Question
-Can you please inform the writer to notify me what are the two companies he/she selected before he/she starts doing the assignment.
-Please use Profitability financial ratio if possible.
-Select two companies operating in the same industry and download their latest annual reports
(minimum year ending 2014). YOU MUST NOT select Thorntons plc.
Sample paper
Coca Cola Company & PepsiCo Financial Statement and Data Analysis
Industry Overview
Coca Cola Company and PepsiCo are both in the beverage sector since they produce ready-to-drink beverages. The beverage industry is one of the fastest growing industries in the world and among the earliest industries. This sector includes companies that manufacture both alcoholic and non-alcoholic drinks. The alcoholic segment includes spirits, wine and beer. On the other hand, the non-alcoholic segment includes soft drinks, coffee, bottled pure water, fresh fruit juices and tea (Wells, 2000). Due to the competitiveness in this industry, most companies turn to producing variety of products, improving their distribution channels as well as their marketing strategies in order to expand their businesses.
Although many of the beverages such as tea, wine and beer have existed for centuries, the beverage industry has only evolved over the past few centuries. The beverage sector is one that is highly fragmented as is evident through the numerous manufacturers, different packaging methods, production processes and even the end products. From the 1990s, beverage companies have evolved from local production to corporate giants that serve international markets. The development in this industry was brought about by the adoption of mass production technique that allowed for expansion into international markets (Nolan, 2007). Other factors also brought about development in the industry such as advancements in product packaging and processes that helped increase the shelf-life of products. Other advancements such as refrigerators helped products such as beers to brewed in plenty without the fear of suffering losses.
Company Profile
Coca Cola
The Coca Cola Company was founded and in operation in 1886 in Atlanta, Georgia as a manufacturer, retailer and marketer of syrups and non-alcoholic beverages. One of the best known products of the company is its flagship product Coca-Cola commonly known as Coke. Since 1889, the company has operated as a franchised distribution system within the industry; it is invoked in the production of syrup concentrates and sells it to various bottlers with sole territorial areas all over the world. However, the Coca-Cola Company has its anchor bottler situated in North America.
Coca Cola Company is the owner and marketer of four of the world’s best seller’s top five non-alcoholic beverage brands which are: Fanta, Coca-Cola, Diet Coke and Sprite (Armus, 2005). According to the 2015 annual report, the company now sells beverage products with their trademark to over 200 countries. These beverages account for over 1.9 billion sales of the estimated 58 billion beverage servings consumed all over the world on a daily basis. The company operates on the belief that its success greatly depends on their ability to associate with its consumers by ensuring they provide products that meet their needs and lifestyles.
PepsiCo
PepsiCo Inc is one of the American multinational beverages Company that also manufactures snacks and has its headquarters in Purchase, New York. The company was commenced in 1965 after the merger of two major companies; Pepsi-Cola Company and Frito-Lay. Since then, expansion has occurred within the company from Pepsi to a company providing products that range from beverages to grain-based snacks. Its expansion included the acquisition of two companies Tropicana and Quaker Oats Company in 1998 and 2001 respectively; it saw Pepsi add the Gatorade brand to its portfolio. By 2012, retail sales of PepsiCo brands generated revenue over $ 1 billion for every piece with the products being distributed to over 200 countries. The bottling and distribution is done by PepsiCo together with other licensed bottlers in other parts of the world. The company has developed and grown to be the second largest catering and Beverage Company in the world.
Competition
Over the years, Coca Cola and Pepsi have been great competitors in the beverage industry. Historically, Coca Cola has been considered Pepsi’s major competitor until the year 2005 in December when PepsiCo beat Coca Cola for the first time ever in 112 years in terms of market value. However, in 2009, tables turned with Coca Cola holding a higher market share within the US than Pepsi in sales of carbonated soft drinks. Through mergers, partnerships and acquisitions done by PepsiCo in the year 1990 and 2000, the company’s business has expanded with the inclusion of a wider product base inclusive of snacks, foodstuffs and beverages (McKelvey, 2006). These products have seen the company make a lot to an extent that the mainstream of the revenue has shifted from the sale and production of carbonated drinks.
Corporate Social Responsibility
In an effort to support the wellbeing of its consumers, Coca Cola ensures that it offers reduced, low or completely calorie-free options in over 191 markets in which it operates. In 2014 alone, the company was able to support more than 300 programs for healthy living in over 112 markets. In that same year, Coca Cola foundation together with the company itself gave back to the community $126 million which is approximately 1.3% of its operating income. Through this efforts, the company has managed to support women, children and communities in general lead better, healthier lives.
