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A Balance Sheet Analysis Of Pepsico Finance Essay

PepsiCo, Inc. was established in Delaware in 1919. In 1986 it was again incorporated at North Carolina, USA .It is a food, snack and beverage company. It products reach over 200 countries every day with its operations in North America, Mexico and United Kingdom.

PepsiCo has a well organized structure. It has three business units namely

a): PepsiCo Americas Foods (PAF) : Includes all its food and snack business in Latin and North America

b) PepsiCo Americas Beverages (PAB): Includes its beverage business in Latin and North America

c) PepsiCo International (PI): Includes all of its businesses in other parts of the world like UK, Europe, Africa and Middle East

These three business units are further divided into 6 segments, each segment responsible for making, marketing and selling and distributing a set of products. These are namely

Frito-Lay North America : Deals in branded snack foods

Quaker Foods North America- Deals in products like Quaker oatmeal, Cap’s Crunch cereal, Aunt Jemima, , Quaker grits, Pasta Roni Life cereal, Rice-A-Roni etc

Latin America Foods- Brands include Gamesa, Doritos, Ruffles, Lay’s and Sabritas, Cheetos etc

PepsiCo Americas Beverages Deals in various beverage brands like Pepsi, Mountain Dew, 7UP (outside the U.S.), and Gatorade. Sierra Mist, Tropicana Pure Premium, Naked Juice etc

Europe deals in many Quaker-brand as well as Lay’s, Walkers, Cheetos, Doritos, and Ruffles etc

Asia, Middle East & Africa deals in Lay’s, Kurkure, Doritos, Chipsy, Smith’s etc.

PepsiCo is a company which believes in sustainable growth. It has focus on developing healthier products for the people, at the same time, use the planet’s resources in an efficient way. As a global food and beverage company, PepsiCo continues to build a portfolio of healthier and enjoyable snacks. Besides it focuses on investing in local communities wherever it operates. Since it operates in competitive markets, the policies and business decisions of the company are highly influenced by the

Laws of the local land (Places where it operates) as well as federal laws of United States C:\Documents and Settings\prodsip9\Local Settings\Temporary Internet Files\Content.Word\New Picture (5).bmp

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At PepsiCo

Performance with Purpose means

Highlights for 2010

PepsiCo’s performance in the past year has been rated from satisfactory to good levels among the analysts. The company showed an impressive operating performance with significant operating cash flows. Following are the notable points about the company

Net revenue showed a hike of 33 percent

Core division operating profit grew 23 percent

Core EPS rose 12 percent

$8 billion was paid out as share repurchases and dividends.

Annual dividend rose by 7 percent

All the above values are on constant currency basis [1] operating profit refers to the profit earned from the firm’s core businesses i.e. excluding any earnings from investments and interests. It is also known as earnings before interest and tax (EBIT) and is calculates as Operating profit = Operating Revenue – Operating Expenses. Core EPS is the gauge of a company’s performance. Earnings per share is calculated as the net profit by the number of outstanding shares

All the above figures are very impressive and indicative of the company’s strength. The company is second largest food and Snack Company with 45 percent of its revenue coming from outside US. It has 300 million dollars in retail sales each day.

Significance of Balance Sheet

Balance sheet is a financial instrument that enlists a company's assets, liabilities and shareholders' equity at a given point in time. A balance sheet consists of two parts – one is Assets and other is liabilities and equity. It is called a balance sheet because the total of both the halves should match.

Any balance sheet is based on the formula

Assets = Liabilities + Shareholders' Equity

An asset is any resource that a company owns and controls. It is expected to provide future benefit to the company directly or indirectly. This resource itself has an economic value attached with it. Assets are of two types – Current Assets and Non Current Assets. Current assets are those which can be converted into cash or liquated within a single business cycle. Three important current assets which can be seen in any balance sheet are

Cash – Refers to cash in hand

Inventories – Refers to unsold finished products and work in progress

Accounts Receivable – Refers to outstanding payments to be received from the customers.

Non Current Assets are any assets which do not fall under any of the above categories. This includes assets like buildings, machinery, plants and equipments etc. Since noncurrent assets can be quickly converted to cash, they are carried forward on balance sheet year after year with adjustment to depreciation.

Liabilities are a company’s debts and obligations it incurs during the normal course of business. It is essential that liabilities are settled promptly by the payment of economic benefits like cash or goods and services. Liabilities are of two types – current liabilities and noncurrent liabilities. Similar to current assets, current liabilities are obligations that should be paid off in the current financial cycle, such as payment of suppliers and employees. Noncurrent liabilities are paid off in more than a year. These are owed by company over a long term like bank loans and debts

The most common way to know about a company’s condition to pay off its short term debts is calculation of Quick Ratio

Quick Ratio =

Current Assets - Inventories

Current Liabilities

Quick Ratio value of greater than 1 says that company has enough cash to cover its immediate obligations

Equity, also known as "shareholders' equity”, represents the funds contributed by the company’s owners or stockholder and the retained earnings. Equity is generally given by the formula as below.

