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FINANCIAL ANALYSIS OF PEPSICO AND COCA-COLA 1

Financial Analysis of PepsiCo and Coca-Cola

Accounting 6351, Spring 2010

A01




Executive Summary

This report compares two dominant companies, PepsiCo and Coca-Cola, in soft

drink/beverage industry in order to recommend the better company for investment. The

introduction covers soft drink/beverage industry economics and different strategies employed by

each company. The financial analysis covers both companies’ common-size income statements

and balance sheets, comparative income statements and balance sheets, and various financial

statement ratios such as liquidity, capital structure and solvency, return on investment, operating

performance, asset utilization and market measures from year 2004 to year 2008. The

conclusions are drawn based upon results of financial analysis. A recommendation is given at the

end of the report.

Both PepsiCo and Coca-Cola are strong leaders in the highly profitable soft

drink/beverage industry. Coca-Cola owns the best-known brand worldwide, whereas PepsiCo

also has great brand-name reorganization but is more diversified than Coca-Cola. From year

2004 to year 2008, PepsiCo achieved slightly better growth rate in sales and net profit, whereas

Coca-Cola have maintained better profit margin with lower cost of sales. PepsiCo posed lower

short-term liquidity risk to its investors compared to Coca-Cola. Both companies exhibited low

long-term solvency risk with PepsiCo’s risk being slightly higher than Coca-Cola’s. PepsiCo’s

overall asset utilization was more efficient than Coca-Cola. Both companies experienced a

similar level of investors’ confidence and stock pricing. Both companies’ stocks are dividend

generating stocks, but Coca-Cola had higher dividend yield and dividend payout rate. Coca-

Cola’s higher profit margin and dividends are certainly very attractive to a potential investor, but

PepsiCo’s growth potentials, business diversification, low short-term liquidity risk, low long-

term solvency risk, good return on investment and efficient asset utilization definitely make the

company’s stock a better investment choice.




Table of Contents

Introduction ....................................................................................................................................4

Soft Drink/Beverage Industry ...................................................................................................4

PepsiCo vs. Coca-Cola Strategies.............................................................................................4

Objectives .................................................................................................................................4

Financial Analysis ..........................................................................................................................5

Common-size Analysis .............................................................................................................5

Common-size Income Statement Analysis ........................................................................5

Common-size Balance Sheet Analysis ..............................................................................5

Comparative Analysis ...............................................................................................................7

Comparative Income Statement Analysis .........................................................................7

Comparative Balance Sheet Analysis ................................................................................7

Financial ratio analysis .............................................................................................................8

Liquidity ............................................................................................................................8

Capital Structure and Solvency .......................................................................................10

Return on Investment ......................................................................................................12

Operating Performance ....................................................................................................12

Asset Utilization ..............................................................................................................14

Market Measures .............................................................................................................16

Conclusions and Recommendation for Investment ..................................................................17

References .....................................................................................................................................20

Appendices ....................................................................................................................................21

Graded Project 1 ..........................................................................................................................31




Introduction

Soft Drink/Beverage Industry

The soft drink/beverage industry is dominated by two major competitors, PepsiCo and

Coca-Cola. The industry is highly profitable, with an average return on assets rate of 14.70%,

much higher than average return on assets rate for S&P 500 companies of roughly 7.00%. In

spite of market maturity and saturation during recent years in the United States, the growth in

international market is very strong and promising. Both PepsiCo and Coca-Cola had large market

shares, dominated distribution channels, well-established brand names and consumer loyalty.

And both companies possess their own secrete formulas. All of these serve as entry barriers that

make it very difficult for a new company to enter soft drink/beverage industry. These high entry

barriers also protect the profitability of the industry.

PepsiCo vs. Coca-Cola Strategies

The competition between PepsiCo and Coca-Cola is intense, but both companies have

successfully avoided price competition in order to maintain high profit margin. Instead, both

companies have focused on improving brand images through effective advertising efforts and

marketing campaigns, and reducing costs and expenses by improving quality of operation and

management. According to Bloomberg BusinessWeek, Coca-Cola remains the best globally

recognized brand across all industries for years, while PepsiCo’s brand ranked number 26 in year

2008. Thus, Coca-Cola is able to charge premiums for its syrup concentrates due to its larger

market shares and better brand-name recognition. In order to compete against Coca-Cola and

increase revenue, PepsiCo has diversified its businesses into other markets such as snacks, chips

and breakfast food, with its core business focusing on soft drink.

Objectives

The main objectives of this report are to compare two major players in softdrink/beverage industry, PepsiCo and Coca-Cola, and to make recommendation for investment.

The analysis will be made based on each company’s common-size income statement, common-

size balance sheet, comparative income statement, comparative balance sheet and financial

statement ratios from year 2004 to year 2008.




Financial Analysis

Common-size Analysis

Common-size Income Statement Analysis

The common-size income statement shows PepsiCo’s cost of sales to sales percentage

rose slightly from 43.31% in year 2004 to 47.05% in year 2008 with a five-year average of

44.89%. Coca-Cola’s five-year average cost of sales to sales percentage was only 35.26%, much

lower than PepsiCo. Coca-Cola was able to obtain higher gross profit margin with lower cost of

sales to sales percentage, the result of its stronger pricing power than PepsiCo and other soft

drink companies. Coca-Cola is able to charge premiums for its syrup concentrates due to its

larger market shares and better brand-name recognition in soft drink/beverage industry.

PepsiCo’s slightly increasing trend of cost of sales as a percentage of sales from year 2004 to

year 2007 should not be a concern, but there was a relatively larger increase to 47.05% in year

2008 from 45.70% in previous year. According to PepsiCo’s Management's Discussion and

Analysis, this was due to “the unfavorable net mark-to-market impact of their commodity

hedges”.

PepsiCo and Coca-Cola’s five-year average selling, general and administrative expenses

to sales percentages are 36.85% and 37.61% respectively. With only slightly higher selling,

general and administrative expenses as a percentage of sales than its rival PepsiCo, Coca-Cola

was able to maintain higher operating profit margin and net profit margin from its higher gross

profit margin. PepsiCo’s net profit margin averaged at 13.84%, 6.83% less than Coca-Cola’s

average net profit margin of 20.67%. In year 2008, PepsiCo’s profit margin decreased to

11.89%. According to PepsiCo’s Management's Discussion and Analysis, reduced profit margin

in year 2008 was caused by “unfavorable net mark-to-market impact of their commodity hedges,

the absence of the tax benefits recognized in the prior year, their increased restructuring and

impairment charges and their share of Pepsi Bottling Group 's restructuring and impairment

charges”.

Common-size Balance Sheet Analysis

On average, PepsiCo’s current assets made up 30.73% of its total assets, whereas the

company’s short-term liabilities made up 24.70% of its total liabilities and shareholders’equity




from year 2004 to 2008. The company’s short-term liabilities percentage fluctuated up and down

with its current assets percentage each year and always stayed at least 7% above. Apparently,

PepsiCo had enough cushion to cover its short-term liabilities from it current assets. Coca-Cola,

on the other hand, exhibited slightly higher short-term liabilities percentage than current assets

percentage in the most recent three years. This could be a warning sign that the company

experienced some degree of difficulties to cover its short-term liabilities.

Among its current assets, PepsiCo’s accounts and notes receivable to total assets

percentage went up from 10.28% in year 2005 to 13.01% in 2008, due to increased collection

period of the company’s accounts and notes receivable. PepsiCo’ inventories to total assets

percentage also went up from 5.34% in year 2005 to 7.01% in year 2008, caused by increased

number of days to sell its inventories. Increased accounts and notes receivable and increased

inventories as percentages of total assets should raise some concerns and thus need to be

analyzed further with liquidity ratios and asset utilization ratios to decide whether these are

warning signs of the company’s financial health or mostly caused by other current or non-current

assets decreasing over those years.

