Ratio Analysis of PepsiCo

Mosammat Fatima
Abu Dhabi University, 1071963@students.adu.ac.ae

Supervised by:

Professor Haitham Nobanee

Abu Dhabi University, Email: haitham.nobanee@adu.ac.ae

Abstract

This paper tends to recognize the financial health and performance of PepsiCo using its financial

statement analysis for the years; 2016, 2017, 2018, and 2019 respectively. After the analysis of

different ratios; liquidity, activity, efficiency, and profitability supported by figures, a conclusion

regarding the investors not to invest in PepsiCo is presented, linking the current financial and

sustainable aspects of the firm.

Introduction

This research paper aims to compute and analyze the financial performance of the PepsiCo

Company and to have a deep understanding of its financial policies. The report also explains the

financial distress of the origin of the company following World War 1 and how it overcomes

through reincorporating and strategizing the financial policies back in the 1920s. [ CITATION

Bri20 \l 1033 ]PepsiCo, Inc. is an American food and beverage company, which is one of the

largest in the world, with multiple product lines across 200 countries. The method used in

research is through referring to past financial data of the company, where the high, low, and

fluctuations in the company’s financial curve are analyzed using different ratios. The past

variations in the finance of PepsiCo are also discussed to recognize the background and financial

factors touching PepsiCo in the long run. Moreover, this report also aims to highlight the reasons
for shifts in the financial situation of PepsiCo over the past few years and how the factors

relating contribute to the decline in the company’s finance. Besides, the report also denotes how

different financial ratios; liquidity ratios, profitability ratios, asset management ratios, and long

term solvency ratios of four consecutive years (2016-19), helps in making an investment

decision for PepsiCo in the present year as well as coming future. Additionally, the transparent

sustainable reporting as well as sustainable practices within the firm’s financial systems are

reviewed in the report, where the contribution of sustainability in shared value creation and

firm’s value is briefly emphasized. [ CITATION Pep \l 1033 ]

PepsiCo, Inc. Background

PepsiCo, Inc. was formed back in 1965, when Pepsi-Cola merged with Frito-Lay, setting the

company’s headquarters in Purchase, New York. With the merger, PepsiCo’s well-known brands

included Pepsi cola, Frito-Lay snack products, Tropicana juices, and Gatorade sports drinks,

Lipton, Rold Gold pretzels, and many more. The company is formed of seven divisions; Frito-

Lay North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle

East; and the Asia Pacific, Australia/New Zealand, and China.

However, the first Pepsi-Cola was made by Caleb D. Bradham a pharmacist in New Bern, North

Carolina, and was named Pepsi-cola by Bradham, by the end of the 18th century. Later in the

early 19th century, Bradham incorporated the Company when the drink turned out to be popular

and made a huge success. Then the journey of the Pepsi-Cola started when Charles G. Guth,

founder of the modern Pepsi-Cola established a new Pepsi-Cola Company, formulating a new

and better drink back in, 1931. The arrangements of new bottling operations lead to the

merchandise of a successful 12-ounce bottle of 5 cents. Then in 1941, Guth lost controlling

power in the Pepsi-Cola Company, so the company was merged into Loft, where the name Loft,

Inc., was later changed to the Pepsi-Cola Company. However, at present the company has 20

offices worldwide and is majorly focused on its expansion process of operations in other
countries, mostly in Russia, to establish PepsiCo as the largest food and Beverage Company in

Russia.[ CITATION Bri20 \l 1033 ]

PepsiCo as a sustainable business

The CSR approach of PepsiCo is carried out through a sustainable food system, where the firm

visions to deliver financial performance over the long run by integrating the green approach into

its business strategy. And that’s implemented through offering a wide range of products;

multiplying the number of different nutritious foods and beverages as well as reducing the

possible negative environmental impacts. Moreover, complete support to the needs and

expectations of the employees and the communities associated with the business is taken care of

as part of corporate social responsibility, as all of these will help place the company for long-

term sustainable financial growth. [ CITATION CSR \l 1033 ]And such corporate disclosure is

fundamental as it will highlight the value added to any firm or industries employing practicing

sustainability in business and the mangers will be able to make better decisions by integrating the

sustainable policies with the financial systems, taking the necessary risks associated approach in

consideration (Alkaabi and Nobanee, 2019). Moreover, the sustainable food system approach by