Equity = Total Assets – Total Liabilities

The most important equity items on a balance sheet are paid-in capital along with retained earnings. Paid-in capital is the amount of money paid by shareholders for their quota of shares in the company. On the other hand, retained earnings refers to the amount, the company chose to reinvest in the business rather than paying out as dividends.

Most companies do not declare all debts and assets on a balance sheet. Some intangible assets like patents, trademarks, goodwill etc are not listed in balance sheets. Similarly large capital expenditures are kept off balance sheets to keep the debt level low. There is an off balance sheet for such items.

Balance Sheet Analysis for PepsiCo

Financial statements like balance sheets are like scorecards. They give investors and general public an idea about the health of the company. Meaningful interpretation and analysis of balance sheets can go a long way in guiding the future course of action for the company’s management and investors. In this section we will explore PepsiCo’s financials from its balances sheet.

Before any meaningful interpretation can be made we should be clear about the characteristics of financial reporting used by the company. PepsiCo financial statements are in conformity with Generally Accepted Accounting Principles (GAAP) .Its financial statements include consolidated accounts of PepsiCo and the affiliates that they control. On February 26, 2010, PepsiCo completed the acquisition of Pepsi Bottling Group (PBG) and Pepsi Americas Inc (PAS). The results of these companies are also reflected in the consolidated results as on the acquisition date.

Liabilities

One characteristic feature of PepsiCo is that it purchases a lot of brands. Upon acquisition of the brands, the purchase price is allocated to identifiable assets and liabilities. This is clear in the high percentage increase in both total assets and total liabilities

Of PepsiCo in 2010 over 2009 as they completed the acquisitions of PBG and PAS

Balance Sheet

Year

 

Percentage Increase

 

2010

2009

 

Total Assets

68,153

39848

71.03242321

Total Liabilities

46677

22406

108.3236633

Also, there is a huge increase of liabilities (108 % increases over the previous year). This is attributed to the increase in long term debt of the company as they had to incur a $145 million charge because of ongoing implementation of SAP software in one of its divisions. The company says it is committed to implement SAP for its global operations. Thus we may expect a further increase in these figures in the years to come.

Liabilities

Year

 

Percentage Increase

 

2010

2009

 

Long term Debt

19,999

7,400

170.26

Other Liabilities

6729

5,591

20.35

Total

26,728

12,991

105.74

One would usually like to see a manageable amount of debt. If the debt levels are falling than it is a good sign. When debt levels are falling, that's a good sign. Since debts levels of PepsiCo are rising, they need to maintain sufficient amount of cash flow to pay for interest and debt.

Generally speaking, since PepsiCo has more assets than liabilities, it can be considered in a decent position in the market. As this gap between the assets and liabilities decreases, the firm will start losing out on the investor confidence.

Asset

On the asset side, PepsiCo saw an increase of approx $ 700 million dollars in the inventories due to acquired inventories of PBG and PAS. Also they recorded a $398 million of incremental costs related to this acquired inventory. Having large amounts of cash and cash equivalents on the balance sheet is a sign of good health as it provides opportunities for future growth. This also boosts investor confidence. PepsiCo has growing cash reserves. The cash reserves have increased from $3,943 to $5,943 Million, which is indicative of the strong company performance in the past year.

A piling of cash indicates that the management is running out of ideas to use it effectively. Since PepsiCo’s management is committed to providing healthier and greener options to the people, it is quite possible that this cash would be put to good use soon.

Also, on the asset side, A investor is keenly interested in the amount of inventories a company is keeping. If the company is keeping too much inventory, it might be unnecessarily tying up too much cash in inventory. For PepsiCo, inventory has increased 29 percent.

 

2010

2009

 Percentage Increase

Inventories

3,372

2,618

28.80%

This might have a negative impact on the inventory turnover, which indicates how quickly the company is utilizing its inventory.

Inventory Turnover

 

Since, inventory is piling for PepsiCo; this may slow down the inventory cycle if the sales are not increasing correspondingly.

Receivables too show a high growth in case of PepsiCo. This again points to the fact that, even though the sales might be increasing, the actual cash flow is not increasing as company may be letting customers buy on credit. The receivables should be kept as low as possible because an increase in receivables increases the chances of bad debt.

Receivables

2010

2009

Percentage Increase

Accounts and notes receivable, net

6,323

4,624

36.74

The quicker a company gets its cash, the better its position becomes financially.

