Question

Financial Analysis Project

Requirements:

You will use the Financial Statements for

Coke

and

Pepsi

as provided on their websites to

complete the following analysis:

1.

Calculate the current ratio and quick ratio for both companies for 2016 and 2017. Write

a paragraph describing what these ratios indicate about the liquidity of Pepsi and Coke

in 2016 compared to 2017. Write a paragraph describing what these ratios indicate

about the liquidity of Pepsi compared to Coke for both years. Which company seems to

be more liquid? What are the advantages and disadvantages of liquidity?

2.

Calculate the accounts receivable turnover and days sales in receivables for both

companies for 2016 and 2017. Write a paragraph comparing 2016 with 2017 and Coke

with Pepsi using these two ratios to indicate the effectiveness of their accounts

receivable collection. Which of the two seems to be doing a better job with receivables?

How does this collection process affect the overall success of the company.

3.

Calculate inventory turnover and days in inventory for both companies for 2016 and

2017. Write a paragraph comparing 2016 with 2017 and Coke with Pepsi using these

two ratios to indicate how they manage their inventory. Which one of the two companies

has a better approach to inventory management? Why? What are the problems that

come with poor inventory management?

4.

Calculate the gross margin, profit margin and return on investment for both companies

for 2016 and 2017. Explain in a paragraph what these ratios show about each

company’s profitability compared to the year before and compared to each other.

Indicate which company shows the best prospects for future profits and explain in detail

why you think the ratios support your observation.

5.

Prepare a vertical analysis or same size income statement and balance sheet for Pepsi

and Coca Cola for 2016 and 2017. Write a paragraph highlighting what you learn from

the percentages of sales or total assets calculated from the financial statements. Write

also about the comparison between 2016 and 2017 and between Coke and Pepsi.

6.

Compare Pepsi’s income statement for 2016 with their income statement for 2017 –

calculate the change in dollars and percent for all of the revenues and expenses. What

do the changes indicate about Pepsi’s success in 2016 relative to 2017? Do the same

comparison for Coke’s income statement. What do the changes indicate about Coke’s

improvement or lack thereof between 2016 and 2017? With this comparison of both

companies over time now compare Coke vs. Pepsi and explain why one company is

better than the other.

7.

Based on all of your calculations and observations described above, make a

recommendation as to which company would be a better investment. Give the reasons

for your conclusion.

Answer 1

Using Financial Statements of Coke and Pepsi for the Financial Year 2017 & 2016, following parts has been answered as under:

1. Current Ratio and Quick Ratio

COKE
	2017(In $)	2016(In $)
CURRENT ASSETS
Cash & Cash Equivalants	6,006	8,555
Short term Investments	9,352	9,595
Marketable Securities	5,317	4,051
Trade Accounts Recievables	3,667	3,856
Inventories	2,655	2,675
Prepaid Expenses and Other Assets	2,000	2,481
Assets held for sale	219	2797
Assets held for sale - DCO	7329
TOTAL CURRENT ASSETS	36,545	34,010
CURRENT LIABILITIES
Accounts Payable & Accrued Expenses	8,748	9,490
Loans & Notes Payable	13,205	12,498
Current Maturities Of Long Term Debt	3,298	3,527
Accrued Income Taxes	410	307
Liabilities held for sale	37	710
Liabilities held for sale - DCO	1496
TOTAL CURRENT LIABILITIES	27,194	26,532
CURRENT RATIO	1.34	1.28
QUICK RATIO	0.90	0.98

PEPSI
	2017(In $)	2016(In $)
CURRENT ASSETS
Cash & Cash Equivalants	10,610	9,158
Short term Investments	8,900	6,967
Accounts & Notes Recievables	7,024	6,694
Inventories	2,947	2,723
Prepaid Expenses	1,546	908
TOTAL CURRENT ASSETS	31,027	26,450
CURRENT LIABILITIES
Short Term Debt Obligations	5,485	6,892
Accounts Payable & other Current Liabilities	15,017	14,243
TOTAL CURRENT LIABILITIES	20,502	21,135
CURRENT RATIO	1.51	1.25
QUICK RATIO	1.29	1.08

