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Working Capital Management: A Comparative Study of The Coca-Cola Company

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 1

Working Capital Management: A Comparative Study of The

Coca-Cola Company and PepsiCo

Abrar Shikder, Yusuf Ahmed Abdi, Mohamed Dhaen Almehairi, Mahmoud Zourob, Abdullah Abuzahra,
Andrew Vaz, Marwan Ashraf Yehya

Supervised by:
Professor Haitham Nobanee

Abstract

This research paper is a comparative study that provides an in-depth financial analysis of the two
industry leaders in the beverage industry: The Coca-Cola Company and PepsiCo. The data for this
study was taken from the financial statements published on Yahoo Finance. The relevant data was
then used to compute, present and discuss the relevant financial ratios for the working capital
management, liquidity, profitability, leverage, and cash flows of the two aforementioned
companies and compares them to arrive at an accurate conclusion regarding their financial
performance over the last four years.

Keywords: working capital management, liquidity, profitability, leverage, cash flows.

 2

Introduction
The Coca-Cola Company, often referred to as simply ‘Coca-Cola’, is one of the world’s
largest manufacturing, retailing and marketing brands for non-alcoholic beverages. Founded in
1892 in Atlanta, Georgia in the United States, Coca-Cola have established the following vision
statement: “Our vision is to craft the brands and choice of drinks that people love, to refresh them
in body & spirit. And done in ways that create a more sustainable business and better shared future
that makes a difference in people’s lives, communities and our planet.” (Purpose & Company
Vision, 2020) After rapid growth over the last century, Coca-Cola currently manufacture and
distribute over 2,800 original products across the globe in over 200 countries (Nganga, 2012).
PepsiCo, Inc., often referred to as PepsiCo, are Coca-Cola’s greatest industry rivals, and their
rivalry is considered among the fiercest across all industries. PepsiCo is also one of the world’s
largest non-alcoholic beverage companies, boasting an array of food and beverage products across
200 countries. Founded in 1965, PepsiCo’s vision is the following: “Be the global leader in
convenient foods and beverages by winning with purpose” (Mission and Vision, 2020).
These two industry leaders and their working capital management will be the subject of
our comparative study over the course of this research paper. Working capital management, in
essence, is the management of working capital done with the objective of maximizing operational
efficiency. Working capital is the difference between a company’s current assets and their current
liabilities, and it serves as an indicator of a company’s operating efficiency as well as their financial
stability. Working capital management, therefore, is considered to be fundamental for a company’s
success both in terms of financial performance as well as operational performance. Working
capital management ratios include the inventory period, receivables period, payables period,
operating cycle, cash conversion cycle and net trade cycle. By using these ratios to maximize
operational efficiency, a business will be able to not only operate more smoothly, but also perform
significantly better financially and competitively (Hawley, 2020). Knowing these benefits as well
as the intense rivalry between Coca-Cola and PepsiCo, it is expected that the findings of this study
will enable us to draw significant and interesting conclusions about the two powerhouses of the
beverage industry.
 3

Literature Review
A study published by Fatima and Nobanee (2020) computed various financial data to get a
better understanding of PepsiCo performance after analyzing different ratios, to understand the
reason why people don’t invest in PepsiCo anymore. Hence, in this study they computed the data
of PepsiCo in four years using Yahoo Finance, measuring the ratios in long-term and short-term
firm’s capability. In the end, this study has shown that the main reason that prevents investors from
investing in PepsiCo is the decreases in the financial performance of the company in recent years
and the inefficiency in paying their debts also not utilizing all of the resources to make a profit.
In a similar study published by Nobanee along with Noor (2020), the financial performance
in four years of one of a well-known company that produces beverages all around the world known
as The Coca Cola Company was analyzed. This research focuses on computing different ratios to
analyze the financial state of Coca Cola Company to decide if the company performing is good or
bad in recent years. The results of this research indicate that Coca Cola organization has been
confronting liquidity issues during the previous three years as the current ratio, quick ratio, and
liquidity ratio have kept on declining. However, the organization expanded its usage of resources
to produce income from 2018 and 2019 when contrasted with earlier years, nonetheless, they
encountered a slight decline in effectiveness when gathering receivables. In the end, the Coca-Cola
Company is confronting liquidity and debt issues and most likely will at present be confronting
the issues in the future.
In a comparative study published by Sharma, the in-depth analysis of key financial ratios
of Coca-Cola and PepsiCo in India was used to assess the company's financial power, liquidity
conditions and operating performance. These financial ratios included liquidity ratios, activity
ratios, and profitability ratios. In terms of liquidity, Sharma found that the current ratio for PepsiCo
decreased between 2009 and 2011, before finally rising 2012. Coca-Cola recorded a higher current
ratio in 2010, 2011 and 2012. It was also found that Coca-Cola had a higher quick ratio in 2009
and 2012 due to having fewer liabilities, while PepsiCo recorded a higher quick ratio in 2010 and
2011 due to an increase in their current assets. The activity ratios also yielded mixed conclusions,
as PepsiCo only had a higher account receivable turnover ratio in 2009 and 2012 due to higher net
sales during those years. The inventory turnover generally favored Coca-Cola, as they recorded a
higher inventory turnover in every year except 2010. Finally, the profitability ratios conclusively
 4

