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Financial Analysis of PepsiCo and Coca-Cola

Essay Topic: ,

PepsiCo and Coca Cola are two major companies that manufacture beverages. They compete to be the number on manufacturer and distributor of beverages in the world. These two companies are very identifiable in this market and you know them as PepsiCo and Coca Cola.

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These two companies have undoubtedly dominated the markets worldwide that they both receive universal recognition for their different products. Although, there are many other manufacturers and distributors of beverages these two are the major competitors.

Not only do they produce soda drinks, they also produce flavored water, spring water, and some energy drinks. PepsiCo, best known for Pepsi and Coca Cola best known for Coke have great marketing anddue to this they are able to target all income brackets. Their marketing and reasonable prices make iteasy for the people to buy their products in all income brackets. I will be examining both company’s income statements and balance sheets to disclose thefinancial condition of these companies in relation one to another.

I will also perform vertical andhorizontal analysis from their annual report of financial data. There are a vast amount of manufacturers and distributors in this market, but Pepsi and Coca-Cola have managed to stay in the number one spot for a couple of decades. These two companies have not only dominated the market domestically they have dominated the worldwide market. They followed a plan that kept them above and beyond the market of soft drinks. They have overcome obstacles that allowed them to manufacture and distribute globally. (The Coca Cola Company, 2009).

These companies compete with one another for the same customers. When one company comes up with a product the other company comes out with something very similar to it; this is called the “follow up strategy,” and while doing so they live the other companies behind dazed and confused, wondering what just happened. (www. PepsiCo. com, 2009). Being successful does not come without a price, both of this companies has had to deal with legal issues, precedents, and politics. These two companies are the best examples on how leadership is the power of influence.

They design their product geared towards a certain taste and to appeal to a certain population and make look as though they are subjected to certain ethical and moral practices. Their influence in this market is so powerful that they drive out and shut down any other competitor in this market. I would like for you to keep in mind that all financial data of these companies are shown in millions so if you see a figure of 200 that means 200 million and if you see 5,000 it is in the billions. We will start with a vertical analysis of these companies. The vertical analysis comes from each company’s financial statements.

The total assets for each company will be the starting point of this analysis. Coca Cola’s total assets in 2004 were $31,441 and its 2005 total assets were $29,427. PepsiCo’s total assets for 2004 were $27,987 and its total assets for 2005 were $31,727. (Weygandt, Kimmel, & Kieso, 2008). The total asset of each of the figures relates to items from each company’s balance sheet. The cost of sales for PepsiCo during 2004 was $12,674 yielding a ratio percentage of 45. 3% of total assets and for 2005 the cost of sales was $14,167 yielding a ratio percentage of 44. 7% of total assets.

Coca-Cola’s cost of sales in 2004 was $7,674 yielding a ratio percentage of 24. 4% of total assets and in 2005it was $8,195 yielding a ratio percentage of 27. 8% of total assets. PepsiCo experienced a 5% increase within a one year span and Coca Cola experienced a 3. 4% increase during the same span. This does not mean that this increase is a positive analysis since the single figure does not reveal whether the increase is a positive measure. A higher cost of sales may not be offset by higher revenues matching or exceeding the increased cost. The next thing we are going to look at is net income.

Pepsi had in 2004 a net income of $4,212 and this yielded a ratio percentage of 15. 1% of total assets and in 2005 their net income was $4,078 yielding a ratio percentage of 13. 2% of their total assets. This is a 1. 9% decrease in their net income between 2004 and 2005 and they also show a decrease in the cost of sales during the same period. Coke on the other hand had a net income of $4,847 in 2004 yielding a ratio percentage of 15. 4% and in2005 their net income was $4,872 yielding a ratio of 16. 6% of their total assets. This shows and an increase of 1. 2% between 2004 and 2005.

Although they experienced an increase it is not entirely an offset of their income overall, making this a negative indication for Coca Cola. Now the breakdown of each company’s consolidated balance sheets to compare current assets and current liabilities to their total assets for each year considered. Pepsi’s total current assets in 2004 were $8,639 which yields a ratio percentage of 30. 9% of total assets for that year. Pepsi’s total current assets in 2005 were $10,454 which yields a ratio percentage of 32. 9% of total assets. This shows a 2%increase in current assets.

In contrast coca Cola current asset in 2004 were $12,281 yielding a ratio percentage of 39. 1% and in 2005 current asset were $10,250 yielding a ratio percentage of 34. 8%;which show a major decrease in their current assets. Although, there was a significant decrease in their current assets it was accompanied by a decrease in their current liabilities, which would be a positive indication for Coke instead of a negative one. Looking at the horizontal analysis of each company will give us more information. Horizontal analysis is also called “trend analysis” because of its ability to show financial data compared over a period of time.

There are two different formulas that can be employed to teach this information. The first one uses the current year amount and subtracts from that the base year amount. The second formula divides the current year amount by the base year amount. The year 2004 is the base year for both companies in this analysis. Pepsi’s total current assets for 2004 were $8,639 and for 2005 were $10,454. In the first Pepsi had an increase of 121. 01% of total current assets; over their 2004 base year figure. The second formula yields a 21. 01% total current assets from the base year. Coke’s total assets in 2004 were$12,281 and $10,250 in 2005.

As you can see Coke’s total current assets dropped between 2004 and2005 without performing the formulaic calculations. All the analysis shows that PepsiCo and Coca Cola both experienced lower net profits in 2005than in 2004. They showed an increased operation expenses which resulted in a lower net profit. Both has had a higher operating expense in 2005 than in 2004 and need to modify their operations to reduce their expenses so their profit margins can increase so they will not keep experiencing a decrease in profits. I have analyzed two well-known companies in this paper.

These two companies are PepsiCo and Coca Cola. These two companies have been around for a long time and have stormed the market. We have seen in my vertical and horizontal analysis that their financial data reveals somewhat a different picture of each company’s financial status. Both companies have experienced a moment were they were not profitable and a moment when they were profitable. During this exercise made me realize that although these companies appear to be profitable the analyses showed that these two companies performance were very different from one another in the years 2004 and 2005