Financial
Statement Analysis
Company
Overview
As society
gravitates away from junk food and sugary drinks, the future financial strength
of the beverage industry may experience lower performance. Is the beverage
market already experiencing a decline? For both 2016 and 2017, the beverage
industry made Forbes’ list of the fifteen least profitable industries (Biery,
2017). Coca- Cola and PepsiCo are forefront leaders of this industry. Although
not a direct rival of Coca-Cola or PepsiCo, Dr. Pepper is a steady growing
contender. Is it a financially sound decision for investors to buy into this
industry? By analyzing financial statements of three of the largest companies
in this industry, one can gain deeper insight into the stability and profitability
of the industry to make wise investment decisions.
Currently
based in Atlanta, the Coca-Cola Company began in 1892 and is one of the largest
corporations in America. Coca-Cola continues to lead the beverage industry as
the most popular beverage choice globally (Coca-Cola, 2018). Some of
Coca-Cola’s products are Diet Coke, Minute Maid juices, Sprite, Powerade and
Peak Tea, Bacardi mixers, energy drinks, and bottled water (Coca-Cola, 2019).
Started
in 1902, PepsiCo Inc. is based in New York. PepsiCo’s four main divisions are
Frito- Lay, PepsiCo Beverages, Quaker Foods, and PepsiCo International
(Moroney, 2005). Some of PepsiCo’s twenty-two brand products are are Mountain
Dew, Pepsi, Aquafina water, tea, Gatorade, Tropicana juice, Lay’s chips, and
Doritos. PepsiCo also owns Pizza Hut, Taco Bell, and Kentucky Fried Chicken
(PepsiCo, 2019). PepsiCo reports around a billion dollars in sales from the
company’s brands annually (Moroney, 2005). PepsiCo is a strong competitor of the
Coca-Cola Company reporting over 66 billion dollars in revenue (PepsiCo, 2019).
Dr.
Pepper, based in Texas, is thirteenth in the beverage industry based on sales
(Beverage, 2019). Dr Pepper was created in the 1880s and claims that the
original soda is manufactured today with variations of added flavors and
different sweeteners. Some of Dr Pepper products are 7-Up, All Sport, IBC root
beer, Clamato, Snapple, Hawaiian Punch, and Yoo-hoo (Dr Pepper, 2019).
Ratio Analysis
The
current ratio provides a view of the company’s capital. The current ratio is
calculated by dividing the total current assets by the total current liabilities.
The higher the current ratio reflects
the company’s ability to repay short-term liabilities (Vliet, n.d.). If
the current ratio is less than one, then the business will not have enough
capital to cover debt. If the current ratio is over two then a business can
comfortably cover liabilities when due (Mitchell, 2019). The current ratio for
each company is calculated from data located on the year-end balance sheets
(Appendix A). PepsiCo has the highest current ratio at 3.89 for 2017 and 3.48
for 2016. Dr Pepper’s score for 2016 is 1.28 and 1.33 for 2015. Coca-Cola has
the lowest current ratio at 1.18 for 2017 and 1.17 for 2016. While these scores
reflect that PepsiCo has the most capital, each company has enough capital to
repay incurred debts.
The
quick ratio measures a company’s ability to repay short-term debt (Mitchell,
2019). The quick ratio is calculated by subtracting the inventory from the
current assets and dividing the total by the current liabilities. Like the
current ratio, the higher the quick ratio, the greater the company’s ability to
cover short-term debts. The information to calculate the quick ratio is on the
balance sheets (Appendix A). Coca-Cola has the highest quick ratio at 4.52 for
December 2017 and 5.01 for January 2017. PepsiCo scored 3.75 for 2017 and 3.35
for 2016. Dr Pepper scored 1.25 for 2016 and 1.29 for 2015.
A
business can use the gross profit margin percentage (GPMP) to measure financial
health and efficiency. If one company’s GPMP is better than its competitor,
then it means the company is operating more efficiently than the competitor. If
the GPMP is lower, then company operations may require adjustments. If the GPMP remains stable over time, then
the company operations are performing well. If the GPMP fluctuates drastically,
then this indicates a major problem within the company functions (Gleeson,
2019). The GPMP is calculated by subtracting the cost of goods sold from the
revenue and dividing that amount by the total revenue, then multiplying by one
hundred. The information to calculate the GPMP is located on the income
statements (Appendix B). All three companies have consistent GPMP, however,
Coca-Cola shows a slight decreasing variance at 39% for 2015, 38% for 2016, and
36% for 2017.Pepsico shows a slight increase at 54% for 2015, and 55% for both
2016 and 2017. Dr. Pepper remains stable at 59% for 2014, 2015, and 2016. Once again,
all three companies have a stable GPMP, but Dr. Pepper’s score is the most
consistent. Dr Pepper has the lowest capital of all three companies.
The
inventory turnover ratio is calculated by dividing the cost of goods sold
divided by average inventory. To obtain the average inventory one adds the
beginning inventory and ending inventories and divides the total by two. The
inventory turnover ratio measures how efficiently a company sells inventory. The
inventory is found on the balance sheets and the cost of goods sold is located
on the income statements (Appendix A and B). The inventory turnover ratio for
Coca-Cola for 2017 is 17.0. The ratio for Dr Pepper for 2016 is 12.6. The ratio
for PepsiCo for 2016 to 2017 is 10.2, but this number may be lower because the
data on the balance sheet spans two years versus the 12 months accounted for Dr
Pepper and Coca-Cola.