favored Coca-Cola, as they recorded a higher gross profit ratio and net profit ratio over PepsiCo
every year in the given time period of the comparative study.

Data & Methodology

For the purposes of this comparative study, we will collect the financial data for The Coca-Cola
Company and PepsiCo in order to calculate various financial ratios for our companies. This means
that our data collection is online secondary research. With this in mind, the following financial
data was collected from the data published in the income statements, balance sheets and cash flow
statements of each company on Yahoo Finance.

Coca-Cola
Item Year
2019 2018 2017 2016
Sales 37,266,000 31,856,000 35,410,000 41,863,000

COGS 14,619,000 11,770,000 13,256,000 16,465,000

Operating Income 10,533,000 9,781,000 9,427,000 10,136,000

Net Income 8,920,000 6,434,000 1,248,000 6,527,000

Cash & Cash 11,175,000 15,964,000 20,675,000 22,201,000

Equivalents
Receivables 3,971,000 3,396,000 3,667,000 3,856,000

Inventory 3,379,000 2,766,000 2,655,000 2,675,000

Current Assets 20,411,000 30,634,000 36,545,000 34,010,000

Accounts Payables 3,804,000 2,498,000 2,288,000 2,682,000

Current Liabilities 26,973,000 29,223,000 27,194,000 26,532,000

Total Assets 86,381,000 83,216,000 87,896,000 87,270,000

 5

Total Liabilities 65,283,000 64,158,000 68,919,000 64,050,000

Long-Term Debt 27,516,000 25,364,000 31,182,000 29,684,000

Total Equity 21,098,000 19,058,000 18,977,000 23,220,000

Operating Cash 10,471,000 7,627,000 7,106,000 8,796,000

Flow

PepsiCo
Item Year
2019 2018 2017 2016
Sales 67,161,000 64,661,000 63,525,000 62,799,000

COGS 30,132,000 29,381,000 28,785,000 28,209,000

Operating Income 10,291,000 10,110,000 10,509,000 9,785,000

Net Income 7,314,000 12,515,000 4,857,000 6,329,000

Cash & Cash 5,509,000 8,721,000 10,610,000 9,158,000

Equivalents
Receivables 7,822,000 7,142,000 7,024,000 6,694,000

Inventory 3,338,000 3,128,000 2,947,000 2,723,000

Current Assets 17,645,000 21,893,000 31,027,000 27,089,000

Accounts Payables 8,013,000 7,213,000 6,727,000 6,158,000

Current Liabilities 20,461,000 22,138,000 20,502,000 21,135,000

Total Assets 78,547,000 77,648,000 79,804,000 74,129,000

Total Liabilities 63,679,000 63,046,000 68,823,000 62,930,000

Long-Term Debt 29,148,000 28,295,000 33,796,000 30,053,000

Total Equity 14,868,000 14,602,000 10,981,000 11,199,000

Operating Cash Flow 9,649,000 9,415,000 9,994,000 10,404,000

 6

List of Ratios and Formulas Used in This Analysis:

• Inventory Period = [Inventory] / (COGS / 365)

• Receivable Period = [(Receivables)] / (Sales / 365)

