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Free Financial Management Importance Essay Sample
Financial management is important for any company that is profit oriented and would like to grow and expand. Managing the financials of an organization involves the management of the cash flows in the organization, expenses, as well as the resources of the organization. Coca cola and Pepsi companies are two companies operating in the beverage industry. The companies are competitors with each company competing for the market share of the industry. Financial management is important for these two companies because it helps them determine not only their performance, but also their ability to grow, expand and gain a larger market share. This paper examines the financial management of Coca cola and Pepsi companies.
Discussion: Ratios
The current ratio of an organization shows the liquidity position of the organization. It is calculated by dividing the current assets by the current liabilities. Liquidity ratios indicate the ability of the company to meet its obligations as they occur. A high current ratio of a firm is recommended because it means that the company realizes more current assets as compared to current liabilities and it is therefore able to meet its obligations as they fall due. Given the financial report of both Coca cola and Pepsi companies, their current ratios can be calculated and found to be 1.3 and 1.7 respectively. Basing on these ratios, Coca Cola Company has a smaller capability to meet its obligations as they fall due as compared to Pepsi Company. This is because the current ratio of Coca Cola Company is smaller than that of Pepsi Corporation. The quick ratios of the companies are 1.2 and 0.9 for Pepsi and Coca Cola companies respectively. The quick ratio, just like the current ratio indicates the liquidity of an organization. The Coca Cola Company has a smaller ratio than Pepsi signifying the inability of the company to quickly turn assets to liquid cash for meeting its obligations.
Profitability ratios
There are many profitability ratios of a company. The ratios include the gross profit margin, the net profit margin, return on assets and return on equity. All these indicators show the level of profit that an organization realizes in the course of its operations. The gross profit margin of Coca Cola Company and Pepsi Company for the financial year 2009 is 68.2% and 49.0%. The profit of Coca Cola Company is higher than the profits of Pepsi Company. The net profit margin for the companies is 22.0 and 4.6 for Coca Cola Company and Pepsi Corporation respectively. Thus, Coca Cola Company has a higher profit and therefore is more profitable than Pepsi Corporation. The effective tax rate is also used to indicate the profitability of a company. The higher the tax rate, the higher the profitability of the company. The tax rates are 5.7 and 22.8 for Pepsi Corporation and Coca Cola Company respectively. Therefore, Coca Cola Company is more profitable than Pepsi Corporation.
Additionally, Coca Cola Company had a higher pretax profit margin of 28.9 as compared to Pepsi Corporation whose pretax profit margin was only 5.7. The pretax profit margin indicates the profit of a company before taxes are deducted. From the figures, it is evident that Coca Cola Company, despite realizing higher revenues, it also realizes higher taxes that significantly reduce the gross profit of the organization when compared to Pepsi Corporation.
Cash flow indicator and investment valuation indicators
The return on assets ratio is 1.0 for Pepsi and 0.6 for Coca Cola Company. This indicates that Pepsi Company realized a higher return on its assets as compared to Coca cola Company. The return on invested capital was 23.4% for Coca Cola Company while for Pepsi Corporation, it was 16.6%. The essence of this is that Coca Cola Company realized more returns on the invested capital as compared to Pepsi Corporation.
The receivable turnover is 9.2 and 9.1 for Pepsi and Coca cola companies respectively. This ratio indicates the level of receivables that is received in the organization. Basing ion this ratio, both companies do have almost a similar level of receivables. The inventory turnover is 12 and 4.3 for Pepsi Corporation and Coca Cola Company respectively. This indicates that the inventories of Pepsi Corporation have a higher level of turnover as compared to the inventories of Coca Cola Company. However, Coca Cola Company has a higher inventory as a percentage of revenue as compared to Pepsi corporation (7.6 and 4.5) respectively. However, the cash flow per share is higher for Pepsi Company ($5.63) as compared to Coca Cola Company ($3.5). This is in line with the cash per share, which is $3.05 and $4.09 for Coca Cola and Pepsi corporations respectively. Following these ratios, the shareholders of Pepsi seem to be more satisfied than the stockholder in Coca Cola Company, although Coca Cola Company seems to be performing better than Pepsi Corporation in terms of revenue and profit.
Investment options
Every investor would like to invest his or her capital in a profitable venture. The investors always look for profit maximization that leads to higher returns on their investment despite the level of certainty and risks involved. The investors in the tow companies can invest in stocks. The investors will be interested in the financial performance of the companies in terms of profits, revenue, return on assets and the earnings per share. The financial analysis of the two companies, Coca Cola and Pepsi reveals that the earnings per share are 3.05 and 4.09, returns on assets, 14.0 and 4.5 and a return on invested capital of 22.9 and 7.8 respectively for the two companies. The outcome indicates that although the returns per share in Coca Col accompany are less productive, the returns on assets are more as compared to Pepsi. Therefore, as an Investor, it is better to invest in Coca Cola Company.
Choosing between the above two options: non-financial criteria
The non financial criterion for investment does not consider financial results of the firms, but other factors. Investors considering non financial information of a company do consider several factors. Some investors base their investment options on historical data such as historical revenues, and performance rather than the financial performance. Others consider low leverage and future expectations that are consistent with demographics. Considering that expenses and services should be proven with a diverse base of sources to serve the investor, the investor can choose to invest in Coca Cola Company.
