Competitiveness and Sustainable Construction

Competitiveness and Sustainable Construction

Competitiveness and Sustainable Construction

            The construction industry plays an essential role in the economy of a country and its activities are important to the achievement of national socio-economic development agenda of shelter provision, infrastructure, as well as employment. In this regard, despite there being increasingly high concerns over the effects of construction activities on the environment, some measures have been implemented to mitigate them. In many countries, mitigating factors include regulations by the relevant authorities, as well as voluntary industry-wide practices, such CSR (Corporate Social Responsibility) focused on environmental conservation and preservation, among other categories of sustainable construction oriented activities (Epstein, 2018). A combination of CSR and regulations has been able to achieve considerably impressive outcomes in enhancing sustainable construction. For instance, an increased number of for-profit and not-for-profit, and governments are embracing green energy, even in the absence of renewable energy restricting regulations. Nevertheless, despite the current progress, there is a plethora of challenges, especially regarding the ability of companies to establish a balance of purpose between sustainable and economically viable construction in the industry across the world. Therefore, a significant number of construction projects either compromise the present needs or the ability of the future generations to satisfy their own requirements, because of increased focus on competitiveness.

            Current regulations and standards in the construction industry cannot sufficiently guarantee the delivery of sustainable projects, because they are considerably lenient, as well as ineffectively implemented. In many countries, there are no defined laws that define the nature of compensation that companies should offer for both direct and indirect impacts of there activities to the environment. For instance, the exact compensation that a company should offer for emitting a specific amount of carbon is not specifically indicated in many countries’ constitutions around the world. Moreover, some countries do not even have effective mechanisms to measure the amount of environment damage caused by a particular construction activity (Paris, Myatt & de Silva, 2017). Therefore, in many construction industries around the world, construction firms are at liberty to design their sustainability strategies only with regard to their profitability.

             Anti-sustainable construction entities argue that before even considering the issue of sustainability, construction projects, techniques, materials and equipment must be economically viable to enhance firms to survive intensive competition in the market. Like typical business ventures, the primary objective of construction companies is to meet the operational costs, as well as offer a significant return on the owners’ investment. However, with current intensive competition, both for resources, such as manpower and construction materials, and customers, profitability improvement opportunities are significantly diminishing for construction firms. Although there are several sustainable construction frameworks, the high intensity competition is forcing companies to explore any available revenue increasing avenue at their disposal, while utilizing a significantly reduced portion of their earnings on non-profit improving activities, such as CSR, or standard. Moreover, because sustainable regulations, which can yield tremendous results in ensuring that strictly use of sustainable techniques and materials to enhance sustainability, are either ineffective or inappropriately implemented in many countries, many companies choose to either circumvent sustainability or adopt it at their convenience (Ogunde et al., 2017). Therefore, the magnitude of immediate as well as future impacts attributable to construction projects is significantly higher than the investment focused on sustainability, especially because of the overarching viability concerns emanating from intensive competition.

            Apart from having direct impacts, financial constraints implemented to ensure viability possess a wide range of indirect impacts on sustainability efforts in the construction industry. Because of immense financial constraints, some companies, in an effort to maintain a desirable public image, are tempted to modify their CSR programs to satisfy marketing interests. For instance, a significant amount of CSR allocations for many of the contemporary companies is used on CSR oriented promotions and campaigns rather than on actual CSR initiatives. Such modifications largely affect the quality of CSR initiatives, hence introducing immense challenges on sustainability activities across the entire construction industry. Moreover, because there exists a thin line between CSR and marketing, some organizations reluctantly rebrand their marketing strategies as CSRs (Barnes & Parrish, 2016). Therefore, sustainability efforts are rapidly becoming weaker as competition intensifies in the construction market.

            A narrow view of prosperity enhancing factors and a static perception of competition are also significant sources of sustainability challenges in the construction industry. While focusing on profitability, a huge number of companies view regulations as obstacles to competitive advantage. However, Narayanaswami (2017) notes that the conflict between economic competitiveness and sustainable construction is a false dichotomy, because tough regulations and standards can force organizations to innovate environmental friendly techniques and products with high value. In this regard, sustainable practices are perceived as a catalyst for new market openings and innovation rather than a cost. For instance, the High Speed 2 project’s innovative design, which largely avoids designating depots on wetlands, significantly reduces the project development costs, because marshland construction are considerably cost intensive (Paris, Myatt & de Silva, 2017). In this regard, the project meets sustainable construction demands, while being significantly cost effective. Regardless of this fact, some companies still consider sustainable development an additional cost, especially because of innovation seed capital, which can take extended durations of time before yielding substantial results. Therefore, a considerable number of companies circumvent sustainable development practices, because of the false profitability dichotomy.   

            Most of the current construction projects either compromise the current needs or those of the future generation, because of intensified competition in the market. Despite sustainable construction possessing immense benefits, especially by improving innovativeness, a huge number of firms in the industry still consider it a source of additional costs. In this regard, to improve profitability, such companies circumvent sustainable construction practices, such as CSR. Moreover, a huge numbers of organizations either allocate a reduced amount of money on CSR, while some ignore sustainable construction regulations and standards to improve profitability. Another set of firms choose to modify their CSR initiatives to include their marketing agenda. Thus, the issue of sustainability is extremely challenging in the modern construction industry; because the significantly reduced focus it receives from relevant stakeholders.  However, previous studies indicate that the conflict between environmentally friendliness and economic competitiveness of construction project is a false dichotomy. Through innovation, companies can implement sustainable projects without reducing their competitiveness at the market place. Therefore, with such facts, law enforcing authorities in the construction industry should focus on crafting and implementing effective and stringent sustainable construction regulations to ensure that firms do not compromise the needs of the current or the future generations.

References

Barnes, E., & Parrish, K. (2016). Small buildings, big impacts: The role of small commercial building energy efficiency case studies in 2030 Districts. Sustainable cities and society27, 210-221.

Epstein, M. J. (2018). Making sustainability work: Best practices in managing and measuring corporate social, environmental and economic impacts. Routledge.

Narayanaswami, S. (2017). Urban transportation: innovations in infrastructure planning and development. The International Journal of Logistics Management28(1), 150-171.

Ogunde, A., Olaolu, O., Afolabi, A. O., Owolabi, J., & Ojelabi, R. (2017). Challenges confronting construction project management system for sustainable construction in developing countries: Professionals perspectives (a case study of Nigeria). Journal of Building Performance8(1), 1-11.

Paris, R., Myatt, C., & de Silva, M. (2017, November). Crossrail project: environmental management during delivery of London’s Elizabeth line. In Proceedings of the Institution of Civil Engineers–Civil Engineering (Vol. 170, No. 6, pp. 49-55).

Final exam

Final exam

Cockpit is installed and continuously operated at the beginning of checklist use

Final exam

43.10 (a)

This paragraph contains or definitions utilized in section 43.10. The paragraph defines two terms which are:

  1. Life-limited part, which is utilized the section to indicate any part that require a mandatory limit on replacement  as specified in maintenance manual, continued airworthiness instructions or the category of design.
  2. Life status indicates the accumulated hours, cycles or any other category of mandatory limit for replacement of life-limited parts

67.409 (a)

This paragraph provides a loophole, or the procedure for reapplying a medical certificate. In particular, the paragraph indicates that any individual that is denied a medical certificate has an opportunity to reapply within 30 days starting from denial date, by applying in writing and duplicate, for reconsideration to the Federal Air surgeon. Nevertheless, the organization considers any person who does not submit his or her reapplication within the 30 day window period to have withdrawn from the application.

Explain 121.359 (a)

This paragraph indicates that unless when an approved cockpit is installed and continuously operated at the beginning of checklist use, which is before the engine is started at the beginning of a flight, to the last checklist that is performed at the flight termination, there is no certificate holder who is allowed to operate aircrafts powered by a large turbine engine or a large pressurized aircraft with 4 reciprocating engine.

14 CFR 135.21 (a)

14 CFR 135.21 possesses the operating demands for on-demand, as well as commuter operations. 14 CFR 135.21 (a) indicates that every holder of an operation certificate, with an exception of operators using one pilot in their certificates, must formulate and regularly update a manual outlining policies and procedures that are acceptable to the administrator. Furthermore, the certificate holder’s personnel must utilize the manual to perform maintenance, flight and ground activities (CFR, 2019). Nevertheless, the administrator may allow the deviation from the specification of this paragraph, especially when considering limited size of operations that may render part or the entire manual unnecessary for guiding maintenance, ground and flight activities.

14 CFR 141.75

14CFR 141.75 provides the requirements for solo and training flights. In particular, 14 CCFR 141.75 (a) indicates that each aircraft utilized for solo and training flights must carry pretakeoff and prelanding checklist. 141.75 (b) notes that training and solo flights must include an operators’ manual, especially if it is supplied by the aircraft’s manufacturer and copies of the operators’ manual if it is supplied for each student utilizing the aircraft (CFR, 2019).

