Financial Benchmark Analysis of Coca-Cola Co. and PepsiCo Inc.: Liquidity, Profitability, and Leverage Assessment

Combined Response to Instructions (a), (b), and (c)

This analysis evaluates Coca-Cola and PepsiCo using key financial metrics—liquidity, profitability, and leverage—in comparison to industry averages. Each section highlights the strengths and risks relevant to short-term creditors, investors, and overall financial health, concluding with an informed investment recommendation.

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Liquidity Comparison (100–125 words)
Coca-Cola shows a current ratio of 1.13 ($22,545 / $19,950), while PepsiCo’s current ratio is 0.83 ($21,783 / $26,220). Coca-Cola also has a stronger acid-test ratio due to higher cash and lower receivables. Compared to industry averages (current ratio = 1.5; acid-test ratio = 0.75), Coca-Cola is closer to ideal benchmarks, suggesting better short-term liquidity. PepsiCo falls below both benchmarks, implying higher liquidity risk. A short-term creditor would perceive Coca-Cola as more capable of meeting obligations without relying on inventory or future earnings. PepsiCo’s lower ratio may prompt cautious lending terms or higher interest expectations due to its relative liquidity constraints.

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Profitability Comparison (100–125 words)
Coca-Cola’s ROI is 10.36% ($9,771 / $94,354) and ROE is 42.48% ($9,771 / $23,000), both significantly above industry averages (ROI = 5.4%; ROE = 12.9%). PepsiCo’s ROI is 8.25% ($7,618 / $92,377) and ROE is 47.48% ($7,618 / $16,043). While Coca-Cola has a higher ROI, PepsiCo’s higher ROE reflects strong returns on shareholder investment. However, evaluating profitability requires more than just net income—it must consider asset use and equity base. ROE is especially relevant for investors because it indicates how effectively a company generates profits from shareholder equity, helping assess return potential. Both companies outperform the industry, but Coca-Cola shows a better balance of ROI and sustainable ROE.

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Leverage Comparison (100–125 words)
Coca-Cola’s debt ratio is 0.74 ($69,494 / $94,354), while PepsiCo’s is 0.83 ($76,226 / $92,377), both above the industry average of 0.51. Their debt-to-equity ratios are 3.02 (Coca-Cola) and 4.75 (PepsiCo), exceeding the industry average of 1.02. This suggests that both companies are highly leveraged, especially PepsiCo. High leverage increases financial risk, particularly in downturns, because obligations must be met regardless of profitability. For stockholders and creditors, higher leverage means more risk: creditors may face delayed repayment, and shareholders’ returns could be volatile due to fixed interest expenses. Coca-Cola’s relatively lower leverage makes it a safer choice among the two.

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Investment Decision (100–125 words)
Given $10,000 to invest, Coca-Cola would be the preferred choice based on its financial performance. It demonstrates superior liquidity, with ratios closer to industry benchmarks, suggesting lower short-term risk. While PepsiCo has a higher ROE, Coca-Cola maintains strong ROI and ROE while using less financial leverage, reducing investor risk. PepsiCo’s high debt-to-equity ratio could threaten stability in economic downturns. Coca-Cola’s consistent profitability, healthier liquidity, and manageable leverage create a balanced profile ideal for long-term investors seeking stability and reliable returns. These factors outweigh PepsiCo’s earnings advantage and make Coca-Cola a safer and more attractive investment option.

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Appendix: Comparative Financial Data (in millions)

Metric	Coca-Cola Co.	PepsiCo Inc.
Net Revenue (Sales)	$38,655	$79,474
Net Income	$9,771	$7,618
Current Assets	$22,545	$21,783
Current Liabilities	$19,950	$26,220
Cash & Cash Equivalents	$12,625	$5,988
Accounts Receivable	$3,512	$8,680
Total Assets (2021)	$94,354	$92,377
Total Assets (2020)	$87,296	$92,918
Total Liabilities (2021)	$69,494	$76,226
Stockholders’ Equity (2021)	$23,000	$16,043
Stockholders’ Equity (2020)	$19,300	$13,454