Thesis: Investing in a Company

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Investing in a Company

The Coca-Cola Company and PepsiCo are the two major competitors in the global non-alcoholic beverage market. The two firms both have similar origins at soda fountains in the U.S. south, Atlanta for Coke and North Carolina for Pepsi. In the post-WWII era, both companies have expanded their operations around the world. Today, they remain locked in intense competition. The older and larger of the two, Coke has always held the higher market share in soft drinks in the key U.S. market. However, the two firms engage in competition on a number of fronts. Pepsi is the more diversified of the two companies. It operates 18 brands that do over $1 billion in business worldwide (2007 PepsiCo Annual Report). The three main business units of PepsiCo are Americas Foods (PAF), Americas Beverages (PAB) and International (PI). Coca-Cola, conversely, remains focused on the beverage business almost exclusively. Their organizational structure therefore remains broken down strictly on geographical lines.

Financials: Coca-Cola Company

In order to determine the quality of either an equity or a debt investment, we must first analyze the financial situation of the company. There are three main types of financial analysis. The first is with respect to liquidity, the second is profitability, and the third is with respect to managerial efficiency. For equity investments, we must also consider the price of the equity at present. To evaluate the value of a debt investment, we must analyze not only the capital structure, but the specific nature of the outstanding debts.

In terms of liquidity, Coca-Cola Company is a liquid operation. However, most of its key liquidity ratios have declined over the past year. The current ratio has dropped from 0.949 in 2006 to 0.915 in 2007. The quick ratio declined from 0.582 to 0.576. Times interest earned - Coke's strongest liquidity metric - declined from 29.9 times to 17.26 times. This was the result of a significant increase in interest expense. The only metric that improved was the cash ratio, which went up from 0.274 to 0.309. All told, however, Coke remains a liquid company with strong ratios on all fronts.

Coca-Cola saw a decline in profitability in 2007. Operating revenues increased 20%, but cost of goods sold increased 27%. This resulted in a decrease in operating margin from 66.1% to 63.9%. Operating margin also declined, from 26.2% to 25.1%. As a result, the net margin for Coca-Cola decreased from 21.1% in 2006 to 20.7% in 2007. That all three margins decreased in 2007 is indicative that Coca-Cola had trouble controlling costs during the year. The company did, however, grow the net income and earnings per share significantly. EPS grew 20%, the same as net revenues. It should be noted that the firm's growth rate in 2007 was much higher than in 2006, when growth was just 4% on the top and bottom lines. In general, revenue growth for consumer products was down around the world. Only the bottling investments showed an improvement in operating revenue growth rate in 2007 compared with 2006.

In terms of managerial efficiency, Coke's return on assets declined in 2007. In 2006, ROA was 16.9%; while in 2007 it was 13.8%. Similarly, the return on equity declined from 30.0% to 27.5%.

Overall, the company's financial performance is strong, but faced decline in 2007. While earnings per share were strong, most other key metrics deteriorated. This has corresponded with a significant increase in leverage for the company. The debt ratio has increased from 43.5% in 2006 to 49.7% in 2007. This is a significant increase in debt for such a large, mature company. Long-term debt more than doubled in the past year, and loans & notes payable increased nearly 90%. The increase in debtload is cause for some concern, but overall Coca-Cola Company still has strong fundamentals.

Financials: PepsiCo

PepsiCo is a liquid company. The firm's liquidity metrics are generally strong and are superior to those of Coca-Cola Corporation. The current ratio was 1.31 in 2007, compared with 1.33 in 2006. The quick ratio was 0.88, compared to 0.95. The cash ratio was 0.32 compared to 0.41 in 2006. Times interest earned improved in 2007 from 34.1 to 29.2. There is no universal direction change with respect to… [END OF PREVIEW]

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Investing in a Company.  (2009, March 24).  Retrieved May 20, 2019, from https://www.essaytown.com/subjects/paper/investing-company/6340376

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"Investing in a Company."  24 March 2009.  Web.  20 May 2019. <https://www.essaytown.com/subjects/paper/investing-company/6340376>.

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"Investing in a Company."  Essaytown.com.  March 24, 2009.  Accessed May 20, 2019.
https://www.essaytown.com/subjects/paper/investing-company/6340376.