FINANCIAL DECISION

MAKING.

Submitted by.

Zeeshan Ghalib Mir

Submission Date.

8th of December, 2010.

“PERFORMANCE OF COCA COLA AND PEPSI

IN THE LIGHT OF FINANCIAL INDICATOR/RATIOS.”
EXECUTIVE SUMMARY

Coca Cola and Pepsi have dominated the marked of beverage throughout the world. In retail
industry both “Coca Cola Company” and “Pepsico, Incorporated” hold most of the market
shares. Resultantly, rivalry between them has been growing throughout the time. In relation to
the subject matter the solved financial ratios of both the companies clearly indicatives that
Pepsi Cola has led the excellence in relation to operate a good business over Coca Cola in
financial year 2009. On the basis of facts and figures it would be convenient to say that Coca
Cola company has to take some major measures like changing of strategy, setting of goal,
efficiency, market scope, superior quality and innovation, customer responsiveness,
environment, tough competition, human resource, technology and organization structures.
Following these simple steps Coca cola can demonstrate tight competition Pepsi.

Since both companies have achieved flourishing their brands name in the world therefore by
doing slightly changing in the areas enumerated above, Coca Cola can prove to be a healthy
competitor of Pepsi and in the same manner Pepsi Cola has to keep an eye of tough market
competitors, credit crunch, meagre buying power of the consumer, e-marketing and latest
technologies and sharp logistic in order to keep the flagship high.
 TABLE OF CONTENTS.

1/- Preface. Page No. 1

2/- Acknowledgement Page No. 1

3/- Background Page No. 2

a) Coca Cola
b) Pepsi

4/- Introduction Page No. 3

a) Coca Cola
b) Pepsi

5/- Financial Ratios of Coca Cola Page No. 4

And Pepsi Cola
a) Liquidity Ratios.
b) Profitability Ratios.
c) Efficiency Ratios.
d) Financial Leverage Ratios.
(With results and conclusions)

6/- References. Page No. 13

 Page No. 1………

1. PREFACE

The purpose of writing this report is to analyse two leading beverage brands i.e. Coca Cola
and Pepsi Cola performed during the recent financial years for academic rationale and to
ascertain which company is in better financial position to lead. In order to ascertain the depth
knowledge of both company various sources i.e. internet, books and lectures etc have been
considered.
Since both companies are well established competitors and achieved customers trust and
confidence, therefore, the consideration of their core values, quality and customers knowledge
was taken into account as a assistance to compile this report.

2. ACKNOWLEDGEMENT

Given a chance to acknowledge first of all I would like to thanks to all Mighty Allah (God)
for his mercifulness and greatness that to give me the strength so that I can write this report.
While doing this essential report writing work I wish to pay my humbly respect and gratitude
to my lecturers for providing me an opportunity to complete my report writing work on
financial decision making.

This report bears on imprint of lecturer especially the Project Supervisor Mr. Zeeshan Q. for
guidance and encouragement in carrying out this report writing work. They helped me finding
case work material in different channels and just because of their effortful attempt of my
seniors made me able to compile this report.

Zeesan G Mir.

Page No. 2………

3. BACKGROUND
Coca Cola: -
In May 1886 Doctor John Pemberton invented formula of coke. The name of the beverage
was given by his bookkeeper frank Robinson. Coca Cola was first sold at the soda fountain in
Jacob’s Pharmacy in Atlanta on May 8, 1886. Astonishingly, the drink was formulated in
order to cure diseases like morphine addiction, dyspepsia, neurasthenia, headache and
impotence. By 1888, there were three versions of Coca Cola in the market that were sold by
three separate businesses.
In 1888 Pemberton sold the rights of formula to four other businessmen JC Mayfield, AO
Murphy, CO Mullahy and EH Bloodworth. Candler the current corporation of Coca Cola
Company was then re-established by Candler in1892. On March 12, 1894 the Coca Cola was
first time sold in bottles along with the first outdoor wall advertisement in Georgia.
In 1899 Chattanooga became the first site of Coca Cola bottling company. The soft drink was
marketed as a tonic by the producer, containing extracts of cocaine as well as the caffeine rich
kola nut until 1905. In 1969 the brand was popular with slogan like “things go better with
coke” and it’s the real thing”. On January 18, 1971, the famous song “I would like to buy the
world a Coke” was broadcasted on Radio, which was written by Billy Davis and Roger Cook
with ideation of Backer. On 23 April, 1985 the New Coke formula was released, however,
owing to the nostalgia associated with the previous drink, the company had to return the old
formula under the name of Coca Cola Classic. On February 7, 2005 the coca cola Company
announced “Diet Coke” for its health conscious consumers, proclaiming that it will give
fewer calories to its consumers as it was sweetened with artificial sweetener called surcralose.
Pepsi: -
Caleb Bradham of North Caroline was a pharmacist. Like many other pharmacists at the turn
of the century he had a soda fountain in his drugstore, where he served his customer
refreshing drinks, which he created himself. His most famous drinks was something called
Brad’s drink made of carbonated water, sugar, vanilla, rare oils, pepsin and cola nuts in 1893.
In 1898, Caleb Bradham wisely bought the trade name “Pep Cola”.
After seventeen years of success, Caleb Bradham lost Pepsi Cola. He had gambled on the
fluctuations of sugar prices during World War I believing that the sugar prices would
continue to rise but they fell instead leaving him with an overpriced sugar inventory. Pepsi
Cola was bankrupt in 1923. in year 1931 Pepsi Cola was bought by Loft Candy Company and
subsequently the soft drink was reformulated. The President of the company Guth strived to
make a success of Pepsi and even offered to sell Pepsi to the Coca Cola Company, who
refused to offer a bid. In 1964 Diet Pepsi was introduced.
Page No. 3……
4. INTRODUCTION.

