ACC-240 Benchmark

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1 Interpreting Financial Statements Elise Odmark Department of Accounting, Grand Canyon University ACC 240: Fundamentals of Accounting Professor Terry Tai October 31, 2021

2 Interpreting Financial Statements Coca-Cola and Pepsi are two companies that have been in competition since their development. These companies are two of the most recognized brands throughout the world and are consistently trying to become the top distributor of sodas and other beverages. The primary strategy these companies use to gain popularity is by appealing to various levels of income with captivating products that are reasonably priced. Liquidity ratios are essential information for large companies because they are used to determine a company’s ability to cover short-term obligations and cash flows (Hayes, 2021). With these ratios, current assets are compared to current liabilities to ensure there is enough money left over to cover short-term debts in case of emergencies. Generally, the higher the ratio, the better the company’s liquidity position is. Currently, Coca-Cola’s current ratio is 1.52 while Pepsi’s current ratio is .95. If a company is making a profit, their current ratio will be over 1. This shows that Coca-Cola is doing better than Pepsi because they have a greater amount of assets than liabilities. Quick ratio indicates a company’s short-term liquidity position and measures its ability to meet short-term obligations with its most liquid assets. The quick ratio includes all current assets as coverage for current liabilities. Coca-Cola’s quick ratio is 1.09 while Pepsi’s is .81. Once again, Cola-Cola proves that they have better liquidity and financial health. The lower the ratio, the more likely the company will struggle with paying debts. Inventory turnover measures how many times in a certain period a company is able to replace the inventory it has sold. Coca-Cola’s inventory turnover is 4.04, while Pepsi’s is 8.45. Unlike the previous ratios, Pepsi is ahead of Coca-Cola when it comes to industry turnover. A slow turnover indicates weak sales and excess inventory, while a faster ratio shows either strong sales or inadequate inventory.

3 Solvency ratios examines a company’s ability to meet its long-term debt obligations (Hayes, 2021). These are often used by prospective lenders when reviewing a company’s credit and by potential bond investors. Similar to liquidity ratios, solvency ratios measure a company’s financial health but tends to focus on the long term. Overall, liquidity ratios signify whether a company’s cash flow is good enough to cover its long-term liabilities. Debt-to-equity ratio compares a company’s total liabilities to shareholder equity is used to understand the amount of leverage a company is using. It is essentially a way to recognize if a company is financing its operations through debt or their own funds. Coca-Cola’s debt/equity ratio is 1.78 and Pepsi’s is 2.33. Pepsi’s debt/equity ratio is significantly higher than Coca-Cola which signifies that this company is high risk and has been vigorous in financing its growth with debt. Similar to debt/equity ratio, leverage ratio assesses a company’s ability to meet certain financial responsibilities. This ratio can also be used to analyze how variations in output will affect operating income. Leverage ratios are imperative because knowing the amount of debt a business has accumulated allows insight into understanding if they can pay them off as they are due. Coca-Cola’s leverage ratio is 4.09 while Pepsi’s is 5.88. Many types of ratios are considered to be leverage ratios; however, the main aspects include debt, equity, assets, and interest expenses. Profitability ratios analyze a company’s ability to gain profit from its sales, balance sheet assets, or stockholders’ equity (Hayes, 2021). These ratios show how successfully a company creates profit and value for its stockholders. Having a higher value compared to a competing company shows that the company is successful. Price-to-earnings ratio compares a company’s share price to its earnings per share. This ratio is used by investors and analysts to find the relative value of a company’s shares and can also be used to compare similar markets against each other. Coca-Cola’s P/E ratio is 27. 57 while Pepsi’s P/E ratio is 26.94. A high P/E ratio

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4 means that investors are expecting an increase of earnings in the future and a low P/E shows that the company is currently undervalued but can also mean that the company is doing much better than it has in the past. Another profitability ratio would be net profit margin. This ratio measures how much net income is created as a percentage of revenues received. This is one of the most important indicators of a company’s financial health in general and shows if a company is creating enough profit from its sales. Coca-Cola’s net profit margin is 23.53 and Pepsi’s is 10.20. These ratios specify that Coca-Cola is generating more profit than Pepsi by a substantial amount. This proves that although these competing companies are extremely large and well-known, Coca-Cola is much more successful and has created a greater profit. Return on equity is a measure of financial performance and is found by diving net income by stockholders’ equity. This ratio is a way to analyze a company’s profitability and how successful it is in creating profit. Coca-Cola’s return on equity percent is 43.22% and Pepsi’s is stated to be 56.76%. Since an acceptable ratio is around 14%, both Coca-Cola and Pepsi have obviously had extreme success in this aspect. Overall, Coca-Cola and Pepsi are two of the largest and most successful brands across the world, and these ratios give insight into exactly why that is. After analyzing each of these companies, it is clear that Coca-Cola is leading in financial health and profits, however Pepsi has proved to have strength in sales and is not fair behind Coca-Cola in many other areas. In the big picture, both of these companies have very successful ratios and will continue to dominate the industry.

5 References The Coca-Cola Company . KO - Research and Analysis for THE COCA-COLA COMPANY - MSN Money. (2021, October 29). Retrieved October 29, 2021, from https://www.msn.com/en-us/money/stockdetails/analysis/nys-ko/fi-a1wljc. Hayes, A. (2021, April 9). Profitability Ratios . Investopedia. Retrieved October 31, 2021, from https://www.investopedia.com/terms/p/profitabilityratios.asp. Hayes, A. (2021, October 25). Liquidity Ratios . Investopedia. Retrieved October 31, 2021, from https://www.investopedia.com/terms/l/liquidityratios.asp. Hayes, A. (2021, October 25). Solvency Ratios . Investopedia. Retrieved October 31, 2021, from https://www.investopedia.com/terms/s/solvencyratio.asp#:~:text=A%20solvency %20ratio%20is%20a,measure%20of%20its%20financial%20health. PepsiCo, Inc. PEP - Research and Analysis for PEPSICO, INC. - MSN Money. (2021, October 29). Retrieved October 29, 2021, from https://www.msn.com/en-us/money/stockdetails/analysis/fi-axyhnm.