PepsiCo Financial Ratio Analysis: Strengths and Weaknesses

Introduction to Financial Ratio Analysis

Financial ratios are valuable tools for evaluating the performance of a business entity. They are used by a wide range of stakeholder groups, including investors, suppliers, creditors, and regulatory bodies. This paper concerns itself with ratio analysis, using PepsiCo — a publicly traded food and beverage company — as the subject of analysis. PepsiCo regards itself as "one of the world's leading food and beverage companies" (PepsiCo, 2013).

In the words of Moyer, McGuigan, Rao, and Kretlow (2011, p. 70), a financial ratio "is a relationship that indicates something about a company's activities." Various financial ratios have been developed over time. The key financial ratio categories examined here include profitability ratios, liquidity ratios, and financial leverage ratios. To enhance the relevance of this analysis, PepsiCo's key ratio values are compared with those of its main competitor, the Coca-Cola Company. The figures used in this analysis are drawn from each company's most recent financial statements.

Key Profitability Ratios

Two of the most useful profitability ratios for determining how successful PepsiCo has been in profit generation are return on assets (ROA) and return on equity (ROE). Return on assets measures how effectively a given entity's assets are being used to generate profit. According to Baker and Powell (2009), this ratio is computed by dividing net income by average total assets. Return on equity, one of the most widely used ratios by both management and shareholders, "measures the accounting return earned on the capital provided by the firm's preferred and common shareholders" (Baker and Powell, 2009, p. 63). It is obtained by dividing an entity's net income by average total equity.

Table 1: Profitability Ratios

Ratio | Computation (PepsiCo) | PepsiCo Value | Coca-Cola Value
Return on Assets: 6,740,000 / 74,638,000 = 0.09 | Coca-Cola: 0.10
Return on Equity: 6,740,000 / 22,417,000 = 0.30 | Coca-Cola: 0.28

Liquidity and Financial Leverage Ratios

Liquidity ratios are of great relevance when it comes to determining how prepared a firm is to meet its short-term obligations (Brigham and Houston, 2009). The liquidity ratio examined here is the current ratio, which, according to Baker and Powell (2009), is obtained by dividing current assets by current liabilities.

Table 2: Current Ratio

Ratio | Computation (PepsiCo) | PepsiCo Value | Coca-Cola Value
Current Ratio: 18,720,000 / 17,089,000 = 1.10 | Coca-Cola: 1.09

The relevance of financial leverage ratios cannot be overstated when it comes to determining the long-term solvency of a business entity. Key ratios under this category include the debt-to-equity ratio and the debt ratio. The debt ratio, examined here, can be obtained "by dividing a firm's total (current and non-current) liabilities by its total assets" (Baker and Powell, 2009, p. 53).

Table 3: Debt Ratio

Ratio | Computation (PepsiCo) | PepsiCo Value | Coca-Cola Value
Debt Ratio: 52,344,000 / 74,638,000 = 0.70 | Coca-Cola: 0.62

Assessment of PepsiCo's Financial Strengths and Weaknesses

With regard to profitability, it is clear from Table 1 that PepsiCo generates more profit for every dollar of shareholder investment. This is demonstrated by the company's higher ROE compared to Coca-Cola. However, looking at return on assets, one would conclude that in comparison to Coca-Cola, PepsiCo earns less money for the same level of investment. PepsiCo's assets are therefore not being utilized as effectively as they could be.

PepsiCo's current ratio is above 1.0, indicating that the company has sufficient current assets to meet its short-term obligations should they become due. The company is therefore not likely to experience significant liquidity challenges. Finally, the debt ratio indicates that PepsiCo is more leveraged than the Coca-Cola Company, which could be an indicator of greater financial risk.