Final Project: Financial Analysis
Two of the major competing companies that manufacture drinks are Coca-Cola, and Pepsi. They both produce regular water, flavored water, and soft drinks of many kinds. While this essay will explain what vertical and horizontal analysis is, it will also explain each company’s vertical and horizontal analyses. Also the ratios for each company will be given, and several examples as to how each company can improve in their financial status. The financial analysis of both companies is very important so both businesses can understand how they are being managed.
It is very important for a company to keep up to date financial documents, audits, taxes, and other financial statements. This is the information needed to show what a company is doing with their finances and what they have done in the past. This information is also very useful for management to use and know what to do differently in future months or years. Information like this allows a company to grow, and have healthy production going forward. Having this data also helps management, investors, and creditors know if there are any issues that have come up in the past that need to be worked on.
While in competition, these two companies have continued to grow in size, market value, and profit sales. Since the beginning of their competition, both companies have ventured into new areas of sales, (such as snack foods, iced tea, and bottled water) and they continue to think of new ways to grow their business yearly. In order for both companies to continue to grow in the ways they foresee, they must have investors to invest money in the company.
These current and potential investors will first look at both company’s financial statements and data, find as much information as possible needed to make a decision, then make a judgment call as to which company is the best investment at the time. By competing for the number one position of drink provider, both companies have continued to grow and prosper by creating new beverages throughout the years. Since they both have the advantage of being known on a global scale, they have been rated number one and two for many years.
They have modeled practices that one another have followed in order that they could overcome any obstacles to worldwide manufacture and distributions. (The Coca Cola Company, 2009). Although they are two different companies, they produce somewhat similar products, and their distribution techniques and services are very similar also. Both companies continue to use the “follow up strategy”, which was used to explain that when one of the companies launched a new product the other would very quickly come up with a similar product or service.
Using this method one could see why these two companies easily pass all other companies in the competition. Even though both these companies are both growing rapidly and gaining huge profits yearly, they have also had to deal with global issues, politics, and precedents. They both have taken risks getting into business with markets where they didn’t necessarily belong and where the risk was far too great. So they had to back out of some markets because of several issues that arose from those ventures. They had to find who their target audience was and begin to produce products that were specifically made for that group of people.
By making it appear as if they are following the highest moral and ethical practices, they create a product that is focused towards a specific population. Then, even though other companies cannot compete at the level that Pepsi and Coke can, they also try to use the same target influences in global markets. There are three tools of the financial statement analysis: Vertical, Horizontal, and Ratio Analysis. Each tool has a different function, but each helps to analyze important information and data that is in a financial statement.
The Vertical Analysis, also called Common Size Analysis, is used to express data in a statement as a percent from the base amount. The base figure given represents the total assets of each company. The main starting point for the financial analysis is the total assets amount for each company. This becomes useful when a company wants to be able to see what percent of assets cash and other items represent. The Horizontal Analysis, also called Trend Analysis, is used to evaluate how a company performs within an accounting period to another accounting period.
The change in percentages given can help a company to better see trends over a designated time frame. Lastly, Ratio Analysis is used to express a relationship among specific items on a financial statement. These relationships are give n in terms of a percent, or a rate. * To fully examine Pepsi I must look at the Consolidated Balance Sheet and take a look at the Current Assets, Current Liabilities, and Total Assets for years 2005 and 2004. After doing so I am able to calculate the Current Ratio for both years 2005, and 2004. The Current Ratio for 2005 is 10,454*/9,406*= 1. 11:1, and the Current Ratio for 2004 is 8,639*/6,752*= 1.28:1.
To find the vertical analysis of both years I must first compute the current assets and divided them by the total assets for each year, I then get: 2005: 10,454*/31,727*= 0. 32949= 33%, and for 2004: 8,639*/27,987*= 0. 3867= 39%. Then for the horizontal analysis I got Assets: 31,727* – 27,987*27,987*= 0. 1336= 13. 3%, and for Liabilities: 17,476* – 14,464*14,464*= 0. 2082= 21%, which gives us the change in total assets. (Weygandt, Kimmel, & Kieso, 2008) After examining The Coca-Cola Company’s Consolidated Balance sheet and using the Financial Accounting worksheet I have found the Current Ratios for both years (2005, and 2004).
