In this paper I’ve reviewed the annual reports for PepsiCo, Inc. and The Coca-Cola
Company and attempted to analyze the financial statements of two industry leaders in the field of
soft drinks or also known as “cola or sodas”. These two major companies have for years compete
to be the number one soft drink not only in the United States but as well as international. Both,
PepsiCo, Inc. and Coca-Cola Company have been rivals for many years and the outcome of my
financial analysis will determine which one is the strongest and gains more profit.
In doing the financial analysis, I will conduct a Vertical Analysis (also called common-
size analysis) which is a technique that expresses each financial statement item as a percent of a
base amount. This would include the base for assets is Total Assets, for liabilities and
stockholders’ equity, the base is the Total Liabilities, and Stockholders’ Equity, and finally for
Income Statement accounts, the base is Net Sales or Net Revenues.
I have also concluded a Horizontal Analysis (also known as Trend Analysis) which is a
technique for evaluating a series of financial statement data over a period of time. Its purpose is
to determine the increase of decrease that has taken place. This change may be expressed as
either an amount or a percentage. The comparisons are performed using the Balance Sheet,
Retained Earnings, and Income Statement. And last I will provide recommendations on each
corporation that can help improve their financial health.
Through examining the financial statements of PepsiCo, Inc. and Coca-Cola Company, I
would like to present the following analysis and when it is completed you will notice that both
companies seem to be improving in one area according to the Horizontal Analysis and Vertical
analysis on the Appendix A and B. Almost all item on the PepsiCo’s balance sheet have
favorable increased between 2004 and 2005; yet it is obvious that current assets have not
increased with the same rate as current liabilities, which would explain why the current ratio
have decreased from 2004 to 2005.
For Coca-Cola Company, however current assets have decreased from $12,281 in 2004
to $10,250 in 2005, while current liabilities have decreased from $11,133 in 2004 to $9,836 in
PepsiCo, Inc, Inventories have increased from $1,541 in 2004 to $1,693 in 2005; this
could be a favorable sign especially when we see the improvement in the inventory turnover
ratio and day’s sales in inventory. The increase in inventory is unfavorable at times, but in this
case it appears that the increase in inventory is to meet increased demand for the company’s
For the Coca-Cola Company, Inventories have increased from $1,420 in 2004 to $1,424
in 2005, which shows that the expected demand Coca-Cola’s management is expecting is not as
high as the one expected by PepsiCo’s management team leaders.
For PepsiCo, Inc., Cash and Cash Equivalents have increased from $1,280 in 2004 to
$1,716 in 2005 (34.06% increase), while Accounts Receivables have increased from $2,999 in
2004 to $3,261 in 2005 (an 8.74% increase) while sales have increased from $29,261 in 2004 to
$32,562 in 2005 (an 11.28% increase). This explains the increase in inventory as PepsiCo, Inc.
seems to be an increase in the demand for its products. The larger increase in Cash and Cash
Equivalents in comparison to the increase in receivables is probably due to stricter measures in
the company’s credit policy.
Also, as a result of the increase in demand, PepsiCo Inc is probably in a stronger position
and can therefore ask its customers to purchase its products in cash.
For the Coca-Cola Company, Cash and Cash Equivalents have decreased form $6,707 in
2004 to $4,701 in 2005 (29.91% decrease), while receivables have increased from $2,244 in
2004 to $2,281 in 2005 (8.2% increase). This is couple with an increase in sales from $21,742 in
2004 to $23,104 in 2005 (6.26% increase).
Coca-Cola Company management should seek new ways to regain its market share as
PepsiCo, Inc. has been acquiring more market share as clear form comparing the percentage
increase in sales of the two companies.
The Retained Earnings as a percentage of Total Liabilities and Stockholders’ Equity have
decreased from 66.92% in 2004 to 66.56% in 2005 for PepsiCo, Inc., which indicates that
PepsiCo is maintaining a constant payout ratio of dividends.
However for Coca-Cola Company the Retained Earnings as a percentage of total
Liabilities and Stockholders’ Equity has increased from 92.57% in 2004 to 106.36% in 2005
(7.54% increase), this indicates that Coca-Cola Company is decreasing its payout ratio so as to
meet future expansion needs.
Conducting a Ratio Analysis of both PepsiCo, Inc. and Coca-Cola Company, the
outcome of the analysis is as follow:
After thoroughly examining the Current Ratio (measures the company’s short-term debt-
paying ability), and the Acid Test Ratio (quick ratio which measures the immediate short-term
debt-paying ability ), then was it noticeable that both companies have suffered a drop in their
current and quick ratios, yet most companies their receivables turnover ratio (measures the
liquidity of receivables), days sales in receivables (measures the number of days it takes the
company to convert its receivables into cash), inventory turnover (measures the liquidity of
inventory), and days’ sales in inventory (the number of days merchandise remain in inventory
until sold) ratios have improved.