PepsiCo is now considering the renewable energy plants, as climate change is creating

challenges for the sustainable food system of the company. The company confirms that by 2030,

over 99% of renewable electricity will be generated in U.S direct operations as part of a

universal goal for cutting out the emissions within a range of 15-20%. [ CITATION Ade20 \l 1033 ]

An article mentions about such initiative towards shared value creating by sustainability is

mentioned through Western and Islamic financing systems. These systems initiate any

sustainable projects owned by a business in various forms; community micro-financing projects,

renewable energy programs, short term green loans, and many more.[CITATION Ali19 \l 1033 ]

Similarly, another article connects financial growth and sustainability through analyzing the

Islamic and Western financial model systems. And such models provide the evaluation and

identifications of any financial distress within various companies like inability to pay obligations
when due, the occurrence of insolvency when the assets of a firm exceed its liabilities, and many

more. And the prediction of any such distress relies on the macroeconomic and non-financial

factors of the firm; market environment, company’s policies, management, rate of inflation,

money supply, and many more (Al Nuaimi and Nobanee, 2019)

However, the implementation of such financial models and sustainable financial strategies with

sustainable reporting is making PepsiCo successful in creating a major socio-environmental

difference across different communities of the world.

Financial statement analysis

Financial analysis denotes the selection and interpretation of a firm’s financial data to evaluate

the operational performance and thus measuring the financial condition of a company. And

financial reporting by the financial analyst is a major part of it, as it reveals the historical and

current financial information of the company. And the analysis is done with the help of different

tools; quantitative analysis and ratio analysis. [ CITATION Fab99 \l 1033 ]

The ratio analysis is essential as it can aid the business owners and managers in measuring their

progress against predetermined goals, a specific competitor as well as the overall industry.

Besides, ratios are powerful mediums of recognizing trends in the firm’s early stages and allow

the business owners to examine the relationships between products and measure the extent of

that relationship (Almansoori and Nobanee, 2019). However, financial ratios are time-sensitive

which means, they only depict the situation of the business at the time when the fundamental

figures were prepared. [ CITATION Inc \l 1033 ]

In general, the ratios are categorized into four; profitability or return on investment,

leverage, liquidity, and operating or efficiency ratios.

Data and methodology

The data for Pepsi Co for four consecutive years; 2016 to 2019 are presented below in table 1.

And the data are obtained from the financials of yahoo finance.
The methodology followed here is the horizontal analysis, as the financial data is compared over

a consecutive reporting period of 4 years.

Table 1: Financial Data (Pepsi Co)

Item/year 2019 2018 2017 2016

Current Assets 17,645,000 21,893,000 31,027,000 27,089,000
Current Liabilities 20,461,000 22,138,000 20,502,000 21,135,000
Inventories 3,338,000 3,128,000 2,947,000 2,723,000
Cash 5,738,000 8,993,000 19,510,000 16,125,000
Receivables 6,447,000 6,079,000 5,956,000 5,709,000
Total Assets 78,547,000 77,648,000 79,804,000 74,129,000
Total Liabilities 63,679,000 63,046,000 68,823,000 62,930,000
Total Equity 14,786,000 14,518,000 10,889,000 11,095,000
Sales 67,161,000 64,661,000 63,525,000 62,799,000
Cost of Goods Sold 30,132,000 29,381,000 28,785,000 28,209,000
EBIT 10,291,000 10,110,000 10.509,000 9,785,000
Interest 1,135,000 1,525,000 1,151,000 1,342,000
Net Income 7,314,000 12,515,000 4,857,000 6,329,000
All numbers in thousands, Source : Yahoo Finance

Ratios for the analysis

The Liquidity ratios are the ratios that measure a company’s capability to repay short- and long-

term obligations. The liquidity ratios covered for the analysis are;

 Current ratio = Current assets / Current liabilities

 Acid-test ratio = Current assets – Inventories / Current liabilities

 Cash ratio = Cash and Cash equivalents / Current Liabilities

The debt ratio measures the comparative amount of a company’s assets which are given through

debt and the ratios used for the analysis are;