The total assets that we previously stated above can be used with other items on the company’s balance sheet. For example, the cost of sales for Pepsi in 2004 was $12,674* which gives the ratio percentage of 45. 3% in their total assets. In 2005, the cost of sales for Pepsi was $14,167*, which gives the ratio percentage of 44. 7% in their total assets. For Coke their cost of sales in 2004 was $7,674*, which yields the ratio percentage of 24. 4% in their total assets, and in 2005 their cost of sales was $8,195*. This gives us the ratio percentage of 27.8% in their total assets.
Over the two years (2004 and 2005) Pepsi’s cost of sales sold differed by a small amount of . 5%, Coke on the other hand an increase of 3. 4% in the same two year time frame. When looking at this information an increase in items sold does not always reveal a positive analysis, because this figure does not go far enough into detail as to whether the increase given is a positive measure. Net income will be the next item to be discussed for the two companies. In 2004, Pepsi had a net income of $4,212*; this gives us a ratio percentage of 15.1% of their total assets. In 2005, Pepsi’s net income was $4,078*.
This shows that the ratio percentage of 13. 2% is Pepsi’s total assets for 2004. So between 2004 and 2005 there is a decrease in their net income of 1. 9%. Coke had a net income of $4,847* in 2004, and a net income of $4,872* in 2005. This gives a ratio percentage of 15. 4% of their total assets in 2004, and a ratio percentage of 16. 6% in 2005. Coke unlike Pepsi has an increase of 1. 2% over these two years. Now we will discuss the current liabilities of each company for 2004 and 2005.
In 2004 Pepsi’s current liabilities totaled $6,752*, which is the ratio which is the ratio percentage of 24. 1%. For 2005 their current liabilities was $9,406*, which gives the ratio percentage of 29. 9%. This shows that there was a 2% increase in Pepsi’s assets. When looking at Coke their current liabilities for 2004 were $11,133* this gives us the ratio percentage of 35. 4%, and for 2005 their current liabilities was $9,836*. This shows a ratio percentage of 33. 4%. This information reveals to us that there was a 1% decrease in Coke’s liabilities from 2004 and 2005.
Looking at both companies total liabilities continues to tell us even more information about their financial status. In 2004 Pepsi’s total liability was $14,464*, which is a ratio percentage of 51. 7%. While their total liabilities in 2005 were $17,476*, so the ratio percentage is 55. 1%. This reveals their 3. 4% increase in their total liabilities for 2004 and 2005. Coke on the other hand had a 4. 9% decrease in total liabilities within these two years. Their total liabilities in 2004 were $15,506* with a ratio percentage 49. 3%, and for 2005 their total liabilities were $13,072* with a ratio percentage of 44.4%.
After reviewing all the information for both Pepsi and Coke we can conclude that both companies experienced lower net profits for the year of 2005 then in 2004. I think that both companies should look into fixing their operation so that they can reduce this expense, once this is done they can increase their profit margins. This will help to get rid of reductions in their profits that have seemed to be nonstop. Since Pepsi had a 5. 8% increase in liabilities and they only had a 2% increase in their assets, the increase in debt did not help the company.
Pepsi would better benefit if they looked into finding strategies that would help in the reduction of their total current liabilities. At this time they should also not take on any new debts, instead they should work harder at increasing their total current assets. Coke on the other hand decreased their total current assets by 4. 3% in these two years. I think that Coke would be better off if they looked into increasing their total current assets also. One way to do this would be to increase their net profits which would then affect their assets.
Coca-Cola and Pepsi have been around for a very long time, and together both companies have helped to take the beverage industry to the next level. Both being global companies, and selling products in over 100 countries, and producing many products that appeal to all kinds of people, they have continued to grow. Taking a look at each company’s vertical and horizontal analysis we were able to see the financial status of both companies. Though both of these companies are profitable, the analysis showed in more detail how different these companies were in 2004 and 2005.
