FINANCIAL ANALYSIS 1
Introduction
Founded in 1886, Coca Cola is currently one of the leading brands in consumer
recognition with an expansive geographical distribution network that sustains unit sales of
approximately 3200 servings. Since the late 1890’s when Coca Cola was marketed as a
caffeine based tonic which rapidly expanded into forty four countries prior to world war two.
Under the leadership of individuals such as Asa Griggs Candler, J. Paul Austin and Muhtar
Kent, the company has managed to sustain its growth to earn the title of the most valuable
brand with a high brand value and significant net worth.
Pepsi draws similar kernels to Coca Cola with the beverage being founded in 1898
following a series of experiments by pharmacist Caleb Bradham who created and patented
the trademark. Pepsi was registered in as a brand 1903 but unlike Coca Cola which relied on
internal growth as an expansion strategy, Pepsi utilized a franchise system and various
marketing campaigns that enabled the brand penetrate the global mareket.
The aim of this paper is to provide a financial comparison of The Coca Cola Company
and Pepsi Inc using annual reports from the year 2003 to 2005. The financial records mainly
the balance sheets and income statements will offer a detailed outlook of the companies’
financial status through horizontal, vertical and ratio analysis. The analyses will also help in
identifying the financial trends of both companies which will be the subject of the
recommendations section of this paper. The companies’ consolidated financial records have
been annotated in line with the purpose and scope of this paper.
FINANCIAL ANALYSIS 2
Vertical Analysis
Vertical analysis reports each financial statement item and expresses it as a base
amount or a percentage. It offers an effective method of comparing the balance sheets of
two or more companies (Weygandt, Kimmel & Kieso, 2008). Below is the vertical analysis of
both the income statements and balance sheets of The Coca Cola Company and Pepsi Inc,
expressed as a percentage of revenue for the income statement and percentage of total
assets for the balance sheet.
PepsiCo Inc Income Statement (amount in $millions)
Vertical Analysis
2005 2004 2003 2005 2004 2003
Total Revenue 32,562 29,261 26,971 100% 100% 100%
Cost of sales 14,176 12,674 11,691 44% 43% 43%
Operating income 5,922 5,259 4,781 18% 18% 18%
EBIT 6,382 5,546 4,992 20% 19% 19%
Income tax provision 2,304 1,372 1,424 7% 5% 5%
Net Income 4,078 4,212 3,568 13% 14% 13%
Coca Cola Income Statement (Amount in $millions)
Vertical Analysis
2005 2004 2003 2005 2004 2003
Revenue 23,104 21,742 20,857 100% 100% 100%
Cost of sales 8,195 7,674 7,776 35% 35% 37%
Operating income 6,085 5,698 5,221 26% 26% 25%
EBIT 6,690 6,222 5,495 29% 29% 26%
Income tax provision 1,818 1,375 1,148 8% 6% 6%
Net income 4,872 4,847 4,347 21% 22% 21%
PepsiCo Inc. Balance Sheet (amount in $Millions)
2005 2004 2005 2004
Vertical Analysis
Assets
Current assets 10,454 8,639 33% 31%
Property/Plant/Equipment- Net 8,681 8,149 27% 29%
Goodwill 4,088 3,909 13% 14%
Total Assets 31,727 27,987 100% 100%
FINANCIAL ANALYSIS 3
Liabilities
Current liabilities 9,406.00 6,752.00 30% 24%
Long term debt obligations 2,313.00 2,397.00 7% 9%
Total liabilities 17,476 14,464 55% 52%
Coca Cola Co. Balance Sheet (amount in $Millions)
2005 2004 2005 2004
Vertical Analysis
Assets
Current assets 10,250 12,281 35% 39%
Property/Plant/Equipment- Net 5,786 6,091 20% 19%
Goodwill 1,047 1,097 4% 3%
Total Assets 29,427 31,441 100% 100%
Liabilities
Current liabilities 9,836 11,133 33% 35%
Long term debt obligations 1,154 1,157 4% 4%
Total liabilities 13,027 15,506 44% 49%
Discussion
The vertical analysis of the income statements reveals that Pepsi has been making a
low average net income of 13% relative to revenue as compared to Coca Cola which has
been making an average net income of 21%. However, Coca Cola has been paying higher
taxes of an average 6% relative to revenue as compared to Pepsi which has lower tax
provisions of 5%. Through the vertical analysis, it is evident that one of the main factors
contributing to Pepsi’s lower net income is the high cost of sales which is approximately 43%
of revenue as compared to Coca Cola’s 35%. The balance sheets also indicate a marked
difference in the distribution of assets and liabilities. For Pepsi, the company reduced its
current assets from 2004 to 2005 but the value of goodwill, property and equipment
decreased. Despite the company reducing its long term debt obligations, it increased its
current liabilities by 6% of total assets leading to an overall increase of total liabilities by 3%.
