A description of each company's progress in the last year.

The Coca-Cola Company is a beverage manufacturer. Its beverages consist of energy drinks, juices, juice drinks, soft drinks, sports drinks, tea and coffee drinks, and water. (CocaCola.com) Dr. John Stith Pemberton invented Coca-Cola in 1886. Today, Coca-Cola is a worldwide brand and an instantly recognizable household name. Coke is it -- "it" being the world's #1 soft-drink company. The Coca-Cola Company owns four of the top five soft-drink brands (Coca-Cola, Diet Coke, Fanta, and Sprite). Its other brands include Barq's, Minute Maid, PowerAde, and Dasani water. Coca-Cola sells Crush, Dr Pepper, and Schweppes outside Australia, Europe, and North America. Its salient achievements are as follows: Strong Brand

Coke is said to be the number one brand in world for years. It has become synonymous with the cold drink. This has been achieved by continuous innovation and keep customer delight is its main focus. Thus important strength of coca-cola is its globally recognized brands.

Vertical integration

In many parts of the world, it has purchased its bottlers leading to the better control on distribution and communication between departments within the companies. This has also reduced the cost and made high barriers to entry for competitors.

Hence Today, Coca-Cola is a worldwide brand and an instantly recognizable household name. Even though the companys original product is soda production, the company has updated its beliefs and product line to offer customized products and services within the communities in which it operates. For example, Coca-Cola now offers about 400 brands of products in over 200

countries, such as Inca Kola, a soft drink found in North and South America, and Samurai, an energy drink available in Asia; to Vita, an African juice drink, and BonAqua, a water found on 4 continents (The Coca-Cola Company, 2007). In addition, in order to ensure organizational and community success, Coca-Cola strives to maintain strong locally based relationships between Coca-Cola bottlers, customers and communities. This is accomplished by becoming an investor in local economies and a driver of marketplace innovation, with a responsibility to act as a good steward of our natural environment (The Coca-Cola Company, 2007). PepsiCo, Inc. In 1893, the original Pepsi formula was created by a pharmacist named Caleb Bradham in New Bern, North Carolina. The drink was originally called Brads Drink and the ingredients consisted of carbonated water, sugar, vanilla, rare oils, pepsin and cola nuts. However, on August 28, 1898, Brads Drink was later renamed to Pepsi Cola after the ingredients pepsin and cola nuts. Due to the success of the Pepsi-Cola formula, Caleb Bradham officially created the PepsiCola Company in 1902 and the name Pepsi-Cola was trademarked on June 16th, 1903. Today, PepsiCo, Inc. is the result of increasingly successful product lines, global offerings, and the 1965 merger between Pepsi-Cola and Frito-Lay. PepsiCo, Inc. is one of the world's largest food and beverage companies. The company's principal businesses include: FritoLay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices, Quaker Foods (PepsiCo, Inc., 2007). As a result, PepsiCos success is the result of superior products, high standards of performance, distinctive competitive strategies and the high level of integrity of our people (PepsiCo, Inc., 2007). Indra Nooyi is the current chief executive officer and President of Pepsico, Inc (PepsiCo, 2007). The first Indian born female was voted to head a western corporation on August 14, 2006. Nooyi succeeded Steve Reinemund as CEO; in the fall of 2006 Reinemund was due to retire (Mark Memmott, 2006). Nooyi received her bachelors degree from Madras Christian College in 1974. Right away she was accepted into the MBA program at the Indian Institute of Management located in Calcutta. PepsiCos Chief Financial Officer is Alfred H. Drewes received his position in June of 2001. Drewes started with Pepsi in 1982 as a financial analyst. Mr. Drewes earned a bachelor of

science degree in electrical engineering from the University of Massachusetts in 1978 and an MBA from Columbia University in 1982 (http://www.pbg.com/press/drewes.html).