This report analyses the performance of two large companies in the light of their annual report
by way of calculating their profitability, liquidity and efficiency ratios as well as prospects of
their past and future performance. The companies to be analysed are Coca Cola and Pepsi,
which are amongst the leading beverage retailers in the world based in United States of
America. Coca-cola Company and Pepsi cola, incorporated hold most of the market share in
virtually every part of the world. Resultantly there is big rivalry between them.

Coca-Cola was introduced in year 1886 y john Pemberton at a drugstore in Columbus

Georgia. The Coca-cola company has introduced some other products under its name i.e. Diet
Coke with other including caffeine-free coca cola, Coca Cola Cherry, Coca Cola Zero, Coca
Cola Vanilla and special editions with lemon, lime or coffee.

Pepsi was conversely first introduced by Caleb Bradham as a “Brad’s Drink” hailing from
North Carolina New Bern in year 1898. Surprisingly, Bradham made this drink at his
Pharmacy which later on named as Pepsi Cola. There was a specific reason because of which
the name of this beverage came into the mind of the founder, as this drink contains the recipe
of digestive enzymes called Pepsin and Kola nuts.
 Page No. 4……....

Performance of both Companies in the light of financial Ratios

Financial Ratios are very helpful and valuable regarding the interpretation of the figures
found in Statement of income and balance sheet. It also clarifies the critical questions such as
whether the business is carrying excess debt or inventory, whether customers are paying
according to the terms, whether the expenses incurred on the costs of product and expenses
are manageable and whether the company’s assets are being used properly to general further
income into the business.

Financial Ratios also provide a view in respect of strengths and weakness of the company and
help the businessmen to focus the areas whether the profitability is lacking. Companies
normally use these ratios quarterly, semi-annually or annually as per requirement.

There are different ways to calculate the financial ratios; out of them some important ratios
are being used year by year when companies intend to make a comparison focussing their
position in the industry.

1) LIQUIDITY RATIOS

Liquidity ratios measure a company’s capacity to meet its near term or short term financial
obligations. Currently there are two frequently used liquidity ratios being exercised into the
business to evaluating liquidity.

a) Current ratio / Working Capital Ratio.

Definition:-
The current ratio is the most basic liquidity test. While using the formula the ascertained
figures if stays less than One (1) then we can say that the company has a liquidation issues
which need to be resolved as quickly as possible.
The higher current ratio provide assurance that the current liabilities can be paid but it does
not mean and include that the company will go bankrupt as there are so many ways to access
finance.
 Page No. 5………

Formula: -
Current Assets.
Current Ratio = ______________________
Current liabilities.

b) Quick Ratio / Acid Test Ratio.

Definition: -
Quick ratio is similar to current ratio, the only difference is that quick ratio is more
conservative than current ratio, because it excludes inventory from current assets. The
inventory has been excluded because some of the companies face difficulties to convert their
inventory into the cash like those companies which manufacturer products from semi
furnished to furnished, as semi furnished products cannot be sold immediately.

Formula: - Current Assets minus inventory

Quick Ratio = ____________________________
Current liabilities

c) Cash Ratio
The cash ratio is an indication of company’s liability to pay off its current liabilities if for
some reason immediate payment were demanded.