Coca Cola on the other hand increased its current assets from 2004 to 2005 while increasing
the value of goodwill, property and equipment against total assets. Long term debt
FINANCIAL ANALYSIS 4
obligations remained unchanged at 4% though there was a general decreased in current
liabilities and total liabilities by 2% and 5% respectively.
Horizontal Analysis
Horizontal analysis can be applied to evaluate a series of financial statements to
determine any increase and decrease in values that have occurred over a specific period of
time (Weygandt et al, 2008). The difference in values is then expressed a percentage with
respect to the base year. A horizontal analysis of The Coca Cola Company and PepsiCo Inc
income statements and balance sheets is shown below with the base year being 2003 for
the income statement and 2004 for the balance sheet.
PepsiCo Inc Income Statement (amount in $millions)
Horizontal Analysis
2005 2004 2003 2005 2004 2003
Total Revenue 32,562 29,261 26,971 21% 8% 0%
Cost of sales 14,176 12,674 11,691 21% 8% 0%
Operating income 5,922 5,259 4,781 24% 10% 0%
EBIT 6,382 5,546 4,992 28% 11% 0%
Income tax provision 2,304 1,372 1,424 62% -4% 0%
Net Income 4,078 4,212 3,568 14% 18% 0%
Coca Cola Income Statement (Amount in $million)
Horizontal Analysis
2005 2004 2003 2005 2004 2003
Revenue 23,104 21,742 20,857 11% 4% 0%
Cost of sales 8,195 7,674 7,776 5% -1% 0%
Operating income 6,085 5,698 5,221 17% 9% 0%
EBIT 6,690 6,222 5,495 22% 13% 0%
Income tax provision 1,818 1,375 1,148 58% 20% 0%
Net income 4,872 4,847 4,347 12% 12% 0%
PepsiCo Inc. Balance Sheet (amount in $Millions)
2005 2004 2005 2004
FINANCIAL ANALYSIS 5
Horizontal Analysis
Assets
Current assets 10,454 8,639 21% 0%
Property/Plant/Equipment- Net 8,681 8,149 7% 0%
Goodwill 4,088 3,909 5% 0%
Total Assets 31,727 27,987 13% 0%
Liabilities
Current liabilities 9,406.00 6,752.00 39% 0%
Long term debt obligations 2,313.00 2,397.00 -4% 0%
Total liabilities 17,476 14,464 21% 0%
Coca Cola Co. Balance Sheet (amount in $Millions)
2005 2004 2005 2004
Horizontal Analysis
Assets
Current assets 10,250 12,281 -17% 0%
Property/Plant/Equipment- Net 5,786 6,091 -5% 0%
Goodwill 1,047 1,097 -5% 0%
Total Assets 29,427 31,441 -6% 0%
Liabilities
Current liabilities 9,836 11,133 -12% 0%
Long term debt obligations 1,154 1,157 0% 0%
Total liabilities 13,027 15,506 -16% 0%
Discussion
For the income statements, a horizontal analysis reveals that had a significant
increase in revenue (13%) as well as a similar increase in cost of sales. Coca Cola on the
other hand indicates a slight growth in revenues by 7% with a 6% increase in cost of sales.
While Pepsi surpassed Coca cola’s EBIT for the 2005 fiscal year, the company recorded a 4%
decrease in net profit as compared to Coca Cola which remained consistent at 12%. The
horizontal analysis of the balance sheets indicates Pepsi increased its total assets by 13%
from 2004 to 2005, while Coca Cola decreased its total assets by 6%. Conversely, Pepsi
increased its total liabilities by 21% while Coca Cola decreased its liabilities by 16%.
Ratio Analysis
FINANCIAL ANALYSIS 6
Ratio analysis is used to evaluate the relationship of various financial statement
values. It enables a company to quantify its performance other companies in the same
industry or against average ratios within an industry (Weygandt et al, 2008).
