Pepsi Ratios Pepsi Performance Assessment Ratio Analysis

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.

Pepsi's Bond Rating

Given the liquidity and debt issues that are apparent from a cursory analysis of Pepsi's credit ratings, it is not too surprising that the company does not receive a perfect bond rating. A comparison of the company's ratios to industry averages shows Pepsi lacking in most regards, and its Double-A-minus (AA-) bond rating reflects this (Morningstar, 2012). This bond rating is still quite respectable and is the same as Pepsi's chief rival, Coca-Cola's, but it reflects the debt management issues that loom within the company as its debt ratio continues to rise above that of the industry average, and as its liquidity remains below this average and below what would be desirable (Morningstar, 2012; Morningstar, 2012a).

All told, it is actually somewhat surprising that Pepsi manages to have a bond rating as high as it does, especially when compared to industry leader Coca-Cola (with a much higher current ration, profit margin, etc.) and the industry averages for many ratios (Morningstar, 2012; Morningstar, 2012a). This is almost certainly because these bond ratings are not based purely on quantitative analyses of a company's current financial position, but also take into account projections of future solvency and stability. When this is taken into consideration, it makes more sense that Pepsi's bond rating should still be at a fairly high level, as the company has a very diverse set of product offerings and brands that are well-recognized and that are strong sellers (Pepsi-Co, 2012). If the debt management of the company continues along its current trajectory, though, this bond rating is likely to decrease.

Financial and Business Risks