Question

2018 Average 62% (data in millions) 2016 Coke $ % Net Operating Revenue/Net Sales $ 41,863 Gross Profit $ 25,398 Operating Income $ 8,657 Net Profit (Consolidated Net Income) $ 6,527 Total Assets $ 87,270 Equity $ 23,220 Return on Assets 7.48% Return on Equity 28.11% $ $ 61% $ 21% $ 16% $ $ $ 2017 % 35,410 22,155 7,599 1,248 87,896 18,977 1.42% 6.58% $ $ 63%$ 21% $ 4% $ $ $ 63% 27% 20% 23% 13% 31,856 20,086 8,700 6,434 83,216 19,058 7.73% 33.76% $36,376 $ 22,546 $ 8,319 $ 4,736 $ 86,127 $ 20,418 5.54% 22.82% 6% 23% 2017 (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 Assets $ 73,490 Equity $ 11,199 Return on Assets 8.61% Return on Equity 56.51% $ 55% $ 16% $ 10% $ $ $ 55% 16% 8% $ $ $ $ $ $ 2018 % 64,661 35,280 10,110 12,515 77,648 14,602 16.12% 85.71% 63,525 34,729 10,276 4,857 79,804 10,981 6.09% 44.23% 55% 12% 19% Average $ $ 63,662 $ 34,862 $ 10,063 | $ 7,900 $ 76,981 $ 12,261 10.27% 62.15% 55% 15% 12% 10% 62% 1. Evaluate the profitability (Dollars) and profitability ratios (%) of both companies for FY 2013, including: profit margin (gross and net), re- turn 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

Solution:-

Coke's profitability trends: Key conclusions

• The company's overall profitability trends are negative due to declining trends in revenues. While the profit margins (%) have held themselves stable reasonably well, the profit figures have taken a hit due to declining revenues.
• Gross profit has seen a constant decline, due to decrease in sales.
• The company's gross profit margins have been very consistent over the three years 2016 to 2018, staying around 62% range
• The net profitability has been volatile, with margins decreasing to just 4% in 2017 which is a sign of risk for investors. However, it picked back up well in 2018 to 20%
• As a result of volatility in net profits, the company's Return on Assets and Return on Equity have been volatile as well, falling to just 1.42% and 6.58% respectively in 2017

Pepsico's profitability trends: Key conclusions

• The company's overall profitability trends are positive due to increasing trends in revenues and stability in margins
• Gross profit figures have seen a consistent rise based on increasing revenues and consistent margins
• The company's gross profit margins have been very consistent over the three years 2016 to 2018, staying around 55% range
• The net profit margins took a slight hit in 2017, falling to 8% but bounced back greatly hitting 19% in 2018.
• Based on the trend in net profits, the company's Return on Assets and Return on Equity so fell little in 2017 but bounced back sharply in 2018 to 10.27% and 62.15% respectively.

Comparative analysis and final conclusions:

• The PepsiCo's revenue trends are positive while Coke's revenue is declining which is a big factor for investors
• The gross profit margins are better for coke (62%) as compared to PepsiCo (55%)
• The net profit margins are relatively similar but Pepsico has shown more consistency in its ability to generate net profits. Coke's net profit margins have been very volatile
• Pepsico's Return on Assets (10%) and ROE (62%) strongly outperforms coke's ROA (6%) & ROE (23%). This is the most important factor from the point of view of investors as it shows that Pepsico is managing its capital far better than coke
• As can be seen from above, PepsiCo seems to be doing a better job with its profitability performance, primarily due to its increasing revenues, lesser volatility in margins and more efficient use of capital