Among its short-term liabilities, PepsiCo’s accounts payable to its total liabilities and

shareholders’equity went up from 18.82% in year 2005 to 22.98% in year 2008, indicating the

company could have been extending its accounts payable outstanding period slightly to leverage

off the effect of increasing accounts and notes receivable percentage to its total assets.

PepsiCo’s property, plant and equipment made up 30.73% of its total assets on average

from year 2004 to year 2008, indicating the company is not capital intensive. PepsiCo and its

rival Coca-Cola had always contracted out their more capital intensive bottling operations to

their affiliated bottlers. Coca-Cola operated on an even lower average property, plant and

equipment percentage, only 20.48% to its total assets.

PepsiCo’s long-term debt obligations to total liabilities and shareholders’equity percentage was steady from year 2004 to year 2006 with an average of 8.12% but increased

sharply to 12.14% in year 2007 and 21.83% in year 2008, indicating the company relied much

more heavily on long-term debt to finance its property, plant and equipment growth in addition

to other sources of financing in the most recent two years. The sharp increase in long-term debt

accompanied by decreased stock price during economic downturn in year 2008 led to more




liabilities than shareholders’equity, 66.37% and 33.90% respectively. This exposed PepsiCo to a

certain degree of risk to fulfill its long-term debt obligations. Further analysis of long-term

solvency ratios is needed to determine the severity of this higher total liabilities percentage.

Comparative Analysis

Comparative Income Statement Analysis

PepsiCo’s sales growth rate averaged at 9.92% each year from year 2004 to year 2008.

But cost of sales grew 11.74% yearly on average. The faster growth of cost than sales lowered

the company’s gross profit growth rate to an average of 8.45% yearly and operating profit

growth rate to an average of 7.89% yearly. The company’s yearly growth r ate of selling, general

and administrative expenses averaged at 9.44%, slightly slower than average sales growth rate.

From year 2004 to 2007, PepsiCo maintained its selling, general and administrative expenses

growth rate below sales growth rate to protect its operating profit margin. Unfortunately, in year

2008, the company’s selling, general and administrative expense grew 11.92% but sales only

grew 9.57%. This, together with 12.82% rising cost, caused PepsiCo’s operating profit to

decrease by 3.28% in year 2008. The combination of decreased bottling equity income by

33.21% and other unfavorable conditions in interest expense and interest income negatively

impacted and reduced PepsiCo’s net profit by 9.12% from previous year 2007. PepsiCo also

posted reduced net profit by 3.18% in year 2005, but operating profit rose a healthy 13.79%. The

major impact of reduced net profit in year 2005 was due to a large increase in provision for

incomes taxes by 67.93%.

Coca-Cola was able to grow its sales every year by an average rate of 9.05% from year

2004 to year 2008, slightly slower than PepsiCo. But Coca-Cola maintained its yearly cost of

sales growth rate, 8.37% on average, below its sales growth rate. This could indicate that Coca-

Cola was successful in controlling its raw ingredients cost either by buying with lower price or

by effective commodity hedging. Coca-Cola’s net profit grew 6.22% yearly on average, slower

than PepsiCo’s 8.88%.

Comparative Balance Sheet Analysis

PepsiCo’s five-year average total current assets growth rate was 10.13%, higher than its

average total short-term liabilities growth rate of 8.77%, consistent with the common-size




analysis of the company’s capability to cover short-term liabilities with its current assets. Its rival

Coca-Cola’s higher average short-term liabilities growth rate of 13.38% than its average current

assets growth rate of 11.22% was also consistent with the common-size analysis of the

company’s higher risk in short-term liabilities coverage.

PepsiCo’s account and notes receivable grew 10.69% on average each year, faster than its

average sales growth rate of 9.92%. This could indicate a slight increase in number of days it

takes for the company to collect from its customers. With an average growth rate of 12.36%

yearly, PepsiCo’s inventories also grew fast than its sales. This could be the result of an increase

in number of days needed to sell its inventories over years.

On average, PepsiCo’s proper ty, plant and equipment grew 8.40% yearly, supporting its

average sales growth rate of 9.05%. But long-term debt grew 39.87% on average each year. Thedebt seemed to grow too fast in effort to finance its property, plant and equipment growth. This

shows PepsiCo relied more and more heavily on debt financing toward year 2008.

PepsiCo’s total liabilities growth rate averaged at 13.69%, whereas total liabilities and

shareholder’ equity growth rate only averaged at 7.57%. This also signals the company’s

elevated long-term solvency risk.

Financial ratio analysis

Liquidity

Current Ratio and Acid-test Ratio

PepsiCo’s five-year average current ratio of 1.25 and acid-test ratio of 0.89 were better

than Coca-Cola’s 0.99 and 0.66, indicating PepsiCo had a larger margin of short-term assets to

cover its short-term liabilities and thus was less risky in short-term liquidity.

PepsiCo’s current ratio from year 2004 to year 2008 always stayed well above 1.0. A

current ratio under 1.0 suggests a company experiencing possible difficulties meeting its short-

term obligations and having a high level of potential liquidity risk. Thus, PepsiCo did not have

much short-term liquidity risk. The trend of PepsiCo’s acid-test ratio was consistent with the

trend of its current ratio, indicating its inventory level remained relatively stable over years.




The five-year average current ratio of Coca-Cola was roughly 1 (0.99). This should raise

some concerns whether the company was in good financial health to pay off its short-term

obligations. The trend showed that current ratio of the company decreased from 1.10 at the end

of year 2004 to 0.92 at the end of year 2007. There was a slight increase to 0.94 at the end of

year 2008 from the previous year. Considering Coca-Cola as a solid company with a 9.05%

average sales growth rate and a 6.22% average net income growth rate each year, we can

speculate that the company was well aware its short-term financial health and would make an

effort to bring its current ratio above 1 in order to reduce its short-term liquidity risk. As a matter

of fact, Coca-Cola’s current ratio did increase dramatically in year 2009 to 1.28 at the year end.

But the effort made to improve current ratio should not be the only reason of such a large

increase. Another factor of this dramatic increase in current ratio could be recession in year 2009

when the company experienced some degree of difficulties in selling its inventories or collecting

cash from accounts receivable. The trend of acid-test ratio of Coca-Cola highly correlated with

the trend of its current ratio, decreasing from 0.81 at the end of year 2004 to 0.58 at the end of

year 2007, followed by a slight increase to 0.62 at the end of year 2008. Further increase of acid-

test ratio to 0.9 in year 2009 supports the speculation of Coca-Cola making an effort to improve

financial health by increasing its current assets to current liabilities ratio.

Collection Period

The collection period measures how many days that accounts receivable are outstanding.

PepsiCo and Coca-Cola had similar collection period, 36.70 and 36.59 on average respectively.

Both companies had longer collection period than 30 days. PepsiCo and Coca-Cola sell syrup

concentrates mainly to their bottling companies rather than directly through retail channels. This

allows both companies to grant their business partners more favorable payment terms than

average. The collection period was relatively steady with a very slight increasing trend from year

to year for both companies. The healthy business cycle and relationship with their major

customers, bottling companies, made this minor fluctuation less of a concern as the collection

period stayed within a certain range. Overall, the collection period was stable and predictable.