For the case of PepsiCo, through its vision to deliver top notch financial performance, it has managed to reduce its operational water use by 23% per unit of production which shows great effort in conservation of water. In addition, the company has also recorded 1 billion liter reduction in absolute water use. Due to its high values portrayed in its business operations, Pepsi has been ranked among the World’s Most Ethical Companies by Ethisphere for ten consecutive years (2007-2016) which is a proof of just how much Pepsi value the community which it serves by maintaining high business standards at all times.
Financial Aspects
Revenue Outlook
The Coca-Cola Company recognizes revenue when the transfer of product to the bottling partners, through a resale or to its direct consumers. The relationship between the parties exists as an agreement where the delivery has been made and price is either fixed or determinable and finally collectability is rationally guaranteed. The financial year 2015 saw the sales capacity and unit sales case size both grow with a margin of 2 % in comparison with the previous year. Although having had a 2% growth on sales of case the Coca- Cola net profit revenue decreased by a 4% margin which was a $ 1,704 million loss (Cola, 2015).It attributed the loss to the unfavorable impacts on the foreign exchange fluctuations. The United States dollar was at a stronger position than most currencies with the company operations. The gross profit with the company also decreased to 60.5 percent in 2015 a 0.6 decrease from the previous year 2014. It was also I attribute to the foreign exchange loss, although offset by the lower prices on commodity as well as a positive price mix in its areas of operations.
PepsiCo net revenue as at 2015 stood at 63,056 million a 5 % decrease from the previous year. The total operating profit decreased by 13 % while the operating margin decreased 1.2 percent (PepsiCo, 2015). Unlike the competitor, PepsiCo had a certain operating cost increase. It also acknowledged that unfavorable foreign exchange was a risk factor to the decrease in operating margin. Unlike the Coca-Cola Company its marketing mix did not work for its revenue growth, PepsiCo has an increased cost on advertisement and marketing.
Marketing and risk factor
PepsiCo acknowledges offering of incentives and discounts on various products as a means of marketing. Most of its incentives arrangement is not more than a year, with only incentives such as fountain pouring rights, extending a year. The company advertising and other related marketing expenses increased with $ 0.1 billion and stood at $2.4 billion. PepsiCo also have part marketing as deferred expenses, which are expensed with the ear once utilized. They include media contribution and personal services, promotional materials and production costs of future media advertising. Deferred advertising incurred by PepsiCo is $40 million. The distribution cost which included cost of shipping and handling activities was $ 9.4 billion (PepsiCo, 2015)
Coca-Cola Company had an increase in its marketing and advertising cost attributed to the investment in strengthening the companies brand and partially offsetting the foreign exchange impact. Selling and distribution expenses with Coca-Cola also reduced in 2015, attributing the reduction on acquisitions and divestitures impacts within the business operations. The Coca-Cola Company also focused more on marketing spending on consumers facing promotional overheads as well as saving on output and initiatives towards reinvestments. The high risk factor facing both companies if the foreign exchange fluctuations against the constant U.S Dollar, causing losses on both companies on international operations.
Profitability ratio
The ratio measures the company ability to utilize its resources in the generation of profitable sale within its operations. The ratios include Gross profit Margin, Net Profit Margin, Operating Profit Margin, Return on Equity (ROE) and Return on Assets (ROA). The gross profit margin is an indicator of the percentage of income available to cover both operative and other outflows. The gross profit margin for Coca-Cola stood at 60.53 %, which was a deterioration from the previous year (Cola, 2015). PepsiCo stood at 54.99%, lower than Coca- Cola although an improvement from the previous year.
The operating profit margin is a representation as operating income divided by revenue. It measures the proportion of companies’ revenue left after expensing on its valuable costs of production. PepsiCo operating profit stood at 13.25 %, while Coca- Cola stood at 19.70% both companies highlighting a decrease from the previous year. Coca-Cola has a higher proportion on income left as compared to PepsiCo.
The Net profit margin which is an indicator of company profitability margin is a representation of net income against the revenue. It highlights the percentage of revenue within the company after all the expenses have been deducted from the sales. Standing at 16.60% Coca-Cola Company highlighted a slight improvement from the previous year. PepsiCo net profit was at 8.65%, with Coca-Cola almost doubling it figure which was a decrease from the previous year.
