Financial Analysis

Financial Analysis Chartorieah Sanders XACC/280 July 21, 2013 Kevin Shuck

Financial Analysis Financial Analysis

Ratios used in finances are valuable tools to help complete a companys fulfillment and financial position. To calculate ratios, the data provided from financial statements is used. Not only do these ratios prove the profitability, liquidity, and solvency of a company they are also useful for comparing the finances of one company to that of another similar to it and also to analyze trends. Financial ratios can tell you a great deal about a company, for instance, its prediction on future bankruptcy is very valuable to investors and creditors. In this paper you will find that I have provided an analogy of the financial health of the Coca-Cola Company and PepsiCo Inc. I have provided a brief description of both companies, an analysis for each companys data vertically and horizontally as well as the calculations for both companys current ratios. PepsiCo Synopsis Caleb Bradham was the creator of Pepsi-Cola but after seventeen years of success, the company resulted in bankruptcy due to the increase of the price of sugar during World War I and he had a large supply of overpriced sugar leftover after the price of sugar declined again in 1923. The Craven Holding Corporation then bought the assets of the company for $30,000. Frito-Lay Inc. merged with the company in 1961 ("Pepsico", 2012). During 1970 the sales of PepsiCo surpassed one billion dollars and doubled that amount by 1974. PepsiCo has accomplished abundant growth with favorable recognition of the brand which makes it clear why some individuals would choose to invest in a company that has displayed ample growth over the last century. PepsiCo takes ownership in many different brands including Sierra Mist, Slice, Tropicana, and Quaker Oats to name a few. Coca-Cola Synopsis

Financial Analysis In 1886, John Pemberton, invented the cola known as Coca-Cola (Ford, Stephens, &

Cooper, 2007). Pembertons partner and bookkeeper, Frank M. Robinson, suggested the CocaCola trademark. Asa Chandler purchased Pembertons recipe for $23,000 in April 1891. By 1892, Chandlers aptitude for merchandising had increased Coca-Colas sales almost tenfold (Ford, Stephens, & Cooper, 2007). In 1919, Ernest Woodruff bought the Coca-Cola Company for $25 million (Ford, Stephens, & Cooper, 2007). A few years later Woodruff turned the company over to his son. According to Ford, Stephens, and Cooper (2007) Today Coca-Colas reach spreads far beyond Georgia and even the United States; the company has become one of the worlds most recognizable corporations. The Coca-Cola brand is one of the five most recognized symbols in the world. (p. 2).

Liquidity Ratio Calculations Liquidity ratios are a class of financial metrics used to determine a companys ability to meet short-term debt obligations. The higher the value of the ratio the company possesses the larger the margin of safety it has to pay short-term outstanding debts. According to "Investopedia" (2011), "A companys ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment (Liquidity Ratios). The current ratio is one of the most commonly used ratios to calculate liquidity of a company. For the purposes of this analysis, the formula that will be used is Current Ratio =

CurrentAssets CurrentLiabilities

Please note that all numbers represent millions.

Financial Analysis

Liquidity ratio calculations for PepsiCo PepsiCo current ratio for 2005
$10 ,454 _(CurrentAss ets) 1.11 $9,405 _(Current _ Liabilities )

PepsiCos current ratio for 2005 is 1.11:1. PepsiCo current ratio for 2004

$8,639_(Current _ Assets) 1.28 $6,752_(Current _ Liabilities )

PepsiCos current ratio for 2004 is 1.28:1.

Liquidity ratio calculations for Coca-Cola

Coca-Cola current ratio for 2005

10,250_(Current _ Assets) 1.04 9,836_(Current _ Liabilities )

Coca-Colas current ratio for 2005 is 1.04:1.

Coca-Colas current ratio for 2004

12,281_(Current _ Assets) 1.10 11,133_(Current _ Liabilities )

Coca-Colas current ratio for 2004 is 1.10:1.

Both companies experienced a decrease in current assets to debts ratio. Pepsi, reporting
ratios of 1.28:1 in 2004 to 1.11:1 in 2005, experienced a decrease of approximately 13 percent. Coke, during the same period, experienced a decrease as well. In 2004 the Coke Company had a current ratio of 1.10:1 which decline in 2005 to 1.04:1, roughly a five percent difference. Although Pepsi has slightly more liquidity, both of these companies are in good financial standing and can meet their short-term obligations. Horizontal Analysis Horizontal analysis, also known as trend analysis, is a method of calculating a sequence of financial statement figures within a specified period. The period may vary, and the analyst can use his or her discretion when selecting a particular timeline. Horizontal analysis uses a base year

Financial Analysis

to calculate the percentage change in assets from year to year. For the purposes of this document, 2004 will be the base year. The formula used to determine the increase or decrease in assets the current year amount minus the base year; then this total is divided by the base year amount. The same formula is used to figure out the percent change in liabilities. Formula used to calculate horizontal analysis:
Total _ Assets _ of _ 2004 Total _ Assets _ of _ 2005 Divided_ by _Total _ Assets _ of _ 2004

PepsiCo Horizontal Analysis

change in total assets 2005 divided by 2004, the base year. Percent

$31,727 $27,987 0.1336 $27,987

PepsiCo experienced a 13.4 percent increase in assets from 2004 to 2005. The higher the

increase in assets, the better financial standing the company has. Percent change in total liabilities equals the 2005 total liabilities minus 2004 liabilities divided by the base year.