Days to Sell Inventory

PepsiCo held inventories much shorter than Coca-Cola. The five-year average of 66.36

days to sell inventory for Coca-Cola was 23.99 days longer than the average of 42.37 days for




PepsiCo. One major factor could be that PepsiCo had more efficient inventory control than

Coca-Cola. Another factor could be the shorter shelf life of PepsiCo’s diversified product lines

of snacks and chips other than soft drinks. With similar collection period between PepsiCo and

Coca-Cola, the larger number of days it took Coca-Cola to sell its inventories translated into the

longer period required from working capital financing. Apparently, PepsiCo managed its

inventories more efficiently and turned its inventories into sales faster than Coca-Cola.

One possible adverse effect of less number of days to sell inventory is that the shorter

holding period of inventories could indicate shortage of inventories on hand. This was not a

concern for either PepsiCo or Coca-Cola.

Days to sell inventory for PepsiCo maintained relatively steady around its five-year

average with a slight increase from 41.63 days in year 2005 to 43.15 days in year 2008. ButCoca-Cola experienced relatively larger increase in number of days to sell inventory, gapped up

from 62.33 days in year 2005 to 67.51 days in year 2006 and from 67.71 days in 2007 to 70.17

days in 2008. This increasing trend was another indicator that Coca-Cola’s inventory control was

less effective than PepsiCo’s.

Capital Structure and Solvency

Total Debt to Equity Ratio and Long-term Debt to Equity Ratio

PepsiCo’s five-year average of total debt to equity ratio was 1.24. On average, Pepsi had

more debt financing than equity financing. Coca-Cola had a lower average total debt to equity

ratio of 0.90, which indicating the company’s use of more equity financing than debt financing.

The long-term debt to equity ratio for PepsiCo averaged at 0.68, much higher than the 0.29

average long-term debt to equity ratio for Coca-Cola. PepsiCo’s higher debt to equity ratio put

the company in a riskier position in the times of rising interest rates.

PepsiCo’s debt to equity ratio increased sharply in year 2008. The economic downturn in

year 2008 that led to depression in year 2009 brought down the company’s stock price

significantly. As shown in its comparative balance sheet, in order to finance the asset growth of

3.94% in year 2008, PepsiCo increased its debt borrowing by 37.33% from previous year. The

major source of this increase in debt borrowing was long-term. Thus, the decreased shareholders’

equity and increased debt financing, especially long-term debt financing, raised PepsiCo’s debt




to equity ratio in year 2008 significantly. Having a high 1.96 total debt to equity ratio and a 1.24

long-term debt to equity ratio, PepsiCo appeared to have experienced greater long-term solvency

risk in year 2008. With recession arrived in year 2009 and interest rate decreased to all-time low

through 2010, this higher debt to equity ratio should not be too much a cause of concern as long

as PepsiCo could manage to stop the increasing trend. In fact, PepsiCo did improve its debt to

equity ratio with a slight decrease in year 2009.

Coca-Cola, PepsiCo’s rivalry company, adopted a different strategy to deal with the

economic downturn in year 2008. Coca-Cola was able to stabilize its debt to equity ratio from

year 2004 to year 2008, with only slight increases in year 2007 and 2008. Coca-Cola’s

comparative balance sheet shows that with only 5.85% decrease in shareholders’ equity from

year 2007, the company did not have to increase debt borrowing when its assets decreased at a

slightly higher r ate of 6.36% than shareholders’ equity. Coca-Cola was able to keep total debt to

equity ratio under 1.0, positioning the company at a less risky level regarding long-term capital

structure and solvency.

Times Interest Earned

Times interest earned ratio shows how well a company could cover its interest expense

on a pretax base. PepsiCo had a better five-year of average of 29.56 than Coca-Cola’s average of

25.75, indicating PepsiCo had enough operating profitability to cover its interest payments with aslightly larger cushion than Coca-Cola. But, both companies’ times interest earned ratios were

well above 2.0, which is a margin value typically considered a warning sign of high long-term

solvency risk. Thus, both PepsiCo and Coca-Cola exhibited very low long-term solvency risk

considering each company’s times interest earned ratio was at a very high level.

PepsiCo experienced decreases in times interest earned ratio in year 2005 and 2008,

mainly due to decreased profitability and increased debt level in those two years. These same

factors also caused sharp decrease in Coca-Cola’s times interest earned ratio from 30.90 in year2006 to 18.27 and 17.98 in year 2007 and year 2008 respectively. The economic downturn in

2008 should play an important role in the decreased times interest earned ratio of that year for

both PepsiCo and Coca-Cola. But these ratios were well above 2.0. So it should not cause any

concern to be raised at this point other than this downward trend should be noted and

continuously monitored.




Return on Investment

Return on Assets and Return on Common Equity

The return on assets ratio is an important profitability measure that shows how

successfully a company manages to generate earnings on every dollar of its assets independent of

sources of financing. PepsiCo’s five-year average return on asserts was 16.48%. Coca-Cola had a

five-year average return on asserts of 16.54%. Both were above soft drink/beverage industry

average of 14.70% with Coco-Cola slightly better than PepsiCo. With a 14.70% industry average

return on assets well above S&P 500 average of roughly 7.00%, soft drink/beverage industry is

highly profitable. Both PepsiCo and its rival Coca-Cola have large market shares in this highly

profitable soft drink/beverage industry and have developed consumer brand loyalty over years.

The return on common equity ratio is another important profitability measure that

indicates how effectively a company manages to generate earnings on its capital investments

provided by common shareholders. The return on common equity rate for both PepsiCo and

Coca-Cola were above soft drink/beverage industry average of 30.70%. A noticeable 21.00%

higher industry average return on common equity rate over S&P 500 average also indicated soft

drink/beverage industry is highly profitable. PepsiCo had a better average return on common

equity of 33.92% than Coca-Cola’s average of 30.29%. Apparently, PepsiCo was able to

generate more profit for its common stock investors. This made PepsiCo more attractive to a

potential investor by profitability measures.

It’s worth noting that both PepsiCo and Coca-Cola’s profitability went down in year 2008

due to the economic downturn. The lower profitability in a time of economic downturn is highly

correlated with higher number of days to sell inventory, lower times interest earned ratio and

other financial ratio changes.

Operating Performance

Profit Margin Ratios

PepsiCo’s five-year average gross profit margin was 55.11%, much lower than its rival

Coca-Cola’s average of 64.74%. PepsiCo’s lower gross profit margin was a direct result of its

higher cost of sales to sales percentage. On their common-size income statements, PepsiCo’s

five-year average cost of sales to sales percentage was 44.89%, noticeably higher than the




35.26% average cost of sales to sales percentage for Coca-Cola. One major contributing factor to

Coca-Cola’s lower cost of sales percentage was that Coca-Cola was able to charge premiums for

its syrup concentrates compared to Pepsi. Another factor could be Coca-Cola had always been

able to effectively lower the cost of raw ingredients by acquiring from suppliers with lower price

or by favorable commodity hedging. A third factor could be that PepsiCo’s diversified

businesses other than soft drink/beverage had lower gross profit margin in general.

By examining common-size income statements, PepsiCo and Coca-Cola had similar five-

year average selling and administrative expenses as a percentage of sales. So operating profit

margin, pretax profit margin and net profit margin highly correlated with gross profit margin.

Coca-Cola was able to obtain higher net profit margin compared to PepsiCo by maintaining

lower cost of sales to sales percentage.

It’s worth noting that PepsiCo did have a slightly lower five-year average selling and

administrative expenses to sales percentage of 36.85% than 37.61% for Coca-Cola. PepsiCo’s

slightly lower selling and administrative expenses and other miscellaneous expenses to sales

percentage helped to bring its profit margin a little closer to its rival, from 9.63% lagging behind

in gross profit margin to only 6.83% lagging behind in net profit margin on average.

