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Comparative Financial Analysis

Comparative Financial Analysis: Coca-Cola Co., Keurig Dr. Pepper, and PepsiCo

Introduction

Food forms part of the most important consumer goods since it is the most important basic need. Therefore, many companies have come up to offer different products that can fully address the consumer needs. CocaCola, PepsiCo and Keurig Dr. Pepper have emerged as the most competitive companies for consumers of a glass of soda, chips and also coffee. These companies have become household names with their products notably being found in restaurants, grocery stores, during sporting activities and even in households. The company’s competitiveness can however be explored better through their individual financial analysis. The purpose of this paper is to give a comparative analysis of the financial performance of Coca Cola, Keurig Dr. Pepper and PepsiCo. Besides the general overview of these companies, a financial ratio analysis and other economic aspects such as LIFO and FIFO will also be discussed.

The Overview of the Companies

CocaCola s an American multinational corporation which was established in 1892 in Atlanta Georgia. The company has interests in retailing, manufacturing as well as marketing of nonalcoholic beverage concentrates and also syrups. In the US, the company spreads to more than 15 states with an employee population of approximately 15,000 people. The company is built on a mission to refresh people’s mind, inspire and create optimism. The brand which the company has established from time to time is based not only on providing tasty products but also in engaging in philanthropic activities such as advocating for climate change and fighting homelessness (Tian & Yu, 2017). Some of the company’s competitors include PepsiCo, Nestle, Red Bull and Parle among others.

The second company is Keurig Dr. Pepper which is a merger between Dr. Pepper Snapple Group and Keurig Green Mountain Company which happened in July of 2018. The original brand of the company was established in 1885 in Waco Texas by Charles Alderton. According to information from the company’s website, Keurig Dr. Pepper prides itself in being the number one flavored carbonated soft drink company with a strong marketing base for noncarbonated soft drinks. Its expansion has seen it to 22 manufacturing locations and more than 100 go downs and distribution centers that offer thousands of employment opportunities. Furthermore, the company partners with other bottling and distribution companies that help to improve the company’s operationalization. Besides, the company employs different manufacturing and distribution methods that advocate for environmental stability. The company’s competitors include oca-Cola Enterprises, PepsiCo, The Coca-Cola Company and Mondelez International.

The third company is PepsiCo which was founded in 1965 by Donald Kendall, Herman Lay and Frito-Lay. The company prides in different beverage brands and snack foods from Pepsi cola to also offering Cheetos chips. The company serves its products to more than two hundred destinations with a clear vision of sustainability. The performance with purpose philosophy which was created by one of the company’s best CEOs Indra Nooyi saw it diversify its product portfolio with the main focus being on production of healthier foods. The company’s cultural perspectives are also defined in its philosophy of corporate responsibility and embracing clean manufacturing approaches. The company specializes in food and beverage manufacturing with a specific focus on healthy snack foods and soft drinks. The company is also defined by its philosophy of investing in people and the community towards attaining successful growth. Some of PepsiCo competitors include Dr Pepper Snapple Group (DPS), Coca-Cola Enterprises (CCE), and Reeds (REED).

Ratio Analysis

Financial ratios are critical tools used in financial reporting especially for quantitative analysis. Some ratios are key in evaluating both short and long-term financial and operational performance hence key in exploring trends in business or giving warning signs for businesses going under.

The current ratio or the working capital ratio is a ratio that compares all the company’s current assets to its current liabilities. Quick ratio measures the ability of a company to offset all its current liabilities without necessarily having to either sell its inventory or have additional financing. Consequently, the ratio dictates the ability of the company to address all its short-term obligations. The formula for finding the quick ratio is

Quick ratio = (current assets – inventory)/current liabilities

Inventory turnover ratio is a ratio that shows the number of times that the company has sold and then replaced an inventory n a given time period. It therefore dictates how well a company can effectively manage its inventory. Often, a higher turnover rate helps to reduce the storage and the holding costs. The formula for the inventory turnover ratio is

Inventory Turnover = Net sales/ average inventory at selling price

The other ratio is the accounts receivable turnover ratio which dictates the company’s collection of accounts receivable. The ratio dictates the proportion of quality customers likely to offset their debts quickly. When the ratio is high, it indicates that the company may likely be operating on a cash basis. Accounts receivable turn over ratio formula is

ART ratio = net credit sales/ average accounts receivable

The last ratio is the asset turn over which is a financial ratio which measures how efficient a company uses its assets to make more revenue or sales income. The ratio is given as

Asset turnover ratio = Net sales/average total assets

Gross profit percentage is one of the most critical measures that can help determine the financial performance of a business (Delen, Kuzey & Uyar, 2013). The ratio reflects how efficient the business is in terms of utilizing its labor, suppliers and raw materials. The formula for finding the gross profit percentage is given as

