Will Tumberger

May 14, 2014

Principals of Finance
Professor Keyes
PepsiCo Inc. Ratio Analysis
PepsiCo Inc. is an American multinational food and beverage corporation headquartered
in Purchase New York, United States, with attention in the manufacturing, marketing, and
distribution of grain based snack foods, beverages, and other products. This firm was formed in
1965 with the merger of the Pepsi-Cola Company and Frito-Lay. PepsiCo has since extended
from its namesake product Pepsi to a larger array of food and drink brands, the largest of which
includes an attainment of Tropicana in 1998 and a union with Quaker Oats in 2001which also
added the Gatorade brand to its portfolio.
As of January 22, 2012 PepsiCo's product lines have produced retail sales of more than
$1 billion each and the company's yields were distributed across more than 200 countries,
resulting in yearly net revenues of $43.3 billion. Their biggest customers are big wholesale
companies like Wal-Mart. Concentrated on net revenue; PepsiCo is the second most leading food
and beverage industry in the world. Within North America, PepsiCo is classified (by net
revenue) as the largest food and beverage business.
Indra Nooyi is an Indian-born naturalized American who has been the chief executive of
PepsiCo since 2006, According to Forbes, she is consistently ranked among the World's 100
Most Powerful Women. The company employs roughly 274,000 people globally as of 2013.
The corporation's beverage distribution and bottling is steered by PepsiCo as well as by licensed
bottlers in certain regions. PepsiCo is a SIC 2080 (beverage) company. These businesses are
listed by the U.S. Securities and Exchange Commision as being the Beverages Industry and
given the Standard Industrial Classification number of 2080. Aside from PepsiCo, other
companies in this industry include:
The Coca-Cola Compay
Anheuser-Busch
Dr. Pepper Snapple Group
Jones Soda Co
Polar Beverages
Seagram Co Ltd
Viking Distillery Inc
Molson Coors Brewing Company
Iceberg Corp of America

The legendary brand rivalry of Pepsi and Coca-Cola has been going on for more than half
a century. Coca-Cola is a major contributor in the cola market share over Pepsi, but Pepsis
multiple business lines haul in more cash. The difference in the industry leaves Coca-Cola with
42% and Pepsi with 31% of the total market share. Annual revenue within Pepsi is 65.4 Billion
and 48 Billion with Coca-Cola. Coca-Cola also spends around 2 billion just on advertisement
spending with Pepsi only spending 1.1 Billion. The reasons behind Pepsis major successes over
Coca-Cola contribute to the fact that although Pepsis beverage brands may not be as strong its
snack food industry is enormous. These businesses include:
Tropicana
Sobe
Fritos
Mountain Dew
Gatorade
Quaker
Life
Sierra Mist
Tostitos
7up
Naked Juice
Aquafina
Lipton



