The report will analyze each ratio in turn, comparing the respective performance of each company. Once this analysis is complete, the report will draw conclusions regarding the two companies and their potential role in our firm's investment portfolio. Body

There are three main types of ratios -- liquidity, solvency and profitability. In terms of liquidity, Pepsi exhibits superior performance. Pepsi has the better current ratio (1.28 to 1.10) and cash ratio (0.77 to 0.63). This means it is in a better position to meet its immediate cash needs. Pepsi also turns over its inventory faster (9.08 times to 5.72 times). Coke turns over its receivables faster (10.31 times to 10.04 times). It is worth noting, however, that while Coke is better, it is barely so; whereas Pepsi is significantly stronger than Coke in inventory turnover. Both companies, however, would be considered liquid.

Both companies are also solvent. Coke, however, is the more solvent of the two. Coke's debt ratio is lower (49% to 52%) but more importantly its cash debt coverage ratio is significantly better (0.42 to 0.18). Coke has better free cash flow as well (2784...

Pepsi does have a better times interest earned, but the difference is minimal compared with Coke's advantages in other areas of solvency (34.43 to 32.74).
While both firms are profitable, Coke is easily the more profitable of the two. Coke has a 22% net profit margin, compared with Pepsi's 14% margin. This means that Coke is able to extract better prices from both its customers and suppliers. Pepsi, however, has a better asset turnover. Both firms have solid returns -- Coke edges Pepsi on ROA (17% to 16%) while Pepsi edges Coke on ROE (33% to 32%). However, the significant different net profit margin makes Coke the more profitable of the two companies.

Based on these observations, it is recommended that the company invest in Coca-Cola. Both companies have strong financial positions. However Coke's higher margins and lower leverage give it more flexibility to withstand market downturns or to take advantages of any opportunities that the market presents. That indicates that Coke is more likely to continue its strong performance in the long run. Pepsi is all likelihood will as well, but Coke is in the better position to…