Financial and Managerial Accounting: PepsiCo - Case Study Example

and Section # of Pepsi – Financial Analysis Introduction The organization which has been chosenfor the analysis is PepsiCo. PepsiCo has been one of the most famous beverage brands of all times. Their organization, PepsiCo now offers the world’s largest portfolio of food and beverage brands including Frito-Lay, Pepsi Cola, Quaker, Tropicana and Gatorade to name a few. These different product lines allow the organization to enjoy more than $1 billion of annual retail sales from all over the world. Their sales figure for 2008 alone has been $43 Billion; they have been actively endorsing their organization as the one that calls for performance with purpose from their highly motivated work force (PepsiCo 2010). Basically, the business is divided into three major business units. The PepsiCo Americas Food which includes brands such as Frito-Lay North America, Quackers Food North America and all of their Latin American food and snack businesses. The second business unit is that of PepsiCo Americas Beverage; this includes the PepsiCo beverage North America and Latin America beverage businesses. The third business unit is the PepsiCo International, which deals with all the international businesses of the United Kingdom, Europe, Asia, Middle East- practically the whole world. The organization’s core value is to provide sustainable growth through the empowerment of people who act responsibly and build trust. Sustained growth, Empowered people, Responsibility and Trust form the core value foundations of the organization (PepsiCo, 2010). For the analysis purposes, the financial statements of 2007, 2008 and 2009 were used. The website provides the financial statements of all three years. For industry analysis and information purposes, the Bloomberg PepsiCo and Bloomberg Coke were also utilized. Initial Review The initial review of the organization is divided into two areas; Analysis of the auditor’s messages as well highlighting the management’s discussion and analysis of the business that took place throughout the year, paying special emphasis on the important aspects of the business. Auditor’s Report: According to the auditor’s report, the audit has been conducted keeping in mind the guidelines of the Public Company Accounting Oversight Board, in USA. According to the standards set by PCAOB, the auditors had to make sure there was enough internal audit control to not allow miss-statement of financial statements. A company is required to exercise sound internal control over the financial reporting processes and procedures in order to provide the auditors and the stakeholders with reasonable surety that the financial reporting was true and the preparation of the financial statements was in accordance with the GAAP (Generally Accepted Accounting Principles). According to the auditor’s report and analysis, PepsiCo has fairly produced its financial statements and had significant internal control over its procedures to provide a clear, authentic picture of the financial position of the company for the investors and other stakeholders. This statement holds true for both the consolidated and the non-consolidated financial statements. Also, the auditing firm has explicitly mentioned that they have found PepsiCo to follow all the standards outlined by the GAAP in accounting standards and procedures. According to this report, there exists no problems in the accounting and financial stamens of the organization. Management’s Discussion and Analysis: The management’s discussion and analysis highlighted the major operations of the business units that took place in the year. International businesses were also highlighted with information regarding the main areas of the business. They have amply discussed their distribution networks all over the world and also mentioned some of the business risks that they have, considering the huge portfolio of products that they boast of. Their competition includes of global, regional and international brands and they have been successful in being market leaders in most of them. One of the business risks that they have mentioned in the MDA is that of changing consumer preference for their product in the light of changing lifestyles if they are unable to innovate and cater to the demands of their valued consumers. For an organization as big as PepsiCo, a prominent realization of this factor is bound to take them a long way in innovation and market sustainability. PepsiCo is also hugely operating and enjoying the market preferences due to their long earned brand equity. Any impact on the brand name can adversely affect the sales of all their brands, posing problems for them. Therefore, special attention is being paid to avoid such endeavors that can hurt the market sentiment and brand equity. Similarly, other stakeholders such as suppliers and the importance of their relationship with the organization are also highlighted. The ever evolving climatic change and legal requirements are also a risk towards their operations. One of the aspects of the MDA was the analysis of PBG merger and PAS merger, quoting that mismanagement or failure to successfully merge may make the organization lose on the cost cuts which were anticipated. Other than that, market risks, including foreign exchange, commodity prices are also discussed and interest rates are also subjected to be prime business risks for the company. Then the critical accounting policies were also mentioned, following their own analysis of the financial statements. Liquidity Analysis Ratios   2007 2008 2009 Liquidity Ratios Current Ratio 1.3 1.2 1.4 Quick Ratio 0.9 0.8 1 Collection Period (in days) 41 40 39 DSI (in days) 46 45 48 The current Ratio appraises the liquidity of the company. It represents a safety net for the creditors of that particular company. Pepsi has maintained the level for the last three annual years and has efficiently managed its resources. Pepsi ranks as an average company in the relevant industry with respect to the current ratio. (Bloomberg, 2010) Further insights into the company financials shows that the company holds much of its current resources in the shape of inventories and prepaid. The acid test ratio clarifies that the company does not have enough cash equivalents to meet the sudden demand of the short term creditors. Pepsi heavily depends on its collections of the receivables for the payments of it near obligations. In the year 2009, it had $1 for every dollar of its near obligations. The company currently ranks average as compared to its competitors in the industry (Bloomberg, 2010). Pepsi had a healthy collection period of 39 days in 2009. It is showing an improving trend over the last three years