COCA COLA & PEPSI ASSIGNMENT Case Solution
If we analyze the return on equity ratio, then this ratio has been increasing significantly for both the companies which is due to the decrease in shareholders’ equity as well as the increase in net income. This shows the outstanding performance of both the companies in satisfying the return needs of its stock holders. Finally, if we analyze the net margin, gross margin and operating margin ratios, then there is not much change within these ratios. Overall, we can conclude that the profitability position of both the companies is strong and this is also evident by the net income growth from 2013 to 2015 as shown in exhibit 2 and exhibit 3 for the vertical and horizontal common size analysis for Coca Cola and Pepsi.
The efficiency ratios have been calculated for both the companies to determine how are both of them performing regarding the management of the outstanding receivables, payables and the conversion of the inventory from raw materials to finished goods and then finally into cost of sales. For calculating the rations we have assumed that the year-end receivables, inventory and payables are equal to average for the period. The first ratio is the stock holding period which shows a declining trend for both companies and it is a positive factor. However, individual comparison shows that the stock holding period for Coke is 23.12 days as compared to 34.98 days of Pepsi. The debtor’s payment period follows an increasing trend for Coca Cola while a declining trend for Pepsi. This means the receivables collection policy of Pepsi is more effective as compared to Coke’s.
The creditor’s payment period is also increasing significantly for both companies which are again positive sign for effective and efficient working capital management in a beverage industry. As a result, the cash conversion cycle for both the companies has shortened which means the time taken by both companies to convert finished goods into cash is reducing Y-0-Y. However, Coca Cola needs to work hard to match the CCC time of Pepsi Company. The debtor’s turnover for Pepsi remains consistent whereas this ratio has declined for Coke in 2015. Similar is the case with creditor’s ratio. Overall, we can conclude that the working capital management policies and operations of Pepsi are more efficient as compared to that of Coke.
Next, the liquidity ratios have been calculated for both the companies. The liquidity ratios measure the liquidity position of the company and show how strong is the working capital management policy of the company. Two key liquidity ratios have been calculated which are the current ratio and the asset test ratio. First of all, if we analyze the current ratio then we can see that the current ratio has been increasing for both the companies. The current ratio for Coke and Pepsi for 2015 is 1.33 and 1.31 times respectively.
Both the companies have enough short term assets to pay all the short term obligations if they become due now. This shows that the management has efficient working capital policies. Both the companies are managing their inventory on the basis of just in time approach and the debtor period and debtor turnover ratios are also high for both the companies which might be the reason for favorable current ratio. Similarly, the acid test ratio has also been increasing for boththe companies. Pepsi and Coke have quick ratios of 1.16 and 1.06 respectively which is goo according to the beverage industry norm. The receivables of Pepsi are decreasing each year which is the reason for slightly higher current and quick ratio for Pepsi.Overall, we can conclude that the liquidity position of both the companies is strong.
Two key ratios have been calculated to analyze the gearing of both the companies. First of all, the financial leverage ratio has been calculated through debt ratio. This ratio has been following an increasing trend for Coca Cola and also for Pepsi. This might be due to the changes in the capital structure of both the companies as they take more external debt. If we compare the financial leverage ratios for both the companies in 2015, then Pepsi has lower financial leverage as compared to Coke. This means that Coke has taken extensive debt to finance the assets of the company relative to the amount of value which is represented by the shareholder’s equity.
The second gearing ratio which has been calculated is the interest coverage ratio. The interest cover ratio for Coke is increasing and for Pepsi it is decreasing in each year. However, the situation is more alarming for Coke because their interest cover is too low. For instance, the interest cover ratio for Coke and Pepsi in 2015 is 0.21 and 8.61 respectively. This could be again due to the fact that the company has taken more debt than its actual capacity which makes the company highly levered and risky. Overall, the gearing of Pepsi is low as compared to that of Coca Cola.
Horizontal Common Size Analysis
First of all, if we analyze the horizontal financial statements for Coke, then we can see that the revenues have grown by 40.5% in 2015 since 2013, net income has grown by 110.7%, cash has growth by 358% and the total assets have grown by 45% in 2015 since 2013. On the other hand, if we analyze horizontal financial statements for Pepsi then we can see that the revenues have grown by -5% in 2015 since 2013, net income has grown by -19%%, cash has growth by -3% and the total assets have grown by -10% in 2015 since 2013. Therefore, we can conclude that the financial position of Coca Cola is stronger than Pepsi and this might be to the scale of operations of Coca Cola and its relative size………………..
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