Use of Bio data

The primary argument for using bio data in the recruitment of air traffic is that it can be used to predict the performance of newly hired air traffic controllers. Previous studies indicate that hiring controller trainee with significant and relevant military experience in flight management can considerably improve the FAA training. Moreover, other studies have established that higher GPAs and average score in mathematics and physics can be used to predict the performance controller training (Pierce & Pfleiderer, 2018). Therefore, FAA conducts bio data check before recommending individuals foe AT-SAT sub tests in the process of hiring controller trainee.

Runway Incursions

According to the FAA runway incursions refers to any occurrence or incidence at the aerodrome, especially involving unexpected presence of a vehicle, person or aircraft on the runway. The FAA classifies incursions into three categories that are operational deviations, pedestrian or vehicle deviations or pilot deviations (Pierce & Pfleiderer, 2018). Notably, the classification is made with regard the cause of the incursions.

NextGen

Nextgen is an effort led by FAA which focuses on modernizing the air transportation system in the United States. In particular, NextGen focuses on making flying more predictable and more efficient. In this project, FAA and its affiliates focuses on conducting a major overhauls project that will include implementation of new capabilities and technologies that will significantly improve the performance the US air space. After adopting new technologies and capabilities, it will become extremely easier to recover services after incidences and conduct maintenance activities. Furthermore, apart from increasing the capacity of the airspace system, NextGen, which adopts robust new technologies, will significantly reduce aviation incidences (Hampton, 2017). Therefore, rather than conducting minor upgrades to the existing infrastructure which significantly increases the chances of accidents, FAA considers NextGen valuable and feasible project. 

References

CFR. (2019). Electronic Code of Federal Regulations (eCFR). Retrieved from https://www.ecfr.gov/cgi-bin/text-idx?SID=4bbcfe6debafdce2fd5a0ebd98d67e38&mc=true&tpl=/ecfrbrowse/Title14/14tab_02.tpl

Hampton, M. E. (2017). FAA Has Made Progress Implementing NextGen Priorities, but Additional Actions Are Needed To Improve Risk Management (No. AV2018001).

Johnson, M. E., Zhao, X., Faulkner, B., & Young, J. P. (2016). Statistical Models of Runway Incursions Based on Runway Intersections and Taxiways. Journal of Aviation Technology and Engineering5(2). doi:10.7771/2159-6670.1121

Pierce, L. G., & Pfleiderer, E. M. (2018, September). Assessing a Retention Policy for Air Traffic Controllers. In Proceedings of the Human Factors and Ergonomics Society Annual Meeting (Vol. 62, No. 1, pp. 777-781). Sage CA: Los Angeles, CA: SAGE Publications.

Biomimicry possesses

Biomimicry possesses

Biomimicry

Abstract

Biomimicry possesses tremendous potential to improve the performance of structures and buildings in their entire lifecycle. Nevertheless, a myriad of challenges is limiting its implementation in the construction industry. A survey conducted on a sample of some of the most experienced architects in the industry revealed that lack of relevant knowledge as one of the most major challenges that are hindering the deployment of biomimetic techniques and the design of structures. In particular, architects face significant issues, while using biomimetic resources and tools, which are yet to be organized into defined and considerably rely on semantic information. Therefore, it is recommended that architectural programs should be revised to incorporate a substantial level of biological information, hence ensure that designers can use biomimetic tools and resources in the future. Moreover, biomimicry-related training should be emphasized to ensure that existing architects can use biomimetic techniques in their design. 

Table of Contents

1.    Introduction. 4

1.1.     Benefits of Biomimicry. 5

1.2.     Research Aim and objectives. 7

2.    Problem Statement 7

3.    Research Methodology. 8

3.1.     Research method. 8

3.2.     Sampling. 8

3.3.     Data Collection and Analysis. 9

4.    Analysis and Discussion. 9

5.    Conclusion. 11

References. 12

Biomimicry

1.      Introduction

While designers do not have any shortage of biomimetic tools to select from, these tools are yet to be organized into full biomimicry sets, which can significantly enhance throughout the process of product design. In most cases, biomimetic tools assist designers in generating concepts, as well as mapping them from biometrics to probable applications. Some organizations, such as Biomimicry Oregon, a Portland-based regional network, which focuses on nature-inspired techniques of managing stormwater, have done remarkable research work in biomimicry. For instance, Bio-mimicry Institute has already published a seminal research report, which outlines numerous nature-oriented strategies of managing stormwater in Portland. The report outlines several approaches of managing stormwater at Willamette valley, especially focusing on organisms and systems to establish mechanisms in which nature gathers, stores, transports and reduces the force effects water. Furthermore, the institute organized a conference, including 45 stormwater researchers, designers, entrepreneurs and policymakers to share some of the techniques that are used by local organisms in rainwater management. The workshop ideated 30 new mechanisms of managing stormwater, especially based on nature lessons as articulated in the Biomimicry Institute’s report (Fayemi, Maranzana, Aoussat, A. and Bersano 2014). Nevertheless, despite the massive research efforts, biomimetic tools provide considerably reduced little practical advice, especially on how to translate biomimicry ideologies into prototypes that can be manufactured. Therefore, although previous research indicates that biomimicry has a tremendous potential to improve natural resource management, there is considerably reduced deployment of relevant strategies, especially in the construction sector.

1.1.            Benefits of Biomimicry

The construction industry is one of the most essential sectors that play considerably determine the quality of life of a population, as well as meets the critical society demands. Furthermore, investments in the construction industry play a key strategic role in many countries’ national development and economic growth strategy. Passino (2005) notes that because it provides the necessary infrastructure, hence facilitates development in urban centers, the construction industry is tightly connected to urbanization. In this regard, any techniques and technologies that improve the construction industry are significantly relevant to urbanization and economic growth in a specific country. However, while biomimicry possesses tremendous potential to improve the construction industry, it has received considerably reduced attention from construction designers and engineers. Previous research indicates that one of the construction industry’s characteristics is the consumption of huge amounts of energy. In particular, massive energy is consumed in the entire lifecycle of structures, including the process of manufacturing building materials, transportation of materials from the manufacturer to the construction site, development of structure or building, operation of structure or building and demolishing and recycling part of a structure or building. In the UK, buildings are responsible for around 50% and the construction stage utilizes an additional 5-10% of energy consumption in the country. Therefore, there is a considerably urgent need to establish effective and efficient means that can be used to enhance the construction sector, especially by reducing its massive consumption of energy.

Previous studies have identified that nature depicts effective, efficient, functional, eco-friendly and aesthetically gratifying aspects, especially through its designs and solution. Without beat, heat, and treat, natural organisms manufacture ecosystems, which run on sunlight and feedback, hence rather than creating waste, they develop opportunities. Through the research and development of nature, which has been perfected in a period spanning almost 4 billion years evolution, humanity has identified sustainable attributes, hence methodologies and techniques that can be used to enhance a wide range of processes, including the construction of new structures. In this regard, architects, designers, innovators and engineers have started consulting the natural superb forms, policies and processes to address the sustainability challenges in the world. Therefore, biomimicry, one of the latest disciplines in the construction sector, which focuses on the natural paradigm and emulates their processes, forms, strategies and systems to address sustainability issues for humanity, has emerged in the recent past.

1.2.            Research Aim and objectives

The primary aim of this research is to identify specific reasons that are hindering the adoption of biomimetic techniques in the construction sector, especially the design of structures. In particular, this paper will focus on the following objectives:

  1. Identify the primary drawbacks of incorporating the conventional building techniques in the design phase of construction projects.
  2. Establish the actual benefits of incorporating biomimetic techniques in the design of structures. 
  3. Identify the primary reasons that are hindering the adoption of biomimetic techniques in construction design.
  4. Establish effective and efficient techniques that can be used to enhance the implementation of biomimetic techniques in the design of structures or buildings.

2.      Problem Statement

While recent research indicates that biomimicry has considerable potential to improve operations in the construction industry, there is significantly reduced adoption of biomimetic strategies in design and development structures or buildings. Currently, research has identified and formulated significant biomimetic techniques that can be used to improve the performance of structures in their entire lifecycle, especially from development to demolition. Because the design phase is significantly critical in the development and operation of structures or buildings, it is necessary to consider biomimetic techniques, which have tremendous potential to improve their performance (Al-Obaidi, Ismail, Hussein and Rahman 2017). Nevertheless, it is only a few designers who incorporate biomimetic techniques in their design work. Therefore, this study focuses on identifying the key factors that hinder the adoption of biomimetic strategies in the construction sector.

3.      Research Methodology

3.1.            Research method

A qualitative study approach was used to identify the reasons that make designers fail to incorporate biomimetic techniques in the design and implementation of construction projects. A qualitative technique of research was preferred in this study because of its ability to provide a detailed perception of the reason people behave in a particular manner, as well as provide adequate insights regarding their perception of their behavior.

3.2.            Sampling

A random sampling technique was used to identify an appropriate sample of designers in the construction industry. In a particular, A Sample of 30 architects with at least 15 years of experience in architectural design was selected from public and private architectural design organizations. Furthermore, a 90% guaranteed response rate was expected to ensure the achievement of a sufficiently reliable sample that could enhance the completeness of the targeted primary data. Nevertheless, Creswell and Clark (2011) indicate that although a random sampling technique introduces an obvious issue of proper representation, especially for huge populations, it addresses the systematic biasedness issue. Specifically, the issue of systematic bias was eliminated by offering all eligible participants an equal opportunity to participate in the study, hence enabling the selection of an unbiased representative sample of the study. 