and hence, it is a positive sign from the investment point of view. At the same time, days sales in inventory has no such healthy trend but it has lost as compared to the last years. Therefore, Pepsi ranks as an average company in terms of the liquidity analysis. Profitability Analysis Ratios   2007 2008 2009 Profitability Ratios Gross Profit Margin 54.30% 52.90% 53.50% Operating Income Margin 18.50% 17.30% 18.70% ROE 32.80% 40.90% 34.10% ROA 16.30% 14.30% 14.60% The Gross Profit Margin is a vital measure from an investment’s point of view as it represents the efficiency of the company’s production facilities and the management. Pepsi has maintained the gross profit margin over 50% for the last three years and leads the industry as provider of one of the highest margins as compared to its competitors (Bloomberg, 2010). This clarifies that Pepsi has an efficient management system in place and that it follows the proper accounting practices. In 2009, Pepsi contributed 53.50 cents to the gross profit for every $1 sale transaction that took place. Pepsi has more or less a consistent operating margin over the three years. It leads the industry with one of the best margins which clarifies that it is doing better than its competitors (Bloomberg, 2010). This shows the efficiency of the company has improved and that it maintains a sustainable low cost model. The return on equity has dropped over the last year by 6.80%. The drop is due to the increase in the equity. But at the same time, the quality of the income has increased over the period. The net income increased by 16% in the year 2009. Pepsi leads the industry with respect to the competitors in the profitability margins (Bloomberg, 2010). In the year 2009, the company generated 15 cents for every dollar that was invested by the creditors and owners of the company. It showed a slight increase as compared to the last year but more or less it has remained stable over a period of time. Solvency Ratios Ratios   2007 2008 2009 Solvency Ratios Financial Leverage 1.01 1.86 1.30 The financial leverage is an important measure for the investors which indicate the riskiness of the business. It provides an indication of the strength of the balance sheet and the future earnings prospects. Pepsi has maintained a strong ratio between 2:1 which depicts the strength of the balance sheet as well as the income statement. It leads the market with one of the better equally leveraged companies (Bloomberg, 2010). Pepsi has fully utilized its debt to earn strong profits over the years. It has generated $1.01 in addition to a dollar of equity. At the same time, it has maintained its interest coverage ratio as one of the better ratios (Bloomberg, 2010). Currently, Pepsi has the interest expenses as negative. Market Test Ratios   2007 2008 2009 Market Test EPS-Basic 3.48 3.26 3.81 EPS-Diluted 3.41 3.21 3.77 Price to Earnings 20.4 16.1 15.8 Pepsi has shown an increasing trend in the earnings given out to the shareholders. The company provided $3.81 per share in the year 2009. It basically provides one of the best returns to the shareholders (Bloomberg, 2010). The Company shows a weak trend in the price to earnings ratio. Pepsi has shown a strong trend in the price to earnings multiples. The investors will be paying less money for every $1 of its current earnings. In the year 2009, the investor will pay $15.8 for $1 of its current earnings. Competitor Analysis Ratios for the Year 2009   Pepsi Coke Liquidity Ratios Current Ratio 1.4 1.4 Quick Ratio 1 0.88 Collection Period (in days) 39 29 DSI (in days) 48 26 Profitability Ratios Gross Profit Margin 53.50% 42.97% Operating Income Margin 18.70% 6.55% ROE 34.10% 32.76% ROA 14.60% 2.97% Quality of Income (In Min) 5946 38.1 Solvency Ratios Financial Leverage 1.30 10.03 Market Test EPS-Basic 3.81 2.95 Price to Earnings 15.8 18.1 The above table compares the financial analysis of PepsiCo with one of it toughest competitors in the US as well as the European market. Coke appears to be weaker investment zone as it lags behind PepsiCo in the most important ratios. Both the companies have strong reputation and goodwill in the markets that cannot be easily demolished or challenged. The companies have strong financial statements and leverage positions. PepsiCo registered a net income of $5946 million as compared to $38.1 million of Coke. Hence, it signifies the difference the earning potential of the two companies in the year 2009. PepsiCo has strong profitability margins as compared to coke. It has a stronger gross profit margin, operating income margin and a very healthy return on assets as compared to the competitor. At the same time, an investor will pay a lesser price for Pepsi of about $15.8 as compared to $18.1 for coke for $1 of the company’s earnings. Therefore, Pepsi is in a very health position. Conclusion I believe that Pepsi has built upon its tremendous reputation and goodwill in the last many years. The financial analysis showed clearly that the PepsiCo leads the industry and is well ahead of its competitors. The company has strong financial statements including the balance sheet and the income statement. PepsiCo leads the market in the profitability margins, financial leverage as well as the market test. It provides its stockholders with one of the best earnings per share as well as provides $1 of its current earnings at a very low price compared to the other companies in the relevant industry. Further competitive analysis have shown that PepsiCo was much better than it strongest competitor, Coke taking into reference the income, the margins, the solvency as well as the financial leverage. Pepsi is considered to a much saver zone as compared to its competitors in the same industry. Therefore, I would invest $10,000 in PepsiCo as it holds a strong financial position as well as show healthy future growth prospects with less risk and credit default chance. . Works Cited Book Bringham, E. F. Houston, J. F. Fundamentals of Financial Management. Cengage Learning. (2007) Warren, C. S. Reeve, J. M. (2006) Financial and Managerial Accounting. Cengage Learning Web Page Bloomberg Businessweek. (2010, May 9th). “PepsiCo” Bloomberg Businessweek. Retrieved on May 9th 2010 from http://investing.businessweek.com/businessweek/research/stocks/financials/financials.asp?ticker=PEP:US Bloomberg Businessweek. (2010, May 9th). “PepsiCo” Bloomberg Businessweek. Retrieved on May 9th 2010 from http://investing.businessweek.com/businessweek/research/stocks/financials/ratios.asp?ticker=COKE:US Pepsi. (2010) “PepsiCo” Pepsi. Retrieved on May 9th, 2010 from http://www.pepsi.com/ Yahoo Finance. (2010, May 10th). “PepsiCo” Yahoo Finance. Retrieved on May 10th 2010 from http://finance.yahoo.com/q?s=PEP Read More