Liquidity Ratios:
Current Ratio
PepsiCo has a current ratio of 1.095; previous years include a 2011 ratio of 0.96 and 2010
at 1.105. Since the current ratio is just above 1 Pepsi is capable of paying off its obligations. In
2011 the ratio of 0.96 suggests that during that year setbacks in the firms ability to pay back its
short term liabilities with its short term assets was not up to par. The industry average is 1.5 for
the current ratio so Pepsi is just shallow of meeting that average. Pepsis main competitor Coca-
Cola has maintained a better overall current ratio in the years from 2012 to 2010 with their
current being 1.09, 1.04, and 1.16. Even though currently these two companies share the same
current ratio standing, Coca-Cola seems to have a healthier balanced average. Although it may
seem like Pepsi is not as productive in its current ratio standings as the industry average has it set
to be, 1.09 is a healthy number telling stockholders that they are efficiently using their current
assets and do not have problems within their short term financing facilities.
Quick Ratio
The quick ratios of Pepsi in 2012 through 2010 are 0.88, 0.74, and 0.89. The quick ratio
industry average is listed as 1.1. One can make the judgment from these ratios that Pepsi may be
struggling to maintain or grow new sales. Also added they could be paying bills too quickly or
collecting receivables too slowly. With Coca-Colas higher ratios starting from 2012 at 0.97, the
previous year at 0.92, and finally 2010 at 1.02, an investor can see that the companies may be
heading in separate directions as far as financial stability, with Coca-Cola being at or nearing
where they would like and Pepsi falling short of expectations. Also to put into perspective is that
of the timing of asset purchases, compensation and collection policies, allowances for bad debt,
and even capital raising efforts that can all influence the calculation of the quick ratio. For these
reasons, liquidity relationships are significant among companies within this industry.
Asset Management Ratios:
Inventory Turnover
The inventory turnover for Pepsi measures the rate at which it can purchase and resell
products to customers. Pepsis turnover ratios from 2012 to 2010 show its stable rate of 18.28,
17.37, and in 2010 with 17.15, and the Industry Average of 11.6. Coca-Cola falls behind in this
area with lower but still abundant ratios of 14.71 in 2012, 15.05 in 2011, and 13.25 in 2010.
These ratios for Pepsi indicate that this company is appreciating solid sales and is also able to
refill cash quickly and has a lower threat of becoming stuck with obsolete inventory, meaning
that will not carry inventory that is useless and unsellable.
Days Sales Outstanding
DSO is important because the speed at which a company collects cash is significant to its
efficiency and overall profitability. The faster Pepsi collects cash, the faster it can reinvest that
cash to make more overall sales. When comparing the DSO between Pepsi and Coca-Cola they
are just about even when it comes to collecting cash. From 2012 to 2010 Pepsi has maintained a
stable average around 39 days. In 2011 Pepsi had a quicker DSO at 37.9 days. 2012 and 2010 the
DSO was at 39 days, meaning that in 2011 the management of credit and the expenditure of
receivables may have been just a bit more efficient. Coca-Cola on the other hand has steadily
lowered their DSO from 46 days in 2010 all the way down to 36 days in 2012. Coca-Cola has
dramatically become more efficient throughout the 3 year span, making it able to handle and
distribute cash a few days quicker than Pepsi. Because of the seasonality changes in sales some
analysts use a day-to-day average of sales based on a 30 to 90 day period using the average
receivable number to get a closer look at a more current DSO.
Fixed Asset Turnover
The fixed asset turnover for Pepsi in 2012 was 3.42, 2011 with 3.37, and 2010 with 3.03.
Although this ratio is a rough measure of the productivity of the companys fixed assets, which
are property, plant, and equipment, it is intended to reflect Pepsis efficiency in managing these
assets. Simply put, the higher the yearly turnover rate, the better. There is no exact number that
determines whether a company is doing a good job of generating revenue from its investments in
fixed assets, so comparing this with its main competitor Coca-Cola is a must. In 2012 Coca-
Colas turnover was 3.31, 3.11 in 2011, and 2.38 in 2010. Comparing the two it can be noticed
that Pepsi is more stable within the efficiency of its fixed assets and on average yields a higher
ratio as well.
Total Asset Turnover
In 2012 the Soft Drink industry average total asset turnover was .66. Pepsi was well
above this average with 0.87 as well as an average of 0.91 and 0.84 in 2011 and 2010. Coca-Cola
fell short of the Industry average in 2012 with a ratio of 0.55 along with 0.58 and 0.48 for 2011
and 2010. This means that Pepsi is doing a much better job at earning money from their assets
than Coca-Cola is. With Coca-Cola below the average it is understood that they are not doing a
quality job of selling their products and making money from their brand. With Pepsi involved in
so many other companies worldwide they have a better opportunity at making money from assets
when their brands are successful, Coca-Cola is not able to catch up because of its smaller spread
within different brands.

Debt Management Ratios:
Total Debts to Assets
Pepsi has a drastically higher debt to asset ratio than Coca-Cola specifically in years 2012
and 2011. Pepsis ratio in 2012 was 0.315 meaning that 31% of the assets of the firm were
funded using borrowed money. This shows that Pepsi is using a large amount of outside funding
to finance their assets. Although Coca-Colas ratio is lower with 0.17 in years 2012 and 2011 as
well as a 2010 ratio of 0.19, it does not increase much each year, along with Pepsis ratios
including 0.28 in 2011 and 0.29 in 2010. This shows that both corporations have been borrowing
more money to help fund their business.
Times Interest Earned
The times interest earned for Pepsi has not differentiated much from 2012 back to 2010.
The ratio calculated in 2012 shows 10.23, 2011 shows 11.32, and in 2010 it was back to 10.11.
In comparison to Coca-Colas TIE it seems that Pepsi is overleveraged compared the
competition. Coca-Colas TIE is very high compared to Pepsi at 30.74 in 2012, 28.47 in 2011
and 20.38 in 2010. But these high numbers can also indicate that Coca-Cola may be too safe and
is disregarding opportunities to expand earnings though leverage, which is the use of borrowed
money or even fixed assets to magnify profit potential. Based on what is known about Coca-
Colas total debts to assets ratio in comparison to Pepsis, it can be implied that Pepsi is better
off because of the companys ability to borrow money and spread it through its many other
successful brands. Coca-Cola may be holding back on this therefore giving the extremely high
TIE ratio.


