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PepsiCo Inc. Financial Ratios

Table 1 Results From Fiscal Year 2020 (Wall Street Journal, 2022) Industry - Beverages (2020) PepsiCo (PEP) Coca-Cola Co. (KO) Keurig Dr Pepper Inc. (KDP) Liquidity Ratios Current Ratio 1.460 0.982 1.318 0.310 Quick Ratio 0.780 0.804 1.094 0.204 Financial Leverage Ratios Total Debt Ratio 0.530 0.854 0.756 0.521 Debt-Equity Ratio 0.750 3.383 2.087 0.614 Asset Management Ratios Inventory Turnover 5.140 7.613 4.134 6.458 Receivables Turnover 9.865 8.374 10.505 10.156 Profitability Ratios Profit Margin -0.70% 10.12% 23.46% 11.40% Return on Assets 0.20% 7.66% 8.87% 2.66% Return on Equity 0.50% 52.54% 36.40% 5.56% Market Value Ratios Price-Earnings Ratio (December 31, 2020) N/A 29.022 30.637 34.409

Table 2 Results From Fiscal Year 2021 (Wall Street Journal, 2022) Industry - Beverages (2020) PepsiCo (PEP) Coca-Cola Co. (KO) Keurig Dr Pepper Inc. (KDP) Liquidity Ratios Current Ratio 1.460 0.829 1.130 0.471 Quick Ratio 0.780 0.663 0.959 0.322 Financial Leverage Ratios Total Debt Ratio 0.530 0.825 0.737 0.506 Debt-Equity Ratio 0.750 2.624 1.779 0.537 Asset Management Ratios Inventory Turnover 5.140 8.496 4.542 6.356 Receivables Turnover 9.865 9.155 11.027 9.955 Profitability Ratios Profit Margin -0.70% 9.59% 25.23% 16.92% Return on Assets 0.20% 8.25% 10.36% 4.24% Return on Equity 0.50% 47.17% 39.30% 8.59% Market Value Ratios Price-Earnings Ratio (December 31, 2021) N/A 31.699 26.316 24.573 PepsiCo, which has become one of the worlds leading food and beverage companies, was started in 1965 when the CEO of Pepsi-Cola and CEO of Frito-Lay created a single company to deliver snacks as well as soft drinks (About the Company, n/d). The following paper analyzes the financial ratios for the fiscal year 2020 as that is what industry data is currently available to compare with. Table 1 has 2020 fiscal year data and Table 2 shows the 2021 individual company ratios versus the same 2020 industry data (Ready Ratios, 2022) as Table 1. Table 2 is included only to share comparison data from 2021 as 2020 was an extreme anomaly year due to Covid-19. The industry these companies are part of is the Beverage industry that contains both alcohol and non-alcohol beverages. However, PepsiCo is only being compared to other non-alcohol focused beverage companies. Liquidity Ratios The intent of liquidity ratios is to understand if a company has the ability to pay off its short-term obligations (Rothaermel, 2021, p. 462). Two ratios that will be analyzed are the current ratio and quick ratio. A current ratio measures the current assets that can readily be converted to cash as compared to what is owed with current liabilities. A ratio above 1 is desired as it means the assets can cover the liabilities. From Tables 1 & 2, PepsiCo was below 1 in both 2020 & 2021, while the industry and their biggest competitor (Coca-Cola) were well above 1. For PepsiCo to improve this ratio, they can look at delaying any large expenditures or sell capital assets that are not contributing a return to the business. An example of PepsiCo looking to save cash is that they are not sponsoring the 2023 Super Bowl halftime show. Dr. Peppers current ratio is below 0.5 for both 2020 & 2021, this should be a concern for their investors. A quick ratio removes inventory from the current assets to measure cash / account receivables / marketable securities / short-term investments versus the current liabilities. The goal would still be to have a ratio above 1. Again, PepsiCo was below 1 while Coca-Cola was above 1 in 2020 and slightly below 1 in 2021. Similar to the current ratio, this shows that PepsiCo needs to control their current assets going forward to be able to cover current liabilities. Financial Leverage Ratios Financial leverage ratios will help show the degree to which a firm relies on debt versus equity in their capital structure (Rothaermel, 2021, p. 462). The ratios chosen to analyze PepsiCo are total debt ratio and debt-equity ratio. For both of these ratios, PepsiCo will want a low ratio as that means they are not financing a large portion of their assets with debt. The total debt ratio for all three companies are below 1 for both years and not far off from the industry number that means they were properly managing the amount of debt they were using for financing. However, both PepsiCo and Coca-Cola had high debt-equity ratios, which means they are a higher risk to investors as they are financing a significant amount through borrowing. Given that PepsiCo had a current ratio below 1, it should be a concern that they are utilizing more debt as their financing option. Asset Management Ratios Asset management ratios are meant to show how a company is using their assets to generate revenue. The ratios chosen for analysis are inventory turnover and receivables turnover. Inventory turnover measures how a company is managing their inventory. Both Coca-Cola and Dr. Pepper have ratios close to the industry average and look have sufficient amount of inventory for their sales volume. PepsiCos ratio was 7.6 in 2020 and 8.4 in 2021 - they did have a 10% growth in sales, but this high of a ratio can mean they do not have an adequate amount of inventory for potential growth. However, the inventory value in 2020 was $4.2B and 2021 was $4.3B (Wall Street Journal, 2022). Since inventory increased while also having a 10% growth in sales, the high inventory turnover ratio is likely due to the increased sales and not to mismanagement of the inventory level. Receivables turnover looks at a companys performance as it relates to timeliness of collecting its receivables. All three companies are performing similarly to the industry average and the industry average is high. This means that each company is doing a good job of collecting on their debts and effectively extending credit terms. Profitability Ratios Profitability ratios are designed to show how efficiently a company is utilizing its resources (Rothaermel, 2021, p. 462). Ratios being analyzed are profit margin, return on assets (ROA) and return on equity (ROE). The goal for all three ratios is to attain a high percentage as that means there is a good income created based on the sales, assets, or equities being compared to. The profit margin for all three companies were about the industry and also above 10% (Coca- Cola was 23.5% which is considered extremely good). These profit margins are good during normal years, but even more impressive during a pandemic. A look and the ROA and ROE ratios also show that all three companies did better than the industry, but PepsiCo and Coca-Cola had very high percentages. With PepsiCo having a 52.5% ROE and a high debt-equity ratio, this should indicate some risk as already mentioned due to the high amount of debt being used to finance their activities. Market Value Ratios Market value ratios are intended to evaluate the share price and returns by shareholders and understand if the stock is under- or over-priced. The ratio being analyzed is the price- earnings ratio (P/E), which shows the market premium paid for earnings and future expectations (Rothaermel, 2021, p. 470). In 2020, PepsiCo had a lower P/E than its two competitors, but that changed in 2021 as PepsiCo had the higher ratio. With the ratios being similar for these competitors in the same industry, that would mean that all three companies are considered similar in risk when investing. PepsiCo Financial Analysis Conclusion After analyzing the financial ratios for PepsiCo as compared to their competitors and overall industry, the conclusions are: 1) current assets do not adequately cover their current liabilities and they need to look at ways to control spending or sell non-profit contributing assets; 2) there is a large amount of financing being covered by debt as compared to equity, which is considered a risk; 3) inventory levels and receivable policies look to be adequate for the current level of sales; 4) profit margins are good, but the high ROE relates to the high debt-equity ratio and should indicate finding other ways than debt to finance activities; and 5) the P/E ratio indicates their investment risk is similar to competition.