• Payables Period = (Payables/ COGS) x 365

• Operating Cycle = DSO + DIO

• Cash Conversion Cycle = CCC = DSO + DIO – DPO

• Net Trade Cycle = {(Receivables + Inventory - Payables)/Sales} x 365

• Operating Cash Flow/Total Assets

• Operating Cash Flow/Sales

• Current Ratio = Current Assets ÷ Current Liabilities

• Quick (Acid-Test) Ratio = (Current Assets – Inventories) ÷ Current Liabilities

• Cash Ratio = Cash ÷ Current Liabilities

• Debt Ratio = Total Liabilities ÷ Total Assets

• Debt to Equity Ratio = Total Labilities/ Total Equity

• LTD to E= Long Term Debt/ Total Equity

• Return on Equity = Net Income / Total Equity

• Return on Total Assets (ROA) = Net Income / Total Assets

• Profit Margin = Net Income / Sales

• Operating Income to Equity = Operating Income / Total Equity

• Operating Income to Total Assets = Operating Income / Total Assets

• Operating Income to Sales = Operating Income / Sales

 7

Results & Discussion

Excel file with all ratio calculations and figures (double-click to access):

Figure 1: Inventory Period (DIO)

Coca-Cola
Item Year
2019 2018 2017 2016
Inventory 3,379,000 2,766,000 2,655,000 2,675,000
COGS 14,619,000 11,770,000 13,256,000 16,465,000
DIO 59.30003037 73.10463186 85.77655055 84.36520966

PepsiCo
Item Year
2019 2018 2017 2016
Inventory 3,338,000 3,128,000 2,947,000 2,723,000
COGS 30,132,000 29,381,000 28,785,000 28,209,000
DIO 35.23325889 37.36859475 38.85912665 40.43442188

Inventory Period
100
90
80
70
60
50
40
30
20
10
0
2019 2018 2017 2016

Coca Cola PepsiCo

 8

The inventory period, otherwise referred to as the Days of Inventory Outstanding (DIO), is a
measure of the average number of days that a company’s products are held in their inventory before
being sold to customers. It is desirable for a company to hold products in their inventory for short
periods of time, meaning that lower values for the inventory period are preferable. From the graph
above, it can be observed that PepsiCo consistently has a lower inventory period each year,
indicating that they are more efficient in selling their products to customers than their main
competitors Coca Cola. It should also be noted that both companies have lowered their inventory
periods considerably over the last couple of years.

Figure 2: Receivable Period (DSO)

Coca-Cola
Item Year
2019 2018 2017 2016
Receivables 3,971,000 3,396,000 3,667,000 3,856,000
Sales 37,266,000 31,856,000 35,410,000 41,863,000
DSO 33.62014189 37.79878565 38.91072325 38.89376375

PepsiCo
Item Year
2019 2018 2017 2016
Receivables 7,822,000 7,142,000 7,024,000 6,694,000
Sales 67,161,000 64,661,000 63,525,000 62,799,000
DSO 38.90682973 40.35828414 40.31533691 42.5102366
 9

Receivable Period
45
40
35
30
25
20
15
10
5
0
2019 2018 2017 2016

Coca Cola PepsiCo

The receivable period, also known as the Days of Sales Outstanding (DSO), measures the average
number of days required for the company to collect receivables from customers. It is favorable for
the company to have lower values for the receivable period, as it indicates greater liquidity due to
being able to convert receivables to cash quickly. In this regard, it is clear that Coca Cola
consistently possess a lower receivable period than PepsiCo. This suggests that Coca Cola are able
to collect their receivables more quickly than their main competitor.

Figure 3: Payables Period (DPO)

Coca-Cola
Item Year
2019 2018 2017 2016
Accounts Payables 3,804,000 2,498,000 2,288,000 2,682,000
COGS 14,619,000 11,770,000 13,256,000 16,465,000
DPO 59.45520802 62.99939650 77.46559048 94.97640057

PepsiCo
Item Year
2019 2018 2017 2016
Accounts Payables 8,013,000 7,213,000 6,727,000 6,158,000
COGS 30,132,000 29,381,000 28,785,000 28,209,000
DPO 79.6791804 85.29980893 89.60705898 97.06441657
 10

Payables Period
120

100

80

60

40

20

0
2019 2018 2017 2016

Coca Cola PepsiCo

The payables period, also known as the Days of Payables Outstanding (DSO), is a ratio that
measures the average number of days a company takes to pay their suppliers. It is preferable for
companies to have a higher payables period, as this would indicate that the company is able to
hold their cash for longer before paying their suppliers. In this regard, PepsiCo consistently
outperforms Coca Cola by recording higher DSO values than their competitors every year between
2016 and 2019. This means that PepsiCo are able to hold their cash for longer periods than Coca
Cola, which puts them in a better position to spend their cash in other areas.