 Debt ratio = Total liabilities / Total assets

  Interest coverage ratio = net income / Interest expense 

Activity ratios are used to measure how far a company is making use of its assets and the

efficiency ratios used are:

 Asset turnover ratio = Net sales / Total assets

 Inventory turnover ratio = Cost of goods sold / inventory

 Receivables turnover ratio = Net credit sales / accounts receivable

Lastly, the profitability ratios measure the extent a company can generate income relative to

revenue, equity, and balance sheet assets. The ratios for analysis are;

 Return on assets ratio = Net income / Total assets

 Return on equity ratio = Net income / Shareholder’s equity

 Profit margin = Net income/net sales

Results and Discussion

Microsoft Excel
Worksheet

Table 2 : Liquidity Ratios of Pepsi Co

Ratio/Year 2019 2018 2017 2016

Current Ratio 0.86 0.99 1.51 1.28

Quick Ratio 0.70 0.85 1.37 1.15

0.28 0.41 0.95 0.76
Cash Ratio
 Current Ratio
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2019 2018 2017 2016

Figure 1: Current Ratio of Pepsico

The current ratio measures a firm’s capability to meet its short term obligations with the current

assets. The higher the rate of the ratio is, the higher is the liquidity of the firm. Here from 2016 to

2017 the ratio increased from 1.3 to 1.5, therefore in 2017 the liquidity of the PepsiCo was

higher, and the firm could easily settle its liabilities. However, the liquidity declined in the next

two consecutive years to 1 by 2018 and 0.8 by 2019, which depicts that PepsiCo having

difficulty in meeting the firm’s obligations since the ratio dropped majorly lesser than 1. 

Quick Ratio
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2019 2018 2017 2016

Figure 2: Quick Ratio of Pepsico

The quick ratio denotes a firm’s capacity to pay for current liabilities without the aid of selling

any inventory or additional financing. It is in the forms of cash or cash equivalents or such assets

which is capable of a convertible to cash. Here, from 2016 to 2017, a quick ratio slightly

increased from 1.1 to 1.3, therefore PepsiCo was not facing any issues related to meeting the
current obligation. Contrarily, from 2017 to 2019, the ration dropped till 0.7 from 1.3, and this

situation indicates Pepsico started to rely on its inventories to meet its current obligations, and

that's not welcoming for the investors and partners of PepsiCo.

Cash Ratio
1
0.8
0.6
0.4
0.2
0
2019 2018 2017 2016

Figure 3 : Cash Ratio of Pepsi Co

The cash ratio measures the ability to finance its current liability through cash and cash

equivalents. In short, it measures the liquidity of the company. 

Here, for PepsiCo the cash ratio rose to 0.95 from 0.76, therefore the firm was liquid enough to

finance its debt, but the scenario is quite opposite for the next two years. 

The ratio dropped majorly from 0.95 to 0.258 by 2019, which means the firm changed its

strategy of holding cash to hold less amount. 

Summary

The current, quick, and cash ratios for PepsiCo highlights that in the year 2017, the liquidity of

the firm was higher enough to meet all short term obligations. But comparatively, following

years of 2017, in all three ratios, PepsiCo has reached a low level (lesser than 1, for all 3 ratios)

of meeting short term obligations. Overall the liquidity ratios were not good for the latest years;

2018 and 2019.

Table 3 : Activity Ratios Ratios of Pepsi Co

Ratio/Year 2019 2018 2017 2016

Inventory
9.03 9.39 9.77 10.36
Turnover
Receivable 1 10. 10 11
Turnover 0.42 64 .67 .00
Total Asset
0.86 0.83 0.80 0.85
Turnover

Inventory Turnover
10.5

10

9.5

8.5

8
2019 2018 2017 2016

Figure 4 : Inventory Turnover of Pepsi Co

This ratio analyses how quickly the inventory is affecting the firm and how fast the company

making sales. The higher the rate of the inventory turnover ratio, the further efficient will be the

management of the firm’s stocks. Here, in 2016, PepsiCo had the highest inventory turnover rate

comparative to 4 years; 10.36, which decreased slightly to 9.77 in the following year. And the

decline continued further in 2018 and 2019, depicting the weaker sales and low demand for