Both companies had an increase in the Return of Equity, PepsiCo stood at 45.73% while Coca-Cola stood at 28.77%. The return on Equity is computed as net revenue against shareholders equity. It is a highlight of the amount of net income returned as a percentage of the shareholders equity. It effectively measures the profit within the corporation though a highlight on how much profits is in generation with the money invested by the shareholders.
The Return on Assets which is the net income against total company assets for Coca- Cola stood at 8.16 % while that of PepsiCo was at 7.83%, which was a decrease from the previous year. The Return on Asset for Coca- Cola was a slight increase from the previous year. The Return on Assets provides a vivid idea on how most of the managers are effective in utilization of assets in generation of earning. It is clear that both companies Return on Asset falls on the same level although PepsiCo is lower with a slight margin.
References
Armus, S. (2005). Coca-Cola Company. France and the Americas: Culture, Politics, and History: a Multidisciplinary Encyclopedia, 273.
Cola, C. (2015). Annual financial Report 2015. Form 10-k.
McKelvey, S. M. (2006). Coca-Cola vs. PepsiCo-A” Super” Battleground for the Cola Wars? Sport Marketing Quarterly, 114.
Nolan, P. Z. (2007). The Beverage Industry. In The Global Business Revolution and the Cascade Effect. Palgrave Macmillan UK.
PepsiCo. (2015). Annual Financial Report 2015. Form 10-k.
Wells, B. H. (2000). Carbonated-Beverage Industry. Journal (American Water Works Association), 860-864.
Appendices
Gross profit margin
Coca-Cola
Gross profit margin = Gross profit ÷ Net operating revenues * 100
= 100 × 26,812 ÷ 44,294 = 60.53%
PepsiCo.
Gross profit margin = Gross profit ÷ Net revenue * 100
= 100 × 34,672 ÷ 63,056 = 54.99%
Operating Profit Margin
Coca-Cola
Operating profit margin = Operating income ÷ Net operating revenues * 100
= 100 × 8,728 ÷ 44,294 = 19.70%
PepsiCo.
Operating profit margin = Operating profit ÷ Net revenue * 100
= 100 × 8,353 ÷ 63,056 = 13.25%
Net Profit Margin
Coca-Cola
Net profit margin = Net income attributable to shareowners of The Coca-Cola Company ÷ Net operating revenues * 100
= 100 × 7,351 ÷ 44,294 = 16.60%
PepsiCo
Net profit margin = Net income attributable to PepsiCo ÷ Net revenue * 100
= 100 × 5,452 ÷ 63,056 = 8.65%
Return on Equity
Coca-Cola
ROE = Net income attributable to shareowners of The Coca-Cola Company ÷ Equity attributable to shareowners of The Coca-Cola Company * 100
= 100 × 7,351 ÷ 25,554 = 28.77%
PepsiCo
ROE = Net income attributable to PepsiCo ÷ Total PepsiCo shareholders’ equity * 100
= 100 × 5,452 ÷ 11,923 = 45.73%
Return on Assets
Coca-Cola
ROA = Net income attributable to shareowners of The Coca-Cola Company ÷ Total assets * 100
= 100 × 7,351 ÷ 90,093 = 8.16%
PepsiCo
ROA = Net income attributable to PepsiCo ÷ Total assets * 100
= 100 × 5,452 ÷ 69,667 = 7.83%
COCA-COLA
Balance Sheet
USD $ in millions
| Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | |||||||
| Cash and cash equivalents | 7,309 | 8,958 | 10,414 | 8,442 | 12,803 | ||||||
| Short-term investments | 8,322 | 9,052 | 6,707 | 5,017 | 1,088 | ||||||
| Cash, cash equivalents and short-term investments | 15,631 | 18,010 | 17,121 | 13,459 | 13,891 | ||||||
| Marketable securities | 4,269 | 3,665 | 3,147 | 3,092 | 144 | ||||||
| Trade accounts receivable, less allowances | 3,941 | 4,466 | 4,873 | 4,759 | 4,920 | ||||||
| Inventories | 2,902 | 3,100 | 3,277 | 3,264 | 3,092 | ||||||