The
account receivable turnover ratio is calculated by dividing the net credit
sales by the average accounts receivable. A higher ratio is favorable as this
indicates the receivables are turned to cash assets quickly. Since the total
credit sales are missing from the company financial reports, the net revenue
(Appendix B) is used to calculate this
ratio for company comparison purposes. Accounts receivable figures are found on
the balance sheets (Appendix A). The accounts receivable turnover ratio for
Coca Cola for 2017 is 8.6. The ratio for Pepsi for 2017 is 9.0 and the ratio
for Dr Pepper for 2016 is 10.0.
Comparison of
Accounting Methods
The
first-in, first-out (FIFO) inventory method assumes that the oldest inventory
is sold before the most recently purchased inventory. The last-in, first-out
(LIFO) method sells the most recently purchased first and bases the final
inventory on the oldest costs (Miller-Nobles, Mattison, Matsumura, 2018).
Companies use this inventory method when purchasing prices increase. A business
using the LIFO method will pay less tax on the net income. Arguably, LIFO is an
unfair advantage for businesses, but this method accounts for inflation and the
additional funds a business needs to replace the sold inventory. Since
Coca-Cola, PepsiCo, and Dr Pepper produce and sells consumable goods with a set
expiration date, the companies use the FIFO method. The FIFO method maximizes
profits and reduces the amount written off as an expense for these companies.
Small
non-public businesses use the direct write-off method to expense out
uncollectible debt (Miller-Nobles, Mattison, Matsumara, 2018). The direct
write-off method does not follow the matching principle and is not acceptable
per the Generally Accepted Accounting Principles (GAAP). Using the direct
write-off method, a business can write-off debt in any period. Therefore, the
revenue from the transaction is recorded in one period and the bad debt expense
recorded later. This lapse can create an overstatement or understatement of the
net income for those periods. The Allowance method follows the matching
principle method by transferring the bad debt into an expense account within
the same period as the sales revenue from the transaction. Corporations and large business use the allowance method
for bad-debt because it is the preferred method per accounting standards
(Miller-Nobles, Mattison, Matsumara, 2018). Since Coca-Cola, PepsiCo, and Dr
Pepper are all corporations, these businesses use the allowance method.
The
three methods used of depreciation are the straight-line, units-of-production,
and double-declining-balance. The straight-line method divides and applies the
depreciation amount equally for each year. The units-of-production method
depreciates by units. The amount of depreciation recognized in a certain period
varies as the depreciation is determined by usage rather than time. The
double-declining-balance method is an accelerated depreciation method. The
largest depreciation occurs in the first period after purchase and then lessens
subsequently (Miller-Nobles, Mattison, & Matsumura, 2018). As
manufacturers, these companies would primarily use the units-of-production
method to account for depreciation of equipment.
Recommendation
If an
investor analyzes the financial statements released by Coca-Cola, PepsiCo, and
Dr Pepper, each company reflects strong numbers. With a few calculations one
can see that each company has enough assets to cover debts and have reasonable
turnover rates. While most of the calculations are overall higher for Coca-Cola
and PepsiCo, Dr Pepper has consistent numbers. Since Dr Pepper is only the
thirteenth largest beverage company according to sales, there is more growth
potential. Dr Pepper is the only company that held a stable GPMP of 59% for
three years. This shows that even though the company has fewer assets than the
competition, the company is using its resources effectively. While any of these
three companies will likely produce profit for an investor, Dr Pepper is the personal
recommendation.
References
Beverage Industry. (2019) The top 100 beverage companies of 2018.110
(6) 6, 30-34. Retrieved from
http://eds.a.ebscohost.com.proxy-library.ashford.edu/eds/pdfviewer/pdfviewer?vid=6&sid=1fcd7f28-7ea0-4681-a334-b586e340f640%40sdc-v-sessmgr01
Biery, M.
(2017, September 24). These industries generate the lowest profit margins. Forbes.
Retrieved from https://www.forbes.com/sites/sageworks/2017/09/24/these-industries-generate-the-lowest-profit-margins/#5c682458f49d
Coca-Cola.
(2019, June 16). Wiki. Retrieved from
https://en.wikipedia.org/wiki/Coca-Cola
Coca-Cola
Company (2018) In Salem Press Encyclopedia. Retrieved from http://eds.a.ebscohost.com.proxy-library.ashford.edu/eds/detail/detail?vid=1&sid=1fcd7f28-7ea0-4681-a334-b586e340f640%40sdc-v-sessmgr01&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#AN=87994579&db=ers
Dr Pepper
Snapple Group. (2019). Our brands. Retrieved from
https://www.drpeppersnapplegroup.com/brands
Gleeson, P.
(2019, March 1). How to calculate gross profit margin percentage. Chron. Retrieved from
https://smallbusiness.chron.com/calculate-gross-profit-margin-percentage-4133.html
How to
calculate inventory turnover. (2019, April 27). Wiki .
https://www.wikihow.com/Calculate-Inventory-Turnover
Miller-Nobles, T. L., Mattison, B. L., & Matsumura,
E. M. (2018). Horngren’s accounting (12th ed.). Retrieved from
https://pearson.com
Mitchell, C.
(2019, May 8). How to calculate financial rations of performance. Chron. Retrieved from
https://smallbusiness.chron.com/calculate-financial-ratios-performance-52697.html
Moroney, R. (2005, December 2). PepsiCo. Business Insights: Global. Retrieved from http://bi.galegroup.com.proxy-library.ashford.edu/global/article/GALE|A140659191?u=ashford
PepsiCo. (2019). In Salem Press Encyclopedia.
Retrieved from
http://eds.a.ebscohost.com.proxy-library.ashford.edu/eds/detail/detail?vid=3&sid=424a8739-2fd6-4b61-9fc8-52196d01ae9b%40sessionmgr4007&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#AN=87996580&db=ers
Vliet, V.
(n.d.). Current ratio. Retrieved from
https://www.toolshero.com/financial-management/current-ratio/
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