Asset Turnover – the contribution to revenue generated by the total assets- is a good measure of how well a company’s assests are utilized. For PepsiCo, Asset turnover is 0.85 which is a very impressive number for a company of its size.This indicates that PepsiCo has managed its assets very well.

Asset Turnover

Revenue

Assets

Asset Turnover

57836

68153

0.85

 

Equities

With regard to equities, PepsiCo believes in active investments. According to their investment policy, they have 40% of equity for U.S. equity allocations, 40% for fixed income allocations 20% for international equity allocations .These allocations are subject to market risks and can change during the course of the year, depending on the market scenario. Last year, PepsiCo recorded an increase in equity interests of $958 million due to acquisitions of PAB and PAS.

Another important measure for calculating a company’s financial health is to measure its debt to equity ratio. It is calculated by dividing total liabilities by total equity. A value of this ratio tells us that the company has been very aggressive on fulfilling its financial needs with debt. PepsiCo’s debt to equity ratio of .95 is also too high. It indicates PepsiCo’s preference for debt as a means to raise funds rather than market borrowing or other similar means.

Debt/Equity Ratio

Long term Debts

Equity

Debt to Equity

19999

21476

0.931225554

Consolidated Balance Sheet for PepsiCo

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Relevant Notes

To make better sense of its financial statements, PepsiCo provides a number of notes. In this section, we would be discussing the notes which have a significant impact on the balance sheet items.

As already discussed the burden of debt has been constantly rising on PepsiCo

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To counter the effect of increasing debt liability, the firm went for debt repurchase. In 2010, PepsiCo paid $672 million to repurchase $500 million (aggregate principal amount) of notes maturing in 2018. Even though this neutralized the impact of increasing debt to some extent, it added a $178 million to interest expense for this year.

On the Equities front, PepsiCo believes in investing their funds in a number of instruments. .The below figure indicates the PepsiCo’s equities in various fields of investments for the years 2010 and 2009. We can observe a significant increase in investments in the fixed income instruments. This is primarily due to turbulent market conditions prevailing since 2008.

Total 2010 2009 C:\Documents and Settings\prodsip9\Local Settings\Temporary Internet Files\Content.Word\New Picture (9).bmp

With respect to notes on assets, noncurrent assets have the major focus. The company has seen a huge increase in them relative to past year esp. in Amortizable intangible assets. This can be attributed to the acquisition of PAB and PAS in the past year.

Non Current Assets

2010

2009

Percentage Increase

Property, Plant and Equipment, net

19,058

12,671

50.41

Amortizable Intangible Assets, net

2,025

841

140.78

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Comparison over Past Five Years

PepsiCo has been amongst top players in its industry from a long time. It has provided good returns to the shareholders and investors. But if we look at the performance for the past 5 years of the company, it would be a cause of concern for the investors.

 

2006

2007

2008

2009

2010

Total Liabilities

14.56

17.39

23.41

22.41

46.68

Total Assets

29.93

34.63

35.99

39.85

68.15

Shareholder's Equity

15.37

17.23

12.58

17.44

21.48

Liabilities have increased a whopping 220 percent from 2006 to 2010. This is a huge increase. Having said this, an increase in assets is just 127 percent from 2006 to 2010. Thus there is not a proportionate increase in assets. Thus seeing this trend, it is expected that the gap between assets and liabilities would decrease in years to come which is not a good sign for PepsiCo. The Company should put in place policies to check this and maintain the company in a healthy financial condition.

Conclusion

Financial Analysis provides a very useful tool for investors. A large number of investors have huge investments in stock. Analyzing a financial instrument like a balance sheet can help them make wise decisions .To gain maximum returns on their investments, it is essential that , company’s official financial statements are clearly understood and made sense of. This paper presented a analytical view of “PepsiCo’s Balance Sheet for the year 2010.” Since financial cycle for PepsiCo ends in December every year, balance sheet for 2011 was not available.

We saw various constituents of a balance sheet. We understood the numbers from the perspective of companies’ policies and decisions in past. We also analyzed what impact these numbers can have on the future.

According to our analysis, PepsiCo is in a very good financial health and its recent acquisitions of PAB and PAS have helped boost its asset turnover to 0.9. And return on assets to 8.3 percent. Similarly the major cause of concern identified during this analysis for PepsiCo is its high reliance on debt as a means to raise funds.

Thus this report helps in understanding the scores of financial health for PepsiCo. If the financial performance remains as it has been during 2010, PepsiCo might very well be on the path to achieve its intended goal of tripling its product portfolio by 2010.

Gross Profit Margin

58.30%

EBIT Margin

15.40%

Receivables Turnover

9.2

Inventory Turnover

7.1

Asset Turnover

0.9

Revenue to Assets

0.8

Return on Invested Capital

14.10%

Return on Assets

8.30%

Debt by Common Equity Ratio

0.95

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