Profitability Ratios:
Operating Margin
With the industry average operating margin at 36% Pepsi falls short with their ratios of
2012 through 2010 at 14.05%, 14.57%, and 15.79%. Coca-Cola is closer but also falls short
beginning with 2012 to 2010 at 25.42%, 25.51%, and 42.54%. In this measure of efficiency the
higher operating margin is associated with how profitable a companys core business is.
Understanding Pepsis operating margin shows that in 2012 for every $1 in sales, Pepsi made
$0.14 in operating earnings as opposed to Coca-Cola with their much greater $0.25 per $1. Both
of these companies are below the industry standard mainly because of the amount and price of
products they sell and distribute. These products are low cost (Pepsis costs are a bit higher than
Coca-Cola) but are abundant so the main goal for these firms in volume and promotion to garner
more sales.
Profit Margin
Pepsi and Coca-Cola are both extremely consistent when it comes to profit margin. Pepsi
had margins of 54%, 54%, and 53% for the 3 years while Coca-Cola had margins of 61%, 64%,
and 64%. What this accounts for is that for every $1 Pepsi makes off its products, it brings in
$0.54 for profit. Interestingly enough Pepsi had higher sales figures than Coca-Cola for the 3
years but the lower gross profit margin shows that Pepsi has a much higher cost of goods sold
than Coca-Cola does.
Return on Assets
This ratio is an indicator of how a company effectively generates profits off their assets.
It is said that the higher the firms earnings in proportion to its assets shows a company is using
their assets to their full profitability. Over the past 3 years Pepsi has not done much in changing
their return on assets. They are 8.28% in 2012, 8.84% in 2011, and 9.27% in 2010. Coca-Cola is
more effective with an ROA of 10.47% to 10.73% to 16.16%, from 2012 going down to 2010.
Falling ROA is a question of concern with Pepsi slowly decreasing year after year. These poor
values from Pepsi could be due to the outstanding liabilities that are not accounted for when
calculating this ratio and when accounted for could indicate a higher profit margin level.
Basic Earning Power
The basic earning power of Pepsi starting at 2012 down to 2010 is 12.33%, 13.30%, and
13.40%. Coca-Colas margins from 2012 to 2010 are 14.16%, 14.85%, and 20.49%. It seems as
if Pepsi is losing earning power annually with its poor performance within the companys return
on assets. Pepsi is not a short term stock option for a day trader. This is a company that on
average is slow growing because it has been around for so long making its long term earnings
power an indication that it may be a good investment. Even though its earning power is lower in
comparison to Coca-Cola, the margins are not big enough for Coca-Cola to ultimately take over
the market.
The chart below was taken from an article in the Business Insider. This is a visual aid to
the rising stock values of both Pepsi and Coca-Cola throughout the years.






