This paper presents the financial statement analysis of PepsiCo and Coca-Cola. The paper presents a description of the companies and an analysis of the firms’ performance using profitability ratios.

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Financial Statement Analysis

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Financial Statement Analysis
Financial Statement Analysis for PepsiCo and the Coca-Cola Company
Introduction
Investment analysts play the important role of advising investors and creditor on which
assets and company to channel their funds. Investment analysts have to analyze the fundamentals
of the a given company in order to provide sound advice concerning the suitability of the firm as
an investment option. This paper presents the financial statement analysis of PepsiCo and Coca-
Cola. The paper presents a description of the companies and an analysis of the firms’
performance using profitability ratios. The paper also scrutinizes news events that have impacted
the performance of the firm, as well as, the firm income statements, and presents a vertical
analysis of the firm’s balance sheets.
Descriptions of Companies
PepsiCo is an American corporation that manufactures and sells beverages and foods in
the global market. The corporation has a broad assortment of products including several
hundreds of beverage brands such as Pepsi, 7 Up, Walkers, and Cheetos. Food brands contribute
63% of PepsiCo’s revenues while beverages contribute the remaining 37%. The company was
founded in 1902 when Caleb Bradham registered the company but the first product, Pepsi, was
made earlier in 1880. Caleb decided to register the firm and a patent for his recipe after the
product gained popularity. The firm went bankrupt in 1931 leading to the purchase of syrup
recipe and the company’s trademark by Charles Guth, who was the president of Loft
Incorporated. In 9135, Loft shareholders sued Guth for his 91% stake because of using Loft
resources to produce and market Pepsi-Cola products. The shareholders won the case leading to
the transfer of the company’s ownership. The company grew using various strategies including
product development, acquisitions and divestments, and internationalization.

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Financial Statement Analysis
Coca-Cola is also an American company that manufactures and sells beverages. The
corporation also has a broad assortment of products including coke, Cola Turka, Evoka Cola and
Fanta. Unlike Pepsi, Coca-Cola only focuses on the production and sale of beverages. In 2013,
Coca-Cola distributed its products in over two hundred nations around the globe with the
company selling over 1.8 billion beverage servings every day. Coca-Cola Company began in
1885 when John Pemberton registered French Wine. Pemberton, then, developed Coca-Cola as
an alcohol-free version of French Wine Coca, which that company sold as medicine. In 1888,
Asa Candler purchased the rights to Coca-Cola Company and its product becoming the sole
proprietor. The first bottling plant was established in 1891 followed by a series of expansion
through a licensing strategy.
Profitability Ratios
Profitability ratios are metrics that weigh the firm’s ability to generate profits. Creditors
are often interested in the profitability of firms because profitability gives them a good indication
about the company’s ability to repay debt. Profit margin is one of the profitability ratios that
would be of interest to creditors. Profit margin weighs the firm’s capacity to convert sales into
net income. It gives a hint of the corporation’s ability to manage costs and expenses. The ratio is
computed by dividing the value of the firm’s net profits with the value of sales.
Creditors are also interested in the return on assets (ROA). The ROA gauges the
corporation’s efficiency in using assets to generate profits. A higher ROA connotes greater
efficiency in the management of company’s assets. The ratio is computed by dividing the value
of net income with that of total assets.
The third profitability ratio that would interest creditors is the return-on-capital-employed
(ROCE). ROCE measures the corporation’s efficiency is using capital to generate profits. A

