We will be comparing two companies; both are strong and have great credibility. Ideally with a solid competitor we want to show differentials and make a solid contrast. In this case we want to compare at least two years of financial data. A great way to exemplify this is to compare Coke to Pepsi. To say which one is better to drink is debatable, but what we are looking at is which is better to invest in. We will analyze the information provided in the appendixes and make a conscience decision as to which company is stronger, therefore a smarter investment choice.
After all, I wouldn’t want you to throw your money down the drain. The three main characteristics used to determine a company’s success are liquidity, solvency, and of course profit. The aspects, when analyzed, can help you decide which is more successful and financially honored as a better investment.
This can also help someone decide which is more successful and financially stable.
While we look at these statements I would like to keep in mind how good it is to look at trend over time. This opens our next concept which is vertical and horizontal analysis. By taking a step back and going over the ratio analysis which is composed of the three main characteristics, we are able to see what has happened during the time period we compare with. Hence us making our intelligent investment decision. Going back, ratio analysis is where we divide two numbers in order to get a percentage which we will compare to the competitor. First characteristic is liquidity. This is where we see the company paying their debts, and on time. This is very similar to an individual person’s credit score. Are they paying their bills?
This shows financial responsibility and that is a very important component in investments. The information is typically shown as a ratio or percentage of the liquid assets. The higher the ratio the bigger the safety margin is in which the corporation will fulfill their debts. You wouldn’t rent a home to someone with bad credit. Nor would you loan someone money if they had a bad tendency to not be responsible with money. Going back to business mind state, we can look at the potential ability to turn a good or service into profit. This is crucial to investing. It’s also crucial to compare companies within the same industry. It seems logical initially but there are ratios and formulas that are used that operate most efficiently when comparison is done within similarities. So, let’s get on with the fun stuff already!
PepsiCo’s Balance Sheet and Liquid Ratio
(Remember, we are dividing the current asset with the liabilities for both years, not dividing the annual comparison. Meaning; do not divide the two numbers next to each other. This is the essential difference between horizontal and vertical analysis. ) Current ratio 2005=10,4549406=1.11
Current ratio 2004= 86396752=1.28
Just to make a quick observation before we move on the ratio of 2005 is 1.11:1 and in 2004 it is 1.28:1. We now have the ratios; let’s get the percentage of total assets from cash and equivalents. Then we will do Coca-Cola’s and compare. Percentage of cash for 2005=1716 (cash and equiv)10454 (total assets)= .1641 Percentage of cash for 2004=12808639= .1481
That’s 16.41% for 2005 and 14.81% for 2004. This is solid statistic and I don’t really see much room for improvement based on the information found. It seems to be a solid bet, but we are far from done.
Coca-Cola’s Balance Sheet and Liquid Ratio
(Again, remember to divide the total asset with total liability.) Current ratio 2005=10,2509,836=1.042
Current ratio 2004=12,28111,133=1.103
So the ratio is 1.042:1 for 2005 and 1.103:1 for 2004. Don’t feel discouraged, we will take this information and further discuss. I would like to mention that liability ratio lowering isn’t a bad thing and can mean potential growth. That being said, I sense improvement. Now that we have our ratio numbers for both companies and both years we will determine the percentage of total assets from cash and the equivalents. Now we will get the percentages of total assets and compare with PepsiCo. Percentage of cash for 2005=4701 (cash and equiv)29427(total assets)= .1598 Percentage of cash for 2004=670731441= .2133
That’s 15.98% for 2005 and 21.33% for 2004. I’m not sure about you, but if my percentage of cash went down 5.35% I would fret. Now, that’s not to say I wouldn’t invest just yet, but it does raise concern. Unless this cash is being used to pay off debts or re-invest into the company however, one should raise concern. Now that we have our calculations let’s make our comparison. In 2004 PepsiCo’s ratio was 1.28:1 then in 2005 it was 1.11:1. Whereas Coca-Cola had 1.103:1 for 2004 and 1.042:1 in 2005. We can divide the total current assets and of the liabilities for the two years giving us the increase or decrease for the same company. Simply divide the total current asset or liabilities for the two different years. We can find the increase or decrease for asset or liabilities. This furthers our comparisons.
Let’s get back to solvency. It is a comparison of current assets and current liabilities. It is determined by dividing one with another. This gives an investor a ratio, which is explained earlier, that provides the investor with good information. That being, how does the company do with long-term responsibility? Also how likely will it act in the future with obligations and goals? The lower the ratio is, the less likely they are to have the follow through we are looking for. A high ratio provides the investor with an imminent outlook on the corporation being free of debt and how the company chooses to re-invest its profit. Profitability can allow an investor to monitor the corporation’s ability to produce assets in comparison to the expenses they must pay off. To put it bluntly, if a company has a higher profit ratio or margin than another company than they are doing better. We can do the same thing with profit that we did with liquidity as far as percentages and ratios go.
