Free Custom «Financial Ratio Analysis» Essay Paper

Introduction

The competition between Pepsi and Coca-Cola will never stop. In the process of competition, the companies help each other survive, and withdrawal from the market of one of the implacable opponents will inevitably lead to the situation when the second under the onslaught of smaller but more arrogant competitors will have to make room. Once, there was an opinion that the two companies belong to one person - an unknown millionaire who made this battle, a grand spectacle, prolonged in time and conquer space in order to maintain interest to these drinks. The current paper will consider the history of each company and provide the financial ratio analysis of them.

History of the Companies

Brand Coca-Cola is probably one of the most famous brands in the world. However, the popularity of the drink under this brand was not always like today, it increased as the business development and application of new advertising and marketing moved. Moreover, it is hard to name another such brand that would be of such popularity due to its advertising and marketing inventions.

 

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Coca-Cola beverage story changed dramatically when the inventor of syrup’s recipe died. This was connected with poor Irish immigrant, Asa G. Candler, who arrived in Atlanta with less than $2 but managed to earn a small capital. Thus, Asa G. Candler bought from the Pemberton's widow the recipe of drink for $2,300 and founded the company called “The Coca-Cola Company” in 1893 together with his brother and two other companions.

Pepsi-Cola was invented twelve years later by an officer Caleb Bredemom. Its composition is different from the Coca-Cola by the absence of cocaine which was replaced by pepsin. In 1922, there was the name under which the product is available on the market today before it was called simply the drink of Bred. The name was changed due to the Caleb Bredemom’s company. In total, Pepsi changed its owners about five times before in the year 1939. Loft Incorporation bought the company and gave it a final name PepsiCo. The beginning of the corporations’ confrontation began in 1938, when Coca-Cola filed the first lawsuit against PepsiCo for the illegal use of the word “cola”.

The PepsiCo produces soft drinks, juices, snacks, and other food products under the brands of Pepsi-Cola, Quaker Oats, Lay's, Gatorade, Mountain Dew, Cheetos, SoBe, Mirinda, Tropicana as well as under local brands. The main business of the Coca-Cola Company is a production of non-alcoholic drinks. The company sells beverages, syrups, and concentrates in more than 200 countries. Syrups and concentrates are sold to companies which directly produce beverages.

Financial Ratio Analysis

According to the Annual & other reports of the Coca-Cola Company (2012), the company’s net operating revenues increased from $35.119 million in 2010 to $46.5 million in 2011 and $48 million in 2012. For this reason, the company is developing and its sales are increasing.

Financial analysis is an interesting subject which requires usage of financial statements, for example, income statements and balance sheets. Financial analysts perform an analysis of financial statements of a particular enterprise and provide recommendations for improving the current situation. However, there is no single approach to determine such category as “financial analysis”. Some economists support an opinion that financial analysis is an analysis of company’s financial state, however, others accent on a dynamic approach to determining this category. They consider that financial analysis is an analysis of financial processes which an enterprise takes part in.

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Nevertheless, it would be reasonable to provide a clear definition from economic dictionary. According to the dictionary of accounting terms:

financial analysis use and transformation of financial data into a form that can be used to monitor and evaluate the firm's financial position, to plan future financing, and to designate the size of the firm and its rate of growth. Financial analysis includes the use of financial statement analysis and funds-flow-adequacy ratio. (“Business definition for financial analysis”, n.d.)

However, according to the most definitions, financial analysis is “the analysis of the financial statement of a company” (“Business definition for financial analysis”, n.d.).

The first group of ratios is the ratio of profitability. This group includes rate of return on common stockholder's equity, rate of return on total assets, and rate of return on net sales. According to the data provided in Table 1, the Coca-Cola’s ratios of profitability were in 2012 at the same level as in 2011. For example, the company’s return on total sales decreased from 0.108 in 2011 to 0.105 in 2012. For this reason, the company’s effectiveness and profitability are at the same level that is not good since the Coca-Cola Company is not developing.

The current ratio describes the company’s ability to repay its own debts. This ratio shows the level of covering total current liabilities by total current assets. According to data provided in Table 1, the Coca-Cola’s current ratio increased from 1.049 in 2011 to 1.09 in 2012. It means that company’s liquidity has increased.