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Financial Statement Analysis
large ROCE connotes a high level of efficiency in the utilization of the company’s capital.
ROCE is computed by dividing Earnings Before Interest and Tax (EBIT) by the value of capital
employed. Capital employed is given by the sum of debt liabilities and shareholders’ equity.
Company PepsiCo Coca-Cola
Year 2013 2012 2013 2012
Profit Margin 0.1015 0.0943 0.1832 0.1878
ROA 0.0870 0.0828 0.0953 0.1047
ROCE 0.1644 0.1599 0.1918 0.2092
The analysis show that the Coca-Cola Company in more profitable than PepsiCo. Coca-
Cola exhibits superior performance in all the three ratios. This trend implies that the Coca-Cola
is more efficient that PepsiCo in terms of utilizing sales, assets, and capital to create profits.
However, Coco Cola exhibits a declining trend in all the three ratios while PepsiCo exhibits
improvements in all the three ratios, in the past two years. These trends imply that while the
efficiency of PepsiCo in managing assets, costs, and capital is increasing, Coca-Cola efficiency
in these areas is declining. PepsiCo and Coca-Cola can improve their gross margin by
establishing strategies for managing their expenses and costs. These strategies may entail
increasing economies of scale or enhancing the efficiency of their operations. The companies can
enhance their ROA by managing asset costs. For instance, the companies can reduce inventory
costs by maintaining levels of inventory that reflect sales expectations. The firm can also reduce
equipment costs by leasing and renting equipment. ROA can also be increased by increasing
revenues without adding the cost of capital. For instance, the company can make optimal use of
production equipments by organizing optimal work schedules. Coca-Cola and PepsiCo can
increase ROCE by establish an appropriate pricing strategy (Dawson, 2013).
News Events
The political, social, physical, competitive, and economic environments have a
momentous effect on the financial performance of corporations. Therefore, it is imperative for

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Financial Statement Analysis
investors to consider these environments. Two contemporary events have affected the operations
of Coca-Cola and PepsiCo. These events include the planned introduction of nutritional labeling
laws and the wet weather conditions. The Food and Drug Administration has put forward
changes to the labeling laws (Wilson & Christensen, 2014). These changes are going to affect the
labels of packages of all beverages and foods. The new laws place emphasis on the disclosure of
total calories, sugar, and certain nutrients contained in the product. These changes target to
provide consumers with additional information about what they consume in products. The main
intent of the changes is to enable consumers to maintain healthy dietary practices.
The changes to the labeling requirements are bound to add to the pressure exerted on both
Coca-Cola and PepsiCo by the increased levels of health consciousness among consumers.
PepsiCo and Coca-Cola specialize in the production of carbonated drinks that have by high sugar
and calorie content. PepsiCo also has a broad array of snack brands that have high fat and calorie
content. Therefore, the changes to the labeling laws are bound to reduce the consumption of
these products by making consumers more aware of the content of the products.
In recent months, the U.S. has experienced wet and cold weather conditions in most of its
regions. The cold and wet weather is attributed to various factors including climate change
(Bohrer, 2014). The cold weather is also having an adverse effect on the operations of both
Coca-Cola and PepsiCo. Cold beverages are the core products for the Coca-Cola Company and
account for a significant portion of PepsiCo’s revenues. However, the cold weather has reduced
the consumption of these beverages in the U.S market. In August 2014, the consumption of
beverages declined by 3.8% from the same period last year (Fusion Research, 2014). The
downturn also reflects in the overall sales of Coca-Cola and PepsiCo.

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Financial Statement Analysis
The two events have had an impact on the financial performance of the company.
However, these events have not had a severe effect on the perception of investors and creditors
of both companies. The surging share prices of both companies give a sign that shareholders still
have confidence in the financial performance of the firms. The credit ratings for both firms also
exhibit creditor’s confidence. A significant factor that has shielded the companies from suffering
severe implication is the high level of product differentiation. The two companies have already
noted this threat and have begun to shift towards the production of relatively health products
such as smoothies, coffee, and others.
Companies’ Income
The income statement informs investors about the ability of the company to generate
income. A high performing firm should have high profits in relations to revenues or low
expenses in relations to revenues. A noteworthy item in an income statement is the company
revenues. This item represents all the money that the firm earns in a given period. High revenues
increase the profitability of the firm. Another significant section of the income statement is the
expense section. Expenses are significant entries into an income statement as they have an effect
on the firm’s income. A company may have high revenues but fail to survive because on an
inability to control expenses. The most appropriate way of analyzing the income of a given firm
is by using the profit margin. This ratio points out the capacity of the corporation to generate
revenues and manage expenses.
An analysis of the income statement reveals that PepsiCo had higher revenues that Coca-
Cola in 2013 and 2012. However, PepsiCo had lower net income that Coca-Cola over the same
period. Therefore, Coca-Cola is the better performer of the two companies because it has a
higher income. Investors are interested in the company’s income and not revenues. The trend