Return on Common Equity
Pepsi has a similar ROE as Coca-Cola, with their 2012 margin at 27.56%, 2011 at
31.12%, and 2010 at 29.71%. Similarly Coca-Cola at 2012 was 27.51%, 2011 at 27.13%, and
2010 at 38.02% with the industry average at 32.40%. Pepsis somewhat stable ROE suggests
they are constant in generating profit without needing much capital. This is also a good indicator
of Pepsis management at positioning the shareholders capital. Even though a constant rising
ROE is better, their ability to stay even is much better in the eyes of the shareholder than it
would be if they were to fall.
Market Value Ratios:
Price/Earnings
If there is one number that people look at more than any other is the price to earnings
ratio. With Pepsis relationship between the stock price and the companys earnings the margins
starting with 2012 and ending at 2010 looks like this; 18.02, 15.03, and 16.04. Coca-Colas
margins are as listed as well; 19.03, 14.02, and 19.02. With Pepsis increasing P/E ratio the
market has high hopes for this stocks future. The question to ask is what is the right P/E for
Pepsi? Unfortunately that is the risk involved because there is no absolute correct answer. This
answer depends on what the buyer is willing to pay for Pepsis earnings. Purchasing stock in
Pepsi based on the growing P/E ratio of this firm means the buyer believes this company has
respectable long term forecasts over and beyond its existing position.
Market/Book
Pepsi has a market/book margin of 0.96 almost identical to that of its competitor Coca-
Cola with a margin of 0.95. Understanding that if the ratio is above 1 the stock is undervalued; if
it is less than 1, the stock is overvalued Pepsi seems to fall under the category of being
overvalued but not by much. Along with Coca-Cola these companies are seen as being
overvalued and are likely to experience a price drop and return to a level which better reflects its
financial status. Looking at these margins and understanding Pepsis small but steady growth
within its P/E I would consider this companys price to decline but only in small increments and
then grow slowly because its past P/E values suggest this in its past patterns.
Summary of Findings:
From the first soda created in 1898, todays PepsiCo has a gigantic range of 22 beverage,
snack, and food trademarks making it one of Americas best enterprises. PepsiCo is shifting with
the times, it doesnt want to be recognized as just another soda or snack food. PepsiCo is
devoting itself to Performance with Purpose, the belief that what is good for business can and
should be good for society. The fact that the Coca-Cola vs. Pepsi battle has stormed for ages
shows that people have certainly had a thirst for its products. Pepsi may be an old company, but
it has clearly developed especially under the current management brought about by Indra Nooyi,
The CEO of Pepsi. The companys product expansion and reinvention are frontward thinking
efforts to develop the long term trajectory of this corporation. Based on all of the market ratios
conducted and the analysis of Pepsis market value I believe that this company will remain
steady and continue to grow slowly within the market. As a marketing major myself I envy
Pepsis ability to establish and grow strong global brands, this creates a company that is diverse
and also increases its overall value as long as they continue to grow with the ever-changing
marketplace. It is interesting to evaluate the different financial aspects that have profound effects
on a companys market value and overall growth throughout the many years of Pepsis lifetime. I
added the stock chart found from Business Insider because the growth and competition between
Pepsi and Coca-Cola is fascinating to learn about. These companies have such strong global
brands that the future growth of both companies should be interesting as well as the rivalry itself.
Along with Pepsi and Coca-Cola, the beverage and soft drink industry as a whole will continue
to grow steadily through the years. These long term corporations keep coming up with new and
inventive ideas as well as exciting brands to quench anyones thirst. It was interesting doing
research on the P/E ratios of both companies, Pepsi seems to be growing slowly and I dont think
there will be any huge jumps but with advertising and the media in todays world there is always
the possibility that a new brand could push any company to make great strides within the market.
As someone who does not know all there is to know about the stock market and with just the
basics learned in principals of finance I would be interested in investing in this company. They
are a long term company that is trust worthy and as a beginner in understanding the stock market
I think it would be a safe company to invest in and more importantly learn from.
Recommendation:
If I were an analyst looking into Pepsi as a future investment or if I was currently holding
stock within this company I would definitely hold on to the stock I had in Pepsi. There is not
much risk since they are not only a long term stock, but they are one of the top successful
companies in the United States for a reason. It is a company I would wait and see for a
considerable amount of time to see where they are heading as a whole as well as what new
brands and products they come to claim as their own.






Works Cited
"1. Introduction - Soft Drink Industry SAR Analysis." 1. Introduction - Soft Drink Industry SAR
Analysis. N.p., n.d. Web. 15 May 2014.
Bhasin, Kim. "COKE VS. PEPSI: The Story Behind The Neverending 'Cola Wars'" Business Insider.
Business Insider, Inc, 04 Jan. 2013. Web. 15 May 2014.
"PepsiCo Home | PepsiCo.com." PepsiCo Home | PepsiCo.com. N.p., n.d. Web. 14 May 2014.
"Pepsico, Inc." Yahoo! Finance. N.p., n.d. Web. 15 May 2014.