Figure 4: Operating Cycle

Coca-Cola
Item Year
2016 2017 2018 2019
DSO 33.62014189 37.79878565 38.91072325 38.89376375
DIO 59.30003037 73.10463186 85.77655055 84.36520966
Operating Cycle 92.92017226 110.9034175 124.6872738 123.2589734

PepsiCo
Item Year
2016 2017 2018 2019
DSO 38.90682973 40.35828414 40.31533691 42.5102366
 11

DIO 35.23325889 37.36859475 38.85912665 40.43442188

Operating Cycle 74.14008862 77.72687889 79.17446356 82.94465847

Operating Cycle
140

120

100

80

60

40

20

0
2019 2018 2017 2016

Coca Cola PepsiCo

The operating cycle is a ratio that measures a company’s efficiency in their process of producing
products, selling them to customers, and finally collecting their receivables in the form of cash. A
lower value for the operating cycle indicates greater efficiency in this repetitive process as well as
superior working capital management. From the figure above, it can be observed that PepsiCo
consistently has lower and more favorable values for their operating cycle in comparison to Coca
Cola. Furthermore, while Coca Cola experienced an increase in their operating cycle from 2016 to
2017, PepsiCo has been able to consistently lower their operating cycle every year over the last
four years.

Figure 5: Cash Conversion Cycle

Coca-Cola
Item Year
2016 2017 2018 2019
DSO 33.62014189 37.79878565 38.91072325 38.89376375
DIO 59.30003037 73.10463186 85.77655055 84.36520966
DPO 59.45520802 62.99939650 77.46559048 94.97640057
Cash Conversion 33.46496424 47.90402102 47.22168332 28.28257284
Cycle
 12

PepsiCo
Item Year
2016 2017 2018 2019
DSO 38.90682973 40.35828414 40.31533691 42.5102366
DIO 35.23325889 37.36859475 38.85912665 40.43442188
DPO 79.6791804 85.29980893 89.60705898 97.06441657
Cash Conversion -5.539091788 -7.572930034 -10.43259543 -14.11975809
Cycle

Cash Conversion Cycle

60
50
40
30
20
10
0
-10
-20
2019 2018 2017 2016

Coca Cola PepsiCo

The cash conversion cycle is a ratio that measures how efficiently a company is able to convert its
inventory into sales and subsequently into cash. The cash conversion cycle is comprised of adding
together the DSO and DIO before subtracting the DPO. Since it is favorable to have lower values
of DSO and DIO, and conversely favorable to have higher values of DPO, it is clear that lower
values for the cash conversion cycle are favorable for a company. From the above figure, it can be
interpreted that PepsiCo not only has lower cash conversion cycle values than Coca Cola every
year, but also that their values are negative. This means that PepsiCo is able to convert their
inventory into sales and then into cash much more efficiently than their industry rival. However,
it should be noted that over the last couple of years, PepsiCo’s cash conversion cycle has been
increasing (from -7.57 in 2018 to -5.539 in 2019), whereas Coca Cola has drastically lowered their
cash conversion cycle over the same period from 47.9 to 33.46.
 13

Figure 6: Net Trade Cycle

Coca-Cola
Item Year
2016 2017 2018 2019
Net Trade Cycle 33.55910948 41.58175657 41.98141637 34.7311222

PepsiCo
Item Year
2016 2017 2018 2019
Net Trade Cycle 18.94194175 18.63927588 17.25622864 17.10300621

Net Trade Cycle

45
40
35
30
25
20
15
10
5
0
2019 2018 2017 2016

Coca Cola PepsiCo

The net trade cycle is a working capital management ratio that indicates how long it takes for a
company’s cash inputs to go through their trade cycle and come back as cash again. Therefore, it
is favorable to have lower values for the net trade cycle. From the figure above, it can be seen that
PepsiCo possesses a much lower net trade cycle compared to Coca Cola. This indicates that
PepsiCo’s cash inputs spend a shorter amount of time in their trade cycle and comes back into the
company as cash more quickly than Coca Cola. However, it should be noted that PepsiCo’s net
 14

trade cycle has been continually increasing since 2016, whereas Coca Cola has been lowering their
net trade cycle every year since 2017.

