Background of Research

Coca Cola
Coca Cola was invented by a pharmacist in the year 1886 when he was experimenting for a
recipe for headache and an energizer. Nowadays Coke serves as one of the number one
recognized brands of the world with a unit sales close to 3200 servings. Coke followed a path of
being known as a tonic and a healer with caffeines in late 1890s to being number one beverage
in 1900 till present. Subsequently Coca Cola rose its domination under the leadership of various
intelligent minds. By the time World War two started Coca Cola was already introduced and
expanded in forty four countries. Today Coca cola has the credit of being one of the top most
brands with a huge net worth and brand value.(Kulaiwik,2009)
Pepsi
Pepsi Cola has a long a rich history starting from 1898. Similar to the story of Coca Cola ,Pepsi
was also developed by a pharmacist who was experimenting with spices and different herbs .
After developing this new taste he applied for Patent trademark. The business finally started to
grow and finally Pepsi was registered in 1903 by the US Patent office. In addition to this a strong
franchise system was also built which was mainly responsible for Pepsis success worldover.
Moreover different marketing campaigns helped Peps built it brand name worldover.

Financial ratios
The Financial Analysis takes into consideration most of the provided information, calculating up
to twelve financial ratios divided into the following four groups:
Profitability ratios
Liquidity ratios
Efficiency ratios
Debt ratios
The analysis then calculates regression trends between the same ratios from consequent
periods to determine predicted future results of the Subject. Each group of ratios is rated
independently on a five grade scale (poor, passable, satisfactory, good and excellent). The
results are shown in the Financial rating section of the reports, example:

Profitability ratios poor

Liquidity ratios satisfactory
Efficiency ratios poor
Debt ratios good
Additionally, when available, the regression trend value is calculated and provided in the
ratios table and in the Financial rating section, example:
Profitability ratios poor but increasing
Liquidity ratios satisfactory but decreasing

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The following table shows meanings of ratios used:

NAME
Gross Margin
Operating
Margin
Net profit
Margin
ROE (Return
On Equity)
ROA (Return
On Assets)

Type

Method of
Calculation
Profitability Gross Profit / Net
Sales
Profitability Operating Profit /
Net Sales
Profitability Net Profit / Net
Sales
Profitability Net Income /
Shareholders
Equity
Profitability Net Income / Total
Assets

ROI (Return
Profitability Net Profit before
On Investment)
Tax / Shareholders
Equity
Current Ratio
Liquidity
Current Assets /
Current Liabilities
Quick Ratio

Liquidity

Asset Turnover Efficiency

(Current Assets
Inventories) /
Current Liabilities
Net Sales / Total
Assets

Inventory
Turnover

Efficiency

Sales / Inventory

Debt Ratio

Debt

Total Liabilities /
Total Assets

Long Term
Ratio

Debt

Long-Term Debt /
Shareholders
Equity

Explanation
The higher the percentage, the more
the company retains to pay for other
expenses of the business.
Measures companys operating
efficiency.
The higher percentage the better
profitability of the company.
Indicates how profitable a company is
in relation to its equity.
Indicates how profitable a company is
in relation to its assets. One of the
ways to look at efficiency of
companys management in a way they
convert assets available into profits.
Shows benefit of investment made.
Measures a companys ability to pay
short-term debts. The higher the ratio
the better.
Measures a companys ability to pay
short-term debts with its most liquid
assets. The higher the ratio the better.
Indicates the relationship between
assets and revenue. This ratio is useful
to determine the amount of sales that
are generated from each dollar of
assets.
Shows how many times a companys
inventory is sold and replaced over a
period of time
Measures proportion of companys
debts to its assets. Ratio below 60%
indicates comfortable situation for the
company.
Helpful in determining the debt
capacity of a firm for its working
capital structure. Ratio below 50%
indicates comfortable situation for the
company.
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Literature Review
Bruce L. Ahrendsen and Ani L. Katchova conducted research on Financial ratio analysis
using ARMS data.
The purpose of this research is to evaluate the financial performance measures calculated and
reported by the Economic Resource Service (ERS) from Agricultural Resource Management
Survey (ARMS) data. The evaluation includes the calculation method and the underlying
assumptions used in obtaining the reported values.
Findings
calculate and report the financial measures recommended by FFSC(Farm Financial Standards
Council), note values that are imputed, periodically update and validate assumptions used in
calculating imputed values, review its policy for flagging estimates as statistically unreliable,
report medians and other select percentiles, and consider reporting the percent of farm businesses
that have values within critical zones.

Y. A. Babalola and F. R. Abiola conducted research on Financial Ratio Analysis of Firms: A

Tool for Decision Making .
This article is to present primarily the relationship between financial analysis and accounting,
and the fundamental role which accounting holds, through the information it produces, into
analysts' work.
Findings
Historical relations between the two disciplines, allow for the accounting as an information
provider for the financial analysis and the latter as a specialty and value-oriented accounting
information exploitation. Undoubtedly, this historical report is always running in the work of
financial analysts that the financial information they feed extensively with materials analysis.
Indeed, many financial databases are in the form of statistical data collection, in which the
structure of accounting information is hidden; the organization of these data favours statistical
criteria pertinent to the portfolio management methods. Consequently, it tends to fade accounting
model underlying the production of monographic data, which is the ultimate source of
information relating to companies.