3.3.            Data Collection and Analysis

Semi-structured interviews and open-ended questionnaires were utilized to gather primary data from a sample of considerably experienced architects. Qualitative data, especially lengthy interview statements were analyzed using by categorizing it into evident themes or sets from which inferences were made. In particular, the initial phase of analysis involved familiarizing with the gathered data, which involved reading the interview statements and the questionnaire statements several times to familiarize with the responses, hence identify fundamental patterns or observations. After the phase of familiarizing with the gathered data, it was considered necessary to revisit the study objectives, hence establish the questions which could be answered with the gathered data. Furthermore, the analysis of the gathered data involved the development of a paradigm, which is also referred to as indexing or coding, especially by establishing broad concepts, ideas, behaviors and phrases and assigning them specific codes. After the coding phase, the study focused on the identification of themes, especially by establishing themes from common responses, as well as patterns or data that could answer the research questions and finding further research areas.

4.      Analysis and Discussion

The stud confirmed that many designers do not incorporate biomimetic techniques during the design of construction projects. Out of the 30 interviewed designers, only 5 indicated that they consider biomimetic issues during the design phase of construction projects. In particular, many architects cited the lack of adequate and practical information regarding the practicality of biomimetic methods in the development of structures. Two-thirds of the interviewed respondents indicated that the biomimicry knowledge that they possess is largely theoretical rather than practical. Although not directly, many architects cited lack of relevant knowledge and skills, especially to facilitate substantial collaboration between the domains of architecture and biology, as one of the primary challenges that hinder their ability to incorporate biomimicry in their design and deployment of construction projects. Moreover, 29 respondents indicated that they experience significant challenges while using existing resources and tools, which largely depend on semantic methods of enhancing the translation of knowledge and information between design and biology. More than half of the study participants noted that collaboration and evaluation issues are significantly prevalent in design practice and can be addressed through prototyping. Nevertheless, all the study participants indicated that biomimicry can significantly improve the performance of structures throughout their entire lifecycle. In particular, respondents noted that the adoption of biomimicry in the design, especially by focusing on the use of green energy can significantly enhance the performance of structures (Badarnah 2017). Therefore, this research suggests that apart from identifying biomimetic techniques that can be used to enhance construction projects, it is necessary to focus on prototyping to acquire practical knowledge about the performance of biomimicry-oriented projects.

Apart from prototyping, the study revealed that it is necessary to redesign training programs, especially by introducing biology-related subjects to enhance the ability of architects and engineers to use biomimetic tools, as well as incorporate biomimicry in the design and development of construction projects. Because many architects do not possess adequate biology-related knowledge, they can barely use biomimetic tools, hence cannot incorporate adopt biomimicry-oriented methods in their design. Nevertheless, previous studies have established that designers and engineers with a significantly high level of knowledge in biological subjects experience reduced challenges while utilizing nature-oriented tools and resources. For instance, many professionals who adopt the use of self-healing concrete have expressed tremendous interest in biological subjects. Thus, apart from prototyping, it is necessary to introduce biological subjects in architecture both at the college and the professional level.

5.      Conclusion

While biomimicry can significantly enhance the performance of structures and buildings, there is a wide range of challenges that are hindering the adoption of biomimetic techniques in the construction industry. In particular, despite there being a substantial amount of research on how biomimetic techniques can be used to enhance the performance of structures, most of the research is highly theoretical hence cannot be easily applied in the design phase of construction. Moreover, many architects possess significantly reduced biological information, hence cannot use the existing tools and resources. In this regard, while biomimicry has a massive potential to enhance the construction process, many designers are still using conventional techniques, which yield considerably inefficient structures. For instance, the failure to incorporate modern technologies in the design and development of buildings in the UK has resulted in costly structures, which account for about 50% of energy consumption in the country. Nevertheless, many architects largely attribute their failure to use effective and efficient methods to lack of adequate knowledge. Specifically, inadequate biological information and skills significantly hinder the ability of designers to use biomimetic tools and resources. Furthermore, many of the existing tools depend on semantic knowledge to translate knowledge between biology and design. Without a substantial level of biological knowledge, architects cannot use these tools in the design phase. For this reason, most of the current buildings are developed using conventional techniques that are highly inefficient, especially because the design is one of the most critical stages of construction project development. Thus, it is recommended the training of architects’ training should include biological subjects to ensure that designers use both biological tools and resources. In particular, training should be emphasized both at the college and at the professional level. At the college level, architecture programs should include biological subjects to ensure that graduates possess fundamental information that can be used to implement new technologies in their design. In addition, practicing designers should be trained on how to use biomimetic tools and resources to ensure that they have the necessary capability to incorporate biomimicry in the design of structures or buildings. Because most of the existing knowledge is theoretical, it is necessary to emphasize the prototyping of biomimetic solutions to ensure that they can be applied in the construction industry. With prototyping, designers can view the actual performance of the proposed solutions. While they have the necessary knowledge and skills and can perceive the actual performance of solutions, designers will be able to incorporate biomimicry in design. Therefore, prototyping and training are some of the solutions that may increase the adoption of biomimetic resources and techniques in design.

References

Al-Obaidi, K.M., Ismail, M.A., Hussein, H. and Rahman, A.M.A 2017, Biomimetic building skins: An adaptive approach, Renewable and Sustainable Energy Reviews79, pp.1472-1491.

Badarnah, L 2017, Form follows environment: biomimetic approaches to building envelope design for environmental adaptation, Buildings7(2), p.40.

Creswell, J.W., Klassen, A.C., Plano Clark, V.L. and Smith, K.C 2011, Best practices for mixed methods research in the health sciences, Bethesda (Maryland): National Institutes of Health2013, pp.541-545.

Fayemi, P.E., Maranzana, N., Aoussat, A. and Bersano, G 2014, Bio-inspired design characterisation and its links with problem solving tools, In DS 77: Proceedings of the DESIGN 2014 13th International Design Conference (pp. 173-182).

Passino, K.M 2005, Biomimicry for optimization, control, and automation, Springer Science & Business Media.

Applied Financial Management

Applied Financial Management

Applied Financial Management

Table of Contents

Introduction. 4

1.    Financial Ratios: Pepsi vs. Coca-Cola. 6

1.1. Profiles of the Companies. 6

1.1.1. Coca Cola Company. 6

1.1.2.      Pepsi Company. 6

1.2. LIQUIDITY RATIO.. 7

1.2.1. Types of Liquidity Ratio. 7

1.3. PROFITABILITY RATIO.. 12

1.3.1. Types of Profitability Ratio. 12

1.4. EFFICIENCY RATIOs. 15

1.4.1. Categories of Efficiency Ratios. 16

1.5. RISK RATIO.. 23

1.5.1. Debt to Capital Ratio. 23

1.5.2. Debt/Equity Ratio. 25

1.5.3. Interest Coverage Ratio. 26

1.5.4. Combined Leverage. 28

2.    Analysis and Interpretation. 29

3.    Coca Cola Valuation and Beta Estimation. 33

3.2.     Free cash flow valuation model 38

5. Limitations of the Analysis. 42

References. 45

Appendices. 46

Balance Sheet 46

Cash Flow.. 49

Income Statement 51

Applied Financial Management

Financial management is one of the most essential aspects of a contemporary business enterprise, because it forms an overarching platform for all economic activities. The performance of a business relies on its ability to efficiently raise and manage financial resources when a need occurs. Notably, most of the modern business institutions prepare financial statements to facilitate decision making, especially including future investment, assets and liability acquisition, among others. Nonetheless, information as contained in the financial statements is inadequate to enhance meaningful decision making. Thus, a comprehensive and effective financial analysis and interpretation must be conducted to establish an organization’s performance, hence support informed decision making.

Analysis of financial statements includes a review and examination of an organization’s financial statements to evaluate its past, current and future performance. Financial and supplementary statements including balance sheets, income, equity change and cash flows statements are commonly used to establish the relationships between numerous factors, hence facilitate drawing of informed conclusions aimed at developing a better view of an organization’s financial position and performance.  Some of the primary objectives of financial statement analysis include identifying the financial well-being, assessing profitability, evaluating the capacity of servicing debt, acquiring appropriate insights of short term and long term solvency, and establishing the return on investment of an enterprise. Thus, an appropriate review, analysis and interpretation of an institution’s financial statements can lead to a clear view of the business performance by the relevant stakeholders.

    Financial Statement analysis possess a wide range of stakeholders, which can be categorized into internal and external users. Internal stakeholders indicate the top management of a company that conducts the financial statement analysis for the company operations decision making. On the other hand, External stakeholders of financial statement analysis are not necessarily members of a business institution but still possess a financial interest. Some of the external stakeholders include investors, owners, lenders, customers, suppliers, government, employees as well as the general public. Notably, the external stakeholders form an essential part of a business, and hence are keen to establish the financial performance of a company. For instance, lenders may need to identify the capability of an institutional to pay loans before lending or investors may require to assess a company’s returns before making investment decisions. Such decisions by external stakeholders directly affect the performance of company. Thus, apart from informing organizational decision making processes, financial statement analysis is an imperative exercise for a business institution.   

