Coca-Cola's Lower Return on Equity Explained

Granted that Coca-Cola is a huge company with many subsidiaries however it cannot still beat PepsiCo on many aspects especially in terms of return on equity.  Both companies are diversified when it comes to product sales but it is still PepsiCo that prevails. 

The average operating margin of Coca-Cola KO + 2.33% was 22% as compared to PepsiCo PEP + 2.75%'s 14% in the last three years.   In spite of this advantage in the margin, Coca-Cola's ROE (return on equity) for 2014 bear 22%, lower than the 31% ROE produced by PepsiCo.  Coca-Cola has higher margins than PepsiCo but it seems that the latter is using its capital more effectively leading to higher return on invested capital, with its debt/equity mix works in favor of its equity shareholders, generating a higher ROE as compared to Coca-Cola, according to Forbes.

It is understood that Coca-Cola's operating margin has consistently stayed well above of what PepsiCo had for the last three years.  Much of this can be credited to its higher gross margin.

But revenues employed by Coca-Cola per unit of capital are much lower compared to PepsiCo and have been sliding over the past three years.  These lower capital turns wipe out the margin advantage and lead to a lower return on capital employed.

The Coca-Cola Corporation and PepsiCo, Inc. tender different benefits depending on investor's preference and goals.  Coca-Cola presents little risk proposition with a higher dividend yield.  PepsiCo has superior growth prospects, better efficiency ratios, more decent suggested growth, generally superior relevant valuation and more diversification of offered products, according to Investopedia.

Analysts are typically optimistic on both companies, and neither is remarkably different from the other in any major financial analysis metric.  In total, PepsiCo has a stronger bull thesis, but the most attractive element of either thesis is the dividend yield, and Coca-Cola's dividend yield is materially higher than PepsiCo's.

Coca-Cola and PepsiCo are both full-blown companies with modestly optimistic outlooks, but PepsiCo has a more powerful growth profile. Over the past year ending June 2015, Coca-Cola's total income plunged 1.8%.  Its net income over the same period dropped 17%. 

PepsiCo's income improved 4% for over a year ending June 2015 while net income grew at 8.6%.  Coca-Cola has delivered 7.7% compounding annual growth over the past 10 years but surpassed by PepsiCo's 8.6%.  Analysts expect Coca-Cola's revenue to grow 5.8% in 2016, with 4.22% compounding annual growth over the next five years.

Consensus analyst approximates call for 8.6% earnings per share (EPS) growth from PepsiCo, coming after a 5.9% compounding growth over the next five years.  Neither company can be regarded as high-growth, but PepsiCo has a clear advantage in historical and expected growth for both the top line and profits.

PepsiCo is more highly leveraged than Coca-Cola though neither giant company carries excessive debt.  Both firms sell different kinds of products, with Coca-Cola having 20 separate billion dollar brands while PepsiCo has 22.  Both companies have established and acquired subsidiaries to move into various geographic markets and diversified beverage types including water and tea.

The major applicative difference between the two firms is PepsiCo's engagement in the snack food industry with its substantial Lay's brand.  Sales of food add to almost half of PepsiCo's consolidated revenue.  Much of the investors value this sale of different products since it reduces exposure to a small number of highly correlated product categories.