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Term Paper: Coca-Cola vs. Pepsi Co.

Introduction The main purpose of this report is to compare the financial viability, and overall financial performance of Coca-Cola and Pepsi, two of the world’s leading companies in the beverage industry. To decide which company has the better financial stability and performance, a financial analysis will be performed. Looking at several growth and leverage ratios, we will be able to compare the companies and determine where each outperforms or underperforms the other. Additionally, we will be able to investigate whether, from current and previous year calculations, Coca-Cola and Pepsi will be able to support their current financial position and performance for years to come, or whether it will be necessary for improvements to be made. Financial Ratio Analysis Liquidity Two of the main ratios that can be used to determine a company’s liquidity are the current ratio and the quick ratio. When referring to a company’s liquidity, we are determining whether they can pay their liabilities and meet short-term financial goals and obligations in a timely manner. Ideally, both the current ratio and quick ratio should be above 1; as these ratios continue to increase, so does the liquidity of a company. On the other hand, it is also best that the quick ratio and current ratio do not go beyond 3, as anything that is above this threshold could instead prove a lack of efficiency when it comes to reaching those short-term goals and fulfilling obligations. Below, graphs depict the comparison of the current ratio vs. the quick ratio for both companies individually over the three-year period- giving us the ability to determine how much change has occurred and how the ratios can compare between both Pepsi and Coca-Cola. 2

2020 2021 2022 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.32 1.13 1.15 0.96 0.81 0.77 Current Ratio v. Quick Ratio 2020-2022 current ratio quick ratio Year Ratio Amount Coca-Cola’s Current vs. Quick Ratio, 2020-2022 From 2020-2022, Coca-Cola’s quick ratio has seen a steady decrease, and the current ratio has remained rather consistent, aside from the 0.19 decrease from 2020 to 2021. As stated previously, it is best that these ratios are above 1, but below 3, however, we can see that is only the case with Coca-Cola’s current ratio. It is important that Coca-Cola works to maintain the current ratio, and increase their quick ratio, to improve their liquidity and be able to maintain this standpoint as they continue to do business. 2020 2021 2022 0.00 0.20 0.40 0.60 0.80 1.00 1.20 0.98 0.83 0.80 0.77 0.56 0.58 Current Ratio v. Quick Ratio 2020-2022 Current Ratio Quick Ratio Year Ratio Amount Pepsi Co.’s Current vs. Quick Ratio, 2020-2022 3

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In comparison, Pepsi Co. has also seen steady decreases in both their quick ratio and their current ratio. Over the 3-year period, their current ratio has seen a total decrease of 0.18, and their quick ratio has seen a total decrease of 0.19. Neither their current ratio nor quick ratio are above the ideal level of 1, which shows that the company is poor at paying their liabilities, as well as meeting their short-term financial goals and obligations. Overall, while both companies have seen decreases in both liquidity ratios over the 3-year period, it is prominent that Coca-Cola remains on top out of the two companies. The company has proved that they are relatively liquid since they have a current ratio above 1, which reflects upon their overall “health” in terms of meeting financial goals. Efficiency We can also compare the performance of Coca-Cola and Pepsi Co. by looking at efficiency ratios, including the age of inventory, age of accounts receivable, and age of accounts payable. These efficiency ratios are used to measure how well a company can manage their assets and liabilities, which in turn reflects upon their short-term and/or current performance. For the age of accounts payable and accounts receivable, the higher the ratio, the better, as this shows that the company generates enough revenues to pay off obligations, as well as has customers that are consistent with paying on time. For age of inventory, it is opposite- the lower the ratio, the better, as this indicates that the inventory is selling quickly and generating revenue. Coca-Cola’s age of inventory has stayed relatively consistent over the 3-year period, seeing a drop from 2020-2021, but then a rise from 2021-2022. Compared to Pepsi Co., Coca-Cola’s age of inventory is about 2x more, as Pepsi’s age of inventory has remained in the 40s- also seeing a drop from 2020-2021, but a rise from 2021-2022. From this, we can tell that Pepsi Co. has the 4

better age of inventory out of the two, proving that their inventory is selling faster in comparison to Coca-Cola’s. When looking at the age of accounts receivable, Pepsi again outperforms Coca-Cola, as their age of AR is just barely higher. From 2020-2022, Coca-Cola saw a decrease in their age of inventory, while Pepsi saw more fluctuation- both companies remaining relatively consistent and not seeing that large of a change from year to year. In the future, both companies should aim to increase the age of accounts receivable, since it reflects better upon their financial stability. As for the age of accounts payable, Coca-Cola takes the lead over Pepsi. From 2020 to 2021, Coca-Cola saw an increase of just over 12%, but from 2021-2022, saw a decrease of about 1.1%. On the other hand, Pepsi’s age of accounts payable has slowly been decreasing, with an overall decrease of 4.6% from 2020-2021. Comparing these ratios, we can determine that Coca-Cola’s revenue streams are higher, giving them the ability to take care of short-term debt and other obligations. Profitability 2020 2021 2022 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 3.10 2.80 2.59 5.86 4.72 4.34 Debt-to-Equity 2020-2022 Coca Cola Pepsi Year Ratio Amount 5

When taking into consideration a company’s amount of debt, and the impact that it can have on financial performance, we can use the debt-to-equity ratio. The lower the ratio, the better, as it indicates that the company has less debt and is in turn less risky for investors and/or lenders. As shown in the graph below, both Coca-Cola and Pepsi have rather high debt-to-equity ratios, which we can assume means that the companies are borrowing more money to fund their operations, Coca-Cola, however, still maintains a lower ratio than that of their competitor. Leverage 2020 2021 2022 5.00% 8.00% 11.00% 14.00% 17.00% 20.00% 23.00% 26.00% 23.47% 25.28% 22.19% 10.12% 9.59% 10.31% Profit Margin 2020-2022 Coca Cola Pepsi Year Profit Margin Finally, we can look at both companies’ profit margin to determine their overall profitability. A good profit margin should be anything above 10%, which can be considered the average. Coca- Cola’s profit margin from 2020-2022 stays at least 12% higher than Pepsi but has seen an overall decrease over the period. Pepsi’s profit margin can still be considered healthy, since it still is consistent around the 10% mark, and has not fluctuated abundantly, though it is less than Coca- Cola’s. Overall, the higher the profit margin the better, as it reflects how well the company manages its costs and supplies goods 6

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There are no sources in the current document. and services- both of which can be considered prominent in the companies that have been analyzed. Conclusion From completing the financial analysis and reviewing the financial performance of both Coca- Cola and Pepsi Co., we can conclude that Coca-Cola’s performance exceeds that of their main competitor. Over the three-year period that was examined, Coca-Cola was able to remain consistent, even in an ever changing market and economy. While Pepsi Co. may not have performed as well as their competitor, it is important to note that their performance was still exceptional in the industry. Based on both companies’ financial performance, as long as they maintain and/or continue to improve their financial performance, they should be able to remain stable in the industry for years to come. 7

Resources Coca-Cola Co. Morningstar, Inc. (n.d.-a). https://www.morningstar.com/stocks/xnys/ko/financials PepsiCo Inc . Morningstar, Inc. (n.d.-b). https://www.morningstar.com/stocks/xnas/pep/financials 8