Comparing the Profitability of Pepsi and Coca Cola Companies

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The purpose of this report is to compare financial reports from the two largest soft drink manufacturers in the world. The Pepsi Co. and Coca Cola have been the industry's leaders in their market since the early 1900's. I will use relevant figures to determine profitability, and break down key ratios in profitability, liquidity, and solvency. By breaking down financial statements, and converting them to percentages and ratios, comparisons can be made between competitors regardless of size. First, let's take a look at Pepsi Co. to determine profitability, there are several ratios utilized. The profit margin is probably the most popular, This ratio is the net income divided the net sales. This helps identify the amount of net income generated by each dollar of sales. For the year of 2005, the profit margin for Pepsi was 12 1/2 percent. In 2004, the profit margin was 14.4 percent and in 2003 it was 13.3 percent. The profit margin for Coca Cola using the same ratio was at about 17 percent for 2005, down from the previous two years of about 18 percent. The average industry profit margin was at about 11.3 percent (Biz Miner 2005). This means that Pepsi Co was average, and maintain a solid profit. While Coca Cola's profit decreased ever so slightly, it was still higher than the industry average. Another look at profitability can be determined by analyzing the efficiency of each company. To do this, a ratio would evaluate how efficiently assets are used to generate sales( Weygandt 2008) This ratio would be the asset turnover. It uses net sales divided by average assets. In 2005, Pepsi Co's asset turnover was at 1.02 while Coca Cola's asset turnover was at 1.06. These are well below the industry average of about 3.5 (Biz Miner 2005). ... ... middle of paper ... ...istent increase of up to 19% while Coca Cola's dividend growth rate has increased, but only at an average of about 11%. Another factor in which I, as an investor, would consider would be the ROE or return on equity. This is determined by net income dividend by the average common stock holders equity. In 2005, Coca Colas ROE was at 28%, while Pepsi Co's was also at 28%. But a review of a 10 year period(dividendgrowthinvestors.com) reveals that Pepsi Co. has been strong between 28 to 34%, while Coca Cola has been around 25 to 33%. That fact that Pepsi Co. has steadily outperformed Coca Cola on the rate of returns to its investors confirms my decision to lean towards Pepsi Co. Don't be misinformed, both companies are strong performers and lead their industry in most every category. I recommend any potential investor to do the math and research for themselves.

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