| Prepaid expenses and other assets | 2,752 | 3,066 | 2,886 | 2,781 | 3,450 | ||||||
| Assets held for sale | 3,900 | 679 | – | 2,973 | – | ||||||
| Current assets | 33,395 | 32,986 | 31,304 | 30,328 | 25,497 | ||||||
| Equity method investments | 12,318 | 9,947 | 10,393 | 9,216 | 7,233 | ||||||
| Other investments | 3,470 | 3,678 | 1,119 | 1,232 | 1,141 | ||||||
| Other assets | 4,207 | 4,407 | 4,661 | 3,585 | 3,495 | ||||||
| Property, plant and equipment, net | 12,571 | 14,633 | 14,967 | 14,476 | 14,939 | ||||||
| Trademarks with indefinite lives | 5,989 | 6,533 | 6,744 | 6,527 | 6,430 | ||||||
| Bottlers’ franchise rights with indefinite lives | 6,000 | 6,689 | 7,415 | 7,405 | 7,770 | ||||||
| Goodwill | 11,289 | 12,100 | 12,312 | 12,255 | 12,219 | ||||||
| Other intangible assets | 854 | 1,050 | 1,140 | 1,150 | 1,250 | ||||||
| Noncurrent assets | 56,698 | 59,037 | 58,751 | 55,846 | 54,477 | ||||||
| Total assets | 90,093 | 92,023 | 90,055 | 86,174 | 79,974 |
| Current Liabilities | 26,930 | 32,374 | 27,811 | 27,821 | 24,283 | ||||||
| Long-term debt,excluding current maturities | 28,407 | 19,063 | 19,154 | 14,736 | 13,656 | ||||||
| Other liabilities | 4,301 | 4,389 | 3,498 | 5,468 | 5,420 | ||||||
| Deferred income taxes | 4,691 | 5,636 | 6,152 | 4,981 | 4,694 | ||||||
| Noncurrent liabilities | 37,399 | 29,088 | 28,804 | 25,185 | 23,770 | ||||||
| Total liabilities | 64,329 | 61,462 | 56,615 | 53,006 | 48,053 | ||||||
| Common stock, $0.25 par value | 1,760 | 1,760 | 1,760 | 1,760 | 880 | ||||||
| Capital surplus | 14,016 | 13,154 | 12,276 | 11,379 | 11,212 | ||||||
| Reinvested earnings | 65,018 | 63,408 | 61,660 | 58,045 | 53,550 | ||||||
| Accumulated other comprehensive loss | (10,174) | (5,777) | (3,432) | (3,385) | (2,703) | ||||||
| Treasury stock, at cost | (45,066) | (42,225) | (39,091) | (35,009) | (31,304) | ||||||
| Equity attributable to shareowners of The Coca-Cola Company | 25,554 | 30,320 | 33,173 | 32,790 | 31,635 | ||||||
| Equity attributable to noncontrolling interests | 210 | 241 | 267 | 378 | 286 | ||||||
| Total equity | 25,764 | 30,561 | 33,440 | 33,168 | 31,921 | ||||||
| Total liabilities and equity | 90,093 | 92,023 | 90,055 | 86,174 | 79,974 |
Income statement
USD $ in millions
| 12 months ended | Dec 31, 2015 | Dec 31, 2014 | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | |
| Net operating revenues | 44,294 | 45,998 | 46,854 | 48,017 | 46,542 | |
| Cost of goods sold | (17,482) | (17,889) | (18,421) | (19,053) | (18,216) | |
| Gross profit | 26,812 | 28,109 | 28,433 | 28,964 | 28,326 | |
| Selling, general and administrative expenses | (16,427) | (17,218) | (17,310) | (17,738) | (17,440) | |
| Other operating charges | (1,657) | (1,183) | (895) | (447) | (732) | |
| Operating income | 8,728 | 9,708 | 10,228 | 10,779 | 10,154 | |
| Interest income | 613 | 594 | 534 | 471 | 483 | |
| Interest expense | (856) | (483) | (463) | (397) | (417) | |
| Equity income, net | 489 | 769 | 602 | 819 | 690 | |
| Other income (loss), net | 631 | (1,263) | 576 | 137 | 529 | |
| Income before income taxes | 9,605 | 9,325 | 11,477 | 11,809 | 11,439 | |
| Income taxes | (2,239) | (2,201) | (2,851) | (2,723) | (2,805) | |
| Consolidated net income | 7,366 | 7,124 | 8,626 | 9,086 | 8,634 | |
| Net income attributable to non-controlling interests | (15) | (26) | (42) | (67) | (62) | |
| Net income attributable to shareowners of The Coca-Cola Company | 7,351 | 7,098 | 8,584 | 9,019 | 8,572 |
PEPSICO
Income Statement (Figures in thousands)
| Revenue | 12/26/2015 | 12/27/2014 | 12/28/2013 |
