Business Research Report #3 Financial Analysis
BUSI 1033 Introduction to Business
Chris Atallah
Yorkville University
Very few soft beverage manufacturers operate within North America and this is a direct result of the competition found within the industry. The entrance into the market is difficult due to the consumer loyalty associated with a given product, which reduces the financial viability of competing organizations (Scholes, 2015). The two largest organizations operating in the soft beverage industry are Coca-Cola and Pepsi. This organization has been in operation for more than a century and this can be attributed to the execution of appropriate financial strategies to allow for business growth. With that being said, the purpose of this paper is to perform a financial analysis of PepsiCo, Inc. Furthermore, a comparison of each company’s financial performance in the soft beverage industry will be performed and the more financially sound organization will be identified. The research questions will be addressed by reviewing peer-reviewed literature and evaluating the financial statements published by the organization.
Richardson (2008) reported that Coca-Cola was developed in 1886 by the physician, Dr. John S. Pemberton. The original concoction was marketed as a health elixir to cure a variety of ailments. Of course, the benefits associated with Coca-Cola were limited; however, exceptional marketing and the public’s previous knowledge of appetizing soft beverages quickly resulted in high sales. The growth of the Coca-Cola Corporation was relatively rapid due to their willingness to alter their marketing strategy to suit the needs of their client base. The organization attempted to develop advertising strategies to appeal to a broad audience by hiring well-known figures to drink Coca-Cola whenever they appeared in public (Richardson, 2008). As the organization continued to grow, Coca-Cola began to allocate billions of dollars each year to marketing to increase the amount of market space they could acquire. Today, as of February 8, 2017, Coca-Cola has a market valuation of $171.81 billion, which is a 1.1% increase from February 2016 (Google Finance, 2017). As such, one could conclude that the organization has experienced a substantial amount of growth and will continue to do so moving forward.
Similarly, the origins of the Pepsi Corporation are similar to Coca-Cola. Pepsi was first drafted in 1898 by the American pharmacist, Caleb Bradham. Again, Pepsi was developed as a health elixir to improve any ailment that modern science was unable to cure (Richardson, 2008). The unique taste of Pepsi resulted in steady revenue growth in the United States and this provided the organization with enough resources to devote to other ventures. As the success of Pepsi grew, so did the amount of available cash that could be utilized for improved marketing campaigns. The only real competitor of Pepsi was Coca-Cola and virtually every campaign was developed to describe how Pepsi was superior to the ‘other cola brand’ (Richardson, 2008, p. 75). Today, Pepsi has a market valuation of $163.23 billion, which is a 0.7% increase from January 2016 (Google Finance, 2017). Even though the market valuation of Pepsi is slightly less than Coca-Cola, the organization is still a market leader and will continue to grow as they acquire new customers.
The completion of a financial analysis, as per Moffett, Stonehill and Eiteman (2014), provides one with a basic understanding of how an organization’s performance will be affected moving forward. For example, if an organization is identified to have a significant amount of debt, then they will be less likely to invest in novel projects to diversify their product and/or services. A financial analysis is typically completed by reviewing an organization’s financial ratios, which broadly elucidates on their current financial viability. One typically acquires the financial statements of the organization in question and then calculates the financial ratios based upon empirical formulas. Moffett et al. (2014) indicated that one could then utilize this data to make an educated decision regarding the success of the organization, especially whether it would be an advantageous investment opportunity.
The liquidity ratio is a measure of an organization’s liquid assets and liabilities (Scholes, 2015). There are two common subsets of liquidity ratios, i.e. current and quick ratio, that can provide an accurate measurement of assets versus liabilities. The current ratio is calculated by dividing current liability by current assets, whereas quick ratio is calculated by dividing the sum of cash, marketability securities, and receivables by current liability (Scholes, 2015). The current ratio for Pepsi was 1.24 and 1.14 for FY 2013 and 2014, respectively. In comparison, the quick ratio for Coca-Cola was 1.13 and 1.02 for FY 2013 and 2014, separately (NASDAQ, 2017). Each organization has a relatively high current ratio, i.e. greater than one, and therefore, one could argue that each possesses sufficient assets to pay off their current liabilities (Scholes, 2015). To continue, the quick ratio for Pepsi was 0.93 and 0.85 for FY 2013 and 2014, separately. Similarly, the quick ratio for Coca-Cola was 0.90 and 0.81, respectively (NASDAQ, 2017). In contrast to the current ratio, the quick ratio would suggest that each organization is unable to pay for their current liabilities with their quick assets if a disadvantageous situation arose. This was determined due to the quick ratios being less than one, which indicates that an unequal number of quick assets is available (Scholes, 2015).