This all means that both PepsiCo, Inc., and Coca-Cola Company are collecting their
money faster, and therefore are able to turnover its receivables quicker in 2005 than 2004. The
same can be noticed for the inventory turnover figures, for PepsiCo, Inc.; however the
percentage of current assets to total assets has increased from 30.9% in 2004 and 32.9% in 2005.
This is a good sign that signifies PepsiCo, Inc. is trying to lower its investments in noncurrent
The Profitability Ratios:
After examining the analysis in the appendix A and B and reviewing the Ratio, Vertical
and Horizontal Analysis form week Seven CheckPoint, one can see that the profit margin ratios
(which measures the percentage of net income that is generated by each dollar of sales) of both
companies PepsiCo, Inc., and Coca-Cola Company has dropped between 2004 and 2005, this
could be the result of these two companies always trying to compete against each other. The cost
of goods sold has increased for both these companies between 2004 and 2005.
The Asset Turnover (which measures how efficient is management in managing its asset
base to generate sales) for PepsiCo had dropped from 1.05 in 2004 to 1.03 in 2005, while the
Coca-Cola Company the Asset Turnover has increased from 0.69 in 2004 to 0.79 in 2005. This
indicates that Coca-Cola Company has a better managing the assets base than PepsiCo Inc, At
the same time PepsiCo, Inc, return on assets (measures the overall profitability of assets) has
dropped from 15.05% in 2004 to 12.85% in 2005, while it increased for Coca-Cola from 15.42%
to 16.56% for the same period.
One of the most important measures of profitability for many investors is the Return on
Equity, for this measures the profitability of their investment has dropped for PepsiCo, Inc, and
Coca-Cola Company between 2004 and 2005; probably due to the drop in the profit margin for
Next the earnings per share (a ratio that measures net income earned by each share of
stock) has dropped for PepsiCo, Inc. from $2.48 in 2004 to $2.44 in 2005, while the price
earnings ratio (the ratio of the market price per share to earnings per share). The higher the price
earnings ratios the higher interest of investors in the companies operations have increased from
25.15 in 2004 to 25.57 in 2005 which is an indication that the investors have an increased
confidence in the company’s future performance.
For Coca-Cola where the earnings per share have increased form $2.00 in 2004 to $2.04
in 2005, yet the price earning ratio have dropped form 26.39 to 25.88 for the same period, which
can also indicate that not too many investors were interested in the company’s operations. With
these figures and analysis of increase and ratio drop is not a good sign that management for both
of these companies need to evaluate their options and keep a balance of increase and decrease in
the profitability ratios.
We will look at the debt to assets ratio (the percentage of total assets financed by
creditors as opposed to the percentage financed by investors) for PepsiCo Inc. had an increased
form 0.52 in 2004 to 0.55 in 2005, I suggest that management should evaluate their capital
structure because the increase of debt in the capital structure is not a good sign. An increase in
the debt ratio signifies a heavier reliance on debt; the interest paid on debt obligations have to be
paid whether the company’s operations are successful or not. A large increase in this ratio could
expose the company to the threat of bankruptcy if it can’t meet its obligations. The times interest
earned ratio has also decreased from 34.21 in 2004 to 25.93 in 2005, this proves that the debt
ratio since the times interest earned ratio measure the company’s ability to meet interest payment
obligations as they are due.
Coca-Cola, however the debt to assets ratio have decreased from 0.49 in 2004 to 0.44 in
2005, which is a favorable outcome because the debt ratio measures the percentage of total assets
provided by creditors and the lower the ratio the safer the company will be from any threat. The
times interest earned ratio have also decreased from 32.74 in 2004 to 28.88 in 2005. This is
probably due to an increase in the cost of debt although the debt had decreased; the interest paid
on debt had increased from $196 in 2004 to $240 in 2005. Management should conduct and
evaluate all necessary analysis to investigate as to why there is an issue and try to lower its
In the conclusion, I want to point out that both mogul corporations PepsiCo Inc. and
Coca-Cola Company are successful and even though PepsiCo Inc, has succeeded in gaining
more customers than Coca-Cola Company. Good marketing, advertisement, and promotions are
probably responsible for the success of PepsiCo, Inc. From my analysis, I believe that if both
companies continue to engage in stock repurchases plans which can result with increase in the
earnings per share since the amount of shares outstanding is now lower. If they continue with
this and work on keeping their percentage low on the solvency, both of these companies will
succeed as they are already successful.
I would also recommend that management try to analyze the components of their current
assets so as to increase both the current and acid test ratios, maybe lower their inventories a bit
will be great. Both of these companies PepsiCo Inc, and Coca-Cola Company should try to
increase their acid test ratio to at least 1:00 to 1:00 to ensure they have enough liquidity to meet
sudden short-term financing needs in the future.