Pepsi's financial performance and bond rating assessment

Pepsi Ratios

Pepsi Performance Assessment

Ratio Analysis

Based on the financial ratios shown in the table in Appendix A, a general assessment of Pepsi's strength and performance over the past several years and in its current position can be made. As a measure of liquidity, the current ratio shows that Pepsi definitely appears to be struggling, though it has made significant improvements since 2009. Current assets are still slightly lower than current liabilities, however, and were only higher by a very slim margin in 2010; a current ratio that is more strongly and consistently above 1 would mean that the company has reached a stable and desirable level of liquidity. Asset management as demonstrated by the receivables turnover rate is quite strong for the company, though, indicating that its collection policies and procedures are more than adequate to meet the company's operational needs. Only slightly more than a tenth of the company's sales remain receivable (i.e. uncollected), giving it plenty of operational capital and meaning its assets are efficiently turned into revenue despite the lack of liquidity evidenced.

Despite the fact that Pepsi appears to be struggling with liquidity, the company's debt ratio continues to climb, suggesting that the company is attempting to borrow its way out of its problems. This is an ineffective strategy over the long-term, and a reduction in the company's debt ratio would be expected in the next several years if the company hopes to remain solvent and profitable. The return on assets has also been dropping in a disappointing fashion, and though the high P/E ratio suggests investors remain confident in Pepsi's ability to continue generating profits, overall the company needs to make some significant changes to retain its strength and industry position.

Financial and Business Risks

Several of the specific investment risks that Pepsi investors might face are already mentioned above, including a current ratio under 1 (which suggests incomplete solvency) and debt management that continues to pose a problem for the company. The company's earnings have dramatically increased in the recent years of economic recovery, but this has not significantly contributed to the company's strength, apparently and this could suggest deeper management issues at the firm that present other more substantial and widespread risks to investors (Kennon, 2012). This is one type of risk that falls under the larger category of "business risk," which is a category of risk to investors that includes all performance-based risks -- risks that the real value of an investment will decline due to a decline in the real value or profitability of the business -- and there are other business risks associated with an investment in Pepsi, as well (Kennon, 2012). As a commodity-based business with a high degree of competition, there is very little that Pepsi can do in terms of price manipulation to recover any expense increases faced from supply chain or labor issues, meaning that any industry or larger economic shocks could lead to serious problems for a company with the liquidity and debt management issues Pepsi currently faces (Kennon, 2012; Pepsi, 2012).

Pepsi's operations, however, do not present much of a risk. Well-established supply chains and product diversity mean revenue streams for the company will remain quite strong. If it gets its internal finances in order, Pepsi would be a very good investment.

Appendix A

2011

2010

2009

Current Ratio

0.9607

1.1055

0.4503

Receivables Turnover

9.6215

9.1472

9.3495

Debt Ratio

0.7132

0.6849

0.5623

Return on Assets

0.0887

0.0930

0.1500

P/E Ratio

19.3369

19.1267

16.6904