$17,476 $14,464 0.208 This figure represents a 20.8 percent increase in liabilities for $14,464
PepsiCo from 2004 to 2005. The higher the liabilities, the less financially stable a company is. In

the case of the PepsiCo, the company has a small increase in assets compared to a larger increase in liabilities, meaning the company has taken on more debt than it has in assets during this period. Coca-Cola experienced the exact opposite in their horizontal analysis. The figures of Coca-Cola will be examined in the following paragraphs. Coca-Cola Horizontal Analysis Using the same formula from above, Coca-Colas data will be entered to determine their financial standing in terms of assets and liabilities as opposed to PepsiCo. First, the change in assets will be computed from 2004 to 2005.

$29,427 $31,441 $2,014 0.064 This figure $31,441 $31,441

Financial Analysis

represents a loss in assets during the two-year period by 6.4 percent. Although a negative total in assets may appear as a bad thing, by looking at Coca-Colas change in liabilities, an investor will notice that debts have decreased dramatically during the same period. The percent change in liabilities for Coca-Cola between 2004 and 2005 are as follows

$13,072 $15,506 $2,434 0.1569 Rounded, this figure represents a 16 percent decrease $15,506 $15,506
in liabilities for the Coca-Cola Company. The less debts, or liabilities, a company has, the better

their financial standing. In the case of Coca-Cola, the company experienced a much larger drop in debts compared to smaller decrease in assets. The decrease in assets is directly related to the decrease in liabilities, as the company used assets to pay off their liabilities. Analyzing the information provided in this section, an investor can quickly see that Coca-Cola is attempting to eliminate as much debt as possible, a positive impression for the company to leave with potential shareholders. Vertical Analysis The proportional analysis of a financial statement, where every line in the statement is listed as a percentage of another item is known as vertical analysis. For the purposes of this report, total assets will be the bases for the percentages on the consolidated balance sheet. To figure out the percentages, the amount on the itemized line is divided by total assets from the same period. This is the formula that will be used to calculate the percentage of cash and cash equivalents for PepsiCo in 2004 and 2004. PepsiCo Vertical Analysis PepsiCo cash and cash equivalents for 2005 =

$1716_(Cash _ Equivalents ) 0.054 $31,727_(Total _ Assets)

this number represents the cash equivalents, which makes up 5.4 percent of total assets from

Financial Analysis PepsiCos balance sheet. The same will be done for 2004. 2004=

$1280_(Cash _ Equivalents ) 0.046 this number represents the cash equivalents, which $27,987_(Total _ Assets)

makes up 4.6 percent of total assets from PepsiCos balance sheet in 2004. In this case, the

figures mean that there was a slight increase in percentage of cash equivalents from 2004 to
2005. In calculating vertical analysis for a company, the analyst can also divide total current assets by total assets to determine how much the company currently has in its possession. This information will be calculated for both years of 2004 and 2005. Percentage of assets for 2005

$10,454 _(Total_ Current _ Assets) 0.329 converted to percentage form equals 32.9 percent. $31,727_(Total _ Assets)
Percentage assets for 2004

$8,693_(Total _ Current _ Assets) 0.3087 converted to percentage $27,987_(Total _ Assets)

form equals roughly 30.9 percent.

these figures mean that they have an increased percentage of total current For PepsiCo,
assets, a trait that shareholders look for in a company when they are making their investment decisions. Coca-Cola Vertical Analysis The same formula is used when calculating Coca-cola figures. Coca-colas cash and cash equivalents for 2005 =

$4,701_(Cash _ Equivalents ) 0.16 this number represents the cash $29,427_(Total _ Assets)

equivalents, which makes up 16 percent of total assets from Coca-Colas balance sheet in 2005.

$6707_(Cash _ Equivalents ) The same will be done for the year prior. 2004= 0.213 this $31,441_(Total _ Assets)
number represents the cash equivalents, which makes up 21.3 percent of total assets from Coca-

Colas balance sheet in 2004. The Coca -Cola Company has a much higher percentage of cash

Financial Analysis equivalents than their competitor PepsiCo and significantly increased this percentage over the periods examined.

Moving on to total current assets divided by total assets, this data will be inputted for the Coca-Cola Company. Percentage of assets for 2005 equals

$10,250_(Total _ Current _ Assets) 0.348 converted to percentage form equals 32.9 percent. $329,427_(Total _ Assets)
Percentage assets for 2004 equals

$12,281_(Total _ Current _ Assets) 0.391 converted to $31,441_(Total _ Assets)

percentage form equals roughly 30.9 percent.

vertical analysis of both companies it is evident that Coca-Cola has a After reviewing the
significantly higher percentage or cash and cash equivalents as well as current assets, both positive qualities in the eye of an investor.

Concluding Recommendations Both companies appear to be financially sound and offer comparable returns. Each company has been around for many years, and has global recognition. As many know, billionaire Warren Buffet has a substantial investment devoted to the Coca-Cola Company. At 3.2 percent, PepsiCo pays out high dividend stock yields to investors. PepsiCo has a strong presence, involved in every market around the globe. The Pepsi Company offers both beverage and snack products which have done well in recent years despite the downturn in economic climate. PepsiCo is well diversified geographically and in the products it offers. Before making any financial decisions, it is in the shareholders best interest to research the company he or she is interested in, in addition to investigating market conditions and economic cycles before diving into the pool of investing.

Financial Analysis References Investopedia. (2013). Retrieved from http://www.investopedia.com/terms/l/liquidityratios.asp#axzz1kDKscwY9

Andy's Pepsiholic Haven. (2002). Retrieved from http://www.sirpepsi.com/pepsi11.htm PepsiCo. (2012). Retrieved from http://www.pepsico.com/Company/Our-History.html

The Archive of Marketing Education. (n.d.). Retrieved from http://www.marketingpower.com/Community/ARC/gated/Documents/Teaching/AME/AM E_Teaching_Materials_2007_08_Ford_Stephens_Cooper.pdf