Over years, PepsiCo’s gross profit margin decreased from 56.69% in year 2004 to

52.95% in year 2008, caused by increased cost of sales to sales percentage from 43.31% in year2004 to 47.05% in year 2008. This should raise some concerns whether this trend could continue

in future years. On the other side, Coca-Cola’s gross profit margin had been relative steady with

well-maintained cost of sales to sales percentage.

By decreasing selling and administrative expenses to sales percentage from 37.70% in

year 2004 to 35.99% in year 2007 with a slight increase to 36.76% in year 2008, PepsiCo’s

operating profit margin and pretax profit margin from year to year was steady without declining

trend. The changes of income taxes percentage over years caused PepsiCo’s yearly net profitmargin to fluctuate a little bit. The lower profit margin in year 2008 was consistent with the

economic downtown started from that year.

Coca-Cola was able to maintain its gross profit margin in a relatively steady level year

after year with only a slight increase in year 2006. The decreased cost of sales to sales percentage




in year 2006 was the reason for the slight increase in its gross profit margin. We don’t have

enough information to find out why Coca-Cola could only bring down cost of sales to sales

percentage in that particular year but could speculate on very successful commodity hedging.

The overall trend of Coca-Cola’s gross profit margin as well as operating profit margin, pretax

profit margin and net profit margin were flat and steady with the exception of lower pretax profit

margin and net profit margin in year 2008. By examining its common-size balance sheet, the

economic downturn in year 2008 appeared to hurt profitability of Coco-Cola’s bottling company

and thus an equity loss of 2.74% to sales was posted to Coco- Cola’s balance sheet. The equity

loss in year 2008 brought down Coca-Cola’s pretax profit margin and net profit margin.

Asset Utilization

Cash Turnover

Cash turnover ratio indicates how efficient a company uses its cash and cash equivalents

to generate sales. PepsiCo had a much larger average cash turnover ratio of 26.08 than Coca-

Cola’s average of 6.24, indicating PepsiCo used its cash much mor e efficiently to generate

revenue. Coca-Cola’s lower cash turnover was the result the company keeping a larger amount

of cash and cash equivalents that averaged at 13.30% of its total assets compared to PepsiCo’s

average 4.77%.

Over recent years, both companies improved efficiency of cash usage with the exception

of a slight decrease in year 2008 due to economic downturn. Pepsi’s cash turnover trended up

from 21.74 in year 2005 to 30.09 in year 2007, and Coca-Cola’s cash turnover trended up from

4.05 in year 2005 to 8.83 in year 2007.

Accounts Receivable Turnover

Accounts receivable turnover indicates how fast a company can collect cash from its

accounts receivable. It is inversely related to the liquidity measure of collection period discussed

above. PepsiCo and Coca-Cola had similar accounts receivable turnover, 9.95 and 9.98 on

average respectively. PepsiCo experienced a slight increase in accounts receivable turnover in

year 2005 followed by a slight decrease from 10.40 in year 2005 to 9.54 in year 2008. Coca-

Cola’s accounts receivable turnover slightly increased in year 2005, trended down from year

2005 to year 2007, and followed by a slight increase in year 2008. Slightly slower accounts




receivable turnover shouldn’t be a concern for both companies as they sell mainly to their

bottling companies which allow them to grant better payment terms than average.

Inventory Turnover

Inventory turnover indicates how quickly a company can turn inventories into sales. It is

inversely related to the liquidity measure of days to sell inventory discussed above. PepsiCo had

faster inventory turnover of 8.62 on average than Coca-Cola’s 9.98 due to its more efficient

inventory control and shorter shelf life of its other products such as snacks and chips. Both

companies experienced slowdown of inventory turnover over years, most likely due to the

changes of average inventory turnover in soft drink/beverage industries. But PepsiCo appeared to

have better control over the decline of inventory turnover than Coca-Cola.

Working Capital Turnover

Working capital turnover indicates how efficiently a company can turn working capital

into sales. A company’s working capital is calculated by total current assets minus total short-

term liabilities. When total short-term liabilities are less than total current assets, working capital

becomes negative and current ratio becomes less than 1.0, which could indicate the company has

trouble fulfilling its short-term liabilities. Coca-Cola apparently exhibited this risk in year 2006,

2007 and 2008. But the trend of negative working capital turnover reduced each of those years

with a dramatic improvement from -602.20 in year 2006 to -36.78 in year 2007, indicating the

company made efforts to improve the coverage of its short-term liabilities. In year 2004 and

2005, Coca-Cola’s working capital turnover was 26.23 and 30.46, better than those of PepsiCo.

But overall, PepsiCo maintained steady working capital turnover with a five-year average of

20.85, indicating the company was consistent in generating sales from the funding working

capital efficiently.

PPE Turnover

PPE turnover indicates how efficiently a company uses its property, plant and equipment

to generate sales. PepsiCo had a slight better average PPE ratio of 3.78 over 5 years than Coco-

Cola’s 3.75, which could relate to its better inventory control system.

Total Assets Turnover




Total assets turnover indicates how efficiently a company uses total assets to generate

sales. PepsiCo had a much better average total assets turnover of 1.16 over 5 years than Coco-

Cola’s 0.77. This is consistent with previous analysis of other asset utilization turnover ratios

indicating PepsiCo was able to generate sales more efficiently from different types of assets than

Coca-Cola.

Market Measures

Price-to-earnings Ratio and Earnings Yield

PepsiCo’s five-year average price-to-earnings ratio was 20.30, slightly lower than Coca-

Cola’s 21.34. This indicates Coca-Cola’s investors had slightly higher expectations to the

company from year 2004 to year 2008, and thus were willing to pay a little bit more to acquire

the company’s stock. On the other hand, PepsiCo’s relatively lower price-to-earnings ratio

presented a good buying opportunity to a potential investor when the company demonstrated

better liquidity, return on investment and asset utilization than Coca-Cola.

Earnings yield is the inverse of price-to-earnings ratio. PepsiCo’s slightly higher five-

year average earnings yield 4.96% than Coca-Cola’s 4.70% indicates PepsiCo generated a bit

more earnings than Coca-Cola on each dollar invested. This once again presented a good reason

to acquire PepsiCo’s stocks as it was properly priced in terms of earnings yield in those years.

Dividend Yield and Dividend Payout Rate

Coca-Cola delivered average dividend yield rate of 2.59% and dividend payout rate of

55.08%, whereas PepsiCo had relatively lower dividend yield rate of 1.99% and dividend payout

rate of 38.74% on average. It was definitely an added bonus to Coca-Cola’s investors to get

much more dividends out of their investments. But PepsiCo’s dividend yield and payout were

good and strong as well, even though Coca-Cola’s were much better.

Price-to-book

PepsiCo’s average price-to-book ratio was 6.86, slightly higher than Coca-Cola’s average

price-to-book ratio of 6.24. This measure indicates that PepsiCo’s investors paid slightly higher

price for its stocks due to relatively higher expectation on the company. PepsiCo’s price-to-book

jumped to 8.49 in 2008 due to investors’ confidence into the company.




Conclusions and Recommendation for Investment

Both PepsiCo and Coca-Cola are strong industry players in soft drink/beverage industry.

From year 2004 to year 2008, Coca-Cola’s sales grew 9.05% each year on average and net profit

grew 6.22% each year on average. PepsiCo achieved even better average sales growth rate of

9.92% yearly and average net profit growth rate of 8.88% yearly. As the soft drink/beverage

market approaches maturity and saturation, the rapid growth and potential strength in

international markets keep earnings strong for both companies.