| Total Revenue | 63,056,000 | 66,683,000 | 66,415,000 |
| Cost of Revenue | 28,384,000 | 30,884,000 | 31,243,000 |
| Gross Profit | 34,672,000 | 35,799,000 | 35,172,000 |
| Operating Expenses | |||
| Research Development | – | – | – |
| Selling General and Administrative | 24,885,000 | 26,126,000 | 25,357,000 |
| Non Recurring | 1,359,000 | 1,359,000 | 1,359,000 |
| Others | 75,000 | 92,000 | 110,000 |
| Total Operating Expenses | – | – | – |
| Operating Income or Loss | 8,353,000 | 9,581,000 | 9,705,000 |
| Income from Continuing Operations | |||
| Total Other Income/Expenses Net | 59,000 | 85,000 | 97,000 |
| Earnings Before Interest and Taxes | 8,412,000 | 9,666,000 | 9,802,000 |
| Interest Expense | 970,000 | 909,000 | 911,000 |
| Income Before Tax | 7,442,000 | 8,757,000 | 8,891,000 |
| Income Tax Expense | 1,941,000 | 2,199,000 | 2,104,000 |
| Minority Interest | 107,000 | 110,000 | 110,000 |
| Net Income From Continuing Ops | 5,452,000 | 6,513,000 | 6,740,000 |
| Non-recurring Events | |||
| Discontinued Operations | – | – | – |
| Extraordinary Items | – | – | – |
| Effect Of Accounting Changes | – | – | – |
| Other Items | – | – | – |
| Net Income | |||
| Net Income | 5,452,000 | 6,513,000 | 6,740,000 |
| Preferred Stock And Other Adjustments | – | – | – |
| Net Income Applicable To Common Shares | 5,452,000 | 6,513,000 | 6,740,000 |
Balance Sheet (Figures in thousands)
| Period Ending | 12/26/2015 | 12/27/2014 | 12/28/2013 |
| Current Assets | |||
| Cash And Cash Equivalents | 9,096,000 | 6,134,000 | 9,375,000 |
| Short Term Investments | 2,913,000 | 2,592,000 | 303,000 |
| Net Receivables | 6,437,000 | 6,651,000 | 6,954,000 |
| Inventory | 2,720,000 | 3,143,000 | 3,409,000 |
| Other Current Assets | 1,865,000 | 2,143,000 | 2,162,000 |
| Total Current Assets | 23,031,000 | 20,663,000 | 22,203,000 |
| Long Term Investments | 2,311,000 | 2,689,000 | 2,623,000 |
| Property Plant and Equipment | 16,317,000 | 17,244,000 | 18,575,000 |
| Goodwill | 14,177,000 | 14,965,000 | 16,613,000 |
| Intangible Assets | 13,081,000 | 14,088,000 | 16,039,000 |
| Accumulated Amortization | – | – | – |
| Other Assets | 750,000 | 860,000 | 1,425,000 |
| Deferred Long Term Asset Charges | – | – | – |
| Total Assets | 69,667,000 | 70,509,000 | 77,478,000 |
| Current Liabilities | |||
| Accounts Payable | 13,507,000 | 13,016,000 | 12,533,000 |
| Short/Current Long Term Debt | 4,071,000 | 5,076,000 | 5,306,000 |
| Other Current Liabilities | – | – | – |
| Total Current Liabilities | 17,578,000 | 18,092,000 | 17,839,000 |
| Long Term Debt | 29,213,000 | 23,821,000 | 24,333,000 |
| Other Liabilities | 5,887,000 | 5,744,000 | 4,931,000 |
| Deferred Long Term Liability Charges | 4,959,000 | 5,304,000 | 5,986,000 |
| Minority Interest | 107,000 | 110,000 | 110,000 |
| Negative Goodwill | – | – | – |
| Total Liabilities | 57,744,000 | 53,071,000 | 53,199,000 |
| Stockholders’ Equity | |||
| Misc. Stocks Options Warrants | -145,000 | -140,000 | -130,000 |
| Redeemable Preferred Stock | – | – | – |
| Preferred Stock | – | – | – |
| Common Stock | 24,000 | 25,000 | 25,000 |
| Retained Earnings | 50,472,000 | 49,092,000 | 46,420,000 |
| Treasury Stock | -29,185,000 | -24,985,000 | -21,004,000 |
| Capital Surplus | 4,076,000 | 4,115,000 | 4,095,000 |
| Other Stockholder Equity | -13,319,000 | -10,669,000 | -5,127,000 |
| Total Stockholder Equity | 12,068,000 | 17,578,000 | 24,409,000 |
| Net Tangible Assets | -15,190,000 | -11,475,000 | -8,243,000 |
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