Introduction
PepsiCo is a public limited company that was formed in 1955 as a merger of Frito-Lay, Inc. and Pepsi-Cola Company. The company is based in the United States and it trades on the New York Stock Exchange. Further, it has a presence in over two hundred countries across the world. PepsiCo operates in the beverage industry. Analysis of the financial performance of PepsiCo is of importance because it has evolved tremendously in a highly competitive and regulated industry over the years. The main competitor of the company is the Coca-Cola Company. Despite the challenges in the economy and the industry in which the company operates, PepsiCo has continuously reported improved performance over the years. Thus, the company will be of interest to analyze. The home page of the company is located at http://www.pepsico.com/ (PepsiCo, Inc., 2014b). The paper seeks to compare various financial aspects of PepsiCo, Inc. and the Coca-Cola Company between 2010 and 2012. The financial information of PepsiCo, Inc. will be obtained from two websites, these are, http://www.pepsico.com/Investors/Annual-Reports-and-Proxy-Information and http://finance.yahoo.com/q/is?s=PEP+Income+Statement&annual (PepsiCo, Inc., 2014a; ABC News Network, 2014).
Profitability ratios
The table presented below shows a summary of various profitability ratios of PepsiCo and Coca-Cola Company.
PepsiCo, Inc.
Coca-Cola Company.
Analysis
In the table, it can be observed that the profit margin for PepsiCo declined from 10.93% in 2010 to 9.69% in 2011. The ratio further declined to 9.43% in 2012. On the other hand, the profit margin for the Coca-Cola Company declined from 33.63% in 2010 to 18.42% in 2011. The value increased to 18.78% in 2012. Thus, it can be noted that the profit margin for the Coca-Cola Company is higher than that of PepsiCo. This implies that the Coca-Cola Company performs better in terms of profitability than PepsiCo. Besides, it may also indicate that the Coca-Cola Company is more efficient in managing cost of sales and operating cost than PepsiCo. The information in the table also indicates that both companies reported a decline in profit margin in 2011 and 2012. This can be attributed to the change in consumer consumption habit, consumption pattern and preferences.
This can be explained by the hard economic conditions and health concerns. The decline reported in 2011 and 2012 by both companies can also be explained by competition from emerging economies. The asset turnover for PepsiCo declined from 1.07 times in 2010 to 0.94 times in 2011. The value further declined to 0.89 times in 2012. The ratio indicates that the amount of revenue generated from each unit of asset declined over the period. In the case of the Coca-Cola Company, the asset turnover increased from 0.58 times in 2010 to 0.61 times in 2011. However, in 2012, the ratio declined to 0.58 times. It can be noted that despite the decline in the ratio, the asset turnover ratios for PepsiCo were higher than those of the Coca-Cola Company. This shows that PepsiCo is more efficient in utilization of assets than the Coca-Cola Company.
Return on assets for PepsiCo also declined from 11.7% in 2010 to 9.14% in 2011. The value further declined to 8.38% in 2012. In the case of the Coca-Cola Company, the return on assets declined from 19.42% in 2010 to 11.21% in 2011. The value further declined to 10.86% in 2012. Return on assets for the Coca-Cola Company is higher than that of PepsiCo. It implies that the Coca-Cola Company is more profitable than PepsiCo. Further, it can be observed that both companies reported a decline in return on assets. Thus, it can be noted that both companies reported a decline in profitability due to changes in market trend.
Free cash flow
The table presented below shows the free cash flow for the two companies.
PepsiCo, Inc.
Coca-Cola Company.
Based on the table above, free cash flow is the difference between operating cash flow and the amount spent on capital expenditure. Free cash flow represents the cash flow that can be used by the company to invest in other opportunities. The free cash flow for PepsiCo increased from $5,195 million in 2010 to 5,605 million in 2011. The value further increased to $5,765 million in 2012. On the other hand, it can be observed that the free cash flow for the Coca-Cola Company declined from $7,317 million in 2010 to $6,554 million in 2011. In 2012, the value increased to 7,865. The values for the Coca-Cola Company were higher than those for PepsiCo. This implies that the Coca-Cola Company has a high amount of resources that can be invested to increase the shareholder’s wealth. Thus, there is a higher potential for increase in profitability at the Coca-Cola Company than at PepsiCo, Inc.
Analysis of cash
The table presented below shows a summary of the cash position of the two companies.
PepsiCo, Inc.
Coca-Cola Company.
The cash position for PepsiCo is lower than that of the Coca-Cola Company. This can be observed in the higher balance of total cash for the Coca-Cola Company than PepsiCo. The higher cash balance for the Coca-Cola Company contributes to a better liquidity position than PepsiCo. This can be observed in the higher values of current and quick ratio for the Coca-Cola Company than for PepsiCo. Thus, the table above indicates that the Coca-Cola Company has better liquidity and financial strength than PepsiCo, Inc.
Conclusion
The analysis above shows that the Coca-Cola Company is more profitable than PepsiCo, Inc. However, the profitability of both companies declined over the years due to the changes in consumer purchase habits and preferences. Further, analysis of free cash flow indicates the Coca-Cola Company has a high amount of resources that can be invested to increase the shareholder’s wealth. Thus, there is a higher potential for increase in profitability at the Coca-Cola Company than at PepsiCo, Inc. Further, analysis of the relative cash position indicates that Coca-Cola Company has better liquidity and financial strength than PepsiCo, Inc. In summary, the overall financial position of that Coca-Cola Company is better than that of PepsiCo, Inc.
References
ABC News Network. (2014). Pepsico, Inc. (PEP). Web.
PepsiCo, Inc. (2014a). Annual report & proxy information. Web.
PepsiCo, Inc. (2014b). Home page. Web.