Coca-Cola Company and Pepsico Investment Research Paper

Excerpt from Research Paper :

The total asset turnover ratio on the other hand indicates that just as is the case with the fixed asset turnover ratio, the Coca-Cola Company has been less effective in the utilization of all its assets in sales generation.

The inventory turnover ratio is essentially a measure of the number of times the inventory of a business entity is replaced or sold within a given period of time. In the words of Gallagher and Andrew (2007, p.97), "if the company has inventory that sells well, the ratio value will be high." During the three years under consideration (see table 3 above), PepsiCo has consistently had a better inventory turnover ratio than the Coca-Cola Company. This essentially means that PepsiCo has consistently had stronger sales than the Coca-Cola Company. Receivables turnover ratio on the other hand is a worthy measure of how fast a given company is in the collection of accounts receivables (Bragg, 2007). With that in mind, PepsiCo seems more efficient in not only credit extension, but in also the collection of accounts receivables. This is particularly the case given that the company has consistently had a high receivables turnover ratio than the Coca-Cola Company. For this reason, the Coca-Cola Company may deem it fit to conduct a reassessment of its credit policies.

Table 4: Market Value Ratios

Coca-Cola Company

PepsiCo.

2012

2011

2010

2012

2011

2010

Price-Earnings Ratio (P/E)

19.00

18.27

12.42

18.82

15.44

15.92

Price to Book Value

5.23

4.95

4.73

5.22

4.83

4.75

Interpretation

The price-earnings ratio largely concerns itself with the relationship between the stock price of a company and its earnings. It "measures a company's future earnings prospects (Warren, Reeve, and Duchac, 2008, p.691). The price-earning ratios of both PepsiCo and Coca-Cola could therefore help us determine just how much the market is willing to pay for either entity's earnings. In the financial years 2011 and 2011, the Coca-Cola Company had a higher price-earnings ratio than PepsiCo. This effectively means that the market is willing to pay more for Coca-Cola's earnings than it is willing to pay for PepsiCo's earnings. It should however be noted that although the market seems to be having high hopes in the Coca-Cola Company's stock performance going forward, the high price-earnings ratio could also be an indicator that the company's stock is relatively overpriced.

The price-to-book ratio seeks to establish the relationship existing between the market value of a given stock and its book value (Bragg, 2012). In our case, the lower price-to-book ratio in the case of PepsiCo (in comparison to that of the Coca-Cola Company during the two years under consideration) could either be an indicator that the company's return on assets are poor or that the company's stock is undervalued. The latter argument seems more plausible.

Table 5: Financial and Operating Leverage

Coca-Cola Company

PepsiCo.

2012

2011

2010

2012

2011

2010

Debt to Equity Ratio

0.99

0.90

0.76

1.27

1.30

1.18

Debt to Capital

0.50

0.47

0.43

0.56

0.57

0.54

Interest Coverage

30.75

28.43

20.43

10.24

11.32

10.12

Interpretation

The ratios I compute in table 5 above are critical when it comes to the determination of how solvent a given firm is in the long-term. To begin with, the debt-to-equity ratio seeks to establish the extent to which a given business entity is making use of both debt and equity to fund its assets. In other words, it is "the ratio of total liabilities to owner's equity" (Gitman and McDaniel, 2008, p.462). Throughout the three years under consideration, PepsiCo has consistently had a higher debt-to-equity ratio than the Coca-Cola Company. This is an indication that in comparison to the Coca-Cola Company, PepsiCo has been using debt more aggressively to finance its growth.

An important measure of an entity's financial leverage, the debt-to-capital ratio is regarded critical when it comes to the determination of how a given business entity is financing/funding its operations. According to Bragg (2012), it indicates how willing the management of a given entity is to make use of debt (as opposed to equity) to finance the operations of the said entity. Throughout the three years under consideration, PepsiCo has had a higher debt to capital ratio than the Coca-Cola Company. This effectively means that PepsiCo has consistently had a higher proportion of debt to equity during the period under consideration.

Data Accuracy and Reliability

In reference to the reliability and accuracy of data presented herein, it is important to note that the ratios I compute above are largely indicators of the financial situation of both firms. For this reason, they should not be viewed in isolation. Other indicators of financial health as well as stability should also be taken into consideration. It should also be noted that the effectiveness of the ratios computed could be limited by the accounting methods used by either company. Different accounting methods could have significantly affected the values of the ratios.

Recommendation/Conclusion

Based on the analysis above, I would endorse PepsiCo's stock. To begin with, it is likely that PepsiCo's aggressive utilization of debt (based on its high debt-to-equity ratio) could enable it to rake in higher revenue figures in future than it would without the utilization of debt. If the said debt is utilized well, the company need not worry about the additional interest expense.

It is also important to note that the PepsiCo's current ratio during the most recent financial year indicates that the company would not encounter any significant challenges remaining solvent during downturns in economic activity. When it comes to profitability, PepsiCo's return on equity for years 2011 and 2012 clearly indicates that its shareholders were better off than those of the Coca-Cola Company during the said years.

My preference for PepsiCo's shares is also founded on the company's efficient utilization of its assets. The high inventory turnover ratio as I have already indicated elsewhere in this text is an indicator of strong sales on PepsiCo's part. Should this continue to be the case into the future, it would offer some form of protection to the company should prices fall for one reason or another. The efficiency with which PepsiCo's collects the monies it is owed is also largely impressive. Given that accounts receivables are more like "interest free loans," the relevance of fast and efficient collection cannot be overstated. It should also be noted that as per the market ratios I have computed in table 4 above, PepsiCo's stock seems largely…

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