Financial statements Financial statements are useful tools for evaluating both profitability and liquidity. Used separately, or in combination, the income statement and balance sheet help interested parties to measure a companys current financial performance, and to forecast its profit and cash flow potential. Many different users have need for accounting information in order to make important decisions. These users include investors, creditors, management, governmental agencies, labor unions, and others. Because the primary role of accounting information is to provide useful information for decision-making purposes, it is sometimes referred to as a means to an end, with the end being the decision that is helped by the availability of accounting information. Investors and other stakeholders in the firm need regular financial information to help them monitor the firms progress. Coca-Cola's Financials Ernst and Young, LLP has been the auditors for Coca-Cola Company for many years and has a proven record when it comes to servicing the client. The Coca-Cola Company experienced a small increase in total assets from $29,427 mil. in 2005 to $29,963.0 mil. in 2006. The total liabilities for Coca-Cola remained nearly the same dropping $29.0 mil. to a total of $13,043.0 mil. for 2006. Retained earning also showed an increase from $31,299.0 mil. in 2005 to $33,468.0 mil. in 2006. Total revenue in 2006 was $24,088.0 mil. resulting in an after tax income of $5,080.0 mil., $208.0 mil. more than in 2005. During 2006, Coca-Cola posts cash from operating activities at $5,957.0 mil. Investing activities consumed $1,700.0 mil and financing activities consumed $6,583.0 mil. for 2006. The result reflects a reduction in cash of $2,261.0 mil. Pepsi's Financials

According to Pepsi Co.'s balance sheet, between the end of 2005 and 2006, total assets fell from $31,727.0 million to $29,930 mil. However, during this period liabilities also dropped from $17,476.0 mil. to $14,562.0 mil. The same period yielded an increase in retained earnings of $3,721 mil. arriving at a total of $24,837.0 mil. in retained earnings for 2006. Total revenue for 2006 was its highest in five years at $35,137.0 mil. resulting in an after tax income of $5,642 mil, $1,564 mil. more than in 2005. The statement of cash flow shows cash from operating activities to be $6,084.0 mil. in 2006. In 2006, $194.0 mil. was used to finance investing activities and $5,983.0 mil. was used toward financing activities. The result was a reduction in cash of $65.0 mil.

Financial analysis In financial analysis, we need qualitative information and try to read between the numbers. We have to ask all the right questions. Over the years, there are some ratios, which have become more popular and handy for rule of thumb analysis of financial statements. Our purpose in this note is not deride them but to advice the reader to use them properly to derive the correct results. Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. In other words it helps in inter firm and intra firm comparison. (Pandey, I.M.) Horizontal analysis is conducted by setting consecutive balance sheet, income statement or statement of cash flow side-by-side and reviewing changes in individual categories on a year-toyear or multiyear basis. The most important item revealed by comparative financial statement analysis is trend.

A comparison of statements over several years reveals direction, speed and extent of a trend(s). The horizontal financial statements analysis is done by restating amount of each item or group of items as a percentage.

Such percentages are calculated by selecting a base year and assign a weight of 100 to the amount of each item in the base year statement. Thereafter, the amounts of similar items or groups of items in prior or subsequent financial statements are expressed as a percentage of the base year amount. The resulting figures are called index numbers or trend ratios.

Vertical analysis It involves expressing the items in proportion to some size-related measure, standardized financial statements can be created, revealing trends and providing insight into how the different companies compare.

www.netmba.com

The common size ratio for each line on the financial statement is calculated as follows:

Common Size Ratio = Item of Interest/ Reference Item

The ratios often are expressed as percentages of the reference amount. Common size statements usually are prepared for the income statement and balance sheet, expressing information as follows:

* Income statement items - expressed as a percentage of total revenue * Balance sheet items - expressed as a percentage of total assets In the balance sheet, for example, the assets as well as the liabilities and equity are each expressed as a 100% and each item in these categories is expressed as a percentage of the respective totals.

( Calculations are attached in the excel file) Interpretation

Risk Management Debt equity measures the companys ability to meet its long-term obligations as they become due. Creditors prefer to see a low debt ratio because there is a greater cushion for creditor losses if the firm goes bankrupt. The lower ratio indicates less risk for the organization. It appears that the Coco Colas risk position (Debt to Equity ratio) at .77 is relatively stronger than the Pepsi at .95 (refer data provided ) in this year as its ratio is lower. Though the position of both the organization in the year 2006 is strong as the ratio is low and has consistently declined through out the years. Similarly Times interest earned ratio of Coke is high which shows its strong solvency. As High times Interest earned indicates better solvency.