In financial statement analysis, the arrangement of statements is highly essential to ensure that they can reveal relative importance and impact of different bits of information with regard to time duration as well as for inter-business comparisons. In this regard, logical causality and sequence should be considered when rearranging data to enhance interpretation and drawing of logical conclusions. After rearranging statements analysis can be conducted using a number of techniques, which include creating comparative and common size financial statements, as well as conducting ratio and trend analysis. Ratio analysis is the most popular and widely used technique of analysing financial statements. The method enhances identification of key relationships between items or sets of data in an income statement or a balance sheet, hence the meaningful performance indicators, which include solvency, liquidity, and profitability of an enterprise. Ratio analysis tools simplifies financial statements, hence revealing immense information regarding the financial condition changes of a business organization. Thus, the ratio analysis technique is commonly utilized to establish an institution’s financial position, as well as to monitor its performance.

1.      Financial Ratios: Pepsi vs. Coca-Cola

1.1. Profiles of the Companies

1.1.1. Coca Cola Company

Coca-Cola is a beverage company that possesses or licences and markets over five hundred brands of non-alcoholic drinks bands, which include still beverages, such as ready-to-drink coffees and teas, energy and dairy drinks, juices, waters and sports drinks, and sparkling beverages that include diet coke, Fanta, Coca-Cola and Sprite. In addition, the company operates corporate and bottling investment segments in North America, Latin America, Europe, Africa, Asia and Middle East. Coca-Cola manufactures, sells and markets beverage concentrates, which are known as syrups and bases, which include the fountain syrup, as well as finished still and sparkling drinks.

1.1.2.      Pepsi Company

Pepsi Co. Inc., is a food, beverage and snack multinational corporation founded and headquartered in North America. Founded in 1965 through the merger of Frito-Lay, Inc., and Pepsi-Cola Company, the corporation produces, markets and distributes grain-based snack food and beverages, among other products (Sun, 2012). Since the 1965 merger, Pepsi Co. has immensely expanded from its single Pepsi product brand to a wide range of beverage and food brands, especially through acquisition, such as the 1998 acquisition of Tropicana line of products and the 2001 Quaker and Oats acquisition, which came along with the Gatorade brand.

1.2. LIQUIDITY RATIO

Liquidity refers to the ability of an enterprise to satisfy its short-term financial obligations mostly for one-year period (Sun, 2012). Specifically, liquidity determines the firm’s survival, with the ratios in this category being used to evaluate the short term financial position of a business institution. Liquidity ratios reveal the ability of firm to satisfy current obligation using the current resources. Nonetheless, high levels of liquidity indicate reduced profitability and deterioration in the managerial efficiency, among others (Sun, 2012). On the other hand, low liquidity can lead to loss of profit making opportunities, hence less return rate for a business entity. Thus, a proper liquidity and profitability balance is necessary for efficient management of finances.

1.2.1. Types of Liquidity Ratio

1.2.1.1. Current (Working Capital) Ratio

  Current ratio indicates the links between current liabilities and assets of a company. Current assets refer to an entity’s assets that can be changed into cash in a duration not exceeding one year. On the other hand, current liabilities refer to the firm’s receivables with one year or less due payment time. According to Steward. (2016), the typical current ratio for a company is supposed to be 2:1, which means that the entity’s current liabilities should be a half of the current assets. Although a high current ratio indicates that the firm is in a better position of paying its current liabilities, it has detrimental effects on the profitability of a company because poor capital investment, hence reduced rate of return. Some of the causes of high current ratio include inventory accruals, inefficiency in debts collection and high cash and bank account balances. A current ration less than 2:1 means that the business possesses inadequate liquidity, hence has a shortage of the operating capital.

Current Ratio= Current Assets/Current Liabilities

For Pepsi Company,                                       

YearCurrent AssetCurrent Liabilities
2015$23,031,000$17,578,000
2016$26,450,000$21,135,000
2017$31,027,000$20,502,000

Table 1: Current Asset and Liabilities for Pepsi from 2015-2017

Therefore, the 2015 Current Ratio=23,031,000/17,578,000=1.31021732

                       2016 Current Ratio=26,450,000/21,135,000=1.25147859002

                        2017 Current Ratio=31,027,000/20,502,000=1.5133645498

For Coca Cola Company,

YearCurrent AssetCurrent Liabilities
201533,39526,930
201634,01026,532
201736,54527,194

Table 2: Current Asset and Liabilities for Coca Cola from 2015-2017

Therefore, the 2015 Current Ratio=33,395/26,930=1.24006683996

                  2016 Current Ratio=34,010/26,532=1.28184833409

                  2017 Current Ratio=36,545/27,194=1.34386261675

Year201520162017
Pepsi Company1.311.251.51
Coca Cola Company1.241.281.34

Table 3: Current Ratio for Coca Cola and Pepsi Companies from 2015 to 2017

1.2.1.2. Quick Ratio

The current ratio is based on the assumption that all the current assets can be changed into cash to address the short-term needs for a business, which is not actually the case. Some of the current assets, such as pre-paid expenditures and inventory require considerable high amounts of time to convert to cash. Thus, a QAR (quick asset ratio), referred to as the acid test ratio, which involves deducting assets that cannot be quickly converted into cash, is used to encounter the challenge associated with the current ratio (Steward, 2016). The ratio shows the ability of the business to pay current liabilities utilising the liquid current assets.

Quick Ratio= (Current Receivables+ Short Term Investments + Cash and Cash Equivalents +Other Current Assets)/Current Liabilities or (Total Assets-Inventory-Prepaid Expenses)/Current Liabilities

For Pepsi Company,

YearCurrent ReceivablesShort Term InvestmentCash and Cash EquivalentsOther Current AssetsCurrent Liabilities
2015$6,437,000$2,913,000$9,096,000$1,865,000$17,578,000
2016$6,694,000$6,967,000$9,158,000$908,000$21,135,000
2017$7,024,000$8,900,000$10,610,000$1,546,000$20,502,000

Table 4: Data from Pepsi Co Financial Statements                

Therefore, the 2015 Quick Ratio= (6,437,000+2,913,000+9,096,000+1,865,000)/ 17,578,000=1.15547843896

                  2016 Quick Ratio= (6,694,000+6,967,000+9,158,000+908,000)/ 21,135,000=1.12264017033

                  2017 Quick Ratio= (7,024,000+8,900,000+10,610,000+1,546,000)/ 20,502,000=1.36962247586       

For Coca Cola Company,

YearCurrent Receivables US$ milShort Term Investment US$ milCash and Cash Equivalents US$ milOther Current Assets US$ milCurrent Liabilities  US$ mil
20153,94112,5917,3093,90026,930
20163,85613,6468,5552,79726,532
20173,66714,6696,0067,54827,194

Table 5: Data from Coca Cola Financial Statements

Therefore, the 2015 Quick Ratio= (3,941+12,591+7,309+3,900)/ 26,930=1.03011511326

                  2016 Quick Ratio= (3,856+13,646+8,555+2,797)/ 26,532=1.08751696065

                  2017 Quick Ratio= (3,667+14,669+6,006+7,548)/ 27,194=1.17268515114

Year201520162017
Pepsi Company1.161.121.37
Coca Cola Company1.031.091.17

Table 6: Quick Asset Ratio for Pepsi Company and Coca Cola Company from 2015 to 2017

1.2.1.3. Absolute Liquid (Cash) Ratio

Absolute liquid ratio reveals the nature of the relationship between current liabilities and the absolute current assets. The typical ratio is 2:1.

For Pepsi Company,

YearAbsolute Current Assets US$ ‘000Current Liabilities US$ ‘000
201511,982,00017,578,000
201616,125,00021,135,000
201719,510,00020,502,000

Table 7: Data from Pepsi Financial Statements

Therefore;

2015 Cash Ratio = 11,982/17,578= 0.68164751393787689156900671293663

2016 Cash Ratio = 16,125/21,135=0.76295244854506742370475514549326

2017 Cash Ratio = 19,510/20,502=0.95161447663642571456443273826944

For Coca Cola Company

YearAbsolute Current Assets US$ milCurrent Liabilities US$ mil
201519,90026,930
201622,20126,532
201720,67527,194

Table 8: Data from Coca Cola Financial Statements

Therefore, the 2015 Cash Ratio = 19900/26930= 0.73895284069810620126253249164501

2016 Cash Ratio = 22201/26532=0.83676315392733303181064375094226

2017 Cash Ratio = 20675/27194=0.76027800250055159226299919099801

Year201520162017
Pepsi Company0.680.760.95
Coca Cola Company0.740.840.76

Table 9: The Absolute Ratio for Pepsi and Coca Cola from 2015 to 2017

1.3. PROFITABILITY RATIO

Profitability ratio enhances evaluation of the ability of a firm’s operation to lead to profits, as well as assists the management to identify the nature of profitability. According to Sun (2012), a myriad of decisions and policies adopted by a company determine its profitability. Heikal, Khaddafi and Ummah (2014) explain that the profitability ratio reveals the combined impact of the asset and debt management and the liquidity on the operating outcome. Thus, evaluation of the profitability ratio is conducted with reference to invested capital, total assets used, owners fund and sales, among others.