Liquidity Ratios:
Current Ratio = Current Assets/Current Liabilities
Coca Cola 2004 2005
Current Assets 12,281 10,250
Current Liabilities 11,133 9,836
Current Ratio 1.103117 1.04209
Pepsi 2004 2005
Current Assets 8,639 10,454
Current Liabilities 6,752 9,406
Current Ratio 1.279473 1.111418
Quick Ratio =Current Assets –Inventory/Current Liabilities
Coca Cola 2004 2005
Current Assets 12,281 10,250
Inventory 1,420 1,424
Current Liabilities 11,133 9,836
Quick Ratio 0.975568 0.897316
Pepsi 2004 2005
Current Assets 8,639 10,454
Current Liabilities 6,752 9,406
Inventory 1,541 1,693
Quick Ratio 1.051244 0.931427
Profitability Ratios:
Gross Profit Margin= Gross Profit/Sales
Coca Cola 2004 2005 Pepsi 2004 2005
Gross Profit 16,587 18,386
Revenue 29,261 32,562
Gross Profit Margin 56.69% 56.46%
FINANCIAL ANALYSIS 7
Gross Profit 14,068 14,909
Revenue 21,742 23,104
Gross Profit Margin 64.70% 64.53%
Return on Assets = Net income/Total Assets
Coca Cola 2004 2005
Net Income 4,847 4,872
Total Assets 31,441 29,427
ROA 15.42% 16.56%
Pepsi 2004 2005
Net Income 4,212 4,078
Total Assets 27,987 31,727
ROA 15.05% 12.85%
Solvency Ratios:
Debt to Equity =Total Debt/Owners Equity
Coca Cola 2004 2005
Total Debt 1,157 1,154
Owners Equity 15,935 16,355
D/E 7.26% 7.06%
Pepsi 2004 2005
Total Debt 2,397 2,313
Owners Equity 13,572 14,320
D/E 17.66% 16.15%
Debt to Asset= Total Debt/Total Assets
Coca Cola 2004 2005
Total Debt 1,157 1,154
Total Assets 31,441 29,427
D/A 3.68% 3.92%
FINANCIAL ANALYSIS 8
Pepsi 2004 2005
Total Debt 2,397 2,313
Total Assets 27,987 31,727
D/A 8.56% 7.29%
Discussion
Liquidity ratios are used in calculating a company’s capacity to meet its short term
obligations. The current ratio for both companies has decreased indicating that there is a
convergence in value for the current assets and current liabilities of both companies
(Weygandt et al, 2008). While Coca Cola has decreased both its current assets and current
liabilities, Pepsi has increased both, which can be of positive or negative impact to the
company depending on its short term strategies. The quick ratio confirms that both
companies have reduced their short term liquidity, though Pepsi still maintains
comparatively high liquidity.
Profitability ratios assist in evaluating the productivity of a company by measuring
gross Profit as a percentage of sales to determine if a company is profitable (Weygandt et al,
2008). Both Coca Cola and Pepsi indicate a decrease in gross profit margin by 0.2% from
2004 to 2005. While both companies show an increase in the gross profits, particularly in
Pepsi, there has been a substantial increase in revenue suggesting that there is a wider
disparity between gross profit and revenue. The slightly higher gross profit margin in Coca
Cola can be attributed to its wide distribution network that has enabled the company access
more markets than Pepsi. Pepsi is showing a decline in ROA as opposed to Coca Cola,
suggesting Pepsi is not maximizing its existing assets, which is indicative of inefficiency. The
FINANCIAL ANALYSIS 9
increasing RAO trend in Coca Cola reflects good management of the company’s assets and
underscores efficiency and effectiveness within the company.
A company’s capability to meet its long-term obligations can be assessed using
solvency ratios are by evaluating obligations such as total debt and owners’ equity
(Weygandt et al, 2008). The Total Debt to Total Equity ratio in both companies has decreased
from 2004 to 2005, with both companies reducing their total debt while increasing equity
which is positive for the companies as they are moving towards equity securities. The
increase in total debt to total assets ratio for Coca Cola is largely due to a decrease in assets,
while Pepsi has increased total debt but maintained an even higher value of total assets
resulting in a D/A decrease. This indicates that Pepsi is currently in a better a position to
meet long term obligations as compared to Coca Cola.
Recommendations
Both Coca Cola and Pepsi show positive signs of growth and financial stability though
there are a few areas that should be addressed to ensure their financial security. According
to the horizontal analysis and current ratio, Pepsi is holding an excessively high number of
current assets which may be indicative of inefficiency. If the company does not plan to utilize
the current assets within the next three months, then it is recommended that the company
invests in more strategic assets to ensure its consistent growth. Pepsi should also strive to
control of sales which is significantly affecting the company’s net income. The company
should review all its expenses and eliminate all redundant processes that may be increasing
business costs. Coca Cola should also monitor its assets base to ensure growth and
productivity through the purchase of additional assets. Both companies should also strive to
FINANCIAL ANALYSIS 10
maintain a Debt to Asset ratio of 1.0 and below in order to ensure they are more reliant on
equity as a source of funding, rather than debt.
Reference
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008). Financial Accounting (6th ed.). Hoboken,
NJ: Wiley.