(Total sales – Cost of goods sold) / Total sales * 100%

The ratio analysis of the three companies can be summarized in the table below and the excel file attached as

Ratio	Coca-Cola	Pepsi	Keurig Dr. Pepper
Current Ratio	1.34	1.28	0.31
Quick ratio	1.25	1.15	0.21
Inventory turn over	24.49	23.08	16.07
Asset turnover ratio	0.74	0.84	0.23
Gross profit percentage	79.69	55.06	82.79

A higher current ratio shows that a company’s assets are higher than the liabilities and therefore the company is able to pay all its creditors in time (Miller-Nobles et al., 2018). In tis case, Coca-Cola is better placed to offset all its debt better than PepsiCo and Keurig Dr. Pepper can. Similarly, quick ratio is a conservative measure that describes the company’s liquidity as well as financial health. A higher ratio is recommended since it shows the company’s ability to offset its debts. Therefore, Coca-Cola which has a higher quick ratio is in a better position to offset its debts as compared to the other two companies.

Inventory turnover measures the number of times within a given period a company is able to replace what it has sold in terms of inventory. The higher the inventory turnover, the better as it indicates better sales and higher demand for the company’s products (Miller-Nobles et al., 2018). Therefore, Coca Cola is still the best to invest in as it has a better sale turn over when compared to the other companies. Asset turnover ratio indicates the efficiency that the company uses to deploy its assets so as to generate revenue. This efficiency is better for PepsiCo followed by Coca-Cola. For gross profit margin, Keurig Dr. Pepper is better followed by Coca Cola.

Allowance Method and Direct Write off method

Subjects Covered

An allowance method is a method of writing off a budget which involves small businesses how much of the bad debt they have at the end of the year. On the other hand, the direct write off approach is when business players write off a bad debt immediately, they conclude that a given customer may not manage to pay an invoice. Consequently, direct write-off method regards bad accounts as an expense especially at a point when debts are regarded as uncollectible (RINI, 2020). The method is often used for purposes of federal income taxes. The allowance method on the other hand offers uncollectible accounts in advance which acts like setting aside some money in reserve bank. The allowance method is used by Coca Cola and Keurig Dr. Pepper while PepsiCo use the direct write off.

Straight line, double declining balance and the unit-of-production depreciation methods

A straight-line method is a way of finding deprecation or amortization or expensing an asset over a longer time period than the one it was purchased. On the other hand, a double-declining balance depreciation method is defined as an accelerated deprecated approach which is counted as an expense more rapidly when compared with the straight-line approach. Lastly, the unit of production method refers to an approach of finding deprecation of an asset’s value over time. The method is often useful when the value of an asset is more related to the number of units produced rather than the number of years the units are in use. For our case, all the three companies used a straight-line depreciation method.

Difference between LIFO and FIFO

LIFO and FIFO are methods often used to determine the value of an unsold inventory and the other critical transactions like the costs of goods sold and the repurchased stock that have to be reported at the end of an accounting year. FIFO contends that it is the unsold goods that have to be recently added to the inventory while LIFO argues that the most recently added goods in the inventory will have to be sold first. For the three companies, Coca-Cola uses the FIFO method while both PepsiCo and Keurig Dr. Pepper uses the LIFO approach.

Different Categories of intangible Assets

Intangible assets are those that are not physical in nature and they include goodwill, brand recognition as well as the intellectual properties. Such assets are important as they are sources of strong competitive advantage for businesses and they are also key to establishing customer value and establishing business reputation. The values of these assets are often never included in the balance sheet. Coca Cola uses the distribution rights, its reliable customer relationships and goodwill. Keurig Dr. Pepper’s intangible assets are the customer relationships and distribution rights while PepsiCo’s intangible assets are the acquired franchise and the distribution rights.

Recommendations

From the analysis, I will recommend an investor to invest in Coca Cola which has better financial growth as compared to the other companies. With a higher current ratio, the company can comfortably offset its debts and hence its financial growth is certain. For a company like Keurig Dr. Pepper, it would be risky to invest in it since it has very low current and quick ratio which means that in the long term, it may not sustain itself financially.

Conclusion

The three companies have become icons in the American culture and beyond especially when it comes to a cup of coffee or an ice-cold coke. Based on the used financial ratios, different accounting approaches and the income statements, it shows that Coca Cola is much more ahead competitively. Coca Cola’s financial position shows that the company has a better current ratio and a quick ratio indicating that it can easily offset its liabilities and creditors. From the inventory turnover, the Coca Cola company is better placed to manage its stock of goods. This task has therefore underscored the important role that financial ratios have in exploring the feasibility for investors to invest in their companies of choice.