Analysis: Financial Condition KO PEP Indu stry KO and PEP both have stronger and more conservative financial condition than the soft drink beverage industry and the S&P Leverage Ratio Book Value/Share 1.8 6.96 2.1 8.96 2.7 8.49 5.7 S&P 500

The leverage ratios of both the companies are better than the industry and S&P 500 which is a sign of good solvency. Though Cokes ratio is better.

Profitability

This indicates a companys financial health and how effectively the firm is being managed to earn a satisfactory profit and return on investment. The Coca Colas Profitability is better as its ratios are higher than the Pepsi in all the years.

Additional analysis:

Profit Margins % Gross Margin

KO 68.7

PEP 60.3

Indu stry 54.3

S&P 500 47.3 KO and PEP both have better profit margins than the soft drink beverage industry and the S&P

Pre-Tax Margin Net Profit Margin 5Yr Gross Margin (5Year Avg.) 5Yr PreTax Margin (5Year Avg.) 5Yr Net Profit Margin (5-Year Avg.)

29 21.5 69.3 28 20.8

19.6 12.6 59.6 18.3 12.7

15.2 10.7 55.8 14.8 10.5

12.4 8.5 47 9.7

(Source money central.com) The profit margin of Coke is better in all the aspects. Asset utilization Investment Returns % KO PEP Indu stry KO and PEP both have better investment returns than the soft drink beverage industry and the S&P Return On Assets Return On Capital Return On Equity (5Year Avg.) Return On Assets (5Year Avg.) Return On Capital (5Year Avg.) 16.7 28.3 31.7 16.3 28.1 13.5 24.5 30.9 13.7 25.8 9.4 16.2 24.6 8.8 14.9 2.9 7.9 12.4 2.1 S&P 500

This is better for Coke as its Return on assets is higher than Pepsi in all the aspects. But both are doing good.

Cash flow management

It is important for conducting business activity especially in times of adversity such as when operating losses occur due to economic conditions or drastic price increases of raw materials or parts. Liquidity must be sufficient to cushion such losses. If not, serious financial difficulties may result. According to the ratio analysis, the current ratio of Pepsi at 1.33 times is higher in 2006 than Cokes .95 times. Other ratios:

Short Term Solvency Days Receivables Days Inventory Days Payables Quick Ratio

35.2 71.5 220.5 0.9

35.1 45.3 162.2 1.0

TIE PEP KO PEP

PEP

Pepsi is better in inventory management and having better quick ratio. Thus Pepsi has better cash management than Coke.

Growth analysis (For calculations see excelfile)

Growth 2001-2006 Sales Gross Operating Profit

3.6% 1.6%

4.9% 3.4%

PEP PEP

PEP

Selling, General & Admin. Expense (SG&A) EBIT Pre-tax Income Income Taxes Net Income from Cont.

0.4%

1.5%

KO

3.3% 4.2% 1.8% 5.2%

7.7% 12.2 % 13.9 % 11.3

PEP PEP PEP PEP

Operations % Pepsi is doing better as its having higher growth in all the aspects except in SG&A expenses.

Conclusions Both KO and PEP are very profitable and very solvent corporations that are conservatively financed.

Both KO and PEP are ahead of their industry in profitability, investment returns, and financial strength, but lag in growth.

Both KO and PEP are lower growth, mature companies.

KO is superior to PEP on Profitability to Sales, risk management and asset utilization

PEP is superior to KO on Cash Management and growth

PEP also has more diversified product lines than KO, which is limited to beverages.

Reference: Financial Management by I.M. Pandey

www.investopedia.com www.bized.co.uk http://www.pepsico.com/PEP_Investors/AnnualReports/06/index.cfm http://www.thecoca-colacompany.com/investors/pdfs/form_10K_2006.pdf www.moneycentral.com http://cbdd.wsu.edu/kewlcontent/cdoutput/TR505r/page37.htm as retrieved on 26 Jul 2006 21:23:26