Financial Analysis

Financial Analysis Nicole Mills XACC/280 1/22/12 Lisa Pendleton

Financial Analysis Financial Analysis Financial ratios are valuable indicators to determine a companys performance and

financial situation. Ratios can be calculated from the data provided by the financial statements. Financial ratios are used to compare the companys financials to those of its competitors and to analyze trends. Ratios can also predict future bankruptcy of a company, a useful tool for loan officers and investors. Ratios determine liquidity, profitability, and solvency of a company. The purpose of this report is to compare two popular brands in regard to their financial health. Each companys information will be analyzed vertically, horizontally, and their current ratios calculated. The following paragraphs will provide a brief description of both companies. PepsiCo Synopsis Pepsi-cola is the invention of Caleb Bradham, a pharmacist, in 1898. He created the drink out of carbonated water, a unique mixture of Kola nut extract, vanilla, and rareoils ("Andy'S Pepsiholic Haven", 2002). In December 1902, Bradham launched the Pepsi-Cola from the back room of his pharmacy. By 1910, there were 250 franchises in 24 states. The company ran 17 ears successfully before encountering price fluctuations in sugar prices during World War I. After sugar prices fell, he was left with a large inventory of overprices sugar, bankrupting the company in 1923. The assets of the company were then sold to Craven Holding Corporation for just $30,000. Frito-Lay Inc. merged with the company in 1961 ("Pepsico", 2012). The company also owns many other brands including Sierra Mist, Slice, Tropicana, Ocean Spray, Mountain Dew, Mug Root Beer, No Fear, Seattles Best Coffee, Tazo, SoBe, Aquafina, and has a partnership with Starbucks and Lipton. In 1970 PepsiCo had sales exceeding one billion dollars and passed the two billion mark by 1974. The company has experienced substantial growth with successful brand recognition. It is easy to see why individuals would be interested in investing in a company that has displayed considerable expansion over the last century.

Financial Analysis Coca-Cola Synopsis The global Coca-Cola Company, headquartered and established in Atlanta, Georgia, is recognized for its charitable contributions history (Ford, Stephens, & Cooper, 2007). In 1886, John Pemberton, a pharmacist, developed the soft drink known as Coca-Cola by combining

cinnamon, lime, Brazilian shrub weeds, coca leaves, and soda water (Ford, Stephens, & Cooper, 2007). Originally, the drink was sold in Atlanta in Jacobs Pharmacy for five cents a glass as a soda fountain drink. Pembertons partner and bookkeeper, Frank M. Robinson, suggested the Coca-Cola trademark. Asa Chandler, an Atlanta businessman and pharmacist who turned Coca-Cola into the globally recognized brand it is today, purchased Pembertons recipe for $23,00 in April 1891. By 1892, Chandlers aptitude for merchandising had increased Coca-Colas sales almost tenfold (Ford, Stephens, & Cooper, 2007). Shortly after he joined forces with his brother John Pembertons former partner Frank Robinson, John S. Chandler, and two additional associates to form a Georgia corporation called The Coca-Cola Company. In 1919, Ernest Woodruff bought the Coca-Cola Company for $25 million (Ford, Stephens, & Cooper, 2007). A few years later Woodruff turned the company over to his son. According to Ford, Stephens, and Cooper (2007) Today Coca-Colas reach spreads far beyond Georgia and even the United States; the company has become one of the worlds most recognizable corporations. The Coca-Cola brand is one of the five most recognized symbols in the world. Currently, the Coca-Cola Company has nearly 400 brands in over 200 countries (p. 2).