PepsiCo products and other product lines, hence the cash flow of the firm is getting slower.
 Receivable Turnover
11.1
11
10.9
10.8
10.7
10.6
10.5
10.4
10.3
10.2
10.1
2019 2018 2017 2016

Figure 5 : Receivables Turnover of Pepsi Co

This ratio measures a company's capability in collecting the receivables from its clients or

debtors. Here, in 2016, PepsiCo had higher receivables turnover comparative to 4 years; 11,

which continued to decline in the next three years slightly, reaching to 10.42 from 11. And it

means Pepsi CO had debtors who are slower to pay the debts of the firm and hence receivables

are not been able to get collected quickly by PepsiCo.

Total Asset Turnover

0.86
0.85
0.84
0.83
0.82
0.81
0.8
0.79
0.78
0.77
0.76
2019 2018 2017 2016

Figure 6 : Total Asset Turnover of Pepsi Co

This ratio measures the efficiency of a company's use of the assets for having sales revenue or

sales income for the firm. Here, for PepsiCo the total asset turnover for 2016 and 2019 is almost

the same; 0.86 and 0.85, where the turnover rate dropped to 0.80 in 2017 but recovered in next

year to 0.83. And this means, PepsiCo is using its assets more effectively in recent years and is

successful in generating more sales for the company. 

Summary

Activity or Efficiency ratios; receivable turnover and inventory turnover for 2019 were very less

compared to the other three years, but the total turnover asset of PepsiCo for 2019 was higher

than the previous 3 years. And this means the PepsiCo has less liquidity and efficacy in

managing the inventory in recent years. 

Table 4: Debt Ratios of Pepsi Co

Ratio/Year 2019 2018 2017 2016

Debt Ratio 0.81 0.81 0.86 0.85

Times Interest Earned

9.07 6.63 9.13 7.29
Ratio

Debt Ratio
0.87
0.86
0.85
0.84
0.83
0.82
0.81
0.8
0.79
0.78
2019 2018 2017 2016

Figure 7 : Debt Ratio of Pepsi Co

The ratio measures the extent of a company's leverage, which means in what amount the assets

are required to sell to pay off all its existing liabilities. Here, the debt ratio increased slightly in
2017 from 0.85 to 0.85, which are not good for the firm, since there's a risk of not generating

enough cash flow to pay off the debt. But in the next two years of PepsiCo; 2018 and 2019, the

ratio declined to 0.81 and maintained that consistency till the recent year, which is a little

improvement for the firm as it is extending the capacity of the firm’s leverage.

Times Interest Earned Ratio

10
8
6
4
2
0
2019 2018 2017 2016

Figure 8 : Times Interest Earned Ratio of Pepsi Co

The ratio measures how quickly the company can disburse its liabilities generated on current

revenue. It is also known as an Interest coverage ratio. Here for PepsiCo, the ratio fluctuated

over last 4 years; 2016 -2019 and rose to higher ratio 9.07 by 2019 from 6.63 in 2018, which

means in recent times the financial condition of PepsiCo is strong as it’s more capable of

meeting its interest obligations, similar to the period of 2016 -2017. 

Summary

PepsiCo is having a strong financial position as both debt ratio and time interest earned ratio

rates are contrary for the year 2019, hence it has a good amount of assets to set off its debts

against liabilities. Overall, the years; 2017 and 2019 depict a better interest coverage ratio than

the other two years of PepsiCo.

Table 5: Profitability Ratios of Pepsi Co

Ratio/Year 2019 2018 2017 2016

Return on Equity 0.49 0.86 0.45 0.57
 Return on Assets 0.09 0.16 0.06 0.09
Profit Margin 0.11 0.19 0.08 0.10

Return on Equity
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2019 2018 2017 2016

Figure 9 : Return on Equity of Pepsi Co

The ratio measures the profitability of a company in relation to stockholders’ equity, which

means determining whether to invest in the company or not. Therefore it is one of the most

important financial ratios for the investors. Here, for PepsiCo, the ratio fluctuated over 4 years;

2016 -2019, where the ratio decreased first and then increased from 0.57 to 0.86 over the period

of 2016-2018. And it was efficient for the firm’s management is at generating income as well as

for the growth from its equity financing. On the contrary, in 2019 the ratio dropped to a very low

rate of 0.49 from 0.86, which highlights that it’s not worthy enough to invest in PepsiCo at

present.

