Pepsi vs. Coca Cola, Capstone Project Example

Coca Cola’s Return on Assets (ROA) increased by 7 percent from 2004 to 2005. This shows that the company has improved its utilization of assets and each dollar worth of asset is generation greater income than the previous year. The company might have been able to achieve it by selling off unprofitable assets which is a positive sign and shows that the management might have been restricting the company. The higher asset utilization rate, thus, improves the financial condition of the company through greater efficiency.

Coca Cola’s inventory turnover also increased by 6 percent from 2004 to 2005 despite an intense rivalry with Pepsi. The company might have improved its inventory management system through investment in information technology and have developed better forecasting models. The higher inventory turnover means the company has lower storage costs which also improves the profitability. It also means that lower resources are tied up in inventory and can be invested somewhere else.

The company’s current ratio fell slightly by 6 percent from 2004 to 2005. But the positive thing is that both the current assets and current liabilities declined over the period though current assets declined by a greater margin. Even though the current ratio has gone down but on the positive side, current liabilities have gone down as well.

Coca Cola’s profit margin also declined by 5 percent from 2004 to 2005. The net income almost remained unchanged but sales grew, resulting in a lower profit margin. This indicates the intensity of rivalry with Pepsi which has probably resulted in higher operating expenses, particularly marketing expenses. Despite a lower profit margin, this should not have a significant impact on the financial position of the company.

But the positive news is that Coca Cola did better than Pepsi in all the four ratios mentioned above. But the company has been trying to restructure its operations in order to improve operating efficiency and future financial performance is probably going to be even better. Coca Cola is not any worse financially in 2005 than it was in 2004 despite possible restructuring expenses.

I will invest in Coca Cola because Coca Cola has shown a great performance despite its huge size. In addition, it has an intensive rivalry with Pepsi, thus, some of the pressure on profit margins is understandable. Coca Cola and Pepsi operate in an industry which operates more like an oligopoly than any other market structure which is also a plus. This means there are artificial barriers for new entrants because Coca Cola has a great brand and enjoys strong customer loyalty which are necessary for growth in the long term. Coca Cola also has Warren Buffet as one of its main shareholders which is also a sign of confidence in the company’s long term stock performance because Buffett has a proven track record.