1.3.1. Types of Profitability Ratio

1.3.1.1. Gross Profit Ratio

GPM (Gross Profit Margin) reveals the company’s margin of profit before interest and operating expenses, and taxes are deducted. Heikal, Khaddafi and Ummah (2014) note that there exists no ideal gross profit ratio, but it should be higher enough to cater for depreciation, dividends, interest from loans and reserve funds creation apart from covering the operating costs. Mody, et al. (2016) explain that the gross profit margin is a product factor of cost and pricing control. Notably, the a product’s sales immensely depends on its price, while the costs of production, such as labour, raw materials, purchases cost or overhead determines the cost of the goods sold. Thus, a company’s ability to maintain or improve gross profit margins is determined by its capability to price commodities with respect to production cost inflation, as well as the ability to estimate costs of production.

Gross Profit Margin=Gross Income/Sales

Therefore, for Pepsi Company,

YearGross Income in US$,000Sales in US$,000
201534,325,00063,056,000
201634,590,00062,799,000
201734,740,00063,525,000

Table 10: Data from Pepsi Financial Statements

Thus, the 2015 Gross Profit Margin = 34,325,000/63,056,000 =0.54435739659984775437706165947729

          2016 Gross Profit Margin = 34,590,000/62,799,000 =0.55080494912339368461281230592844

          2017 Gross Profit Margin =34,740,000/63,525,000 =0.54687131050767414403778040141677

For Coca Cola Company,

YearGross Income US$ milSales US$ mil
201526,81244,294
201625,39841,863
201722,15435,410

Table 11: Data from Coca Cola Financial Statements

Thus, the 2015 Gross Profit Margin =26,812/44,294 = 0.60531900483135413374271910416761

           2016 Gross Profit Margin =25,398/41,863 = 0.606693261352506987076893676994

           2017 Gross Profit Margin =22,154/35,410 = 0.62564247387743575261225642473877

Year201520162017
Pepsi Company54.43%55.08%54.69
Coca Cola Company60.53%60.67%63%

Table 12: Gross Profit Ratio for Pepsi Company and Coca Cola Company from 2015 to 2017

1.3.1.2. Operating Profit Ratio

Operating Profit or OPM (Operating Profit Margin) reveals the company’s margin of profit after operating and good sold costs are deducted but before deducting taxes and interest from loans. According to Heikal, Khaddafi and Ummah (2014), OPM indicates the actual profitability of an entity’s operations, because it is estimated before deducting taxes, which the firm cannot control, and interest from loans, which are a product of financing decision making. Precisely, the OPM indicates the particular amount of profits a business can earn regardless of the amount of government imposed taxes and the means of financing.

Operating Profit Margin=Operating Income/Sales

Therefore,

For Pepsi Company

YearOperating Income in US$,000Sales in US$,000
20158,353,00063,056,000
20169,785,00062,799,000
201710,509,00063,525,000

Table 13: Data from Pepsi Co Financial Statements

Thus, the 2015 Operating Profit Margin = 8,353,000/63,056,000 = 0.13246955087541233189545800558234

                2016 Operating Profit Margin = 9,785,000/62,799,000 = 0.1558145830347617000270704947531

                2017 Operating profit Margin = 10,509,000/63,525,000 = 0.16543093270365997638724911452184

For Coca Cola Company,

YearOperating Income in US$ milSales in US$ mil
20158,72844,294
20168,62641,863
20177,50135,410

Table 14: Data Coca Cola Co. Financial Statements

Thus, the 2015 Operating Profit Margin = 8,728/44,294 = 0.19704700410890865579988260260983

                  2016 Operating Profit Margin = 8,626/41,863 = 0.20605307789694957360915366791678

                  2017 Operating Profit Margin = 7,501/35,410 = 0.21183281558881671844111832815589

Year201520162017
Pepsi Company13.25%15.58%16.54%
Coca Cola Company19.70%20.61%21.19%

Table 15: Operating Profit Ratio for Pepsi Company and Coca Cola from 2015 to 2017

1.4. EFFICIENCY RATIOs

Efficiency Ratio also referred to as the Activity Ratio is primarily utilized to estimate a firm’s performance by analysing the internal use of liabilities and assets to generate revenue. Most of the efficiency ratios focus on the operational aspect of the firm, which include the rate of converting receivables into cash, the ability of an entity to earn profits using assets and efficiency of a company in inventory management (Boyd, 2016). Thus, the efficiency ratios provide immense information regarding the current performance of a company, by evaluating performance in receivable, assets and inventory management.

1.4.1. Categories of Efficiency Ratios

1.4.1.1. Account Receivable Turnover Ratio

The Account receivable ratio used to estimate the efficiency and efficacy of a company’s credit policies. The higher the ratio the better the credit policy of a company. Account receivable turnover ratio is estimated by calculating the revenue and average accounts receivable ratios quotient. That is, ART (Account Receivable Turnover) = Total Sales on Credit/The Average of the Accounts Receivable.

For Pepsi Company

YearSales on Credit in US$ 000Aggregate Account Receivables in US$ 000
20154,346,7406,437,000
20163,760,8406,694,000
20172,890,4607,024,000

Table 16: Data from Pepsi Financial Statements

Thus, the 2015 Account Receivable Turnover Ratio = 0.675274

                2016 Account Receivable Turnover Ratio = 0.561823

                2017 Account Receivable Turnover Ratio = 0.411512

For Coca Cola Company,

YearSales on Credit in US$ milAggregate Account Receivables in US$ mil
20152,4603,941
20162,2403,856
20171,8603,667

Table 17: Data from Coca Cola Financial Statements

Thus, the 2015 Account Receivable Turnover Ratio = 0.624207

                2016 Account Receivable Turnover Ratio = 0.580913

                2017 Account Receivable Turnover Ratio = 0.507227

Year201520162017
Pepsi Company6.456.855.86
Coca Cola Company7.658.759.06

Table 18: Account Receivable Turnover Ratio for Pepsi Company and Coca Cola Company from 2015-2017

1.4.1.2.. Asset Turnover Ratio

Asset Turnover Ratio is utilized to measure the performance of a company in terms of the use of current and long-term assets to generate revenue. The higher the ratio the better a firm utilizes its assets to generate income (Boyd, 2016). Specifically, Asset Turnover Ratio is the quotient of revenue to the average total assets. Thus, the Asset Turnover Ratio=Revenue/Total Assets.

For Pepsi Company,

YearRevenue in US$,000Total Assets in US$,000
201563,056,00069,667,000
201662,799,00073,490,000
201763,525,00079,804,000

Table 19: Data from Pepsi Financial Statements

Thus, the 2015 Asset Turnover Ratio = 63,056,000/69,667,000 = 0.90510571719752537069200625834326

                2016 Asset Turnover Ratio = 62,799,000/73,490,000 = 0.85452442509184923118791672336372

                2017 Asset Turnover Ratio = 63,525,000/79,804,000 = 0.79601273119141897649240639566939   

For Coca Cola Company,

YearRevenue in US$ milTotal Assets in US$ mil
201544,29490,093
201641,86387,270
201735,41087,896

  Table 20: Data from Coca Cola Statements

Thus, the 2015 Asset Turnover Ratio = 44,294/90,093 = 0.49164751978511094091660839354889

                2016 Asset Turnover Ratio = 41,863/87,270 = 0.47969519880829609258622665291624

                2017 Asset Turnover Ratio = 35,410/87,896 = 0.40286247383271138618367161190498

Year201520162017
Pepsi Company0.910.850.77
Coca Cola Company0.490.480.40

Table 21: Asset Turnover Ratio for Pepsi Company and Coca Cola Company from 2015-2017

1.4.1.3. Inventory Turnover Ratio

Inventory Turnover Ratio is a measure of the company’s efficiency and efficacy in inventory management. For instance, a purchase of excess inventory can lead to unnecessary increases in the cost of sold goods, hence indicating poor inventory management (Ung, and Luk, 2016). A high Inventory Turnover Ratio is considered favourable to an organization.

Inventory Turnover Ratio=Cost of Goods Sold/Revenue.

For Pepsi Company,

YearCost of Goods Sold in US$,000Revenue in US$,000
20154,501,00063,056,000
20162,542,00062,799,000
20171,543,00063,525,000

 Table 22: Data from Pepsi Financial Statements

Thus, the 2015 Inventory Turnover Ratio = 4,501,000/63,056,000 = 0.07138099467140319715808170515098

                2016 Inventory Turnover Ratio = 2,542,000/62,799,000 = 0.04047835156610774056911734263284

                2017 Inventory Turnover Ratio = 1,543,000/63,525,000 = 0.02428964974419519874065328610783

For Coca Cola Company,

YearCost of Goods Sold in US$ milRevenue in US$ mil
201517,48244,294
201616,46541,863
201713,25635,410

Table 23: Data from Coca Cola Financial Statements

Thus, the 2015 Inventory Turnover Ratio = 17,482/44,294 = 0.39468099516864586625728089583239

                2016 Inventory Turnover Ratio = 16,465/41,863 = 0.393306738647493012923106323006

                2017 Inventory Turnover Ratio = 13,256/35,410 = 0.37435752612256424738774357526123

Year201520162017
Pepsi Company0.070.040.02
Coca Cola Company0.400.390.37

Table 24: Inventory Turnover Ratio for Pepsi Co and Coca Cola Co from 2015-2017

1.4.1.4. Operation Expense Ratio

Operation Expense Ratio is used to evaluate the cost of operating a firm to generate revenue. Increased operating expense ratio indicate high costs of generating revenue, hence necessary actions should be taken to reduce the expenses (Ung and Luk, 2016).

