The Coca Cola Company and PepsiCo.

The Coca Cola Company and PepsiCo.

Basic Information

The Coca-Cola Company is an American corporation involved in the manufacture and retail of non-alcoholic beverages. The most common product of the company is its flagship Coca-Cola beverage invested by pharmacist John Stith in Atlanta, Georgia. The company headquarters are in Atlanta, Georgia. The company stock price stands at the US $53.75 as of today, according to the NYSE.

PepsiCo Inc. is a multinational corporation dealing with snacks, food products, and beverages. It is headquartered in Harrison, New York. The company is involved in the manufacturing, retail, and distribution of its various products — the stock price of PepsiCo. Inc stood at the US $135 as of 2^nd December, according to the NYSE.

Source of the Financial Data

The Coca-Cola Company;

https://www.sec.gov/Archives/edgar/data/21344/000002134419000014/a2018123110-k.htm#s5CE36CC6045351CAA3D5FE6C57BC6D70

PepsiCo Inc.

https://www.sec.gov/Archives/edgar/data/77476/000007747619000017/pepsico201810-k.htm#s4FA87BCA3CF65CE8991BCB65087D12E8

Financial information

Part 2: DuPont Analysis Ratio

Return on Equity; Return on Equity=Net Income/Avg. Total Stockholder’s Equity

Coca-Cola

ROE= 6,727/19,017.50= 0.3537

PepsiCo

ROE= 12,559/12 781.50=0.9826

PepsiCo has a higher return on equity compared to Coca-Cola.

Return on Asset; Return on Asset=Net Income/Avg. Total Asset

Coca-Cola

ROA= 6727/85,556= 0.0786

PepsiCo.

ROA= 12,559/78,726=0.1595

There is not a significant difference in the return on assets for both companies.

Financial Leverage; Financial Leverage=Average Asset/Avg. Stockholder’s Equity

Coca-Cola

FL=85,556/19,017.50=4.499

Pepsi

FL= 78,726/12,781.50=6.159

PepsiCo has a higher tendency to use debt to raise capital for asset acquisition, as indicated by the higher financial Leverage. Higher Financial leverage increases the probability of risk failure.

Return on Sales; Return on sales =Net Income/Sales

Coca-Cola

ROS=6727/31,856=0.1777

PepsiCo.

ROS= 12,559/64661= 0.1942

Coca-Cola has a higher Return on Sales ratio compared to PepsiCo, which means that a higher percentage of its revenue goes to profits compared to PepsiCo.

Asset Turnover; Asset Turnover=Sales/ Avg. Total Asset

Coca-Cola

Turnover =31,856/85,556=0.3723

PepsiCo

Turnover= 64,661/78,726=0.8213

PepsiCo has a higher asset turnover compared to Coca-Cola, which indicates the effective utilization of assets to produce sales.

Putting the ratios Under Dupont Analysis Framework for comparison of PepsiCo and Coca-Cola company

The Rate of Return of Equity is equivalent to

ROE = ROS x Asset Turnover x Financial Leverage

Coca-Cola

ROE= 0.1777*0.3723*4.499= 0.2976

PepsiCo. Inc

ROE= 0.3537*0.8213*6.159= 1.789

A higher return on equity shows more value or profits for shareholders. PepsiCo generates more profit for its shareholders compared to Coca-Cola.

Part 3: Profitability Analysis and Efficiency Analysis

Gross Margin= (Sales – Cost of Goods Sold)/Sales

Coca-Cola

Gross Margin= 20,086/31,856= 0.6305

Pepsi

Gross Margin = 35,280/64,661=0.5456

Coca-Cola has a slightly higher gross margin compared to Pepsi, which indicates higher financial health.

Operating Margin= Operating Income/Sales

Coca-Cola

Operating margin = 8700/31,856=0.2731

Pepsi

Operating margin= 11,010/64,661=0.1703

SG & A to Sales= Selling, General and Administration Expenses/ Sales

Coca-Cola

SG & A to Sales= 10,307/31,856=0.3235

Pepsi

SG & A to Sales= 25,170/64661= 0.3893

The SG & A to Sales ratio is higher for PepsiCo which means a higher percentage of their sales is directed to expenses.

Effective Tax Rate= Income Taxes/Pre-Tax Income

Coca-Cola

Effective Tax Rate= 1623/8350=0.1944

Pepsi

Effective Tax Rate= 3370/9189=0.3667

A higher percentage of income generated by PepsiCo falls under the taxable income bracket compared to Coca-Cola.

Interest Expense to Sales= Interest Expense/Sales

Coca-Cola

=919/31,856=0.0288

Pepsi

= 1515/64,661=0.0234

A lower interest expense to sales ratio is healthier for a business.

Profit Margin; Net Income/sales

Coca-Cola

Profit margin = 6727/31,856=0.2112

Pepsi

Profit margin = 12559/64, 661=0.1942

Coca-Cola has a higher profit margin compared to Pepsi and is therefore more competitive.

Part 4: Accounting Policies

I find the following for Coca-Cola company Accounting policies;

1. Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery of products has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.

1. Income Taxes

Our annual effective tax rate is based on our income and the tax laws in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax expense and in evaluating our tax position

1. Principles of Consolidation

Our Company consolidates all entities that we control by ownership of a majority voting interest. Additionally, there are situations in which consolidation is required even though the usual condition of consolidation (ownership of a majority voting interest) does not apply.

I find the following for PepsiCo Accounting policies;

1. Revenue Recognition

We recognize revenue upon shipment or delivery to our customers based on written sales terms that do not allow for a right of return.

1. Goodwill and Other Intangible Assets

We sell products under a number of brand names, many of which were developed by us. Brand development costs are expensed as incurred. We also purchase brands and other intangible assets in acquisitions

1. Income Tax Expense and Accruals

Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax rate and in evaluating our tax positions.

There is no significant difference between the PepsiCo and Coca-Cola companies in regards to the various accounting policies identified above.

Part 5: Strategies

I found this information on the annual report for PepsiCo;

‘At PepsiCo, we believe delivering strong performance and acting with a sense of purpose are intertwined – we call this approach Performance with Purpose, and it is embedded in our business. We believe our Performance with Purpose strategy will enable us to continue delivering strong financial results while positioning our Company for long-term sustainable growth. Our business strategies are designed to address key challenges facing our Company, including: uncertain and volatile macroeconomic conditions, including unfavorable exchange rate fluctuations and currency restrictions; geopolitical, economic and social instability; an increasingly competitive business environment with constantly changing consumer tastes and preferences, including continued consumer focus on nutritious products and changes in methods of distribution and payment; resource scarcity; and intensifying regulatory pressures, including changes in tax laws and the imposition of labeling requirements in markets in which our products are made, manufactured, distributed or sold.’

I found this information on the annual report for the Coca-Cola company;

‘Our goal is to use our Company’s assets — our brands, financial strength, unrivaled distribution system, global reach, and the talent and strong commitment of our management and associates — to become more competitive and to accelerate growth in a manner that creates value for our shareowners.’

The two companies are committed to achieving more growth and increasing shareholder value and also committed to full maximization of available resources to achieve their core objectives.