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Ilorah Fabian Uzochukwu conducted reasearch on The Role of Ratio Analysis in Business
Decisions.
Through the above research we found that financial statements contain lots of information
summarized in figures. Viewed on the surface, they do not provide enough information about the
viability of the reporting entity. Thus, they need to be analyzed by means of financial ratios to
unravel the mass of truth hidden in them, and to enhance decision-making.
Ratio analysis helps to reveal, compare and interpret salient features of financial statements.
When applied to a set of financial statements, financial ratios highlight significant aspects of the
financial position and operational results of a business requiring further investigation. They help
to identify the strengths and weaknesses of a business.
In fact, ratio analysis helps to evaluate the past performance, the present condition, and the future
prospects of a business. It enables us to ask the right questions about a business, and paves way
to finding the useful answers. Such analysis therefore, aids planning, control, forecasting and
decision- making.

Doron Nissim and Stephen H. Penman conducted research on Ratio Analysis and Equity
Valuation.
The analysis of profitability extends the traditional analysis, the analysis of growth complements
it: profitability and growth drive equity values. The analysis is guided by the residual earnings
valuation model but is appropriate for forecasting free cash flows and dividends if other
valuation approaches are adopted.
Ratios are identified as drivers of future residual earnings, free cash flow and dividends. Ratios
in current financial statements are then viewed as information to forecast the future drivers.
The analysis does not deal with uncertainty in forecasting. This is incorporated in valuation
models through the discount rate (or discounts from expected values) and one conjectures that
financial statement analysis is also relevant for determining the discount rate.

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Boris Nenide, Robert W. Pricer and S. Michael Camp conducted research on The use of
Financial Ratios for Research:Problems Associated with and Recommendations for Using
Large Databases.
When researchers use databases in general and specifically when they use the financial statement
information, adjustments must be made if analysis is to be meaningful. As a first step, the sample
selected must be carefully reviewed for obvious information entry errors. With the sample of
wholesale firms described in this paper, 65 firm financial statements contained errors of such
magnitude that they needed to be eliminated from study. This is a common problem with data
and careful review is necessary to be certain that accurate observation measurements are being
used in the analysis stage. If ratio variables are part of the analysis being undertaken, the
remaining data must be reviewed to remove financial observations that lead to denominators
being negative or approaching zero. Because ratio analysis assumes proportionality between
denominators and numerators of observations being compared, this is an essential adjustment
that must be made for results to have meaning. For the wholesale firm sample discussed in this
paper, of the 185 firms reviewed for this adjustment, 19 firms were removed because their
performance data resulted in ratio denominators that were negative or approaching zero. If these
observations had been included in the data being analyzed, the results would have been distorted
beyond meaning.

H. W. Collier, T. Grai, S. Haslitt and C. B. McGowan conducted research on The use of

financial ratio analysis: the case of Motorola.
In this paper, we find out that financial ratio analysis is complicated for companies that do not
readily fall into a single industry. Motorola has six operating units that fall into several industries
with two industries accounting for most of the sales telecommunications and semi-conductor.
The differences in the industry characteristics of these two industries complicate the financial
ratio analysis of Motorola. However, a more relevant picture of the operating characteristics of
Motorola is achieved by increasing the complexity of the analysis, that is, by comparing
Motorola to both industries.

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Mabwe Kumbirai and Robert Webb conducted research on A financial Ratio Analysis of
Commercial Bank Performance in South Africa.
The analysis has uncovered that the illiquidity levels in the South African commercial banks has
reached extreme levels. This is exacerbated by the banks dependence on wholesale markets and
the fact that deposits with less than one year maturity represent close to 80% of total deposits.
Despite these alarming features, South African banks have managed to continue with their
normal day to day business during the global financial crisis. South African banks low leverage,
high profitability, and limited exposure to foreign assets and funding allowed them to remain
liquid and well-capitalized; obviating any need for extraordinary liquidity or state support.
We also found significant differences in profitability performance for the period 2005-2006 and
the period 2008-2009. The results indicate that profitability deteriorated during the later period.
There might be several reasons for the significant deterioration in profitability. One of the
reasons could be increasing bank operating costs and reduced incomes amid the global financial
crisis. Furthermore in these recessionary times, when corporate and private clients find it hard to
service their debts, the level of the provision for loan losses and bad debts increased.