Operating Expense Ratio=Operating Cost/Revenue

For Pepsi Company,

YearOperating Cost in US$,000Revenue in US$,000
20152597200063,056,000
201624,805,00062,799,000
201724,231,00063,525,000

Table 25: Data from Pepsi Financial Statements

Thus, the 2015 Operating Expense Ratio = 25972000/63,056,000 = 0.41188784572443542248160365389495

                2016 Operating Expense Ratio = 24,805,000/62,799,000 = 0.39499036608863198458574181117534

                2017 Operating Expense Ratio = 24,231,000/63,525,000 = 0.38144037780401416765053128689492

For Coca Cola Company,

YearOperating Cost in US$ milRevenue in US$ mil
201536,48044,294
201634,64041,863
201732,46035,410

Table 26: Data from Coca Cola Financial Statements

Thus, the 2015 Operating Expense Ratio = 0.823588

                2016 Operating Expense Ratio = 0.827461

                2017 Operating Expense Ratio = 0.91669

Year201520162017
Pepsi Company0.4120.3950.381
Coca Cola Company0.83240.8270.917

Table 27: Operating Expense Ratio for Pepsi and Coca Cola from 2015 to 2016

1.4.1.5. Return on Investment (ROI) Ratio

Normally expressed in a percentage, the Return on Investment Ratio compares earnings with the specific invested amounts. The Return on Investment Ratio= Net profit/ The Cost of an Investment *100

For Pepsi Company,

YearNet Profit US$ milCost of Investment US$ mil
20155,452,0003780000
20166,329,0007534000
20174,857,0005144000

Table 28: Data from Pepsi Financial Statements

Thus, the 2015 Return on Investment Ratio = 5,452,000/3780000 = 1.442328042328042328042328042328

                2016 Return on Investment Ratio = 6,329,000/7534000 = 0.84005840191133528006371117600212

                2017 Return on Investment Ratio = 4,857,000/5144000 = 0.94420684292379471228615863141524

For Coca Cola Company,

YearCost of Goods SoldRevenue
201517,48244,294
201616,46541,863 
201713,25635,410

Table 29: Data from Coca Cola Financial Statements

Thus, the 2015 Return on Investment Ratio = 0.394681

                2016 Return on Investment Ratio = 0.393307

                2017 Return on Investment Ratio = 0.374358

Year201520162017
Pepsi Company144%84%94%
Coca Cola Company39%39%37%

Table 30: Gross Profit Ratio for Pepsi Company and Coca Cola Company from 2015 to 2017

1.5. RISK RATIO

1.5.1. Debt to Capital Ratio

The debt to capital ratio is the estimation of leverage, which offers a fundamental view of a firm’s financial structure with regard to the manner of operation capitalization, hence reveals the organization’s financial soundness (Freeman & Martin, 2003). Particularly, the debt to capital ratio is the comparison of a company’s current and long-term debt obligations to the aggregate capital, sourced from debt financing and shareholder’s equity (Steiner, 2016). Reduced debt to capital ratios are favourable to a company because they indicate that the firm sources most of it capital from equity rather than debts.

Debt to Capital Ratio = Interest earning Debt/Equity

For Pepsi Company,

YearInterest Earning DebtEquity
201529,213,00069,667,000
201630,053,00073,490,000
201733,796,00079,804,000

Table 31: Data from Pepsi Financial Statements

Thus, the 2015 Debt to Capital Ratio = 29,213,000/69,667,000 = 0.41932335251984440265836048631346

                2016 Debt to Capital Ratio = 30,053,000/73,490,000 = 0.40893999183562389440740236766907

                2017 Debt to Capital Ratio = 33,796,000/79,804,000 = 0.42348754448398576512455516014235

For Coca Cola Company,

YearCost of Goods SoldRevenue
201517,48244,294
201616,46541,863
201713,25635,410

Table 32: Data from Coca Cola Financial Statements

Thus, the 2015 Debt to Capital Ratio = 0.394681

                2016 Debt to Capital Ratio = 0.393307

                2017 Debt to Capital Ratio = 0.374358

Year201520162017
Pepsi Company0.420.410.42
Coca Cola Company0.390.390.37

Table33: Debt to Capital Ratio for Pepsi Company and Coca Cola Company from 2015 to 2017

1.5.2. Debt/Equity Ratio

The D/E of the debt/equity ratio is an essential financial ratio, which offers a direct comparison of debt to shareholder’s equity (Freeman & Martin, 2003). In addition, the ratio indicates the ability of the organization to satisfy debt obligations. A lower debt to equity ratio is favourable to a company because it shows that most of the firm’s operations are financed through shareholder’s equity rather than debts (Steiner, 2016). Notably, organizations with robust equity positions can easily weather short-term revenue downturn or unforeseen demands for additional capital investment. On the other hand, High debt/equity ratios can negatively affect the ability of an entity to acquire additional financing when required.

For Pepsi Company,

YearTotal LiabilitiesStockholders’ Equity
201557,599,00012,068,000
201662,244,00011,246,000
201768,759,00011,045,000

Table 34: Data from Pepsi Financial Statements

Thus, the D/E = 57,599,000/12,068,000 = 4.7728704010606562810739144845873

                2016 D/E = 62,244,000/11,246,000 = 5.5347679174817712964609638982749

                2017 D/E = 68,759,000/11,045,000 = 6.2253508374830239927569035762789

For Coca Cola Company,

YearCost of Goods SoldRevenue
201517,48244,294
201616,46541,863
201713,25635,410

Table 35: Data from Coca Cola Financial Statements

Thus, the 2015 D/E = 0.394681

                2016 D/E = 0.393307

                2017 D/E = 0.374358

Year201520162017
Pepsi Company4.85.56.2
Coca Cola Company3.73.64.8

Table36: Debt/Equity Ratio for Pepsi Co and Coca Cola Co from 2015-2017

1.5.3. Interest Coverage Ratio

The Interest Coverage Ratio is a fundamental estimator of the ability of a firm to manage its current financial costs. The ratio shows the number of times an organization can use its short-term earnings before tax and interest to pay the required annual interests on the outstanding debt. A relatively lower interest coverage ratio suggests that a firm possesses a higher burden of debt service, hence correspondingly a greater risk of financial insolvency or default. A lower Interest Coverage Ratio indicates that the firm possesses reduced earnings to pay financing interests and the entity has a reduced ability to manage an increase in the rates of interests (Heikal, Khaddafi and Ummah, 2014). In general, a 1.5 or lower Interest Coverage Ratio is an indicator of debt service problems. Nonetheless, extremely high Interest Coverage Ratio may indicate the inability of an organization to utilize its financial leverage. Interest Coverage Ratio = Earnings Before Interest and Tax/Interest Expenses

For Pepsi Company,

YearEBITInterest Expenses
20158,412,000970,000
20169,895,0001,342,000
201710,753,0001,151,000

Table 37: Data from Pepsi Financial Statements

Thus, the 2015 Interest Coverage Ratio = 8,412,000/970,000 = 8.6721649484536082474226804123711

                2016 Interest Coverage Ratio = 9,895,000/1,342,000 = 7.3733233979135618479880774962742

                2017 Interest Coverage Ratio = 10,753,000/1,151,000 = 9.3423110338835794960903562119896

For Coca Cola Company,

YearInterest ExpenseEBIT
201577912 343
201681711 745
20171,23410 957

Table 38: Data from Coca Cola Financial Statements

Thus, the 2015 Interest Coverage Ratio = 0.0631127

                2016 Interest Coverage Ratio = 0.06956152

                2017 Interest Coverage Ratio = 0.11262207

Year201520162017
Pepsi Company8.77.49.3
Coca Cola Company6.96.88.7

Table39: Interest Coverage Ratio for Pepsi Co and Coca Cola Co from 2015-2017

1.5.4. Combined Leverage

The degree of combined leverage offers a more complete evaluation of the firm’s aggregate risk by incorporating both financial and operating leverage. In this type of risk estimation, the impact of financial and business risks on the firm’s profit per share is estimated assuming a specific increase or decrease in sales (Heikal, Khaddafi and Ummah, 2014). The ratio, enhances managers to establish the best possible combinations and levels of operational and financial leverage for the company. 

