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With the help of the information obtained from the financial statements the ratios related to liquidity, activity, debt and profitability are calculated of Pepsi Co for the fiscal years 2007-2008.
Liquidity
The current ratio helps in determining the ability of a company to fulfill its short-term liabilities by using its short-term assets. It is the easiest way to determine the liquidity of a company. if the current ratio is greater than or equal to one then it determines that the company is in a good shape to pay its short-term liabilities through its short-term assets and vice versa. Thus by calculating the current ratio the liquidity for a company can be measured. as per the current ratio PepsiCo’s has sufficient current assets to fulfill its short-term liabilities as the current ratio in 2007 was 1.3 and in 2008 the current ratio was 1.2.
Current Ratio = (Current Assets) / Current Liabilities
2007 = 10,151.0 / 7,753.0 = 1.3
2008 = 10,806.0 / 8,787.0 = 1.2
Activity
In order to compute the accounts receivable turnover the total accounts receivables are divided by the total daily sales credits. In case of PepsiCo there was only one line present for revenue and the daily credit sales was not available on the income statements which makes us to assume that the sales are totally credit based and involve no cash sales. The total Revenue for Pepsi Co can be seen as under:
2008 Total Revenue 2007 Total Revenue
43252 39474
The total receivable for Pepsi Co is reflected below:
2008 Total A/R 2007 Total A/R
4683.0 4389.0
43252 = 11.0 39474 = 11.0
It was calculated that the customers usually pay in 40 days for the products they purchase. It was calculated by dividing the Total Receivable Net (or total sales) by the Total Revenue. It was 11% for both years thus converting into 40.15 days sales outstanding. The Accounts Receivable Turnover ratio for Pepsi Company for both 2008 and 2007 is 11.0 which show that its receivables are 11 times per year. this is a good indicator which shows that the credits and collections are managed properly.
The formula where the sales made on credit by average accounts receivable are divided shows that if the total sales on credit are not exposed by the company a shortcut can be adopted by using “total sales” instead. There are certain questions that are answered by Accounts Receivable turnover like if the collection on sales is taking place at an acceptable time period from the customers after providing them with the credit. If the ratio is high it implies that maybe the company operates on a cash basis or it may also imply that it has an efficient way to provide the extension of credit and collection of accounts receivable. In case of low ratio the company policies must be re-assessed. In order to compare the ratios of different companies it should be assured that the process remains consistent figuring ratios or else comparing credit based with total sales would be deceptive. Furthermore make it sure that the firm operates only on a cash basis or not.
The Inventory Turnover can be computed by dividing the total revenues with the total inventory. For Pepsi Co the figures are 17.15 and 17.24 for2008 and 2007 respectively. The calculations are shown below:
43252 39474
2522=17.15 2290=17.24
The inventory is said to be turned on if a product is sold for the equal to the amount of money invested in the product. In case of turning over the inventory in 12 months period the inventory turnover rate measures the total times of turning it over. Here is an example: (process only; not related to Pepsi)
| Annual Cost of Goods Sold | Inventory Investment | Annual Inventory Turns |
| $10,000 | $10,000 | 1 |
| $10,000 | $5,000 | 2 |
| $10,000 | $2500 | 4 |
The high turnover indicates that the inventory is coming in and going out of the warehouse in a consistent manner. Their total inventory for 2008 was 2522 and 2290 in 2007 which shows that inventory management is very efficient in the company.
Debt
In order to support or finance the assets of a firm the firm borrows funds from different sources. The short-term and long-term debt is the two types of debts and the rest of the percentage is financed by equity. The ratio of this borrowed debt is calculated through Debt ratio. The profitability can be measured by comparing the difference between debt-to-equity mixes. To borrow this debt the firm needs assets which can be used as collateral and the amount of debt a firm uses depends on it. Furthermore it is also dependant on the proven income record. The debt is borrowed from different sources on the basis of certain percentage of the interest which has to be paid to the lender. It is appropriate to increase debt relative to equity, but one must make it sure that it is not harmful for the financial position of the company. thus the company must make a wise decision keeping everything in view that whether to finance the assets through debt or through equity. Debt Ratio of Pepsi Corporation was 0.66 in 2008 and 0.50 in 2007.
Debt Ratio = Total Liability
Total Assets
2008 Debt Ratio = 23,888.0 = 0.66
35,994.0
2007 Debt Ratio = 17,394.0 = 0.50
34,628.0
Profitability
Return on Assets shows the profitability of a company in regard to its total assets and their utilization. It can be calculated when the annual earnings of a company are divided by its total assets and the figure obtained is in percentage. ROA is also known as rate of investment. A good ROA (return on assets) indicates that a company is utilizing its assets properly and in the best possible manner. For Pepsi the ROA was 14% and 16% in 2008 and 2007 respectively which shows that the managers are using the assets to their best. But in order to avoid a decline in this ratio in future years the sales goals are required to be revised.
If a firms earning a return on investment is greater than the cost of the debt; then the higher its return on equity will be. Pepsi Co was able to manage its reinvested earnings in a very well manner in order to generate more earnings. This was been indicated by the return on equity (ROE) for Pepsi in the year of 2008 was 42%, and in 2007 it was 33%. The debt ratio in 2008 for Pepsi Co was 66% along with a ROE of 42% whereas in 2007 the debt ratio was 50% along with a 33% R.O.E. both the ratios have a proportional relationship which means increase in one led to increase in the other which may indicate that because of the use of debt financing the higher return is coming.
Return on Assets (R.O.A)= Net Income Total Assets
2008 5,142 = 0.1428
35,994.0
2007 5,658 = 0.1633
34,628.0
Return on Equity (R.O.E.)= Net Income Total Equity
2008 R.O.E. 5142 = 0.42
12,106
2007 R.O.E. 5658 = 0.33
17,234
Conclusion
The ratios calculated for Pepsi Co shows that the company is in good financial health and its management is working very efficiently. Its current assets are able to satisfy its short-term obligations for both years whereas the ROE and debt ratios indicate that the company is using debt financing in order to increase the return on retained earnings. The credit, collection, ROA and inventory ratios also indicate good management and results.
Keown, Arthur J., Martin, John D., Petty, J. William, and Scott, David F.. Financial Management: Principles and Applications, 10th ed.. copyright © 2005 Pearson Prentice Hall, Inc.
MSN Money, Pepsico Inc: Financial Statement, from moneycentral.msn.com/investor
http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=pep&lstStatement=Balance&stmtView=Ann
Website: Investopia http://www.investopedia.com/terms/r/receivableturnoverratio.asp
Website: http://financial-education.com/2007/01/31/accounts-receivable-turnover-and-days-sales-outstanding/
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