Formula.
Cash plus Marketable securities
Cash Ratio = ____________________________________
Current liabilities

Let’s have a look of income statement and balance sheets of Pepsi and Coca Cola and
ascertain which company is in better position to meet its liability.
 Page No. 6………

Coca Cola

5170
Current Ratio = _______________ = 1.12
4588

5170 – 874
Quick Ratio = __________________ = 0.94
4588

1036
Cash Ratio = ____________________ = 0.23
4588

Pepsi
12571
Current Ratio= _______________ = 1.43
8756

12571 – 2618
Quick Ratio = _____________________ = 1.14
8756

3943
Cash Ratio = ______________________ = 0.45
8756

Results and conclusion

As calculated above, it can easily be seen that both companies have current ratio more than 1
therefore both companies will be able to fulfil their financial obligations. Pepsi has got better
current ratio than Coca cola; it means that they have currently enough cash to be invested in
other projects. As far as Quick Ratio is concerned although Coca Cola has got 0.94 which is
less than 1, it is a bit tight to the extent that the Coca Cola has less cash in hands but some
companies like Wal-Mart which has a small amount of account receivable but actually Wal-
Mart collects cash quickly from sales and reinvests the cash in inventory or property or plant,
equipment, dividend, or make other uses of cash. If the quick ratio is lower than the working
capital ratio, it means current assets are highly dependant on inventory. Retail stores are
example of this type of business.
Contrary to the quick ratio, the cash ratio is further refinement of quick ratio to the extent that
current liabilities can be paid off with the help of readily available funds.
 Page No. 7………...

2) Profitability ratio
Profitability ratio means how company is successful in generating maximum profits as
compared to its expenses and other relevant costs incurred during a specific period of time.

a) Gross Profit Margin

Definition: - it tells the profit a business makes on its cost of sales or cost of goods sold. It
is very simple and tells us how much gross profit per £1 of turnover our business is earning.

Formula: - Sales – Cost of Goods Sold.

___________________________ X 100

Sales.

b) Return on Assets

Definition: - it means how the management is efficient to utilize the assets in order to
generate further profit.

Formula: - Net Income

__________
Total Assets

c) Return on Equity

Definition: - It means company’s profitability by revealing how much profit a company

generates with money shareholders have invested.

Formula: - Net Income

__________________
Equity

Let’s analyse the profitability ratios of both companies.

Coca Cola: -

21645 – 13333
Gross Profit Margin = _________________ x 100 = 38%
21645

731
Return on Assets = ____________ x 100 = 4.5 %
16416
 Page No. 8………

731
Return on Equity= __________ x 100 = 165.8%
882

PEPSI: -
43232-20099
Gross Profit Margin= __________________ x 100 = 53%
43232

5979
Return on Assets = ____________________ x 100 =15%
39848

5979
Return on Equity=___________________ x 100 = 68.6%
17442

Results and conclusion:

Coca Cola and Pepsi Cola have got Gross Profit Margin of 38% and 53% respectively,
therefore, Pepsi cola can be judged in a better position than Coca Cola, as higher the gross
profit margin the company is considered to have a good control of its costs. People, who are
interested in investment, generally choose companies with higher gross profit.

Return on Assets show how an organisation is capable to generate revenue through assets.
ROA is the most stringent and excessive test of return to shareholders. If a company has no
debt, the return on assets and return on equity figures will be the same. ROA is particularly
effective way of measuring the efficiency of manufacturing companies but it does not always
work so well in service industry or the company which has primary assets as people instead of
equipment. In this Scenario Coca Cola and Pepsi Cola has got 4.5% and 15%, therefore, again
Pepsi Cola is leading on Coca Cola as they have higher percentage of assets, which could
assist Pepsi to utilise them in the event of liquidation.

A company intends to maximize its use of stockholder’s equity, as it is the stockholders the
company must answer to on how they spent their money. Return on equity shows how any
dollars of earning was generated per dollar of equity of the stockholder’s provided. In the
present case, Coca Cola and Pepsi Cola has got ROE 165.8% and 68.6% respectively,
therefore, investors would prefer Coca Cola Company because of its high and growing return
on equity.
 Page No. 9………...

3) Efficiency Ratios.
It means the process to analyse or calculate the turnover of receivables, the repayment of
liabilities, the quantity and usage of equity and the general use of inventory and machinery.

a) Asset Turnover Ratio.

It indicates how efficiently the company utilizes its assets. Two common used asset turnover
ratios are receivable turnover and inventory turnover.

Receivable Turnover
Receivable turnover means the days that credit sales may remain to collect from the debtors.

Annual Credit Sales

i) Receivable Turnover = _____________________________
Accounts Receivable

A/c Receivable
ii) Average Collection Period =
___________________________
Annual Credit Sales/365

Average Inventory
iii) Inventory Period = ___________________________________
Annual Cost of Goods Sold/365

Let’s have a quick look on the performance of both the companies in the light of efficiency
ratio.

