Samples

Ratio Analysis of PepsiCo.

Question 1 Trends in profitability 

The above tabulated ratios have been used to analyze trends in profitability. Pepsi has declining profitability as indicated by the ROA, RONA, ROS and OPM while ROE indicates an increase in profitability. While the ROA is calculated by dividing the net income by total assets to indicate the efficiency in generating profits from the company’s assets, RONA is calculated by dividing the net income and average total assets (Investopedia, 2016). In addition the ROS considers the net income before interest and tax and dividing this by sales while the OPM is calculated from the division of profit before interest and tax by the sales revenue. Further, the ROE is calculated from dividing the net income and average shareholders’ funds (Kaplan Financial Limited, 2012).

On one hand, the increase in ROE differs from the decline in all the other ratios in light of the denominator used. The ROE uses equity which indicates increased efficiency that might be attributable to high liabilities that have been obtained by the company in 2008. On the other hand the ROA and RONA use assets as the common denominator and reflect how efficiently companies use assets to generate profits. For Pepsi, the industry it operates in is asset intensive. Thus, the both the ROA and RONA indicate a decrease in efficiency towards production of profits.  Further, the decrease in ROS and OPM indicate decreasing efficiencies in production and selling efficiencies (Kaplan Financial Limited, 2012). From the above ratios reflect a decrease in profitability levels.

Question 2.Trends in debt 

While the debt-to-equity ratio is calculated by dividing the long-term debt over equity (Kaplan Financial Limited, 2012), the debt-to-total capital is obtained by dividing total debt by summation of shareholders’ equity and debt (Investopedia, 2016). Both ratios show an increase when compared to the previous year indicating that the company has obtained both long-term and short-term debt. This is consistent with the ROE as indicated under the profitability ratios. In addition, the EBIT/ Interest expense indicates that the company has a decreased ability to pay dividends from profits. The times interest earned ratio  is still healthy since it is above 2% and may be decreasing due to both the decrease in profitability and increased debt (Kaplan Financial Limited, 2012).

Question 3.Ability of the company to meet its financial obligations

The ratios used are the current and quick ratios to indicate the liquidity of Pepsi. To begin with, the current ratio is calculated by dividing the current assets by current liabilities. For Pepsi, the current ratio has decreased to 1.23 in 2008 (1.31; 2007) which can be a result of the increase in short term debt the company obtained as indicated by the debt-to-total capital. Secondly, the quick ratio has also decreased from 0.32 in 2007 to 0.26 in 2008. The ratio is calculated by dividing current assets, less inventory, by the current liabilities. Although the above ratios are low, they are within the industry range and due to debt; the company is still able to meet its obligations (Kaplan Financial Limited, 2012).

Question 4.How efficiently the company is using its assets

The reduction in the asset turnover, revenue growth, day’s receivable and day’s inventory indicates a decrease in the efficient use of assets. It is also evident from the table above that the decrease in the ratios is minimal. However, in light of the profitability ratios discussed above, there is a decrease in efficiency. Further, the asset growth ratio has no comparative figure but is low.  All this ratios indicate that Pepsi has reduced the efficient use of its assets from the previous year.