Problem 1-11A Computing and interpreting return on assets (3)
Coca-Cola and PepsiCo both produce and market beverages that are direct competitors. Key financial figures for these businesses for a recent year follow.
| Key Figures ($ millions) | Coca-Cola | PepsiCo |
| :----------------------- | :-------- | :-------- |
| Sales | $45,754 | $91,471 |
| Net Income | 10,714 | 9,074 |
| Average assets | 95,233 | 90,341 |
Required
1. Compute return on assets for (a) Coca-Cola and (b) PepsiCo.
2. Which company is more successful in its total amount of sales to consumers?
3. Which company is more successful in returning net income from its assets invested?
Answer (2)
Coca-Cola's Return on Assets (ROA) is approximately 0.1125, while PepsiCo's ROA is about 0.1004. PepsiCo has higher sales than Coca-Cola, but Coca-Cola is more efficient in generating net income from its assets. Therefore, Coca-Cola outperforms PepsiCo in terms of ROA despite lower sales.
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Calculate Coca-Cola's Return on Assets: RO A C oc a − C o l a = 95 , 233 10 , 714 ≈ 0.1125
Calculate PepsiCo's Return on Assets: RO A P e p s i C o = 90 , 341 9 , 074 ≈ 0.1004
Compare sales: PepsiCo ($91,471 million) has more sales than Coca-Cola ($45,754 million).
Compare ROA: Coca-Cola (0.1125) is more successful in returning net income from its assets than PepsiCo (0.1004).
Explanation
Understanding the Problem We are given the sales, net income, and average assets for Coca-Cola and PepsiCo. We need to compute the return on assets (ROA) for both companies, determine which company has more sales, and determine which company is more successful in returning net income from its assets.
Defining Return on Assets (ROA) The return on assets (ROA) is calculated by dividing the net income by the average assets. This ratio indicates how efficiently a company is using its assets to generate profit.
Calculating Coca-Cola's ROA For Coca-Cola, the ROA is calculated as follows: RO A C oc a − C o l a = A v er a g e A sse t s C oc a − C o l a N e t I n co m e C oc a − C o l a = 95 , 233 10 , 714 ≈ 0.1125 This means that for every dollar of assets, Coca-Cola generates approximately 11.25 cents in net income.
Calculating PepsiCo's ROA For PepsiCo, the ROA is calculated as follows: RO A P e p s i C o = A v er a g e A sse t s P e p s i C o N e t I n co m e P e p s i C o = 90 , 341 9 , 074 ≈ 0.1004 This means that for every dollar of assets, PepsiCo generates approximately 10.04 cents in net income.
Comparing Sales Comparing the sales of Coca-Cola and PepsiCo, we have: Coca-Cola Sales = $45,754 million PepsiCo Sales = $91,471 million PepsiCo has significantly higher sales than Coca-Cola.
Comparing ROA and Determining Success Comparing the ROA of Coca-Cola and PepsiCo, we have: Coca-Cola ROA ≈ 0.1125 PepsiCo ROA ≈ 0.1004 Coca-Cola has a higher ROA than PepsiCo. This indicates that Coca-Cola is more efficient in generating net income from its assets compared to PepsiCo.
Final Answer Coca-Cola's Return on Assets is approximately 0.1125, and PepsiCo's Return on Assets is approximately 0.1004. PepsiCo has more sales ($91,471 million) than Coca-Cola ($45,754 million). Coca-Cola is more successful in returning net income from its assets invested, as its ROA is higher than PepsiCo's.
Examples
Understanding Return on Assets (ROA) is crucial in the business world. For instance, if you're deciding where to invest your money, comparing the ROA of different companies can help you determine which company is using its assets more efficiently to generate profits. A higher ROA generally indicates better management and profitability, making it a key factor in investment decisions. This concept extends beyond just stock investments; it's also relevant in evaluating the performance of different departments within a company or assessing the efficiency of various business strategies.