With a common understanding to avoid price competition in order to protect profitability,

both companies spent a great deal of effort to boost their brand images domestically and

internationally through advertisement and effective marketing. Coca-Cola, possessing the best

recognized brand worldwide, incurred a lower average cost of sales to sales percentage of

35.26% compared to PepsiCo’s average 44.89%, by charging premiums for its syrup

concentrates and by reducing the cost of raw ingredients with the help of favorable commodity

hedging. Coca-Cola exhibited higher net profit margin than PepsiCo due to its lower cost of sales

to sales percentage. PepsiCo’s also experience a downward trend in its gross profit margin. But,

through slightly decreasing selling and administrative expenses to sales percentage, PepsiCo was

able to stabilize its profit margin and pretax profit margin from year to year without a declining

trend. Higher net profit margin certainly made Coca-Cola attractive to a potential investor, but itshould be noted that both companies were highly profitable even in the times of economic

downturn. And it also should be noted that PepsiCo was able to deliver slightly higher sales

growth rate and net profit growth rate from year 2004 to year 2008, which could make the

company a better candidate for potential growth.

PepsiCo, in an effort to battle its rival Coca-Cola, diversified its businesses into other

products such as snacks, chips and breakfast food with core business focusing on soft drinks. But

Coco-Cola has been staying primarily in soft drink/beverage industry. PepsiCo’s diversity isdirectly related to lower business risk. This is certainly an added bonus to a potential investor.

PepsiCo’s current assets averaged 30.73% of its total assets, and short-term liabilities

averaged 24.70% of its total liabilities and shareholder s’ equity. Thus, it had a healthy average

current ratio of 1.25. Coca-Cola’s current assets average of 31.99% and short-term liabilities




average of 32.22% presented an average current ratio of 0.99. Apparently, PepsiCo was more

liquid than Coca-Cola and thus posed a lower liquidity risk to its investors in terms of current

ratio as well as acid-test ratio. PepsiCo’s short-term finance remained healthy over years and did

not present much short-term liquidity risk, whereas Coca-Cola had a marginal current ratio

around 1.0 from year 2004 to 2008 that could raise some concerns about its ability to cover its

short-term obligations. In addition, PepsiCo had better inventory control than Coca-Cola and

was able to turn its inventories into sales much faster than Coca-Cola. Thus, PepsiCo could gain

favoritism from a potential investor in the measure of liquidity.

PepsiCo exhibited higher long-term solvency risk due to its higher debt to equity ratio of

1.24 and higher long-term debt to equity ratio of 0.68 on average, compared to Coca-Cola’s 0.90

and 0.29. But both companies’ long-term finances are within a healthy range. PepsiCo had better

coverage of its debt responsibilities than Coca-Cola by the measure of times interest earned ratio,

while both were well above the alarming margin value of 2.0. This better interest payments

coverage should slightly offset the concern about PepsiCo’s elevated debt to equity ratios.

Overall, both PepsiCo and its rival Coca-Cola exhibited low long-term solvency risk with

PepsiCo’s risk being slightly higher than Coca-Cola’s because PepsiCo relied on more debt to

finance its continued growth than Coca-Cola. This could lead a potential investor to consider

lower long-term solvency risk as an added bonus to invest in Coca-Cola.

PepsiCo had a better average return on common equity of 33.92% than Coca-Cola’s

30.29%, whereas both companies had similar return on assets with Coca-Cola’s 16.54% average

only being slightly better. These results are consistent with both companies being major players

in highly profitable soft drink/beverage industry. With return on assets and return on common

equity being two major measurements of a company’s profitability, PepsiCo’s higher return on

common equity could gain a certain degree of favoritism for the company from a potential

investor.

PepsiCo demonstrated more efficient asset utilization than Coca-Cola. PepsiCo had better

cash turnover, inventory turnover, working capital turnover, PPE turnover and total assets

turnover on average, and roughly the same account receivable turnover as Coca-Cola. PepsiCo

exhibited much more efficient cash usage towards revenue generation, with an average cash

turnover ratio of 26.08 compared to Coca-Cola’s average of 6.24. Coca-Cola kept a much larger




amount of cash and cash equivalents as 13.30% of its total assets, whereas PepsiCo’s cash to

total assets percentage only averaged at 4.77%. With a better inventory control system,

PepsiCo’s inventory turnover and PPE turnover were also better than Coca-Cola. PepsiCo

maintained a steady working capital turnover ratio averaged at 20.85. But Coca-Cola’s negative

but improving working capital turnover in year 2006 and 2007 should raise some concerns.

Overall, PepsiCo should be a winner in terms of better asset utilization.

PepsiCo exhibited slightly lower investors’ confidence and slightly cheaper stock pricing

by the measure of price-to-earnings ratio and earnings yield but slightly higher investors’

confidence and slightly more expensive stock pricing by the measure of price-to-book than

Coca-Cola. Overall, both companies are at a similar level in terms of investors’ confidence and

stock pricing. But it is noticeable that PepsiCo’s price-to-book had a big increase from 6.39 in

year 2007 to 8.49 in year 2008, indicating that the company experienced increasing investors’

confidence over Coca-Cola. On the other hand, it clearly is an added bonus to Coca-Cola’s

investors that the company had much better dividend yield and dividend payout rate.

The analysis shows that both companies are strong leaders in the highly profitable soft

drink/beverage industry. PepsiCo is definitely a better investment choice if we keep a scoreboard

for both companies in terms of growth, diversity, operating performance, liquidity, capital

structure and solvency, return on investment, asset utilization and market measures.




References

Clyde P. Stickney, Paul Brown and James M. Wahlen (2006). Financial Reporting, Financial

Statement Analysis and Valuation. South-Western.

Investopedia (n.d.). Retrieved from http:// www.investopedia.com

Yahoo! Finance (n.d.). Retrieved from http://finance.yahoo.com

Yahoo! industry center (n.d.). Retrieved from http://biz.yahoo.com/ic

MSN Money (n.d.). Retrieved from http://moneycentral.msn.com

Google Finance (n.d.). Retrieved from http://www.google.com/finance

PepsiCo, Inc. and Subsidiaries. (February 19, 2009). Form 10-K.





The Coca-Cola Company and Subsidiaries. (February 26, 2009). Form 10-K.




The Coca-Cola Company and Subsidiaries. (March 4, 2005). Form 10-K.




Appendices

Table 1. PepsiCo Common-size Statement of Income

Common-size Statement of Income

PepsiCo, Inc. and SubsidiariesYears 2008, 2007, 2006, 2005, 2004

(in percentage) 2008 2007 2006 2005 2004 5-Yr Avg.