Timo Salmi and Teppo Martikainen conducted research on A Review of the Theoretical and
Empirical Basis of Financial Ratio Analysis.
In this paper we review four areas of financial ratio analysis research:
The research on the functional form of financial ratios has been characterized by theoretical
discussions about the ratio format in financial ratio analysis and empirical testing of the ratio
model. We conclude from the review that the proportionality assumption for financial ratios is
stronger within an industry than between industries. Moreover, proportionality varies from ratio
to ratio, and between time periods indicating problems in temporal stability.
The research on the distributional characteristics of financial ratios has focused much on the
question of normality of the financial ratio distributions because normality would be very
convenient in statistical analysis. The empirical results, however, indicate that in many cases the
financial ratios follow other than the normal distribution. Part of the research has sought to
restore normality by transformations of the data or by eliminating outlier observations. Some
improvement towards normality has been observed, but in many cases it has been inadequate.
The research on classifying financial ratios into parsimonious sets can be in our opinion best
characterized as the following trends: pragmatical empiricism, deductive approach, inductive
approach, and confirmatory approach. The review shows that the number of essential financial
ratios often can be reduced to about 4-7 essential ratios. However, empirically based
categorizations are not stable across the different studies that is there is no clear consensus what
the categories are, except that profitability and solidity commonly appear. This dispersion of the
inductive empirical results has given rise to using theoretical classifications and then seeking
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empirical confirmation of a priori classifications. The most prevalent method has been factor
analysis, although also other options have been used.
The fourth area we reviewed was the estimation of internal rate of return from financial
statements. The discussions center on three trends, the relationship between IRR and ARR, the
usage of CRR for IRR estimation, and direct estimation of IRR from the financial statements.
This area is characterized by much debate both on the concepts of economists' and accountants'
views, and the validity of both the theoretical and empirical results. No unique consensus
whether successful IRR estimation is possible has been reached in the literature.

Florenz C. Tugas, conducted research on A Comparative Analysis of the Financial Ratios of

Listed Firms Belonging to the Education Subsector in the Philippines for the Years 20092011.
This research paper aims to analyze the financial statements of Centro Escolar University, Far
Eastern University, and iPeople, Inc. (Malayan Colleges) for periods 2009, 2010, and 2011 using
comparative financial ratios. This seeks to provide an answer to the question: what are the norms,
industry figures, and peculiarities in the education subsector of the Philippines using liquidity,
activity, leverage, profitability, and market value ratios?
Moreover, this study specifically aims to meet the following objectives:
To determine the liquidity, activity, leverage, profitability, and market value ratios of CEU, FEU,
and Malayan Colleges and to determine norms, industry figures, and peculiarities of the
education subsector of the Philippines.

Venus C. Ibarra conducted research on Cash Flow Ratio Tools for Financial analysis.
This paper tested the use of ratios derived primarily from statements of cash flows in analyzing
the performance of manufacturing companies. It showed how these ratios could be useful in
analyzing the financial status of a manufacturing company, if the ratios can be understood by
users without the help of the income statement balance sheet. Liquidity ratios however, will be
insignificant if there is no cash flows generated from operations or cash flows is negative. In this
situation, the ratios cannot be used to analyze the liquidity of a company. Analyst will have to
use the standard ratios using accrued data. Although the profitability ratios are useful to both
internal and external users, interpreting the ratios are confusing particularly to external users who
may not have enough knowledge of accounting. Cash returns on assets and on fixed assets are
good indicators of the ability of a company to generate operating cash; however, a company's
ability to make use of its assets is not a guarantee that there will be enough cash to meet the
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company's other obligations. The percentage of net income converted to cash (earnings quality)
and a higher ratio indicating cash flow from sales are better measurements of the profitability of
a company. The help of other accrued ratios like gross profit margin and net profit margin will
strengthen the cash flows profitability ratios. Coverage or solvency ratios are important to longterm creditors and investors. It is important to the creditors and investors to determine when a
company can pay its long-term debts or give dividends through its current operating cash flows.
The proposed ratios cash flow to long term debts and cash dividends coverage ratio can be used
to determine coverage. The ability of the company to make use of their shareholders' investment
can be determined by the cash return to shareholders' ratio. Except for the exceptions mentioned
above, the ratios can be helpful in determining liquidity, efficiency, profitability and solvency of
a company. However, it should be pointed out that since the basis of the ratios is operating cash
flows, it is highly probable that the data will be negative. Negative ratios as against positive
ratios cannot be used to determine the performance of a company. In such a case, use of standard
accrued ratios derived from the income statement and balance sheet will be better.

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Objectives
The main objectives of this report are to compare two major players in soft drink/beverage
industry, PepsiCo and Coca-Cola, and to make recommendation for investment. The analysis will
be made based on each companys common-size income statement, common-size balance sheet,
comparative income statement, comparative balance sheet and financial statement ratios
The Minor objectives of study aimed as:
To evaluate the performance of the company by using ratios as a yardstick & to measure
the efficiency of the company.
To understand the liquidity, profitability and efficiency positions of the company during
the study period.
To evaluate and analyze various facts of the financial performance of the company.
To analyze the capital structure of the company with the help of Leverage ratio.
To offer appropriate suggestions for the better performance of the organization.

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