Liquidity Ratio Calculations

Financial Analysis Liquidity ratios are a class of financial metrics used to determine a companys ability to meet short-term debt obligations. The higher the value of the ratio the company possesses the larger the margin of safety it has to pay short-term outstanding debts. According

to "Investopedia" (2011), "A companys ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment (Liquidity Ratios). The current ratio is one of the most commonly used ratios to calculate liquidity of a company. For the purposes of this analysis, the formula that will be used is Current Ratio = CurrentAssets CurrentLiabilities

Please note that all numbers represent millions. Liquidity ratio calculations for PepsiCo $10,454 _(Current _ Assets) =1.11 $9,405 _(Current _Liabilities)

PepsiCo current ratio for 2005

PepsiCos current ratio for 2005 is 1.11:1. PepsiCo current ratio for 2004 $8,639 _(Current _ Assets) = 1.28 $6,752 _(Current _ Liabilities)

PepsiCos current ratio for 2004 is 1.28:1. Liquidity ratio calculations for Coca-Cola Coca-Cola current ratio for 2005 10,250 _(Current _ Assets) = 1.04 9,836 _(Current _ Liabilities)

Coca-Colas current ratio for 2005 is 1.04:1. Coca-Colas current ratio for 2004 12,281_(Current _ Assets) = 1.10 11,133_(Current _ Liabilities)

Coca-Colas current ratio for 2004 is 1.10:1.

Financial Analysis Both companies experienced a decrease in current assets to debts ratio. Pepsi, reporting ratios of 1.28:1 in 2004 to 1.11:1 in 2005, experienced a decrease of approximately 13 percent.

Coke, during the same period, experienced a decrease as well. In 2004 the Coke company had a current ratio of 1.10:1 which decline in 2005 to 1.04:1, roughly a five percent difference. Although Pepsi has slightly more liquidity, both of these companies are in good financial standing and can meet their short-term obligations. Horizontal Analysis Horizontal analysis, also known as trend analysis, is a method of calculating a sequence of financial statement figures within a specified period. The period may vary, and the analyst can use his or her discretion when selecting a particular timeline. Horizontal analysis uses a base year to calculate the percentage change in assets from year to year. For the purposes of this document, 2004 will be the base year. The formula used to determine the increase or decrease in assets the current year amount minus the base year; then this total is divided by the base year amount. The same formula is used to figure out the percent change in liabilities. Formula used to calculate

horizontal analysis:

Total _ Assets _ of _ 2004 - Total _ Assets _ of _ 2005 Divided _ by _Total _ Assets _ of _ 2004

PepsiCo Horizontal Analysis Percent change in total assets 2005 divided by 2004, the base year.

$31,727 - $27,987 = 0.1336 $27,987 PepsiCo experienced a 13.4 percent increase in assets from 2004 to 2005. The higher the increase in assets, the better financial standing the company has. Percent change in total liabilities equals the 2005 total liabilities minus 2004 liabilities divided by the base year.

Financial Analysis $17,476 - $14,464 = 0.208 This figure represents a 20.8 percent increase in liabilities for $14,464

PepsiCo from 2004 to 2005. The higher the liabilities, the less financially stable a company is. In the case of the PepsiCo, the company has a small increase in assets compared to a larger increase in liabilities, meaning the company has taken on more debt than it has in assets during this period. Coca-Cola experienced the exact opposite in their horizontal analysis. The figures of Coca-Cola will be examined in the following paragraphs. Coca-Cola Horizontal Analysis Using the same formula from above, Coca-Colas data will be entered to determine their financial standing in terms of assets and liabilities as opposed to PepsiCo. First, the change in

assets will be computed from 2004 to 2005.

$29,427 - $31,441 - $2,014 = = - 0.064 This figure $31,441 $31,441

represents a loss in assets during the two-year period by 6.4 percent. Although a negative total in assets may appear as a bad thing, by looking at Coca-Colas change in liabilities, an investor will notice that debts have decreased dramatically during the same period. The percent change in liabilities for Coca-Cola between 2004 and 2005 are as follows

$13,072 - $15,506 - $2,434 = = - 0.1569 Rounded, this figure represents a 16 percent decrease $15,506 $15,506 in liabilities for the Coca-Cola Company. The less debts, or liabilities, a company has, the better their financial standing. In the case of Coca-Cola, the company experienced a much larger drop in debts compared to smaller decrease in assets. The decrease in assets is directly related to the decrease in liabilities, as the company used assets to pay off their liabilities. Analyzing the information provided in this section, an investor can quickly see that Coca-Cola is attempting to

