527 Millennium Building Applegate Avenue corner Linden Brooklyn, New York 06 April 2008 Ms. Martha and Mr. Fred Greenfield #145 Linden Suites Washington, California
Dear Sir and Madam,
Greetings! It is a pleasure to inform you of my final decision regarding the investment choice between Coca-cola and Pepsi stocks. After a thorough analysis of these two companies’ financial statements and computation of their respective financial ratios, I would like to recommend Pepsi shares to be a better investment alternative indicated by its better liquidity coupled with higher returns to equity.
Attached with this letter is a table highlighting the two business organizations’ computed financial ratios including current, quick, inventory, debt, debt to equity, net profit margin, return on assets, and return on equity ratios. Current and quick ratios denote the company’s liquidity or its ability to pay its immediate obligations should they become due immediately. In both ratios, Pepsi emerged to be superior noting that even without its inventories. its current assets can more than pay-off all its short-term liabilities. In terms of moving its inventories to the market, Coca-Cola shows advantage because of its lower inventory ratio. Pepsi and Coca-Cola display always the same capital structure with creditors and investors having 50-50 contribution in its assets. It should be noted that both companies have 0.50 debt to equity ratios indicating that there is an equal share between creditors and equity holders. Profitability ratios including net profit margin, return on assets, and return on equity shows that Pepsi is performing better. Even though Coca-Cola has a higher net profit margin and a stronger cost management techniques, this is offset by Pepsi’s higher return on assets and return on equity. It should be noted that the net income of Pepsi generated more value to the company’s resource and investors.
The higher return on equity has become the primary basis of this recommendation. Realizing that the goal of a business organization is to maximize shareholder wealth, it is important that it shows a high return on equity. For prospective investors like you, this is important to note as the return on equity measures how much the return on your investment in the company’s stocks.
Attach herewith is the Pepsi and Coca-Cola’s computation of financial ratios. Please, don’t hesitate to contact me should you have any queries.
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Attachment: Computation of Pepsi and Coca-Cola’s Financial Ratios