When looking at profits we must be sure to compare annually because many companies have a season where they are selling more product. What the intended affect would be is to get the average and avoid the fluke statistics. When investing, it is a good idea to take a good step back. Like looking through the window of a candy shop. One candy might look good but you take a step back you can admire the entire display and see what is really going on. The big picture. Horizontal analysis can be utilized to provide the investor with the corporation’s financial data over a monthly or annual progression. It can be expressed using a balance sheet, an income statement, or retained earnings statement.
When an investor evaluates the horizontal analysis they can determine the stability of the corporation, giving them solid insight. First we will apply horizontal analysis to PepsiCo’s assets and liabilities. We start by dividing the difference of total current assets between 2004 and 2005. As I have provided the spreadsheet earlier with the information it won’t be necessary to repeat. We are still dealing with those highlighted numbers; this will make it easier to locate the correct statistics. 10454 assets of 2005 – 8639 (assets of 2004)8639 (assets of 2004) = .210 We can then turn this into percentage which would be 21% (technically 21.01%) total current asset increase from one year to the next. Now we’ll do the same with liabilities. 9406 liabilties of 2005- 6752 (liabilties of 2004)6752 (liabilties 2004)= .393
Let’s do this in percentage form, 39.3%. That’s increase of liabilities during the time span of 2004 to 2005. By analyzing this information we are provided with the fact that there is an increase in current assets. This can be done by obtaining loans and gaining credibility as a corporation. On the counterpoint here there is a possibility that debt has increased. Keep in mind that while numbers are increasing and numbers don’t lie, it’s the person analyzing them that puts things in perspective. Let’s make a comparison now with Coca-Cola. 10250 assets of 2005- 12281 (assets of 2005)31441 assets 2004= -.064 We made the horizontal analysis to see if Coca-Cola has gone through increase or decrease with assets and liabilities between the two years of information we were given.
When we translate our answer from decimal to percentage we get -6.4% which is a decrease. Let’s divide liabilities for Coca-Cola now. 9836 liabilities of 2005- 11133 (liabilities of 2004)11133 (liabilties of 2004)= -.116 This gives us -11.6% decrease in liabilities from 2004 to 2005. Translating that to English, this means that while assets were low it seems they were clearly paying off debts. This is a responsible and promising thing for a corporation to act on. A good investor will recognize debts being paid off and see that they are making profits and creating a solid foundation for the future. By judging the company’s percentage of growth we can easily separate the stronger competitor. Now, let’s do PepsiCo’s vertical analysis. Year 2005=1716(cash and equiv)31727 (total asset)= .054
Year 2004=1280 (cash and equiv)27987 total asset= .046
In 2005 the percentage is 5.4% while in 2004 it was only 4.6%. Let’s now figure out how much of the assets are currently in possession of the company, first with 2005. Oh, and imagine how nice it would be if we could do that with people we’ve loaned money to. Year 2005=10454 (current asset)31727 (total asset)= .3295
Year 2004=8639 (current asset)27987 (total asset)= .3087
So, we have 32.95% in 2005 and 30.87% in 2004. Meaning that PepsiCo’s assets in possession went up 2.08% in a year. Promising, right? Well, what about Coca-Cola’s? Year 2005=4701 (cash and equiv)29427 total asset= .160
Year 2004=6707 (cash and equiv)31441 (total asset)=.213
In 2005 the percentage is 16% while in 2004 it was 21.3%. Interesting, huh? Let’s figure out the assets Coca-Cola owned in possession. This is where investor’s ears perk up and we can get to some real solid numbers that will eventually define our final decision. Year 2005=10250 (current asset)29427 (total asset)= .348
Year 2004=12281 (current asset)29427 (total asset)= .391
In 2005 the percentage is 34.8% while in 2004 it was higher with a 39.1%. One can easily come to the conclusion that Coca-Cola may have fewer assets in possession, but keep debts in mind. Investors are looking for exactly this. Sure, they own less but they are also being financially responsible. In conclusion with all that has been said and analyzed I would like to conclude this intense and considerate examination. Many statistics were provided by the appendix and several calculations were made to come to a logical and sound conclusion. By viewing over the ratios and percentages we can determine that Coca-Cola is a stronger company. With the fact they do have low assets, we consider how many debts are being paid off due to the profits that are made. The CEO clearly had a strong head on their shoulders and even though these numbers are but six years old, I can only imagine their consistence has stayed the same. Reason being, the corporation has remained out of debts and re-invested their profits into future proceedings which allow a positive outlook for investors.
Hill, M.G (2009). Financial Accounting