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Financial Statement Analysis
suggests a problem in the operations of PepsiCo. The firm is unable to manage its expenses
effectively. In 2013, PepsiCo had a gross margin of 0.1014 as compared to 0.1832 for Coca-
Cola. These figures are an indication that out of one dollar of sales PepsiCo was only able to
convert $0.1014 into profits while Coca-Cola was able to convert $0.1832.
Year 2013 2012
PepsiCo 0.1014 0.0943
Coca-Cola 0.1832 0.1878
Therefore, the best way for PepsiCo to improve its financial performance is by reducing
its expenses. The income statement demonstrates that PepsiCo has no problem in generating
revenues. In fact, the firm had more revenues than Coca-Cola. The problem is, therefore, in the
management of expenses. Wal-Mart can reduce expenses by reevaluating it value chain and
eliminating non-essential activities. The firm can also introduce efficient ways of running its
operations. Specifically, PepsiCo needs to find ways of reducing its selling general and
administrative costs, interest expenses, and tax expenses.
Companies’ Balance Sheet
Vertical Analysis of PepsiCo's Balance Sheet
Period Ending 2013 Percent
Assets
Current Assets
Cash And Cash Equivalents 9375000 12%
Short Term Investments 303000 0%
Net Receivables 6954000 9%
Inventory 3409000 4%
Other Current Assets 2162000 3%
Total Current Assets 22203000 29%
Long-Term Investments 1841000 2%
Property Plant and Equipment 18575000 24%
Goodwill 16613000 21%
Intangible Assets 16039000 21%
Other Assets 2207000 3%

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Financial Statement Analysis
Total Assets 77478000 100%
Liabilities
Current Liabilities
Accounts Payable 12533000 16%
Short/Current Long-Term Debt 5306000 7%
Total Current Liabilities 17839000 23%
Long-Term Debt 24333000 31%
Other Liabilities 4931000 6%
Deferred Long-Term Liability Charges 5986000 8%
Minority Interest 110000 0%
Total Liabilities 53199000 69%
Stockholders' Equity
Misc Stocks Options Warrants -130,000 0%
Common Stock 25000 0%
Retained Earnings 46420000 60%
Treasury Stock -21,004,000 -27%
Capital Surplus 4095000 5%
Other Stockholder Equity 5,127,000 7%
Total Stockholder Equity 24409000 32%
Net Tangible Assets -8,243,000 -11%
Vertical Analysis of Coca-Cola’s Balance Sheet
Period Ending 2,013.00 Percent
Assets
Current Assets
Cash And Cash Equivalents 10,414,100.00 12%
Short Term Investments 9,854,000.00 11%
Net Receivables 4,873,000.00 5%
Inventory 3,277,000.00 4%
Other Current Assets 2,886,000.00 3%