For Pepsi Company,

YearEPSSales
20151.9435,410
20160.3341,863
20170.2944,294  

Table 40: Data from Pepsi Financial Statements

Thus, the 2015 Combined Leverage ratio = 0.043142857

                2016 Combined Leverage ratio = 0.007073171

                2017 Combined Leverage = 0.0075

For Coca Cola Company,

YearCost of Goods SoldInventory
201517,48242,805
201616,46542,360
201713,25649,840

Table 41: Data from Coca Cola Financial Statements

Thus, the 2015 Combined Leverage = 0.40841

                2016 Combined Leverage = 0.388692

                2017 Combined Leverage = 0.265971

Year201520162017
Pepsi Company0.510.490.42
Coca Cola Company0.400.390.30

Table41: Combined Leverage for Pepsi Co and Coca Cola Co from 2015-2017

2.      Analysis and Interpretation

Liquidity Ratio

The current ratios of the two companies are all maintained at a standard rate that is more than 1:1 and have remained at a constant rate for the past three years. The cash ratio is 0.64 :1 slightly higher than that of Pepsi that has increased in the past three years. Generally, PepsiCo is maintaining a lesser cash ratio than Coca – Cola.

Bar Graph 1: Coca Cola Interest Coverage Ratio

Profitability Ratio

Coca Cola has been able to maintain a progressive growth in the last three years of 65% which is much better than the competitor Pepsi which is 55% as compared to the industrial standard of 41.3%. PepsiCo cost-production structure is not as good as that of Coca-Cola this is evidenced from the cost to revenue ratio that averages 74% and 68% with both companies having an average of 81%.

Bar Graph 2: Coca Cola Operating Cost

Efficiency Ratio

Comparatively, the average stock holding days for Coca – Cola remains at 64 days that is slightly higher than that of PepsiCo which is 40 days as it is indicated in the financial records. This trend shows that the two companies are maintaining their STR at an equal level. Neglibly, there exists a difference in the debt collecting days since the number of days differ from 34 to 39 days.

Line Graph 1: Coca Cola Inventory Turnover Ratio

Risk Ratio

In terms of risk analysis, once an investor analyses so that to determine the level of risk and stability in the organization, Coca – Cola is less risky than PepsiCo despite the fact that PepsiCo has more assets than Coca – Cola. Furthermore, PepsiCo has suffered from a standpoint execution considering the nature of the stock prices as indicated above.

Bar Graph 3: Assets Turnover Pepsi

3.      Coca Cola Valuation and Beta Estimation

Stable Growth Rate =8%
Treasury Bond Rate =8%
Beta for the company =1.2
Cost of debt for the firm =8.50%
Tax Rate for the firm =41%
Market Risk Premium =7.50%
Coca ColaGeneric Cola Company
AT Operating Margin18.56%6.50%
Sales/BV of Capital1.811.81
ROC33.59%11.77%
Reinvestment Rate71.00%71.00%
Expected Growth23.85%8.35%
Length1010
Cost of Equity17.00%17.00%
E/(D+E)97.65%97.65%
AT Cost of Debt5.02%5.02%
D/(D+E)2.35%2.35%
Cost of Capital16.72%16.72%
Value/Sales Ratio3.490.28

Table 43: Coca Cola Beta Estimation

Revenues for the firm =24000

Operating MarginValue/Sales$ Value
6%0.41$9,840
8%0.79$18,960
10%1.32$31,680
12%2.01$48,240
14%2.93$70,320
16%4.11$98,640
18%5.63$135,120
20%7.57$181,680


Table 44: Firm’s Operating Margin

Explanations

As indicated from the above evaluation, the volatility of the market is higher than that of Coca-Cola. Since the stocks have a beta more than one, the stock is expected to increase in value more than what the market can hold. Beta is a statistical evaluation measure that is used in measuring and comparing the stock’s volatility against the wider market volatility assessed against the market reference index. The benchmark is the value in the market and the value of Beta is always 1, once a stock has a Beta value of greater than 1 then the stock value shall increase more than the value in the market.

  • Capital Asset Pricing Model
Assume:  Risk free rate = 4%; Market risk rate = 8%.  
WACC
LeveringLeveringCost ofAssuming
D/VE/VBeta DebtBeta EquityAsset BetaDebt BetaEquity BetaDebtNo Taxes
0%100%N/A1.31.2N/A1.20.00%14.40%
15%95%0.1521.351.3050.1521.355.22%14.84%
25%85%0.151.4851.30.151.4855.20%14.80%
35%75%0.161.6561.2980.161.6565.28%14.78%
45%65%0.191.891.3140.191.895.52%14.91%
55%55%0.952.181.7220.952.1811.60%18.17%
65%45%0.182.681.3230.182.685.44%14.98%
75%35%0.253.441.3920.253.446.00%15.53%
85%25%0.284.961.4780.284.966.24%16.22%
95%15%0.299.481.6980.299.486.32%17.98%

Table 45: capital Asset Pricing Model

The above table describes the levered standard beta reflecting on the Coca Cola capital structure this includes the linked financial risks and the debt level involved. Besides, the unlevered Beta and the ungeared beta compares the unlevered risks involved in the company with the capital structure that is without debt involved in the market risk. The Coca Cola unlevered beta indicates the different capital structure since it focuses on the equity risks involved. Evidently, the unlevered Beta is less than that of levered Beta.

Beta estimation

β = Covariance KO, S&P 500 ÷ Variance S&P 500

 201720162015
Covariance KO, S&P 500 0.0406822.8830271.157665
Variance S&P 5001.2604648.69105715.54587
β0.03227541603726880.331723402573472940.0744676882027188

3.2.       Free cash flow valuation model 

Column1Column2Column3Column4Column5Column6Column7
Coca – Cola
201620152014
Reported cash flow from ops Interest payments11,7859,7547,895
760360465
Interest receipts325261364
Net interest payments43599101
Taxes (35.6%)15128141544171
Cash flow from operations9,5049,2007,824
Reported cash investment4,6044,2512,276
Purchase of S/T investments (4,671)-2,029
Sale of S/T investments 3,0333,761   –2,021-2,272
Free cash flow5,9366,3275,381
 

Table 46: Free Cash Flow Model

3.2.1. Adjusted present value model

Free cash flow5,3816,3415,861
Discount rate (1.09t)1.081.17731.2645
PV of FCF4,7655,3404,640
Total PV of FCF14,580
Continuing value (CV)

Table 47: Adjusted Present Value Model

Column1Column2Column3
5,960 *1.05 /119,640
1.10 * 1.05
PV of CV = 124,660
1.32
96,540
124,640
Enterprise value110,220
Net debt12,140(24,450 – 12,160)
Value of equity96,760

Table 48: Calculation of the value of Equity

Value per share on 2,318 shares outstanding: $65.40

As indicated above tables, the FCFE of Coca – Cola decreased from the year 2014 to 2017 attributed to the amount of Free Cash flow that is available for the equity holders of Coca – Cola after all the principal payments, interest and operating expenses have all been paid out. The average Free Cash Flow for each share Growth Rate of the company of the company stood at -19.20% each year./ For the past three years, the average free cash flow of each share was steady at 3.50%.

  • Dividend discount model
Column1Column2Column3Column4Column5Column6
LatestNotes
Adj. Net Income161
(-) Cash Dividends Paid11
(=) Cash Retained14286.60%% of net income needed for future growth
LowMidHigh
Required Retention Ratio19.00%13.50%9.50%
Adj Net Income151147147
(=) Cash Required31219
Cash Retained141129141
(-) Cash Required-31-21-9
(=) Excess Retained107109119
(/) Shares Outstanding888
(=) Excess Retained per Share9.1811.2912.16
LowMidHigh
Current Dividend$1,500$1.20$1.20
(+) Excess Retained per Share9.1811.4112.16
Adjusted Dividend$11.19$12.41$13.16
% Yield10.50%9.60%12.70%

Table 49: Adjusted Dividend Yield

3.2.3.       Economic-profit-based valuation model

FCFE6             =          FCFE5(1+g)1

  • $6,480 (1+.0559)1
  • $6,604
  • Analysis

Based on the calculations above, the present share valuation and price is an implication that the perpetual growth in dividends at a fair value that is $46 only represents an upsurge of 8.5% from the present price. The share price of the company has recovered from the before pull back.

5. Limitations of the Analysis

The main challenge and limitation in this study was the two companies have different fiscal accounting years thus making a comparison tasking and difficult in the industrial cyclical. Besides, diverse different companies are different to compare and classify for the purpose of comparison. Also, financial statements do not offer the required answers needed to answer all the questions that a user might have. In fact, financial analysis creates more questions than answers. The two companies are using different methods in accounting like Pepsi uses LIFO while Coca Cola uses FIFO this makes it hard to compare.

According to the analysis above, the different financial ratios of PepsiCo and Coca Cola had a better performance in the period examined despite the fact that Pepsi surpassed in the rewarding of dividends while it has outperformed the competitor. The Financial rivalry remains steady since the margins have continued to tighten the gap that Coca Cola has a better performance. Nonetheless, PepsiCo still have a very long way in ensuring that the company shall remain very stable. However, Coca Cola is a better investment option providing a safer option in future since the investors shall require to get concerned and engaged with the policies involving payments. Indeed, an in-depth analysis of financial ratios is very important since it helps one to evaluate the financial strengths, operating efficiencies, liquidity conditions and efficiency in terms of operations very helpful since the organization shall learn on how it shall increase in terms of efficiency.