Net Revenue 100.00 100.00 100.00 100.00 100.00 100.00

Cost of sales 47.05 45.70 44.86 43.54 43.31 44.89

Selling, general and administrative expenses 36.76 35.99 36.18 37.63 37.70 36.85

Amortization of intangible assets 0.15 0.15 0.46 0.46 0.50 0.34

Restructuring and impairment charges sts — — — — 0.51 0.10

Operating Profit 16.03 18.16 18.50 18.38 17.97 17.81

Bottling equity income 0.86 1.42 1.57 1.52 1.30 1.34

Interest expense (0.76) (0.57) (0.68) (0.79) (0.57) (0.67)

Interest income 0.09 0.32 0.49 0.49 0.25 0.33

Income from Continuing Operations before Income Taxes 16.23 19.33 19.89 19.60 18.95 18.80

Provision for Income Taxes 4.34 5.00 3.83 7.08 4.69 4.99

Income from Continuing Operations 11.89 14.33 16.06 12.52 14.26 13.81

Tax Benefit from Discontinued Operations — — — — 0.13 0.03

Net Income 11.89 14.33 16.06 12.52 14.39 13.84




Table 2. PepsiCo Common-size Balance Sheet

Common-size Balance Sheet

PepsiCo, Inc. and Subsidiaries

Years 2008, 2007, 2006, 2005, 2004


ASSETS

Current Assets

Cash and cash equivalents 5.73 2.63 5.52 5.41 4.57 4.77

Short-term investments 0.59 4.54 3.91 9.98 7.74 5.35

Accounts and notes receivable, net 13.01 12.67 12.45 10.28 10.72 11.82

Inventories 7.01 6.61 6.44 5.34 5.51 6.18

Prepaid expenses and other current assets 3.68 2.86 2.20 1.95 2.34 2.60

Total Current Assets 30.02 29.31 30.50 32.95 30.87 30.73

Property, Plant and Equipment, net 32.40 32.42 32.37 27.36 29.12 30.73

Amortizable Intangible Assets, net 2.03 2.30 2.13 1.67 2.14 2.05

Goodwill 14.24 14.93 15.35 12.88 13.97 14.27

Other nonamortizable intangible assets 3.13 3.60 4.05 3.42 3.33 3.51

Nonamortizable Intangible Assets 17.37 18.53 19.40 16.31 17.30 17.78

Investments in Noncontrolled Affiliates 10.79 12.57 12.33 10.98 11.73 11.68

Other Assets 7.38 4.86 3.27 10.73 8.84 7.02

Total Assets 100.00 100.00 100.00 100.00 100.00 100.00

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Short-term obligations 1.03 — 0.92 9.11 3.77 2.96

Accounts payable and other current liabilities 22.98 21.95 21.70 18.82 20.01 21.09

Income taxes payable 0.40 0.44 0.30 1.72 0.35 0.64

Total Current Liabilities 24.41 22.39 22.92 29.65 24.13 24.70

Long-Term Debt Obligations 21.83 12.14 8.52 7.29 8.56 11.67

Other Liabilities 19.49 13.84 15.45 13.63 14.65 15.41

Deferred Income Taxes 0.63 1.87 1.76 4.52 4.34 2.62

Total Liabilities 66.37 50.23 48.65 55.08 51.68 54.40

Commitments and Contingencies

Preferred Stock, no par value 0.11 0.12 0.14 0.13 0.15 0.13

Repurchased Preferred Stock (0.38) (0.38) (0.40) (0.35) (0.32) (0.37)

Common Shareholders’ Equity

Common stock, par value 1 2/3 ¢ per share

(issued 1,782 shares) 0.08 0.09 0.10 0.09 0.11 0.09

Capital in excess of par value 0.98 1.30 1.95 1.94 2.21 1.67

Retained earnings 85.12 81.39 82.98 66.56 66.92 76.59

Accumulated other comprehensive loss (13.04) (2.75) (7.50) (3.32) (3.17) (5.96)

73.14 80.03 77.53 65.27 66.07 72.41

Less: repurchased common stock, at cost

(229, 177, 144, 126 and 103 shares, respectively for 2008-2004) (39.23) (30.00) (25.92) (20.13) (17.58) (26.57)

Total Common Shareholders’ Equity 33.90 50.03 51.61 45.14 48.49 45.83

Total Liabilities and Shareholders’ Equity 100.00 100.00 100.00 100.00 100.00 100.00




Table 3. PepsiCo Comparative Statement of Income

Comparative Statement of Income


Years 2008, 2007, 2006, 2005, 2004


Net Revenue 9.57 12.34 7.91 11.28 8.49 9.92

Cost of sales 12.82 14.44 11.19 11.85 8.41 11.74


Amortization of intangible assets 10.34 (64.20) 8.00 2.04 1.38 (8.49)

Restructuring and impairment charges sts — — — (100.00) 2.04 (19.59)

Operating Profit (3.28) 10.27 8.66 13.79 10.00 7.89

Bottling equity income (33.21) 1.27 11.72 30.26 17.65 5.54

Interest expense 46.88 (6.28) (6 .64) 53.29 2.45 17.94

Interest income (67.20) (27.75) 8.81 114.86 45.10 14.76

Income from Continuing Operations before Income Taxes (7.99) 9.19 9.51 15.07 11.10 7.37

Provision for Income Taxes (4.76) 46.47 (41.54) 67.93 (3.65) 12.89

Income from Continuing Operations (9.12) 0.28 38.35 (2.30) 16.98 8.84

Tax Benefit from Discontinued Operations — — — (100.00) — (20.00)

Net Income (9.12) 0.28 38.35 (3.18) 18.05 8.88




Table 4. PepsiCo Comparative Balance Sheet

Comparative Balance Sheet


Years 2008, 2007, 2006, 2005, 2004


ASSETS

Current Assets

Cash and cash equivalents 126.81 (44.88) (3.79) 34.06 56.10 33.66

Short-term investments (86.44) 34.16 (63.01) 46.24 83.32 2.85

Accounts and notes receivable, net 6.70 17.83 14.23 8.74 5.97 10.69

Inventories 10.13 18.90 13.76 9.86 9.14 12.36

Prepaid expenses and other current assets 33.60 50.84 6.31 ( 5.50) (4.80) 16.09

Total Current Assets 6.45 11.18 (12.67) 21.01 24.66 10.13

Property, Plant and Equipment, net 3.87 15.91 11.59 6.53 4.10 8.40

Amortizable Intangible Assets, net (8.04) 24.96 20.19 (11.37) (16.71) 1.80

Goodwill (0.87) 12.52 12.38 4.58 2.98 6.32

Other nonamortizable intangible assets (9.62) 2.97 11.60 16.40 7.36 5.74

Nonamortizable Intangible Assets (2.57) 10.52 12.21 6.86 3.79 6.16

Investments in Noncontrolled Affiliates (10.82) 17.99 5.88 6.12 12.47 6.33

Other Assets 58.03 71.63 (71.20) 37.49 9.22 21.04

Total Assets 3.94 15.70 (5.66) 13.36 10.50 7.57

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Short-term obligations — (100.00) (90.52) 174.10 78.34 12.38

Accounts payable and other current liabilities 8.83 17.03 8.79 6.64 7.40 9.74

Income taxes payable (3.97) 67.78 (83.52) 451.52 (83.80) 69.60

Total Current Liabilities 13.34 13.02 (27.07) 39.31 5.25 8.77

Long-Term Debt Obligations 86.96 64.82 10.25 (3.50) 40.83 39.87

Other Liabilities 46.43 3.63 6.96 5.46 0.59 12.62

Deferred Income Taxes (65.02) 22.35 (63.18) 17.93 (3.57) (18.30)

Total Liabilities 37.33 19.45 (16.67) 20.82 7.52 13.69

Commitments and Contingencies

Preferred Stock, no par value 0.00 0.00 0.00 0.00 0.00 0.00

Repurchased Preferred Stock 4.55 10.00 9.09 22.22 42.86 17.74

Common Shareholders’ Equity

Common stock, par value 1 2/3 ¢ per share

(issued 1,782 shares) 0.00 0.00 0.00 0.00 0.00 0.00

Capital in excess of par value (22.00) (22.95) (4.89) (0.65) 12.77 (7.54)

