Receivables turnover ratio on the other hand is a worthy measure of how fast a given company is in the collection of accounts receivables (Bragg, 2007). With that in mind, PepsiCo seems more efficient in not only credit extension, but in also the collection of accounts receivables. This is particularly the case given that the company has consistently had a high receivables turnover ratio than the Coca-Cola Company. For this reason, the Coca-Cola Company may deem it fit to conduct a reassessment of its credit policies.
Table 4: Market Value Ratios
Coca-Cola Company
PepsiCo.
2012
2011
2010
2012
2011
2010
Price-Earnings Ratio (P/E)
19.00
18.27
12.42
18.82
15.44
15.92
Price to Book Value
5.23
4.95
4.73
5.22
4.83
4.75
Interpretation
The price-earnings ratio largely concerns itself with the relationship between the stock price of a company and its earnings. It "measures a company's future earnings prospects (Warren, Reeve, and Duchac, 2008, p.691). The price-earning ratios of both PepsiCo and Coca-Cola could therefore help us determine just how much the market is willing to pay for either entity's earnings. In the financial years 2011 and 2011, the Coca-Cola Company had a higher price-earnings ratio than PepsiCo. This effectively means that the market is willing to pay more for Coca-Cola's earnings than it is willing to pay for PepsiCo's earnings. It should however be noted that although the market seems to be having high hopes in the Coca-Cola Company's stock performance going forward, the high price-earnings ratio could also be an indicator that the company's stock is relatively overpriced.
The price-to-book ratio seeks to establish the relationship existing between the market value of a given stock and its book value (Bragg, 2012). In our case, the lower price-to-book ratio in the case of PepsiCo (in comparison to that of the Coca-Cola Company during the two years under consideration) could either be an indicator that the company's return on assets are poor or that the company's stock is undervalued. The latter argument seems more plausible.
Table 5: Financial and Operating Leverage
Coca-Cola Company
PepsiCo.
2012
2011
2010
2012
2011
2010
Debt to Equity Ratio
0.99
0.90
0.76
1.27
1.30
1.18
Debt to Capital
0.50
0.47
0.43
0.56
0.57
0.54
Interest Coverage
30.75
28.43
20.43
10.24
11.32
10.12
Interpretation
The ratios I compute in table 5 above are critical when it comes to the determination of how solvent a given firm is in the long-term. To begin with, the debt-to-equity ratio seeks to establish the extent to which a given business entity is making use of both debt and equity to fund its assets. In other words, it is "the ratio of total liabilities to owner's equity" (Gitman and McDaniel, 2008, p.462). Throughout the three years under consideration, PepsiCo has consistently had a higher debt-to-equity ratio than the Coca-Cola Company. This is an indication that in comparison to the Coca-Cola Company, PepsiCo has been using debt more aggressively to finance its growth.
An important measure of an entity's financial leverage, the debt-to-capital ratio is regarded critical when it comes to the determination of how a given business entity is financing/funding its operations. According to Bragg (2012),...
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