Financial Analysis Comparing a minimum of two years of financial data is needed to make a financial analysis of a company against their competitor. In this paper I will be making a comparison of two companies, Coca Cola Company and PepsiCo Inc.. As this research paper was finalized, the financial analysis contradicted my previous thoughts and showed Coca Cola as the prime investment option. Further information provided in this paper will lay out the details found doing this research of why Coca Cola Company is the better option.
When comparing companies it is necessary to identify key properties in both, to identify who the stable companies are. Investing money into a company is a big commitment and knowing its position is critical. Profitability, liquidity, and solvency are used in this process to determine the health of the companies that are being compared. Detailed financial documents will provide all the information needed to calculate the health of these companies. In order to document a company’s vertical and horizontal analysis, it is required to see what trend the company has had over the years. A ratio analysis is used from the liquidity, profitability, and solvency through analyzing this data. This will provide an educated prediction of what the company might do in the future, which will help determine if it would be a good investment or not.
Financial Dictionary defines liquidity as “the measure for a company’s ability to meet short-term obligations using its liquid assets”. In other words, liquidity is a number expressing the ability of a company paying their short-term debts. This number is expressed as a percentage or ratio of current liabilities. Liquidity can be calculated into a ratio by dividing the current cash by current liabilities. This number is sometimes referred to as the current ratio. The importance of this ratio is that it shows the ability of the company to cover short-term debts if something bad happens. This number will help tell potential investors if the company is in a healthy position or not. Per Investopedia.com, “The higher the ratio, the larger the safety margin the company has to cover short-term debts”. The ability for the company to produce money from product, as well as their efficiency to do so, can also be considered liquidity ratio. Another determining factor of liquidity is when a company has trouble receiving payment on receivables.
For PepsiCo Inc., in order to get the liquidity ratio we use the formula Current Ratio = Current Assets divided by Current Liabilities. To use this formula, retrieve the data from the balance sheet and input them into the appropriate place.
Current ratio of PepsiCo Inc.:
Current Ratio 2005 = 10,554 (current assets) ÷ 9,406 (current liabilities) = 1.12 = 1.12:1
Current Ratio 2004 = 8,639 (current assets) ÷ 6,752 (current liabilities) = 1.28 = 1.28:1
Coca Cola Liquidity Ratio:
Current Ratio 2005 = 10,250 (current assets) ÷ 9,836 (current liabilities) = 1.04 = 1.04:1
Current Ratio 2004 = 12,281 (current assets) ÷ 11,133 (current liabilities) = 1.10 = 1.10:1
Total Assets from cash and cash equivalents 2005: 4,701 (cash and cash equivalents) ÷ 29,427 (total assets) = 0.1598 = 15.98%
Total Assets from cash and cash equivalents 2004:
6,707 (cash and cash equivalents) ÷ 31,441 (total assets) = 0.2133 = 21.33%
Percent of current assets in 2005: 10,250 (current assets) ÷ 29,427 (total assets) = 0.348 = 34.8%
Percent of current assets in 2004: 12,281 (current assets) ÷ 31,441 (total assets) = 0.392 = 39.2%
Now to find increase or decrease between the two years: 10,250 (total current assets 2005) ÷ 12,281 (total current assets 2004) = 0.835 = 83.5%
From 2004 to 2005 there is a 83.5% decrease. Now subtract the 2005 from 2004 and there is a 16.5% decrease in total current assets. 9,836 (total current liabilities 2005) ÷ 11,133 (total current liabilities 2004) =