Financial Analysis about PepsiCo - Essay Example

?Contents Introduction to the company 2 Financial ment Analysis 3 Share price movement 5 References 6 Introduction to the company The PepsiCo isa renowned global food and beverage leader having its presence in almost all corners of the globe. Since its inception in the early 1893, the company has flourished by leaps and bounds and now its name is considered analogous with fizzy carbonate drinks. The company initially marketed its famous product “Pepsi Cola” by the name of Brad’ drink but later on changed the name to Pepsi 1903. Later on in the same era, the PepsiCo for the first time registered the trademark ‘Pepsi’ and commenced the commercial production and marketing of the beverage. During the great depression of 1931, the PepsiCo went bankrupt owing to the speculation on the prices of the sugar, a vital ingredient in the manufacturing of the beverage. However, after the change of ownership and massive restructuring, the company was able to revive. The rise of the company began in the year 1936, right after the great depression. Through ingenious marketing and tactical production techniques, the company was able to divert consumer’s attention from coke to their product. Since then, the rivalry between the Coca-cola and the company has remained fierce with both them constantly struggling to acquire major market shares all across the globe. Today the PepsiCo has a wide and diverse range of edible products and it is one of the largest multinational corporations of the world. As per the financial statements of the company for the financial year 2011, the company has more than 22 mega brands which accounts for more than $1 billion each in annual retail sales. The company has been working diligently on focusing on its strategic targets and has been able to add several brands in the last decade. During the financial year 2011 the company was able to post revenue of 14 percent through its food and average business. The global snack portfolio of the company accounts for around $34 billion. In this particular niche, the company has been able to diverse immensely and through active innovation, the company has been able to add new products such as bread snacks and refrigerated dips. In addition, Lays, one of the world’s leading brands is also owned by PepsiCo and accounted for $9 billion in sales during the financial year 2011.On the other hand, the global beverage portfolio of the company amounts for $34 billion which has shown an impressive increase of 5% growth from the previous financial year. Considering the current strategies and innovation, the company is actively working on brining new experiences to its customers all across the globe. The fact that the company is committed in expanding its operations all across the globe can be identified from the fact that during the 2011 financial year 50% of the revenue of the company came from outside of the America. The company has actively started marketing one of its major beverages Gatorade and Pepsi MAX outside of the America. No matter how strong the asset base of a company is and how prudent and effective the management of its resources is, there are always certain business risk lurking. As per the latest financial statement of the company, a great quantum of its sales pertains to outside of America to countries such as Mexico, United Kingdom, China, India etc. However, the markets in these countries are still emerging and there is no certainty and surety that the products manufactured by the company will be accepted in the coming future. In addition, the political instability or severe economic meltdown can cause serious affect on the profitability of the company. Serious competition from any of the local brand in the aforementioned countries can also give difficult time to the company in achieving its desired sales target and revenue level. Change in the legal and regulatory requirement in any of the country can adversely affect the operations of the company. The overseas operations and conduct of the business including production, distribution, sales advertising, transportation etc. is regulated by the law of that particular country and a sanction or an unfavorable change can seriously cause an adverse impact of the profitability of the company. Other matters which should be considered by the company is the changing information technology demand at the global level and how investment in research and development should be made now in order to safeguard the future operational efficiency. Financial Statement Analysis Pepsi Co. Ratio report   2011 Working Capital -713 Current Ratio 0.96 Quick Ratio 0.6 Accounts Receivable Turnover 10 Number of Day's Sales in receivable 36.3 Inventory Turnover Ratio 8.8 Number of Day's Sales in inventory 0.1 Ratio of fixed asset to long-term liability 0.96 Ratio of liability to stockholder's equity 2.5 Number of times interest charge are earned 3.8 Ratio of net sale to asset 3.8 Rate earned on total asset 0.1 Rate earned on stockholder's equity 3.2 The working capital of the company is $713 negative which shows that the company has greater current liabilities than the current assets. It is also from the balance sheet of the company in which the company has in which the short term obligations and the accounts payable figure has been increased during the current financial year. This represents the fact that company is trying to enhance and increase its operations by taking credit from its suppliers. In the prior year the working capital figure was $1,677 positive. The liquidity ratio analysis is also very important in order to analyze the financial outlook of a company. The ratio identifies the liquid assets available with the company in order to discharge its current liabilities. As apparent from the above financial analysis, the current ratio of the company has decreased during the current financial year. The current assets of the company have decreased by 128 million during the current year owing to a major decrease in the cash and cash equivalent balance of the company. The quick ratio of the company also analyses the liquidity potential of the company, however it does not take into account inventory while making the calculation. The asset test ratio of the company has also decreased due to the overall decrease in the current assets of the company. Debtor turnover period explains how much efficient a company is converting its debt into cash. A higher debtor turnover ratio implies that the company is efficient in collecting the debts and thus presents a sound internal control management. PepsiCo’s debtor turnover ratio has increased during the current financial year which shows that the company is actively making efforts in collecting debts from its customer. The number of day's sales in receivable calculates the time taken by the company to collect revenue after the sales have been made. Inventory turnover ratio calculates how much time it is taken by the company to sell of the items in the inventory and the number of day’s sales in inventory calculates how much time it is required by the company to convert the inventory into sales. Both of these ratios appear strong and it shows that the company is active in selling of its inventory and making sure that a lot of the funds are not tied up in its inventory. Ratio of fixed asset to long-term liability measures the extent to which the fixed assets of the company have been filed through equity rather than through internally generated funds. As apparent from the above ratio analysis, 96% of the fixed assets of the company have been financed through debt. The ratio has decreased from the previous financial year which shows that the company is now focusing on financing its assets through internally generated funds rather than through debt. The ‘Ratio of liability to stockholder's equity’ explains the capital structure of a company and highlights the level of debt and equity through which the assets of the companies are financed. The ratio is 2.5 which shows that majority of the assets of the company are financed through debts. This is an alarming situation for the company as it should focus on financing majority of its assets through equity. Ratio of net sale to asset is calculated by dividing the net sales with the total assets. The ratio of 3.8 shows the fact that for every $1 invested in assets of the company, the company is able to generate $3.8. Whereas the ratio ‘return on total assets’ showing a return of 10% which can interpreted as for every $100 invested in assets, the company is earning net profit of $10. Return on stock holder’s equity is another method through which the profit making ability of the company can be analyzed. The ratio is quite essential from investor’s point of view as investors wants to see higher return on their investment. The ROCE of the company has increased during the current financial year which is positive sign for the investor as it shows a positive financial outlook of the company Share price movement The above share price movement presents a comparison of the share prices of PepsiCo and Coco-Cola. Due to the economies of scale and comparatively larger market share, the share price of the Coke remained higher during most of the past three years. But the share price of PepsiCo has also shown stability over the period. The share price of PepsiCo showed a downward movement during the mid of financial year 2012, but it spiked again during the start of financial year 2013 and since then the upward trend continues. Base on the above analysis it can be suggested that PepsiCo is a lucrative venture to invest in for the investors and it promises a sound financial outlook in the future. References Investopedia.com (2012) Financial Ratio Tutorial | Investopedia. [online] Available at: http://www.investopedia.com/university/ratios/ [Accessed: 13 Mar 2013]. Investopedia.com (2011) Understanding Financial Liquidity. [online] Available at: http://www.investopedia.com/articles/basics/07/liquidity.asp [Accessed: 13 Mar 2013]. Read More