Financial Analysis

eliminate as much debt as possible, a positive impression for the company to leave with potential shareholders. Vertical Analysis The proportional analysis of a financial statement, where every line in the statement is listed as a percentage of another item is known as vertical analysis. For the purposes of this report, total assets will be the bases for the percentages on the consolidated balance sheet. To figure out the percentages, the amount on the itemized line is divided by total assets from the same period. This is the formula that will be used to calculate the percentage of cash and cash equivalents for PepsiCo in 2004 and 2004. PepsiCo Vertical Analysis PepsiCo cash and cash equivalents for 2005 = $1716 _(Cash _ Equivalents) = 0.054 $31,727 _(Total _ Assets)

This number represents the cash equivalents, which makes up 5.4 percent of total assets from PepsiCos balance sheet. The same will be done for 2004. 2004=

$1280 _(Cash _ Equivalents) = 0.046 This number represents the cash equivalents, which makes $27,987 _(Total _ Assets) up 4.6 percent of total assets from PepsiCos balance sheet in 2004. In this case, the figures mean that there was a slight increase in percentage of cash equivalents from 2004 to 2005. In calculating vertical analysis for a company, the analyst can also divide total current assets by total assets to determine how much the company currently has in its possession. This information will be calculated for both years of 2004 and 2005. Percentage of assets for 2005

$10,454 _(Total _ Current _ Assets) = 0.329 converted to percentage form equals 32.9 percent. $31,727 _(Total _ Assets)

Financial Analysis

8 $8,693_(Total _ Current _ Assets) = 0.3087 converted to percentage $27,987 _(Total _ Assets)

Percentage assets for 2004

form equals roughly 30.9 percent. For PepsiCo, these figures mean that they have an increased percentage of total current assets, a trait that shareholders look for in a company when they are making their investment decisions. Coca-Cola Vertical Analysis The same formula is used when calculating Coca-cola figures. Coca-colas cash and cash

equivalents for 2005 =

$4,701_(Cash _ Equivalents) = 0.16 This number represents the cash $29,427 _(Total _ Assets)

equivalents, which makes up 16 percent of total assets from Coca-Colas balance sheet in 2005.

The same will be done for the year prior. 2004=

$6707 _(Cash _ Equivalents) = 0.213 This $31,441_(Total _ Assets)

number represents the cash equivalents, which makes up 21.3 percent of total assets from CocaColas balance sheet in 2004. The Coca-Cola Company has a much higher percentage of cash equivalents than their competitor PepsiCo and significantly increased this percentage over the periods examined. Moving on to total current assets divided by total assets, this data will be inputted for the Coca-Cola Company. Percentage of assets for 2005 equals

$10,250 _(Total _ Current _ Assets) = 0.348 converted to percentage form equals 32.9 percent. $329,427 _(Total _ Assets)

Percentage assets for 2004 equals

$12,281_(Total _ Current _ Assets) = 0.391 converted to $31,441_(Total _ Assets)

percentage form equals roughly 30.9 percent.

Financial Analysis

After reviewing the vertical analysis of both companies it is evident that Coca-Cola has a significantly higher percentage or cash and cash equivalents as well as current assets, both positive qualities in the eye of an investor.

Concluding Recommendation Both companies are financially sound and offer comparable returns. Each company has been around for many years, and has global recognition. As many know, billionaire Warren Buffet has a substantial investment devoted to the Coca-Cola Company. At 3.2 percent, PepsiCo pays out high dividend stock yields to investors. PepsiCo has a strong presence, involved in every market around the globe. The Pepsi Company offers both beverage and snack products which have done well in recent years despite the downturn in economic climate. PepsiCo is well diversified geographically and in the products it offers. Before making any financial decisions, it is in the shareholders best interest to research the company he or she is interested in, in addition to investigating market conditions and economic cycles before diving into the pool of investing.

Financial Analysis References Investopedia. (2011). Retrieved from http://www.investopedia.com/terms/l/liquidityratios.asp#axzz1kDKscwY9

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Andy's Pepsiholic Haven. (2002). Retrieved from http://www.sirpepsi.com/pepsi11.htm Pepsico. (2012). Retrieved from http://www.pepsico.com/Company/Our-History.html Ford, W., Stephens, R., & Cooper, L. (2007, August). Coca-Cola Case Study. The Archive of Marketing Education, ().