Question

2017 2018 Average 55% $ 55% $ 16% $ 10% $ $ $ $ 55% 16% 8% (data in millions) 2016 PepsiCo Net Operating Revenue/Net Sales $ 62,799 Gross Profit $ 34,577 Operating Income $ 9,804 Net Profit (Consolidated Net Income) $ 6,329 Total Current Assets $ 26,450 Total Assets $ 73,490 Equity $ 11,199 Return on Assets 8.61% Return on Equity 56.51% Total Current Liabilities $21,135 Total Liabilities $62,291 12% 63,525 34,729 10,276 4,857 31,027 79,804 10,981 6.09% 44.23% $20,502 $68,823 $ $ $ $ $ $ $ 64,661 35,280 10,110 12,515 21,893 77,648 14,602 16.12% 85.71% $22,138 $63,046 $ 63,662 55% $ 34,862 12% $ 10,063 19% $ 7,900 $ 26,457 $ 76,981 $ 12,261 10.27% 62.15% $ 21,258 $ 64,720 10% 62% 2016 2018 Average 63% 21% 4% 62% 23% (data in millions) Coke Net Operating Revenue/Net Sales Gross Profit Operating Income Net Profit (Consolidated Net Income) Total Current Assets Total Assets Equity Return on Assets Return on Equity Total Current Liabilities Total Liabilities $ $ 61% $ 21% $ 16% $ $ $ $ $ 41,863 $ 25,398 $ 8,657 $ 6,527 $ 34,010 $ 87,270 $ 23,220 7.48% 28.11% $26,532 $64,050 13% 2017 % 35,410 22,155 7,599 1,248 36,545 87,896 18,977 1.42% 6.58% $27,194 $68,919 $ $ $ $ $ $ $ $ 31,856 20,086 8,700 6,434 30,634 83,216 19,058 7.73% 33.76% $29,223 $64,158 $ 36,376 63% $ 22,546 27% $ 8,319 20% $ 4,736 $ 33,730 $ 86,127 $ 20,418 5.54% 22.82% $ 27,650 $ 65,709 23%

Evaluate the profitability (Dollars) and profitability ratios (%) of both companies for FY 2016, 2017 and 2018, including: profit margin (gross and net), return on assets and equity. What conclusions can you draw from your analysis? Which company, if either, is doing a better job of generating profits and returns? Keep in mind that investors focus on a company’s profit growth & consistency.

Answer 1

The Firm's Profitability can be calculated in the following different ways:-

- Gross Profit Margin

- Net Profit Margin

- Return on Assets (ROA)

- Return on Equity (ROE)

i) Calculating Firm's Profitability using Gross Profit Margin

Gross Profit Margin= Gross Profit / Revenue

Firstly of PepsiCo,

(amt in $)

	Particular	FY 2016	FY 2017	FY 2018
a	Revenue/Net Sales	62799	63525	64661
b	Gross Profit	34577	34729	35280
c	Gross Profit Margin [(b)/(a)]	55.05%	54.66%	54.56%

Then of Coke,

(amt in $)

	Particular	FY 2016	FY 2017	FY 2018
a	Revenue/Net Sales	41863	35410	31856
b	Gross Profit	25398	22155	20086
c	Gross Profit Margin [(b)/(a)]	60.66%	62.56%	63.05%

ii). Calculating Firm's Profitability using Net Profit Margin

Net Profit Margin= Net Profit / Revenue

Firstly of PepsiCo,

(amt in $)

	Particular	FY 2016	FY 2017	FY 2018
a	Earnings / Net Profit	6329	4857	12515
b	Revenue	62799	63525	64661
c	NET Profit Margin [(a)/(b)]	10.07%	7.64%	19.35%

Then of Coke,

(amt in $)

	Particular	FY 2016	FY 2017	FY 2018
a	Earnings / Net Profit	6527	1248	6434
b	Revenue	41863	35410	31856
c	Net Profit Margin [(a)/(b)]	15.59%	3.52%	20.19%

iii). Calculating Firm's Profitability using Return on Assets (ROA)

Return on Assets (ROA)= Net Profit(Earnings)/ Total Assets

Firstly of PepsiCo,

(amt in $)

	Particular	FY 2016	FY 2017	FY 2018
a	Earnings / Net Profit	6329	4857	12515
b	Total Assets	73490	79804	77648
c	ROA [(a)/(b)]	8.61%	6.08%	16.11%

Then of Coke,

(amt in $)

	Particular	FY 2016	FY 2017	FY 2018
a	Earnings / Net Profit	6527	1248	6434
b	Total Assets	87270	87896	83216
c	ROA [(a)/(b)]	7.47%	1.41%	7.60%

iv). Calculating Firm's Profitability using Return on Equity (ROE)

Return on Equity (ROE)= Net Profit(Earnings)/ Shareholder's Equity

Firstly of PepsiCo,

(amt in $)

	Particular	FY 2016	FY 2017	FY 2018
a	Earnings / Net Profit	6329	4857	12515
b	Shareholder's Equity	11199	10981	14602
c	ROE [(a)/(b)]	56.51%	44.23%	85.70%

Then of Coke,

(amt in $)

	Particular	FY 2016	FY 2017	FY 2018
a	Earnings / Net Profit	6527	1248	6434
b	Shareholder's Equity	23220	18977	19058
c	ROE [(a)/(b)]	28.10%	6.57%	33.76%

Since, Profitability of both the companies have been already calculated in question, Profitability Ratios of the same has been Evaluated.

- Gross Profit margin of PepsiCo has been same in all the 3 FYs despite revenue increased a little in preceding years which means they are not able to reduce there production cost. Coke's GP Margin is higher than that of PepsiCo. Coke is able to increase GP margin in preceding year meaning able to achieve cost reduction. So, Coke is performing better as per GP margin.

- Net Profit Margin, there is reduction in net profit margin for both pepsico and coke due to increase in non- operating expenses but they recovered it the following year. On an  average Coke performed better than Pepsico in terms of Net profit.

- In ROE & ROA, PepsiCo is able to generate more returns than Coke. Pepsico is using Debt component more in its capital structure to finance there business thus generating more returns on equity.

While both the companies have shown growth and consistency & PepsiCo and Coke have reasonably same GP margin and NP Margin, but Pepsico is generating signifiantly more ROE and ROA than of Coke's because of Debt component. Thus, Pepisco is able to do better job by generating more return thus more profit for less investment compared to coke for shareholder's by using more debt in there capital structure.