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Benchmark: Executive Summary

Benchmark: Executive Summary

Summary of the Industry and Companies

  • The industry is the non-alcoholic beverage industry;
  • The industry is mostly a profitable one (Essays UK, 2018) ;
  • The two companies chosen are Coca-Cola Company and Pepsi;
  • The two companies are the two biggest beverage companies globally.

One of the biggest industries globally is the beverage industry. The industry varies from bottled water, to carbonated soft drinks and other similar drinks. The giants of the industry are Coca Cola and Pepsi company. The two companies have dominated the non-alcoholic beverage industry not just in the US, but also globally. Their goods can be found in all parts of the world. This has made the companies thrive financially as they have come to dominate the market for non-alcoholic soft-drinks.

Liquidity and Solvency Ratios

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  • Coca Cola liquidity ratios relative to the industry is 2.1 (Essays UK, 2018).
  • Relative to Pepsi, the liquidity ratio is 1.6.
  • The solvency ratio for Coca Cola is 31%.
  • In contrast, the solvency ratio for Pepsi is 8.8%

Liquidity ratio refers to a class of financial metrics that measures the capability of a debtor to pay the off any debt the debtor may have or may acquire currently. An important facet is that the company can pay off the debts without the company needing to raise any funds from any external sources. Coca Cola has a healthy ratio relative to the industry. Its ration relative to the Pepsi is also superior.

Solvency ratio refers to the capability of a corporation to encounter its debt responsibilities. Prospective lenders will use solvency ratio as a basis for making funds available to a company that seeks credit. The solvency ratio for Coca Cola is 31% while that for Pepsi is 8.8.%. Thus, Coca Cola has better solvency ratios than Pepsi.

Profitability Ratios

  • The overall profits for the industry were $ 328. 390 billion (Statista, 2020);
  • Coca Cola had $ 34.3 billion. PepsiCo had $ 64 billion in revenue (Statista, 2020);
  • Coca Cola had 71% profit margins which is higher than the industry average;
  • The Pepsi had a higher margin at 77%;
  • Thus, Pepsi had a higher margins at consolidated level.

The two companies both exhibit high profit margins relative to the industry. Almost a third of the profits in the industry went to the two companies. While the industry had an industry-wide profits of almost 330 billion dollars as per Statisca (2020). At 71% consolidated profit levels and 77% for Coca Cola and PepsiCo respectively. The beverage commerce is a exceedingly competitive one. However, in spite of the competition, the two companies continue to make profits that are higher than industry averages.

Importance of Budgeting

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  • Budgeting is imperative in an organization relative to these ratios (Weygandt et al., 2008);
  • Ratio analysis helps to understand trends over time;
  • They also assist in the measuring the financial state of the business;
  • The ratios thus assist in properly allocating funds to avoid financial upsets.

Financial ratios are import in the budgeting process. By looking at the ratios of a company as against competitors and the industry, one is able to know the industry wide trends. Past trends assist in predicting future trends in the industry. Looking at profitability ratios of the entire company over time  can also assist the company in knowing what the company should prioritize in regard to the competition. Understanding what to prioritize eventually leads to a more balanced budgeting process that takes into account industry trends and the competitive atmosphere.

Variance Report and Balanced Scorecard

  • Variance Report
    • Coca Cola: $ 34.3 billion as opposed to projections of $ 40 Billions thus having a negative difference of more than $5 billion
    • PepsiCo: Profits of $ 64 billion with projections of $65 billion.
    • Industry: The industry grew by 5.3%.
  • Balanced scorecard
    • The company was not innovative during this time;
    • The company also opened up new markets;
    • It also maintained impressive growth rates.

The variance report for the company was not impressive, bbut it was not bad. Both the two companies and industries posted impressive results. The companies slightly missed their targets though. While the variance report is not positive overall.

The balanced scorecard is better. The company did not exhibit positive innovations in the time. However, the company opened up new markets during this time. Moreover, it also maintained impressive growth rates for an industry that is becoming saturated.

Capital Budgeting Decisions

  • Capital budgeting decisions are impacted by capital budgeting decisions;
  • Ratios are quantitative tools for analysis;
  • Profit investment ratios affect the capital budgeting decisions.

Capital budgeting decisions take into account a lot of metrics from both the company and the general competitive environment(Weygandt et al., 2008). Profit Investment Ratio affects capital budgeting in a variety of ways. The Profit Investment Ratio measures the value of a project as compared to the funds and other investment that is put towards the effectuation of the project(Weygandt et al., 2008).

The Profit Investment Ratio impacts the capital budgeting process as it determines whether a project will make financial sense in the long term(Weygandt et al., 2008). If Profit Investment Ratio is at least 1, then it is acceptably profitable.  If it is lower than 1, then the company should abandon the project(Weygandt et al., 2008).

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Concluding Summary

  • The two companies measure well against the industry;
  • However, on the average Coca Cola is better than PepsiCo;
  • Coca Cola has better profit margins than PepsiCo.

While the companies have acceptable profit margins, Coca Cola is slightly better than PepsiCo. On a consolidated scale, PepsiCo has better profits at consolidated level at the operating margin level, Coca Cola did well at 30% as opposed to PepsiCo's 20%.

Similarly, on the question of the interest expenses, Coca Cola had a before tax margin of 30%. However, for Pepsi, it was low at half of that.

Thus, in a way one can look at the PepsiCo's low interest payment margins and decide that it places PepsiCo in a better place financially. However, the fact that Coca Cola had better liquidity and solvency levels makes Coca Cola better overall.

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