Retained earnings 8.71 13.48 17.62 12.74 17.35 13.98

Accumulated other comprehens ive loss 393.07 (57.61) 113.30 18.85 (30.07) 87.51

(5.01) 19.42 12.06 11.98 21.08 11.91

(229, 177, 144, 126 and 103 shares, respectively for

2008-2004) 35.96 33.89 21.47 29.82 45.73 33.37

Total Common Shareholders’ Equity (29.56) 12.16 7.87 5.51 14.09 2.01

Total Liabilities and Shareholders’ Equity 3.94 15.70 (5.66) 13.36 10.50 7.57




Table 5. Coca-Cola Common-size Statement of Income

Common-size Statements of Income

The Coca-Cola Company and Subsidiaries

Years 2008, 2007, 2006, 2005, 2004


NET OPERATING REVENUES 100.00 100.00 100.00 100.00 100.00 100.00

Cost of goods sold 35.61 36.06 33.89 35.47 35.30 35.26

GROSS PROFIT 64.39 63.94 66.11 64.53 64.70 64.74


Other operating charges 1.10 0.88 0.77 0.37 2.21 1.06

OPERATING INCOME 26.44 25.13 26.19 26.34 26.21 26.06

Interest income 1.04 0.82 0.80 1.02 0.72 0.88

Interest expense 1.37 1.58 0.91 1.04 0.90 1.16

Equity income (loss)—net (2.74) 2.31 0.42 2.94 2.86 1.16

Other income (loss)—net (0.09) 0.60 0.81 ( 0.40) (0.38) 0.11

Gains on issuances of stock by equity method investees — — — 0.10 0.11 0.04

INCOME BEFORE INCOME TAXES 23.29 27.28 27.31 28.96 28.62 27.09Income taxes 5.11 6.56 6.22 7.87 6.32 6.42

NET INCOME 18.18 20.73 21.09 21.09 22.29 20.67




Table 6. Coca-Cola Common-size Balance Sheet

Common-size Balance Sheets


Years 2008, 2007, 2006, 2005, 2004


ASSETS

CURRENT ASSETS

Cash and cash equivalents 11.60 9.46 8.14 15.98 21.33 13.30

Marketable securities 0.69 0.50 0.50 0.22 0.19 0.42

Trade accounts receivable, less allowances 7.63 7.67 8.63 7.75 7.14 7.76

Inventories 5.40 5.13 5.48 4.69 4.52 5.04

Prepaid expenses and other assets 4.74 5.22 5.42 6.04 5.88 5.46

TOTAL CURRENT ASSETS 30.05 27.98 28.17 34.68 39.06 31.99

INVESTMENTS

Equity method investments:

Coca-Cola Enterprises Inc. — 3.78 4.38 5.88 4.99 3.81

Coca-Cola Hellenic Bottling Company S.A. 3.67 3.58 4.18 3.53 3.39 3.67

Coca-Cola FEMSA, S.A.B. de C.V. 2.16 2.30 2.79 3.34 2.52 2.62

Coca-Cola Amatil Limited 1.57 1.86 2.73 2.54 2.34 2.21

Other, principally bottling companies and joint ventures 5.71 5.32 6.99 7.01 5.51 6.11

Cost method investments, principally bottling companies 1.14 1.13 1.58 1.22 1.13 1.24

TOTAL INVESTMENTS 14.26 17.97 22.64 23.52 19.88 19.66

OTHER ASSETS 4.28 6.18 9.01 9.00 9.48 7.59

PROPERTY, PLANT AND EQUIPMENT—net 20.55 19.63 23.04 19.82 19.37 20.48

TRADEMARKS WITH INDEFINITE LIVES 14.95 11.91 6.83 6.61 6.48 9.36

GOODWILL 9.94 9.84 4.68 3.56 3.49 6.30

OTHER INTANGIBLE ASSETS 5.97 6.49 5.63 2.81 2.23 4.63

TOTAL ASSETS 100.00 100.00 100.00 100.00 100.00 100.00

LIABILITIES AND SHAREOWNERS’ EQUITY

CURRENT LIABILITIES

Accounts payable and accrued expenses 15.31 15.98 16.87 15.27 14.00 15.49

Loans and notes payable 14.97 13.68 10.80 15.35 14.41 13.84

Current maturities of long-term debt 1.15 0.31 0.11 0.10 4.74 1.28

Accrued income taxes 0.62 0.60 1.89 2.71 2.26 1.61

TOTAL CURRENT LIABILITIES 32.05 30.56 29.67 33.43 35.41 32.22

LONG-TERM DEBT 6.86 7.57 4.39 3.92 3.68 5.28

OTHER LIABILITIES 8.39 7.24 7.45 5.88 8.95 7.58

DEFERRED INCOME TAXES 2.16 4.37 2.03 1.20 1.28 2.21

SHAREOWNERS’ EQUITY

Common stock, $0.25 par value 2.17 2.03 2.93 2.98 2.78 2.58

Capital surplus 19.66 17.05 19.97 18.66 15.67 18.20

Reinvested earnings 95.05 83.74 111.70 106.36 92.57 97.88

Accumulated other comprehensive income (loss) (6.60) 1.45 (4.31) (5.67) (4.29) (3.88)

Treasury stock (59.76) (54.02) (73.82) (66.76) (56.06) (62.08)

TOTAL SHAREOWNERS’ EQUITY 50.52 50.25 56.47 55.58 50.68 52.70

TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY 100.00 100.00 100.00 100.00 100.00 100.00




Table 7. Coca-Cola Comparative Statement of Income

Comparative Statements of Income


Years 2008, 2007, 2006, 2005, 2004


NET OPERATING REVENUES 10.70 19.80 4.26 6.26 4.24 9.05

Cost of goods sold 9.30 27.46 (0.38) 6.79 (1.31) 8.37

GROSS PROFIT 11.48 15.87 6.81 5.98 7.55 9.54


Other operating charges 37.80 37.30 117.65 (82.29) (16.23) 18.84

OPERATING INCOME 16.46 14.97 3.66 6.79 9.14 10.20

Interest income 41.10 22.28 (17.87) 49.68 (10.80) 16.88

Interest expense (3.95) 107.27 (8.33) 22.45 10.11 25.51

Equity income (loss)—net (230.84) 554.90 (85.00) 9.50 52.96 60.30

Other income (loss)—net (116.18) (11.28) (309.68) 13.41 (40.58) (92.86)

Gains on issuances of stock by equity method investees — — (100.00) (4.17) 200.00 19.17

INCOME BEFORE INCOME TAXES (5.51) 19.69 (1.67) 7.52 13.23 6.65Income taxes (13.74) 26.30 (17.60) 32.22 19.77 9.39

NET INCOME (2.91) 17.74 4.27 0.52 11.50 6.22




Table 8. Coca-Cola Comparative Balance Sheet

Comparative Balance Sheets


Years 2008, 2007, 2006, 2005, 2004


ASSETS

CURRENT ASSETS

Cash and cash equivalents 14.85 67.75 (48.10) (29.91) 99.49 20.82

Marketable securities 29.30 43.33 127.27 8.20 -49.17 31.79

Trade accounts receivable, less allowances (6.84) 28.22 13.42 1.65 7.32 8.75

Inventories (1.49) 35.28 19.00 (2.89) 13.42 12.67

Prepaid expenses and other assets (15.04) 39.25 (8.72) (3.84) 17.7 5.87

TOTAL CURRENT ASSETS 0.59 43.41 (17.29) (16.90) 46.27 11.22

INVESTMENTS

Equity method investments:

Coca-Cola Enterprises Inc. (100.00) 24.77 (24.21) 10.33 24.52 (12.92)

