rendered the company more liquid. Similar to Pepsi, Coca- Cola won’t face difficulties in borrowing money as high liquidity is an attribute creditors analyze when lending to firms. Long Term Solvency * The total debt ratio decreased by 0. 865% because of an increase in total assets. * The debt-equity ratio has declined by 31. 852% as a result of the increase in total equity and the increase in total debt. The company’s equity multiplier has decreased by 0. 508% due to the increase in total assets accompanied with a smaller increase in total equity. * Overall, the company has become less solvent because its total equity and total assets have increased. * Improving the solvency of the company would involve increasing its debt by taking out more loans and increasing the company’s assets through the purchase of capital or an increase in sales. Asset Management * The company’s inventory turnover rate decreased by 9. 423% since the cost of goods sold has decreased and the inventory increased.Inventory was transferred into sales less rapidly in 2009 than in the previous year. * Days’ sales in inventory for the firm increased by 10. 4% because inventory turnover rate has increased. Although there was a rise in the days’ sales in inventory, the increase is smaller than that of Pepsi. Therefore Pepsi was selling more inventory than Coca Cola. * The receivables turnover rate has decreased by 20. 232% because of the increase in accounts receivable and the decrease in sales. Therefore, with a lower receivables turnover, the company is not operating as effectively as the previous year. The ratios show that the company did not improve its asset management; thus, Coca Cola could further enhance its asset management by increasing sales. Profitability * Coca Cola’s profit margin increased by about 22. 2% because of the decline in sales and the increase in net income. * The company’s return on assets (ROA) fell by 2. 098% since the increase in total assets was greater than the increase in net income. * The return on equity (ROE) of the firm has declined by 3. 571% due to the increase in total equity which was greater than the increase in net income. * The company, therefore, has shown an increase in profitability.This was caused primarily by the rise in net income. By increasing sales, the company can increase its revenues and, accordingly, raise its net income. Valuation * Earnings per share increased by 17. 53% meaning that Coca Cola was selling shares for 0. 44$ more in 2009 than in 2008. Thus, Coca Cola has increased the value of its shares. * The Price Earnings Ratio has decreased by about 20. 5% since the market value has dropped somewhat between 2008 and 2009. * The price sales ratio has increased by about 2. 7%, this means that investors are expecting relatively higher growth from Coca Cola in the future because the 2. % increase indicates that Coca Cola is doing relatively better compared to its past performance. * Coca Cola has shown an increase in earnings per share and price sales ratio, despite a drop in the price earnings ratio, by increasing sales and stimulating consumer and investor demand, Coca Cola can continue to increase all three. Part Three: Recommendations and Comparison between Pepsi and Coca Cola Since 2008, both Pepsi and Coca Cola have increased their overall liquidity; neither firm will face any significant issues if they should need to borrow in the future, as liquidity is a major factor considered by lenders. Both Coca Cola and Pepsi have become less solvent; this was due to the increase in total assets and equity, without a similar increase in liabilities. This decrease in solvency is on the one hand a benefit, as it means the companies are both able to pay off debts as they come due, however, low solvency can also be an issue as it indicates low financial leverage. A way to mitigate this problem would be for both firms to acquire more debt, thereby increasing liabilities and thus increasing solvency. In terms of asset management, Pepsi did slightly better than Coca Cola between 2008 and 2009.While Coca Cola was unable to increase sales relative to its increasing accounts receivables, Pepsi, on the other hand, was still able to keep its receivables turnover slightly increasing between 2008 and 2009. Both Pepsi and Coca Cola saw profitability increase between 2008 and 2009, however, return on equity for both companies decreased during the year because equity increased and a disproportiona te rate compared to net income. To remedy this, both companies could be less apt to increase equity at such a high rate compared to net income. In terms of market value, both Pepsi and Coca Cola had overall increases in their share value. However, both companies endured decreases in their price earnings ratio (Coca Cola almost five times less than that of Pepsi), meaning that investors, between 2008 and 2009 were willing to invest less per share in both companies. Overall, between 2008 and 2009, despite enduring similar trends, Pepsi fared slightly better in terms of asset management, profitability and market value in comparison to Coca Cola’s performance References: Google Finance Investopedia. com Moneycentral. msn. com How to cite Pepsi vs. Coca Cola, Papers