Mgt211 Analysis of Pepsi and Coca-Cola

MGT 211-002 Case Study  

Pepsi versus Coca-Cola

Analysis of  Pepsi and Coca-Cola

Coca-Cola Co. (KO) and PepsiCo, Inc. (PEP) have very similar businesses in terms of industry, ideal consumers and flagship products. They are leaders in the beverage industry and offer ancillary products. They also have their own special characteristics that make them competence in the industry. To know more about the similarities and differences of the two company, we can analyze it through three aspects using multiple accounting ratios.

1. Profitability Ability and Quality of Earnings Analysis

In this part, we will analysis six ratios: ROE, ROA, financial leverage percentage, net profit margin, earning per share and earnings quality.

For Pepsi, its ROE, ROA, net profit margin, financial leverage percentage and EPS are all increased from 2015 to 2016 and decreased from 2016 to 2017. And financial leverage percentage is increased from 15% to 38%, which means Pepsi did successful with its investment or borrowing effectively. For most ratios, Pepsi has higher value. It means that the Pepsi is doing well and is good at generating profits and revenues.

For Coca-Cola, as shown from the data, its ROE, ROA, financial leverage percentage, net profit margin and EPS are decreased from 2015 to 2017, except earning quality, which rocketed to 560% from 2016 to 2017. In consequence, Coca-Cola may not do well on generating profits and revenues as the development of itself.

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1) From Figure 1.1, Pepsi’s ROE is increased from 2015 and 2017. On the contrast, Coca-Cola’s ROE is falling. It suggests that Pepsi is increasing its ability to generate profit without needing as much capital. It also indicates Pepsi 's management is deploying the shareholders' capital well. However, a higher ROE does not necessarily mean better financial performance of the company, because write-downs, share buybacks or a high level of debt can artificially boost ROE.

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2) In general, the higher the ROA the better. As Figure 1.2 shown for ROA, from 2015 to 2017, Pepsi keeps ROA ratio almost stably, comparing to Coca-Cola, it gives an idea that Pepsi generate profit by using its assets more efficiently. On the other hand, ROA of Coca-Cola kept descending from 2015 to 2017, which is a problem to the company.

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3) As shown in Figure 1.3, Pepsi’s financial leverage increased from 15% to 38%, which means higher interest payments. It will negatively affect the company's bottom-line earnings per share. But at the same time, Coca-Cola’s financial leverage dropped from 50% to 6%. The leverage value should not go down too low, as the firms issuing too much equity is considered less secure because the amount of risk in equity markets is too high. Both should take notice of their financial leverage percentage.