Coca-Cola Hellenic Bottling Company S.A. (4.00) 23.82 20.40 (2.62) 13.39 10.20

Coca-Cola FEMSA, S.A.B. de C.V. (11.95) 19.28 (14.97) 23.99 17.51 6.77

Coca-Cola Amatil Limited (20.84) (1.35) 9.22 1.63 12.88 0.31

Other, principally bott ling companies and joint ventures 0.56 9.83 1.60 18.98 2.12 6.62

Cost method investments, principally bottling companies (5.12) 3.17 31.39 1.41 13.06 8.78

TOTAL INVESTMENTS (25.69) 14.65 (2.01) 10.72 12.89 2.11

OTHER ASSETS (35.21) (0.96) 2.00 (11.17) -10.26 (11.12)

PROPERTY, PLANT AND EQUIPMENT—net (1.97) 23.03 18.38 (4.27) -0.1 7.02

TRADEMARKS WITH INDEFINITE LIVES 17.58 151.98 5.09 (4.47) 2.93 34.62

GOODWILL (5.33) 203.35 34.00 (4.56) 6.61 46.81

OTHER INTANGIBLE ASSETS (13.99) 66.57 103.74 17.95 -28.44 29.17

TOTAL ASSETS (6.36) 44.41 1.82 (6.41) 14.99 9.69

LIABILITIES AND SHAREOWNERS’ EQUITY

CURRENT LIABILITIES

Accounts payable and accrued expenses (10.27) 36.80 12.51 2.04 8.5 9.92

Loans and notes payable 2.48 82.97 (28.40) (0.29) 75.42 26.44

Current maturities of long-term debt 249.62 303.03 17.86 (98.12) 361.3 166.74

Accrued income taxes (2.33) (54.50) (28.86) 12.41 -23.1 (19.27)

TOTAL CURRENT LIABILITIES (1.79) 48.76 (9.62) (11.65) 41.17 13.38

LONG-TERM DEBT (15.14) 149.39 13.86 (0.26) -54.03 18.77

OTHER LIABILITIES 8.55 40.43 28.96 (38.52) 12.02 10.29

DEFERRED INCOME TAXES (53.60) 210.86 72.73 (12.44) 19.29 47.37

SHAREOWNERS’ EQUITY

Common stock, $0.25 par value 0.00 0.23 0.11 0.23 0.11 0.14

Capital surplus 7.97 23.32 8.94 11.44 12.13 12.76

Reinvested earnings 6.29 8.27 6.93 7.54 9.06 7.62

Accumulated other comprehensive income (loss) (527.16) (148.49) (22.65) 23.81 -32.43 (141.38)

Treasury stock 3.59 5.68 12.59 11.46 11.05 8.87

TOTAL SHAREOWNERS’ EQUITY (5.85) 28.51 3.45 2.64 13.09 8.37

TOTAL LIABILITIES AND SHAREOWNERS’ EQUITY (6.36) 44.41 1.82 (6.41) 14.99 9.69




Table 9. PepsiCo Financial Statement Ratios

Financial Statement Ratios


Years 2008, 2007, 2006, 2005, 2004

2008 2007 2006 2005 2004 5-Yr Avg.

Liquidity

Current ratio 1.23 1.31 1.33 1.11 1.28 1.25

Acid-test ratio 0.79 0.89 0.95 0.87 0.95 0.89

Collection period (in days) 38.28 37.51 36.28 35.09 36.36 36.70

Days to sell inventory 43.15 42.66 41.90 41.63 42.52 42.37


Total debt to equity 1.96 1.00 0.94 1.22 1.07 1.24

Long-term debt to equity 1.24 0.56 0.50 0.56 0.57 0.68

Times interest earned 22.34 35.07 30.24 25.93 34.21 29.56


Return on assets 15.17% 17.98% 18.81% 14.22% 16.21% 16.48%

Return on common equity 34.83% 34.53% 37.91% 29.24% 33.08% 33.92%


Gross profit margin 52.95% 54.30% 55.14% 56.46% 56.69% 55.11%

Operating profit margin (pretax) 16.03% 18.16% 18.50% 18.38% 17.97% 17.81%

Pretax profit margin 16.23% 19.33% 19.89% 19.60% 18.95% 18.80%

Net profit margin 11.89% 14.33% 16.06% 12.52% 14.39% 13.84%

Asset Utilization

Cash turnover 29.09 30.83 20.87 21.74 27.87 26.08

Accounts receivable turnover 9.54 9.73 10.06 10.40 10.04 9.95

Inventory turnover 8.46 8.56 8.71 8.77 8.58 8.62

Working capital turnover 19.58 16.91 21.18 22.19 24.36 20.85

PPE turnover 3.78 3.77 3.83 3.87 3.66 3.78Total assets turnover 1.22 1.22 1.14 1.09 1.10 1.16

Market Measures

Price-to-earnings ratio 20.20 19.63 17.86 22.87 20.94 20.30

Earnings yield 4.95% 5.09% 5.60% 4.37% 4.78% 4.96%

Dividend yield 2.51% 2.09% 1.90% 1.82% 1.66% 1.99%

Dividend payout rate 49.69% 39.08% 32.75% 40.33% 31.84% 38.74%

Price-to-book 8.49 6.39 6.52 6.48 6.41 6.86




Table 10. Coca-Cola Financial Statement Ratios

Financial Statement Ratios


Years 2008, 2007, 2006, 2005, 2004

2008 2007 2006 2005 2004 5-Yr Avg.

Liquidity

Current ratio 0.94 0.92 0.95 1.04 1.10 0.99

Acid-test ratio 0.62 0.58 0.58 0.72 0.81 0.66

Collection period (in days) 36.60 37.34 36.88 35.74 36.39 36.59

Days to sell inventory 70.71 67.71 67.51 62.33 63.54 66.36


Total debt to equity 0.98 0.99 0.77 0.80 0.97 0.90

Long-term debt to equity 0.34 0.38 0.25 0.20 0.27 0.29

Times interest earned 17.98 18.27 30.90 28.88 32.74 25.75


Return on assets 14.54% 17.14% 17.59% 16.52% 16.92% 16.54%

Return on common equity 27.51% 30.94% 30.53% 30.18% 32.29% 30.29%


Gross profit margin 64.39% 63.94% 66.11% 64.53% 64.70% 64.74%

Operating profit margin (pretax) 26.44% 25.13% 26.19% 26.34% 26.21% 26.06%

Pretax profit margin 23.29% 27.28% 27.31% 28.96% 28.62% 27.09%

Net profit margin 18.18% 20.73% 21.09% 21.09% 22.29% 20.67%

Asset Utilization

Cash turnover 7.26 8.83 6.75 4.05 4.32 6.24

Accounts receivable turnover 9.97 9.78 9.90 10.21 10.03 9.98

Inventory turnover 5.16 5.39 5.41 5.86 5.74 5.51

Working capital turnover (33.07) (36.78) (602.20) 30.46 26.23 (123.07)

PPE turnover 3.80 3.75 3.78 3.88 3.57 3.75Total assets turnover 0.76 0.79 0.81 0.76 0.74 0.77

Market Measures

Price-to-earnings ratio 21.41 20.77 20.31 20.96 23.22 21.34

Earnings yield 4.67% 4.81% 4.92% 4.77% 4.31% 4.70%

Dividend yield 2.83% 2.53% 2.83% 2.62% 2.15% 2.59%

Dividend payout rate 60.56% 52.51% 57.41% 54.90% 50.00% 55.08%

Price-to-book 6.08 5.73 6.08 6.25 7.07 6.24




Graded Project 1

(Please see attachment)

Documents

Sample Project Coke Pepsi