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Profitable Company

2007 Ratio Computations for Coca-Cola & PepsiCo.

Computation of Profitability Ratios:

1) Profit margin
Coca-Cola Company PepsiCo.
Formula: Net income
Net sales 5,981 = 21% 5,658 = 14%
28,857 39,474
Commentaries:

The profit margin ratio is used to measure the percentage of each dollar of sales that becomes net income as well as the company's coverage of all expenses through the sells price.

The profit margin ratio for Coca-Cola is 0.21 and for PepsiCo the ratio is 0.14 that means that Coca-Cola generates 21 cents on each dollar of sales while PepsiCo generates 14 cents, making Coca-Cola more profitable.

2) Asset turnover
Coca-Cola Company PepsiCo.
Formula: Net sales
Average total assets 28,857 = 0.79 39,474 = 1.22
36,616 32,279
Commentaries:

The asset turnover ratio shows how well a company uses its assets. In other words, the ratio shows how much income from sales is generated for each dollar invested. Coca-Cola's asset turnover ratio is 0.79 times and PepsiCo's ratio is 1.22 times, this means that PepsiCo is operating more efficiently and generating more sales on every dollar invested in assets.

3) Return on assets
Coca-Cola Company PepsiCo.
Formula: Net income
Average total assets 5,981 = 0.16 5,658 = 0.18
36,616 32,279
Commentaries:

The return on assets ratio is used to measure the overall profitability of a company. This ratio basically shows the amount of net income generated by each dollar invested in assets. Coca-Cola's return on assets is 16% and PepsiCo's ratio is 18% that means PepsiCo is a more profitable company.

4) Return on common stockholders' equity
Coca-Cola Company PepsiCo.
Formula: Net income - Preferred stock dividends
Average common stockholders' equity 5,981 = 0.31 5,658 = 0.35
19,332 16,386
Commentaries:

The return on common stockholders' equity ratio measures the profitability of a company from the common stockholders' point-of-view and shows how many dollars of net income earned for each dollar invested by stockholders. Coca-Cola's return on common stockholders' equity is 31% and PepsiCo's is 35%, making PepsiCo a bit more attractable to investors.
Based on the above information questions are:

3) Which company is more profitable? Why?
4) Which company's stock would you purchase? Why?

Solution Preview

1) Which company is more profitable? Why?

Even though Coca Cola has a higher net income than Pepsi, we will use the Return on Assets formula to determine the overall profitability of the company. This is because the total asset bases of the companies are different. Thus we have to compare relative profitability. ROA is used to measure the overall profitability of a company. This ...

Solution Summary

The solution does a great job of answering the problems below. Both the problem and the answers are straightforward and well explained.

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