Current Ratio indicated firm's ability to pay off its current liabilities and Quick ratio indicates how much liquid resources firm has to pay off its immediate liabilities. Ideal Current Ratio is 2:1, and Ideal Quick Ratio is 1:1. As we can see above, Coke's Current ratio increased from 1.28 in 2016 to 1.34 in 2017 and its Quick ratio declined slightly from 0.98 to 0.90 in 2017. This indicates that company does not have enough liquid resources to pay off its immediate debts, its slightly on lower side. Pepsi's Current Ratio increased from 1.25 in 2017 to 1.51 in 2017 and Quick ratio also improved from 1.08 in 2016 to 1.29 in 2017. This indicates a better liquidity situation as the firm is more stable and have more liquid resources to pay off its debts.

As between Coke and Pepsi, clearly Pepsi seems to be more liquid and in a better situation.

Being liquid is good as it ensures enough resources to pay off debts but also resources should not be ideal.

2. Accounts Receivable Turnover and Days Receivable

COKE
	2017(In $)	2016(In $)
Net Operating Revenue	35,410	41,863
Accounts Receivable	3,667	3,856
Accounts Receivable Turnover	9.66	10.86
Days Sales in Receivables (in Days)	38	34

PEPSI
	2017(In $)	2016(In $)
Net Operating Revenue	63,525	62,799
Accounts Receivable	7,024	6,694
Accounts Receivable Turnover	9.04	9.38
Days Sales in Receivables (in Days)	40	39

Coke's Accounts Receivable Turnover Ratio was 10.86 in 2016 and 9.66 in 2017 and Days taken for collection were 34 in 2016 and it increased to 38 days in 2017. The more number of days taken for collection indicates weakening of collection process. Pepsi's Accounts Receivable Turnover was 9.38 in 2016 and 9.04 in 2017 and days for collection were 39 in 2016 and they increased by 1 day in 2017 as they were 40 days.

More time taken for collection indicated more working capital needed and funds are blocked in the cycle, that's why speedy collection is crucial to success of business.

3. Inventory Turnover & Days in Inventory

COKE
	2017(In $)	2016(In $)
Cost of goods Sold	13,256	16,465
Inventory	2,655	2,675
Inventory Turnover Ratio	4.99	6.16
Days in Inventory (in Days)	73	59

PEPSI
	2017(In $)	2016(In $)
Cost of goods Sold	28,785	28,209
Inventory	2,947	2,723
Inventory Turnover Ratio	9.77	10.36
Days in Inventory (in Days)	37	35

As we can see above, for Coke, Inventory days in 2016 were 59 days and they increased to 73 days in 2017. This indicates funds were blocked in the production cycle for more number of days. While in case of Pepsi, Inventory days in 2016 were 35 days and they also increased by 2 days i.e. 37 days in 2017. This indicates in case of Coke, slowing down of production process by 14 days, which is a serious concern and needs to be looked into.

4. Gross Margin, Profit Margin & ROI

COKE
	2017(In $)	2016(In $)
Net Operating Revenue	35410	41863
Cost of goods Sold	13,256	16,465
Gross Profit	22,154	25,398
Gross Margin	62.6%	60.7%
Selling, General & Administrative Expenses	12496	15262
Other Operating Expenses	2157	1510
Operating Income	7,501	8,626
Operating Margin	21.2%	20.6%
Total Investment	58,180	56,985
Return On Investment	13%	15%

PEPSI
	2017(In $)	2016(In $)
Net Operating Revenue	63525	62799
Cost of goods Sold	28,785	28,209
Gross Profit	34,740	34,590
Gross Margin	54.7%	55.1%
Selling, General & Administrative Expenses	24231	24805
Other Operating Expenses	0	0
Operating Income	10,509	9,785
Operating Margin	16.5%	15.6%
Total Investment	56,060	47,921
Return On Investment	19%	20%

Thus, we can see above, even though Gross Margin and Profit Margin in case of Coke is better than Pepsi, still Return on Investment is better in case of Pepsi. This shows Pepsi is able to generate better returns on its Investment.