PepsiCo Inc. Coca-Cola Company annual report analysis

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INTRODUCTION

PepsiCo (Pepsi)and Coca Cola (Coke) are competitors in the beverage industry, both operating profitably and generating a healthy double digit return on assets. While they are comparable in many ways, and have avoided many of the pitfalls of their less successful counterparts, both firms are slightly worse off than last year. This report will study the liquidity, solvency, activity and profitability of these two firms for the 2004 to 2005 time period. Suggestions include improving inventory turnover, improving tax strategies, curbing interest expenses, reviewing how operating cash flows are employed and watching out for possible aging of property, plant and equipment.

LIQIUDITY

Measures of liquidity are usually the current ratio (current assets/current liabilities) or the sticker version, the acid test ratio, and the computation of working capital (current assets - current liabilities). The liquidity measures are to tell the reader if, in the short run, the cash or near cash assets will be adequate to pay the vendors, taxing authorities and employees that they owe in the short run (current liabilities). Typically, a current ratio above one is "out of trouble" and one near two is "solid." Current ratios higher than that do not really help you feel better because once you have enough, that's all you need and keeping more idle cash around is really not smart management as you do not earn on idle cash.

Pepsi and Coke have current ratios above one (in both 2004 and 2005) meaning their current assets, cash or near cash, exceed the short term obligations. Since both are "healthy" from this view, they are on the same footing and so one is not stronger than the other. Both seem to have managed their short-term payment risks soundly.

SOLVENCY

Measures of solvency look to review whether , in the longer run, there are sufficient profits to afford the debt (times interest earned) and sufficient owner's capital to reduce the credit risk for the lenders (debt to equity ratio). Like the current ratio above, if Pepsi and Coke pass these measures, it means that neither has trouble affording their debt or look like a high credit risk from the lender's point of view. While each lender has their own ...