Return on Assets
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
2019 2018 2017 2016

Figure 10 : Return on Total Assets of Pepsi Co

The ratio depicts the efficiency of the company is utilizing its assets to raise profit, through the

earning before interests and taxes of the company. The higher the rate of return on asset is, the

better it is for the company, as it is managing its assets properly to make sales. Here, for PepsiCo

for two years; 2016 and 2017, the ratio dropped to 0.06 from 0.09, but gain an increment in next

year; 2018 to 0.16. And for Pepsi Co the year 2018 was profitable as the profit margin was rising

by utilizing its assets properly and generating more sales than the previous two years. But in

2019, the ratio again declined to 0.09, similar to the financial situation faced in 2016, hence

PepsiCo is recently unable to make enough income from its assets.

Profit Margin
0.25

0.2

0.15

0.1

0.05

0
2019 2018 2017 2016

Figure 11 : Profit Margin of Pepsi Co

The profit margin or the gross profit ratio measures how much of the firm’s sales are generated

from its net income. Here, in 2016 and 2017 the ratio declined slightly to 0.08 from 0.10 but

increased in the following year to 0.19. And, it dropped further to 0.11 by 2019, which denotes

the lower margin, indicating the PepsiCo is currently under-pricing and unable to make a

reasonable profit on the sale. And this condition won’t attract more Investors to pay more for

PepsiCo

Summary

Pepsico currently having less profitability compared to past years and shows instability in

maintaining the higher profit margin for 4 years; 2016-1019. And it depicts that PepsiCo is not
utilizing its assets well to generate its sales. However, comprehensively, the profitability ratios

are impressive for the year 2018, since the ratios were higher enough, compared to 2019 and

other years. 

Conclusion 

Based on the computations and ratio analysis results of PepsiCo of the past four consecutive

years, there is a clear indication for the investors not to invest in PepsiCo in the present time. The

Liquidity ratios Of PepsiCo indicates that the financial performance of the firm has not been

strong enough in recent years, and the firm requires to show adequateness with its ability to meet

the short term debt responsibilities, as soon as possible. Similarly, the activity ratios show a

diminished business performance of PepsiCo for the current period due to not deploying its

possessions at optimal utilization and not attempting to grow annually through higher inventory

turnover, fixed assets, fixed assets, and many other factors to make sales.  

On the contrary, the debt ratios state positive results, through generating cash from its operations

of around $8-10b, resulting in operating cash to a total debt ratio of almost 26%. And it means,

PepsiCo’s current level of operating cash is strong enough to cover all debts. Additionally, the

debt levels in terms of the firm’s sustainability are assessed through a comparison of the

company’s interest payments to its earnings. And any company generating (EBIT) at least thrice

of its net interest payments is considered to be financially strong. And the debt ratio of PepsiCo

denotes that interest is comfortably covered, \which highlights the opposite scenario to the

investors about considering PepsiCo as such as PEP is a safe investment in current times.

[ CITATION Sim18 \l 1033 ]

Lastly, the profitability ratios showed the company’s profit margin is low in recent times, as well

as the return on assets and return on equity. And this depicts the poor condition of the firm

regarding the utilization of the firm’s assets to generate sales. And regarding this, the firm is
trying to carry out new productivity plans initiated at the beginning of 2019, such as

implementing new technology and business models for simplifying and generating improved

automated processes. At the same time, re-engineering the go-to-market and data processing,

which will allow accurate automation for every existing market and industry. Moreover, the

productivity plan will and optimize the manufacturing and supply chain footprint, through

simplifying the operations within the organization. And this particular plan is expected to boost

PepsiCo’s low-profit margins overcoming next years, as it will allow the firm to operate

effectively through intended cost savings. [ CITATION For19 \l 1033 ]

Therefore, for the current period, PepsiCo is slightly more expensive to invest in comparison to

trailing earnings than shares of competitor Coca-Cola. Also, it is having ongoing initiatives

towards boosting its financial condition as well as the recovery of its revenues, hence the

investors require to invest high in return of attractive dividends.

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