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Subject: Analyzing Inventory Ratios
INVENTORIES RATIOS MEMORANDUM
Inventory Turnover
Inventory turnover mainly implies or informs the company about its pricing strategy and the supplier relationships to the product life cycle and promotions, and thus it’s essential for a company to know either way how its sales and that’s this will turn to inform how the company would sail. According to Fernando (2021), inventory turnover is mainly a financial ratio that shows how many times a company has sold and replaced its inventory during a specific period. Calculating the inventory turnover ratio for an organization is essential as it helps them make better decisions about marketing, manufacturing, pricing, and purchasing new inventory.
Looking at the data for both companies, Coca-Cola and Pepsi, for the quarter that ended in September 2021, the inventory turnover was 1.23 (Coca-Cola, 2019) and 2.01, respectively. For the last two years, Coca-Cola has had a decrease in inventory turnover whereby in 2019, the inventory turnover was 4.53, while at the end of the fiscal year 2020, the inventory turnover was 4.04 (Guru Focus, 2021). The same applies to Pepsi as its inventory turnover also decreased over the two years 2019 and 2020 with 9.32 and 8.46, respectively.
The inventory turnover tends to differ significantly among various industries. However, in the beverage industry, a high ratio indicates a fast-moving inventory, and on the other hand, a low ratio suggests that there are slow-moving or, at times,obsolete inventories in the company’s stock. A decrease in Coca-Cola and Pepsi’s inventory turnover indicates that its products were sold slower than they used to in the previous years. The shelf life of Coca-Cola’s products as long as the product takes years to expire but still faced trouble in selling their product in the last two years but all in all it was still a good ratio. One thing I believe resulted in a decrease in the company’s inventory turnover was the global pandemic that hit the world and was discovered in 2020, which resulted in most consumers not buying products from the company. Looking at Pepsi’s inventory turnover, we can conclude that it was selling its inventories twice as fast as Coca-Cola, and this was because of the product portfolio between the two companies. Pepsi mainly sells a wide range of products, but they primarily sell to the retailers, and most of them tend to have a short expiration date. On the other hand, Coca-Cola mainly sells its products to various bottling companies located worldwide.
Average Days in Inventory
The average days in inventory ratio is related to the inventory turnover and mainly measures how many days a company takes in selling all its inventory. According to TradeGecko (2020), calculate the inventory turnover period. It provides valuable information and allows the company to assess how they manage their inventories and how effectively they run their businesses, and helps identify various areas that need improvement. A low number of average days calculated in the beverage industry implies that the company is selling its inventories within a certain period.
From the data calculated, the average days in inventory for Coca-Cola for the quarter that ended in September 2021 was 74.14, why for Pepsi was 45.50. for the past two years, 2020 and 2019, the average days in inventory for Coca-Cola company were 90.28 days and 80.57 days, while Pepsi was 43.10 and 39.16 days, respectively. Looking into this data, we can conclude that Pepsi had much better ratios than Coca-Cola company, and the same way the inventory turnover was affected by the COVID-19 pandemic in 2020, the average days in inventory were also less efficient.
Companies Managing Inventories
The primary role of inventory at Pepsi is mainly ensuring that the specific designs the company is manufacturing can fit into the market. With its wide variety of products to its consumers, Pepsi tends to tailor different components such as bottle caps and even mix in the final product to be sold into the market. On the other hand, Coca-Cola mainly takes advantage of various discounts provided in obtaining raw materials in bulk for its production units. This plays a constant supply of raw materials and is readily available and prevents cost inflation. High inventory turnover for Coca-Cola and Pepsi is mainly brought about by consumers being satisfied that they have good products in the market, and other factors could play in shortages of the product such as transport but not production. With this, we can see Pepsi having better ratios than Coca-Cola.
References
Coca-Cola. (2019, October 24). Balance Sheet. The Coca-Cola Company. https://investors.coca-colacompany.com/financial-information/balance-sheet
Fernando, J. (2021, October 5). Inventory turnover definition. Investopedia. https://www.investopedia.com/terms/i/inventoryturnover.asp
Guru Focus. (2021). KO Cost of Goods Sold | Coca-Cola Co – GuruFocus.com. Www.gurufocus.com. https://www.gurufocus.com/term/COGS/KO/Cost-of-Goods-Sold/Coca-Cola-Co
TradeGecko. (2020). Inventory days formula: how to calculate Days Inventory Outstanding. Tradegecko.com. https://www.tradegecko.com/inventory-management/days-inventory-outstanding
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