Liquidity Ratios
Coca-Cola
Item Year
2016 2017 2018 2019
Current Ratio 1.281848334 1.343862617 1.048283886 0.756719683
Quick Ratio 1.181026685 1.246230786 0.953632413 0.631446261
Cash Ratio 0.836763154 0.760278003 0.546282038 0.414303192

PepsiCo
Item Year
2016 2017 2018 2019
Current Ratio 1.281712799 1.51336455 0.988933056 0.862372318

Quick Ratio 1.152874379 1.369622476 0.847637546 0.699232687

Cash Ratio 0.433309676 0.517510487 0.393938025 0.269243927

The current ratio measures a company’s ability to meet short-term obligations with its current
assets. Coca Cola has a superior current ratio in 2016 and 2018, but PepsiCo was superior in 2017
and 2019. The quick ratio indicates a company’s ability to cover its current liabilities using its
liquid assets. Coca Cola had a more favorable quick ratio in 2016 and 2018, but PepsiCo was
superior in this regard in 2017 and 2019, although both have decreased considerably since 2017.
Coca Cola consistently has a superior cash ratio, meaning they have a greater ability to pay off
short-term liabilities than PepsiCo (Hayes, 2020).

Debt (Leverage) Ratios

Coca-Cola
Item Year
2016 2017 2018 2019
 15

Debt Ratio 0.733929185 0.784097115 0.770981542 0.755756474

Debt to Equity 2.758397933 3.631712073 3.366460279 3.094274339
Ratio
Long-Term Debt 1.278380706 1.643146967 1.330884668 1.30419945
to Equity Ratio

PepsiCo
Item Year
2016 2017 2018 2019
Debt Ratio 0.84892552 0.86240038 0.81194622 0.81071206

Debt to Equity 5.619251719 6.26746198 4.317627722 4.282956685

Ratio
Long-Term Debt 2.683543173 3.077679628 1.937748254 1.960451977
to Equity Ratio

The debt ratio measures the degree to which a company finances its assets using debt. PepsiCo
consistently has a higher debt ratio each year, meaning that they are more reliant on debt. The debt-
to-equity ratio represents a company’s financial leverage in terms of the degree to which debt and
equity is financing its assets. PepsiCo has a higher debt ratio, meaning they rely more debt and
equity to finance their assets. The long-term debt to equity ratio that measures a company’s a long-
term debt against the shareholders’ equity. PepsiCo is higher in this area each year. This suggests
the PepsiCo is generally riskier than Coca Cola.

Profitability Ratios
Coca-Cola
Item Year
2016 2017 2018 2019
Return on Equity 0.281093885 0.065763819 0.337601007 0.42278889
Return on Total 0.074790879 0.014198598 0.077316862 0.103263449
Assets
Profit Margin 0.155913336 0.035244281 0.201971371 0.239360275

PepsiCo
 16

Item Year
2016 2017 2018 2019
Return on Equity 0.565139745 0.442309444 0.857074373 0.491928975

Return on Total 0.085378192 0.060861611 0.161176077 0.093116223

Assets
Profit Margin 0.10078186 0.076458087 0.193547888 0.108902488

The return on equity ratio demonstrates a company’s ability to generate revenue from its equity
investments. PepsiCo is higher each year in this regard, meaning that their investments yield more
returns compared to Coca Cola. The return on total assets ratio indicates the profitability of a
company’s assets. PepsiCo is superior in 2016, 2017, and 2018, but falls short to Coca Cola in
2019. The profit margin is a general measure of profitability (Kenton, 2020). PepsiCo had a higher
profit margin in 2016 and 2017 but fell short to Coca Cola over the last two years.

