Date: September 21, 2023

To: Professor Patrick O’Meara

From: Trang Pham

Subject: Analyzing Financial Statements of Coca-cola and Pepsi.

As you requested, I have created an MS Excel spreadsheet about the financial statements of
Coca-cola and Pepsi Corporation in 2021 and 2022. This report points out some of my
comparative financial analysis that is deducted from the statement summary that I have
attached with this memo.

Overall Performance. Looking at the summary table, Coca-cola is more efficient but less
profitable than Pepsi. Its higher efficiency derives from the fact that Coca-cola’s gross profit
margin, pre-tax operating profit margin, and after-tax operating profit margin are all higher than
those of Pepsi, with the difference in gross profit margin being approximately 6% and the
difference in operating profit margin being more than 10%. However, we can also see that
Coca-cola is less profitable because its return on capital employed and return on equity is not as
high as Pepsi. The most noticeable figure is in 2022, while the ROE of Coca-cola is only 37%,
that of Pepsi is 52%. Therefore, I think that which management team is performing better
depends on what our company is looking for, efficiency or profitability.

Operating Cycle Ratios. Pepsi turns over its inventory much more rapidly (about 39 days
quicker than Coca-cola) and has a longer collection period (about 10 days longer than Coca-
cola). Meanwhile, the accounts payable turnover of Coca-cola is higher than that of Pepsi
(usually more than 100 days). Still, I do not think that these ratios matter when considering the
financial health of a company because there are a number of factors that can affect operating
cycle ratios. For example, Coca-cola’s lower collection period does not necessarily mean it is
more efficient because chances are it hardly sells goods on store credit.

Financial Leverage. Based on the debt-to-equity ratio, Pepsi is relatively more leveraged with
4.34 in 2022 and 4.72 in 2021; in other words, Pepsi is financed more with debt and less with
equity. To make the leverage become a negative factor in the business operations of either firm,
they have to start to finance their business with shareholder’s equity more by issuing stocks and
reduce dependence on debts.

Investment Decision. As mentioned in the “overall performance” part, the investment decision
depends on our company’s goal. However, I am more inclined into suggesting investing in
Coca-cola because its performance is effective and even though it is not as profitable as Pepsi,
the situation can improve in the long run. All of Coca-cola’s profit margins are higher and its
assets are more liquid (its current ratio is more than 1 while that of Pepsi is less than 1 in both
years summarized). Also, Coca-cola is less reliant on debt financing (debt-to-equity ratio is no
more than 3).
DuPont Equation. To improve ROE, Coca-cola should find ways to increase total asset
turnover, which means the firm should try to utilize assets, especially fixed assets, more
effectively so that each dollar of assets produces more dollars of sales. As for Pepsi, an
increase in after-tax operating profit may be helpful and to do so, the company may try to cut
down on the selling, general and administrative expenses.

Above is my analysis of Coca-cola and Pepsi’s performance. Please take a look at the
spreadsheet to get detailed information and please let me know if you would like additional data.

Thank you,

Trang Pham
tpham5@mail.niagara.edu