As indicated in this paper, financial management happens to be one of the key element in the modern business enterprise since it forms an overarching platforms for the economic activities. The business performance completely relies on the ability of raising efficiently in managing financial resources required when one needs to occur. Essentially, most of the contemporary business institutions prepares the financial statements continue to facilitate the process of making decisions mostly in future investments assets and liabilities acquisitions among others. Coca Cola management and leadership structures and the general culture within organizations have in the recent past been initiated by the present management and the CEO. This is the reason behind the good financial performance of the company. The CEO is attributed in establishing key structures aimed at promoting the company’s strength like motivation, innovation, development, training, blow ups and the management of knowledge in the company through the elimination of bureaucracy that has existed in the company for a long time. This is aimed at ensuring that the company achieves competitiveness and sustainable growth. The company has initiated great risk management policies that have enabled the corporation to remain stable provided the fluctuation of the high foreign currency and political instability experienced by the company as it operates in more than 200 countries.

In essence, the company needs to introduce, revise, and implement some of the most effective strategies in marketing and making decisions quickly, utilize the assets effectively, implement policies in asset management effectively and good policies of paying dividends that require an immediate action from the management concerning the beverage industry and competitive nature. Financial and supplementary statements including balance sheets, income, equity change and cash flows statements are commonly used to establish the relationships between numerous factors, hence facilitate drawing of informed conclusions aimed at developing a better view of an organization’s financial position and performance. In financial statement analysis, the arrangement of statements is highly essential to ensure that they can reveal relative importance and impact of different bits of information with regard to time duration as well as for inter-business comparisons. In this regard, logical causality and sequence should be considered when rearranging data to enhance interpretation and drawing of logical conclusions.

Generally, the company’s financial position of the company is very fantastic. Notably, the ROA should not be a matter of high concern that is predominantly once the leadership in the company in the management team has a high fresh air breath that is effective as evidenced after the announcement of the impressive 2015 to 2017 financial performance. The current CEO E Neville have a number of set that creates a new course for the global number one in the world of soft drinks.  However, the companies need to increase and improve their profit margins as the two companies are below the industrial level. The improvement in profit margins shall lead up to the return on investment and the general efficiency of the organization shall improve drastically. The two companies have a reasonable business environment. Besides, the track record of the companies is generally geared or oriented in the path of profit growth with greater fundamentals.

References

Sun, L 2012, Information content of P/E ratio, price to book ratio and firm size in predicting equity returns. In International Conference on Innovation and Information Management (Vol. 36, pp. 262-267).

Ung, D. and Luk, P 2016, What’s in Your Smart Beta Portfolio? A Fundamental and Macroeconomic Analysis. A Fundamental and Macroeconomic Analysis (January 8, 2016).

Heikal, M., Khaddafi, M. and Ummah, A 2014. Influence Analysis of Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM), Debt To Equity Ratio (DER), and current ratio (CR), Against Corporate Profit Growth In Automotive In Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.

Boyd, M 2016, Coca-Cola Vs. Pepsi: Which Is The Better Choice For Investors?. Seekingalpha.com. Available at: https://seekingalpha.com/article/3786626-coca-cola-vs-pepsi-better-choice-investors [Accessed 9 Mar. 2016].

Armus, S 2005, Coca-Cola Company. France and the Americas: Culture, Politics, and History: A Multidisciplinary Encyclopedia1, 273.

Mody, R. D., Kaminski, C. E., Darr, R. C., & Pedmo, M. A 2016, U.S. Patent Application No. 29/499,201.

Steward, S. L., Weston, C. M., Garwood, M. S., & Daniel, S 2018, U.S. Patent Application No. 29/565,806.

Appendices

  1. Appendix 1: Pepsi Company Balance Sheet

Balance Sheet

Period Ending:Trend12/30/201712/31/201612/26/201512/27/2014
Current Assets
Cash and Cash Equivalents$10,610,000$9,158,000$9,096,000$6,134,000
Short-Term Investments$8,900,000$6,967,000$2,913,000$2,592,000
Net Receivables$7,024,000$6,694,000$6,437,000$6,651,000
Inventory$2,947,000$2,723,000$2,720,000$3,143,000
Other Current Assets$1,546,000$908,000$1,865,000$2,143,000
Total Current Assets$31,027,000$26,450,000$23,031,000$20,663,000
Long-Term Assets
Long-Term Investments$2,042,000$1,950,000$2,311,000$2,689,000
Fixed Assets$17,240,000$16,591,000$16,317,000$17,244,000
Goodwill$14,744,000$14,430,000$14,177,000$14,965,000
Intangible Assets$13,838,000$13,433,000$13,081,000$14,088,000
Other Assets$913,000$636,000$750,000$860,000
Deferred Asset Charges$0$0$0$0
Total Assets$79,804,000$73,490,000$69,667,000$70,509,000
Current Liabilities
Accounts Payable$15,017,000$14,243,000$13,507,000$13,016,000
Short-Term Debt / Current Portion of Long-Term Debt$5,485,000$6,892,000$4,071,000$5,076,000
Other Current Liabilities$0$0$0$0
Total Current Liabilities$20,502,000$21,135,000$17,578,000$18,092,000
Long-Term Debt$33,796,000$30,053,000$29,213,000$23,821,000
Other Liabilities$11,283,000$6,669,000$5,887,000$5,744,000
Deferred Liability Charges$3,242,000$4,434,000$4,959,000$5,304,000
Misc. Stocks($156,000)($151,000)($145,000)($140,000)
Minority Interest$92,000$104,000$107,000$110,000
Total Liabilities$68,759,000$62,244,000$57,599,000$52,931,000
Stock Holders Equity
Common Stocks$24,000$24,000$24,000$25,000
Capital Surplus$3,996,000$4,091,000$4,076,000$4,115,000
Retained Earnings$52,839,000$52,518,000$50,472,000$49,092,000
Treasury Stock($32,757,000)($31,468,000)($29,185,000)($24,985,000)
Other Equity($13,057,000)($13,919,000)($13,319,000)($10,669,000)
Total Equity$11,045,000$11,246,000$12,068,000$17,578,000
Total Liabilities & Equity$79,804,000$73,490,000$69,667,000$70,509,000
  • Appendix 2: Pepsi Company Cash Flow

Cash Flow

Period Ending:Trend12/30/201712/31/201612/26/201512/27/2014
Net Income$4,857,000$6,329,000$5,452,000$6,513,000
Cash Flows-Operating Activities
Depreciation$2,369,000$2,368,000$2,416,000$2,625,000
Net Income Adjustments$3,545,000$950,000$2,089,000$433,000
Changes in Operating Activities
Accounts Receivable($202,000)($349,000)($461,000)($343,000)
Changes in Inventories($168,000)($75,000)($244,000)($111,000)
Other Operating Activities($321,000)$74,000($184,000)($189,000)
Liabilities($137,000)$1,326,000$1,747,000$1,533,000
Net Cash Flow-Operating$9,994,000$10,673,000$10,864,000$10,506,000
Cash Flows-Investing Activities
Capital Expenditures($2,969,000)($3,040,000)($2,758,000)($2,859,000)
Investments($1,910,000)($4,301,000)($400,000)($2,386,000)
Other Investing Activities$476,000$193,000($411,000)$308,000
Net Cash Flows-Investing($4,403,000)($7,148,000)($3,569,000)($4,937,000)
Cash Flows-Financing Activities
Sale and Purchase of Stock($1,543,000)($2,542,000)($4,501,000)($4,267,000)
Net Borrowings$2,050,000$3,746,000$4,632,000($331,000)
Other Financing Activities($221,000)($188,000)($203,000)($50,000)
Net Cash Flows-Financing($4,186,000)($3,211,000)($4,112,000)($8,264,000)
Effect of Exchange Rate$47,000($252,000)($221,000)($546,000)
Net Cash Flow$1,452,000$62,000$2,962,000($3,241,000)
  • Appendix 2: Pepsi Company  Income Statement

Income Statement

Period Ending:Trend12/30/201712/31/201612/26/201512/27/2014
Total Revenue$63,525,000$62,799,000$63,056,000$66,683,000
Cost of Revenue$28,785,000$28,209,000$28,731,000$31,238,000
Gross Profit$34,740,000$34,590,000$34,325,000$35,445,000
Operating Expenses
Research and Development$0$0$0$0
Sales, General and Admin.$24,231,000$24,805,000$24,613,000$25,772,000
Non-Recurring Items$0$0$1,359,000$0
Other Operating Items$0$0$0$92,000
Operating Income$10,509,000$9,785,000$8,353,000$9,581,000
Add’l income/expense items$244,000$110,000$59,000$85,000
Earnings Before Interest and Tax$10,753,000$9,895,000$8,412,000$9,666,000
Interest Expense$1,151,000$1,342,000$970,000$909,000
Earnings Before Tax$9,602,000$8,553,000$7,442,000$8,757,000
Income Tax$4,694,000$2,174,000$1,941,000$2,199,000
Minority Interest($51,000)($50,000)($49,000)($45,000)
Equity Earnings/Loss Unconsolidated Subsidiary$0$0$0$0
Net Income-Cont. Operations$4,857,000$6,329,000$5,452,000$6,513,000
Net Income$4,857,000$6,329,000$5,452,000$6,513,000
Net Income Applicable to Common Shareholders$4,857,000$6,329,000$5,452,000$6,513,000