Operational Profitability Ratios

Coca-Cola
Item Year
2016 2017 2018 2019
Operating Income 0.436520241 0.496759235 0.513222794 0.499241634
to Equity
Operating Income 0.116145296 0.107251752 0.117537493 0.121936537
to Total Assets
Operating Income 0.242123116 0.26622423 0.307037921 0.282643697
to Sales

PepsiCo
Item Year
2016 2017 2018 2019
Operating Income 0.873738727 0.957016665 0.692370908 0.692157654
to Equity
Operating Income 0.131999622 0.131685129 0.130202967 0.131017098
to Total Assets
 17

Operating Income 0.155814583 0.165430933 0.156353907 0.153228808

to Sales

The operating income to equity and operating income to total assets measure a company’s returns
against its equity and total assets respectively, thus being a measure of operational profitability.
PepsiCo recorded higher values in these areas over the last four years. The operating income to
sales ratio is the degree to which sales contribute to income. Coca Cola is higher in this regard,
meaning that their sales have a greater contribution to their operating income when compared to
PepsiCo.

Cash Flow Ratios

Coca-Cola
Item Year
2016 2017 2018 2019
OCF/Total Assets 0.10079 0.08085 0.09165 0.12122
OCF/Sales 0.210113943 0.200677775 0.239421145 0.280979982

PepsiCo
Item Year
2016 2017 2018 2019
OCF/Total Assets 0.140349931 0.125231818 0.121252318 0.122843648

OCF/Sales 0.165671428 0.157323888 0.145605543 0.143669689

The operating cash flow to total assets ratio is a cash flow ratio that “measures the amount of
operating cash flow you generate for every dollar of assets you own. The higher the ratio, the more
efficiently you use your assets.” (Keythman, 2017). Therefore, based on the above figures, it can
be interpreted that PepsiCo generates a greater operating cash flow for every dollar of assets owned
by PepsiCo, as they boast a greater operating cash flow to total assets ratio every year over the
course of the given time period. On the other hand, Coca-Cola has recorded a greater operating
cash flow to sales ratio every year since 2016. This means that Coca-Cola has a superior ability to
turn its sales into liquid cash.
 18

Conclusion
Based on our findings over the course of this project, several comparative conclusions can
be drawn regarding the working capital management, liquidity, leverage, profitability and cash
flows of Coca-Cola and PepsiCo. Firstly, it can be reasonably concluded based on the working
capital management ratios that PepsiCo has more efficient working capital management. PepsiCo
recorded a lower inventory period, operating cycle, cash conversion cycle and net trade cycle while
also possessing a greater payables period. Coca-Cola only edged PepsiCo in its receivable period,
where Coca-Cola had a lower a DSO over their industry rivals.
The liquidity ratios yielded mixed results, mainly due to the fact that while Coca-Cola
boasted a superior current ratio and quick ratio in 2016 and 2018, PepsiCo were superior in 2017
and 2019. However, Coca-Cola consistently had a greater cash ratio, meaning that they possessed
a greater ability to pay off short-term liabilities over PepsiCo (Al Ghanem et al. 2021).
The debt ratios on the other hand depicted a clear winner, as Coca-Cola was found to
possess a lower debt ratio, debt-to-equity ratio and long-term debt to equity ratio than PepsiCo. It
was thus clear that PepsiCo was not only significantly more reliant on debt than Coca-Cola, but
also that they were riskier, as indicated by their long-term debt to equity ratio (Alali et al. 2021).
The profitability and operational profitability ratios also resulted in mixed conclusions.
PepsiCo recorded a higher return on equity every year between 2016 and 2019, and also recorded
greater return on total assets ratios in every year apart from 2019, thereby suggesting that PepsiCo
generally tends to yield greater returns from their equity and total assets in comparison to Coca-
Cola. PepsiCo also had a greater profit margin in 2016 as well as 2017, but Coca-Cola
outperformed them in this regard during the last two years. Furthermore, PepsiCo also recorded
greater values for their operating income to equity and operating income to total asset ratios for
each of the last four years, indicating that PepsiCo is likely to be a better investment. On the other
hand, Coca-Cola recorded higher values for their operating income to sales ratio each year,
indicating that their sales have a greater contribution to their operating income.
Finally, the two cash flow ratios that were used in this study showed mixed results, which
each company dominating one ratio each over the last four years. PepsiCo recorded a greater
operating cash flow to assets ratio, meaning that they generated more cash for every dollar of their
assets. However, Coca-Cola recorded higher values for the operating cash to sales ratio, indicating
that they are able to turn their sales into cash more efficiently (Alhosnai et al. 2021).
 19

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