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Financial Statement Analysis
Total Current Assets 31,304,000.00 35%
Long-term Investments 11,512,000.00 13%
Property Plant and Equipment 14,967,000.00 17%
Goodwill 12,312,000.00 14%
Intangible Assets 15,299,000.00 17%
Other Assets 4,661,000.00 5%
Total Assets 90,055,000.00 100%
Liabilities
Current Liabilities
Accounts Payable 9,886,000.00 11%
Short/Current Long-term Debt 17,925,000.00 20%
Total Current Liabilities 27,811,000.00 31%
Long-term Debt 19,154,000.00 21%
Other Liabilities 3,498,000.00 4%
Deferred Long-term Liability Charges 6,152,000.00 7%
Minority Interest 267,000.00 0%
Total Liabilities 56,882,000.00 63%
Stockholders' Equity
Common Stock 1,760,000.00 2%
Retained Earnings 61,660,000.00 68%
Treasury Stock (391,091,000.00) -434%
Capital Surplus 12,276,000.00 14%
Other Stockholder Equity (3,432,000.00) -4%
Total Stockholder Equity 33,173,000.00 37%
Net Tangible Assets 5,562,000.00 6%
The vertical analysis of the balance sheet reveals several issues about the firms. The
analysis reveals that PepsiCo is doing badly in term of managing it credit sales. According to the
analysis, PepsiCo receivables are 9% of the firm’s total assets while Coca-Cola receives accounts

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Financial Statement Analysis
for only 5% of the total asset value. PepsiCo also has relatively low liquidity as the value of
current assets is 29% of the total asset value as compared to Coca-Cola’s 35%. This percentage
indicates that PepsiCo is a higher risk of experiencing liquidity problems than Coca-Cola. The
figures suggest that most of PepsiCo’s assets are in the form of long-term assets. In fact, PepsiCo
value of plants and equipments is 24% of total asset value as compared to Coca-Cola’s 17%. The
analysis also reveals challenges in the management of liabilities within PepsiCo. PepsiCo total
liabilities are 69% of the value of total assets while Coca-Cola liabilities are 63% of the firm’s
asset value. These figures suggest that Coca-Cola is better placed to meet its debt obligations
than PepsiCo. PepsiCo high liabilities are attributed to company’s reliance on debt finance.
PepsiCo’s long-term debt is 31% of the firm’s asset value as compared to Coca-Cola’s 10%.
From the vertical analysis, it is clear that PepsiCo is the lagging company.
PepsiCo can improve its financial performance in various ways. First, PepsiCo should
revise its credit policies so as to enhance the management of assets. The credit policies are
affecting the company’s income and cash position by holding too much of the company’s assets
in the form of receivables. PepsiCo should revise its credit policies so as to ensure that debts pay
their dues within the shortest time. PepsiCo can use strategies such as cash discount to enhance
its debtor management capacity. PepsiCo should also reduce asset costs through leasing and
hiring of equipments. The firm’s value of plants and equipments is relatively high, which means
that the firm spends a lot of resources in the purchase and maintenance of plants and equipment.
This trend reduces the returns of the company. PepsiCo can enhance its debt management
capacity by reducing its financial leverage level. The firm has a high debt level which means that
it finances the purchase of company assets using debt. The firm needs to revise its capital

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Financial Statement Analysis
structure so as to reduce bankruptcy risks. PepsiCo should consider exploring more of the equity
option so as to reduce the company’s debt level.
Conclusion
The analyses reveal that both companies are in a good financial position. However, Coca-
Cola is the best investment option for creditors and investors as it outperforms PepsiCo in many
financial indicators. PepsiCo can enhance its financial performance by improving its
management of expenses, debtors, assets, and debts.

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Financial Statement Analysis
References
Dawson, T., (2013). How Starbucks utilizes its pricing strategy to maximize profit. Retrieved
from http://wlligently.com/ 51/How-Star -Pricing-Strategy-for-Profit-Maximization
Wilson, J., & Christensen, J., (2014). Nutritional labels are getting a makeover. Retrieved from
http://edition.cnn.com/2014/02/27/health/nutrition-labels-changes/
Fusion Research (2014). PepsiCo and Coca-Cola. Retrieved from
http://seeha.com/article/1673862-copsico-despite-rage-stocks-smells-like-money
Bohrer, B., (2014). Freezing cold weather hit U.S. Retrieved from
http://www.huffingtonpost.com/2014/11/09/us-cold-weather_n_6129836.html