Coca Cola

21645
Receivable Turnover = ______________ = 8.84
2448

2448
Average Collection Period = _______________ = 41 days
21645/365

731
Inventory Turnover = ______________ = 0.83
874

874
Inventory Period = _______________ = 24 days
13333/365
 Page No. 10……….
Pepsi

43232
Receivable Turnover = _______________ = 9.35
4624

4624
Average Collection Period =_________________ = 39 days
43232/365

43232
Inventory Turnover =_______________ = 16 times
2618

2618
Inventory Period = _______________ = 47 days
20099/365

Results and conclusion

Receivable turnover ratio is an activity ratio, whereby company checks its extendibility of
credit and collecting debts. It can be measures the number of times Accounts receivable were
collected during the year. So also it tells us how well the company collects sales on credit
from its customers.

In the instant matter, if we observe Coca Cola and Pepsi cola have got Receivable turnover
ratio as 8.8% and 9.35% respectively, since a high or increasing Accounts Receivable
Turnover is usually a positive sign, therefore, Pepsi Cola Company is successfully executing
its credit policies and quickly turning its Account Receivables into the cash. However Coca
Cola has shown possibly negative aspect to an Account receivable turnover because of
probably its too strict credit policies and missing out some of the potential sales.

Average Collection Period is a process whereby company ascertain the number of days in
which company to collect its credit sales. If we see the Average collection period of Coca
Cola and Pepsi which are 41 and 39 days respectively therefore again it seems Pepsi is in
slightly better position to recover the credit sales through debtors in 39 days rather than 41
days. A particular thing to watch out for is if the Average Collection period is rising over time
then this could be an indicator that the company customers are in trouble to create problem
for the company in future. In furtherance, it means company has loosened its credit policies
Page No. 11……….

with customers. Credit Sales though boost sales, but could also result in an increase of sales
revenue that cannot be recovered (bad debts).
Inventory period ratio measures a number of times a company sells its inventory throughout
the financial year. In the present event, if you see Coca Cola and Pepsi Cola have Inventory
period ratio of 24 and 47 days/times and since high inventory turnover ratio indicates that the
products or inventories are selling well, therefore, Pepsi Cola has proved to be successful.

4) Financial leverage Ratio

Definition: - Financial leverage furnishes a long term solvency of the firm. Unlike
liquidity ratio that is concerned with short term assets and liabilities.

a) Debt Ratio

The Debt ratio is defined as total debt divided by total assets. Debt ratios depend on
the classification of long term leases and some items as long term debt or equity.

Formula: -
Total debt
Debt Ratio = ________________________
Total Assets

b) Debt to Equity ratio

The Debt to equity can be ascertained by total debt divided by total equity.

Total Debt
Debt to Equity Ratio = _________________
Total Equity

Now let’s compare the performance of both companies in context of financial leverage Ratio.

Coca Cola
7891
Debt Ratio = ____________________ = 0.94
16416

7891
 Debt to Equity Ratio= _____________ = 17.6
882

Page No. 12……….

Pepsi

7400
Debt Ratio = ____________________ =0.56
39848

7400
Debt to Equity Ratio = __________ =0.42
17442

Results and conclusion

Debt ratio shows the proportion of the company’s assets which are financed through debt. In
this Scenario it is clear that Coca Cola has higher proportion of company i.e. 0.94 assets
financed through the debt than Pepsi cola which is 0.56. In this regard it is worth notice here
that if the debt ratio is less than 0.5 the company’s assets financed through equity and if the
ratio is greater than 0.5 most of the company’s assets are financed through debt. It is said that
companies with high debt stay “highly leveraged” not highly liquid as stated above. In the
present case both companies have proportioned higher than 0.5 therefore it means that both
Coca Cola and Pepsi are financed their assets through debts.

Both businesses have $ 0.94 and 0.56 in debt for every dollar of assets. So far both companies
business deems in a good financial health as the total debt ratio should be 1 or less.
The lower the debt ratio, the less total debt the business has in comparison to its asset. On the
other hand, businesses with high total debt ratios are in danger of becoming insolvent or
bankrupt. As a result of which the lenders take serious interest in this ratio.

Debt to equity ratio is also close related to risk, gearing and leverage ratios. This ratio is
obtained by dividing “Total liability or Debt” of the company by its “Owners Equity”. This
type of ratio measures how company leveraging its debt against capital employed by its
owners. If the liabilities exceed the owner’s equity then in that case the creditors have more
stake than the shareowners. In the present circumstances Coca Cola and Pepsi Cola have
DTEO of 17.6 and 0.42 which means that Coca Cola has high ratio therefore involving a risk
because it must meet principal and interest on its obligations. Potential creditors are reluctant
to give financing to the company with a high debt position.
 Page No. 13……….

References: -

• Books/Articles.
1. Behaviour Management by Thomas J. Zirpoli.
1. Economist (Various Editions)
2. Administrative System in Organization.

• Websites.

1. www.wikipedia.org.uk

2. www.netmba.com.

3. www.thetimes100.co.uk

4. www.scribd.com