Financial Analysis On The Soft Drink Industry

1805 Words Jul 31st, 2015 8 Pages
Financial Analysis:
ROE:
The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation 's profitability by revealing how much profit a company generates with the money shareholders have invested. (Text book Definition). ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder 's Equity
Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder 's equity does not include preferred shares. Return on equity (ROE) is one of the most important indicators of a firm 's profitability. ROE shows how well a company uses investment funds to generate earnings growth and is an indicator of potential dividend growth. By completing a ROE analysis using the DuPont formula, an investor can understand the key drivers of that return: profitability, operating efficiency, and financial leverage.
The importance of the DuPont analysis becomes clear when examining the soft drink industry. Three companies combined hold almost 90% of the entire market share of the carbonated soft drink in the U.S. - Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP) and Dr. Pepper Snapple (NYSE:DPS). All three have an ROE of approximately 27-28%, suggesting that they are evenly matched in terms of profitability and potential growth. However, a closer examination using the DuPont equation shows some important differences.
DuPont Analysis
Below is the DuPont…
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