Financial Statement Analysis
The National Beverage Corp. is an American beverage company located in Fort Lauderdale, Florida. This corporation is ranked by Beverage Digest (Beverage-Digest Fact book 23rd Edition, 2018) as the fifth-largest soft drink company in the United States, while the non-alcoholic beverage industry has many competitors located across the globe, who is number one? We will look at three companies: The Coca-Cola Company, Dr. Pepper and PepsiCo because these are considered the top three in the industry. A ratio analysis will help us discuss potential liquidity of these companies, a comparison of accounting methods will show the difference between each, and a better understanding of the strengths and risks will allow for a recommendation of investment.
In order to understand the ratio analysis process, we need to determine the calculations for the current ratio, the quick ratio, gross margin percentage, inventory turnover, accounts receivable turnover, and assets turnover. I prefer to also analyze a company’s return on equity and return on assets before making a recommendation for investment. We can determine a company’s ability to pay short-term obligations using the current ratio. According to GuruFocus (2019), “Coca-Cola Co's current ratio for the quarter that ended in Jun. 2019 was 0.83.” When compared to PepsiCo for the same quarter we see a small difference, 0.86. Dr. Pepper reported 0.32 for the quarter that ended March of 2019. This is calculated by taking the total current assets and dividing it by the total current liabilities. We know that Dr. Pepper has more liabilities compared to assets than Coca-Cola or PepsiCo because we have a smaller ratio. Next we will look at the quick ratio. This calculation removes the total inventories of a company when dividing current assets by current liabilities. Depending on the size of a company or what kind of product is sold, its ability to quickly turn inventory into revenue can vary between businesses. This ratio shows us how more readily available assets such as cash are available for a company to immediately pay off current liabilities. According to GuruFocus (2019), “Coca-Cola Co's quick ratio for the quarter that ended in Jun. 2019 was 0.71.” This is the highest of the three companies with PepsiCo at 0.66 and Dr. Pepper at 0.32. Coca-Cola has the strongest ability to immediately pay back its liabilities but PepsiCo may have stronger inventory when looking at the current ratio. Next let’s look at Gross Margin %. This is determined by dividing gross profit by revenue. According to GuruFocus (2019), “Coca-Cola Co's Gross Profit for the three months ended in Jun. 2019 was $6,076 Mil. Coca-Cola Co's Revenue for the three months ended in Jun. 2019 was $9,997 Mil. Therefore, Coca-Cola Co's Gross Margin % for the quarter that ended in Jun. 2019 was 60.78%.” According to Peavler (2019), “Gross profit margin is a financial calculation that can tell you, in percentage terms, a good deal about a company's overall financial health. It reveals how much money is left over after paying for production to cover operations, expansion, debt repayment, and many other business expenses.” PepsiCo reported the lowest of the three companies with 54.99% and Dr. Pepper at 55.83%. According to GuruFocus (2019), “Inventory turnover measures how fast the company turns over its inventory within a year. It is calculated as Cost of Goods Sold divided by Total Inventories. Coca-Cola Co's Cost of Goods Sold for the three months ended in Jun. 2019 was $3,921 Mil. Coca-Cola Co's Total Inventories for the quarter that ended in Jun. 2019 was $3,316 Mil. Coca-Cola Co's inventory turnover for the quarter that ended in Jun. 2019 was 1.18.” Compared to PepsiCo at 1.96 and Dr. Pepper at 0.26, Coca-Cola looks to have a healthy turnover where as Dr. Pepper’s low inventory turnover could mean a problem with marketing, sales are week or they have too much inventory, known as overstocking. According to GuruFocus (2019), “Accounts Receivable are created when a customer has received a product but has not yet paid for that product. Coca-Cola Co's accounts receivables for the quarter that ended in Jun. 2019 was $4,888 Mil. Accounts receivable can be measured by Days Sales Outstanding. Coca-Cola Co's Days Sales Outstanding for the quarter that ended in Jun. 2019 was 44.62.” Compared to Dr. Pepper with the lowest of the three at 37.02, PepsiCo looks to have the strongest ability to issue credit and collect funds with a ratio of 47.79. Last is Asset Turnover. This helps measure how quickly a business can generate sales form its assets by dividing revenue by total assets. According to GuruFocus (2019), “Coca-Cola Co's Revenue for the three months ended in Jun. 2019 was $9,997 Mil. Coca-Cola Co's Total Assets for the quarter that ended in Jun. 2019 was $89,172 Mil. Therefore, Coca-Cola Co's asset turnover for the quarter that ended in Jun. 2019 was 0.11.” PepsiCo has the highest of the three companies with a 0.22 and Dr. Pepper in last place with a 0.05. While this is all very important information to review when looking to invest, I feel that there are two more equally important ratios to consider before making a determination. Return on equity (or ROE) and return on assets (or ROA). ROE measures management’s ability to generate income from the company’s equity while ROA measures the profit against the assets used to generate the revenue. ROE is often used to compare the performance of companies in the same industry as we are doing here. According to GuruFocus (2019), “During the past 13 years, PepsiCo's highest Return on Equity (ROE) was 101.48%. The lowest was 28.78% and the median was 35.18%. NAS: PEP’s ROE % is ranked higher than 99% of the 69 Companies in the Beverages - Non-Alcoholic industry.” Coca-Cola with a current ROE of 58.07% is ranked higher than 94% while Dr. Pepper is ranked lower than 75% with the lowest current ROE of 4.07%.
Next we will look at a comparison of accounting methods between these three companies. The Coca-Cola company uses FIFO while the Dr. Pepper and PepsiCo both use LIFO. The FIFO method is used to keep products from expiring or loosing quality which is a major area of importance to Coca-Cola. Using the LIFO method reduces the cost of goods sold and increases net income which may look better to investors.
My recommendation is that while Coca-Cola Company may be the most profitable of the three for the most current quarter, PepsiCo has the best asset turnover and will see the largest gross profit over the next several business cycles as it has historically over the last decade. Dr. Pepper may look more lucrative to short-term investors because of its current gross profit of 55.83% compared to PepsiCo at 54.99% but the return on equity is substantially lower there. PepsiCo has the ability to generate the most sales from its assets with the highest asset ratio.
In conclusion, my recommendation is PepsiCo, even though it may be one of the top three companies in the industry, it still remains less profitable than the fifth largest soft drink company, National Beverage Corporation. There asset turnover ratio is 0.48, higher than all three of the larger companies put together. There return on assets as of April 2019 is 20.81%, almost double that of Coca-Cola and PepsiCo (GuruFocus, 2019).
- Bailey, S. (2019). Market Realist. An overview of Dr Pepper Snapple’s key brands. Retrieved from https://marketrealist.com/2014/12/overview-dr-pepper-snapples-key-brands/
- Bailey, S. (2014). Market Realist. PepsiCo: A company overview. Retrieved from https://finance.yahoo.com/news/pepsico-company-overview-203956177.html
- Beverage Digest, A Zenith Global Company (2018). Beverage-Digest Fact book 23rd Edition. Retrieved from https://www.beverage-digest.com/
- GuruFocus.com (2019). Historical Data. Retrieved from https://www.gurufocus.com
- Peavler, R. (2019). The meaning and use of gross profit margin. Retrieved from https://www.thebalancesmb.com/what-is-the-gross-profit-margin-393201
- Vault.com Inc. (2019). About the Coca-Cola Company. Retrieved from https://www.vault.com/company-profiles/food-beverage/the-coca-cola-company
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