Ratio Analysis, DDM, Economical Analysis, Intro
Ratio Analysis, DDM, Economical Analysis, Intro
Ratio Analysis, DDM, Economical Analysis, Intro
P/E ratio demonstrates the amount that an investor in common shares pay for each dollar
invested in current earning:
F22Q F22Q3 F22Q2 F22Q1 Fiscal Year- F21Q4 F21Q3 F21Q2 F21Q1 Fiscal Year-2021
4 2022
27.12 25.88 28.47 27.84 27.12 27.63 27.47 30.49 32.01 27.63
Forward P/E Ratio:
1) Forward P/E based the EPS for the next four quarters:
Current Stock Price = $59. 02
EPS for the next 4 quarters = 2.25 + 2.38 + 2.21 + 2.30 = $9.14
Forward P/E based on the EPS for the next four quarters = 59.02/9.14 = 6.46
As analyzed above , due to the high volatility of earnings during the different business cycles of
the food and beverage industry, all the four different methods lead to slightly different P/E ratios
except for the Forward P/E ratio based on the next 4 quarters which is much less than the
others(6.46). This is because the deeper and more calibrated the time period observed, the more
volatile earnings tend to be. In that case, analysts lean more towards the calculation of P/E ratio
using the Normalization method.
Table of essential values for the Normalization Method(In Millions except per share Data)
Normalization Method:
The calculation of a normalized EPS allows the adjustment of earnings volatility, which arises
due to varying business cycles.
Po 1−b
Justified P/E ratio = = where ,
E 1 r −g
b = retention ratio = 1 – Dividend Payout ratio
r = required rate of return as obtained using CAPM
g = Dividend growth rate
Given that the justified P/E ratio is much below the market value of P/E ratio, which is 23.82,
garners up enough credence to consider the shares of Coca-Cola Company as undervalued.
Historical Valuation of multiple Ratios (Annual Filings 10-K Report, 2022 -2018)
Ratios Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31,2019 Dec 31, 2018
1) P/E Ratio: As analyzed previously, the P/E ratio for Coca-Cola Co. fell from 2020 to
2021 and decreased again from 2021 to 2022(Appendix 4a). On the other hand, For
Pepsi Co. , its P/E ratio increased from 2020 to 2021 but then it fell from 2021 to 2022
but by a small percentage. A low P/E ratio would be desirable to both companies since it
is more attractive to investors. Both of them have roughly the same P/E ratio with
PepsiCo’s P/E ratio being slightly lower by 0.68%, in 2022.
2) P/S Ratio : Generally, a high price to sales ratio bears the archetype of that a company
is relatively inefficient in making optimal use of investors’ funds to stimulate revenue.
Coca-Cola experienced a rise in its P/S ratio from 2020 to 2021 but then its P/S ratio
plummeted largely from 2021 to 2022 while that of PepsiCo spiked up from 2020 to 2021
and fell by only a small percentage from 2021 to 2022. From that sense, a stock
investment in PepsiCo instead of Coca-Cola may imply a greater optimal use of the
investors’ funds, ceteris paribus.
3) P/BV Ratio : A higher P/BV ratio means that the stock is more expensive, but it could
also mean propound that the overvaluation of the stock is due to potential of high future
growth rates. Coca-Cola witnessed a rise in its P/BV ratio from 2020 to 2021 but it
dropped down significantly from 2021 to 2022. For PepsiCo, there was an increase from
2020 to 2021 and followed by a slight decrease from 2021 to 2022. According to the
most recent data, PepsiCo’s stock is more expensive and with Coca-Cola having a lower
P/BV Ratio, this could mean a credible investment prospect since value investors aiming
to generate stable returns when the market value reaches the true book value, are more
inclined to choose a company having a lower P/BV ratio.
Comparison of Ratios with that of the Industry and Sector:
The above metric are useful in assessing the valuation of Coca-Cola’s stock but its
investment viability can be further assessed through from a general comparison of
ratios from that of the beverages Industry and sector using the above ratios and from
a relative valuation perspective using specific comparative formula, a concept we shall
explain in more profound detail on the next part.
Industry and Sector Ratio Comparison Table (Annual 10-K Filings report,2018-2022)
P/E Ratio
P/S Ratio
P/BV Ratio
MVc/VIc( i.e P/E Ratio) = average multiple of the market value of the comparable company
Workings:
(a) = (28.0 + 21.27)/2 = 24.635 (Same method of calculation to the other columns)
Coca-Cola’s Stock Price= $57.69 ( From Yahoo Finance, as of 03:47 p.m. Market open, 20th
December 20, 2023)
(b) Trailing Earnings Per Share(EPS) = 57.69/Average multiplier = $2.34
(c) Forward EPS = 57.69/average multiplier = $2.85
(d) Selling price = 57.69/ average multiplier =$21.81
(e) Book Value per share = 57.69/ average multiplier = $7.36
Equals Estimated Market Value for Coca-Cola =Average multiplier × VIt
6) Investment decision
As it can be analyzed in appendix 6A, despite PepsiCo yields higher revenues than Coca-Cola all
along from 2018 to 2022 and prospectively in the upcoming fiscal years as well, it would be
financially unwise to not consider the latter as a market leader in the Food & Beverages Sector.
However, the operations of Coca-Cola take place at higher margins than Pepsi, given its
profound focus on beverages, higher operational efficiency and its commendable competitive
pricing power given its highly lucrative brand development strategy. Furthermore, the much
larger revenue gap in favor of PepsiCo is due to its larger portfolio that comprises not only of
beverages but also of nutritional goods and other snacks. However, Coca-Cola has a greater
dividend yield of 3.05 % as compared to PepsiCo. Moreover, with Coca-Cola having a much less
dividend payout ratio than PepsiCo, the former can use this financial leverage point to be more
flexible in reinvestment into its business activities.
On a final note, after analyzing its internal environment, SWOT analysis, details calculations of
the equity valuation of Coca-Cola, its FCFE and FCFE, growth rate using the Gordon Growth
Mode, and through its profound analysis of key financial ratios, it can be concluded that for a
long-term investment, Coco-Cola will be a worthwhile investment in itself but also a more
profitable one than its main rival PepsiCo given that it has a greater potential for stock stability
and high-dividend yielding power. Given its elite brand equity and with Warren Buffet having
this stock among one of its top holdings, Coca-Cola can be classified as a reliable investment for
long-term investors.