Working Capital Management Ratios of PepsiCo

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

Supervised by:

Professor Haitham Nobanee

Abstract

This research paper aims to recognize the financial health of PepsiCo through analyzing the

efficiency, liquidity, and profitability of the company for four consecutive years; 2016, 2017,

2018, and 2019, followed by the working capital ratio analysis method. Through the analysis of

inventory, collection, and payable period ratios in addition to measuring operating, cash

conversion, and net trade cycles supported by figures, a conclusion about the existing optimal

management of the working capitals of Pepsi Co are assured. Furthermore, the sustainability

engagement of Pepsi Co refined its current assets management by its increased cash-flows,

followed by a low collection period and higher payable period in the company respectively.

Introduction

This research paper aims to focus on the role of working capital management and its relation

with the net trade cycle in maintaining the profitability and liquidity of PepsiCo. The report also

discusses the need to practice working capital management during crisis periods by every firm;

small, medium, and large firms including Pepsi Co, through decreasing their capital expenditure,

and inventory levels for maintaining creditworthiness. PepsiCo, Inc. is one of the largest

American food and beverage companies in the world, having varied food products in more than

200 countries. (Pepsico, Inc., 2020)For the Current assets management ratio analysis of PepsiCo,

the research method referred to the historical financial data of the company of four years (2016-

2019), and the analysis is provided through computing different financial ratios. Moreover, this
report tends to highlight the causes for low fall in the financial performance of the company for

the last few years, in addition to identifying what all factors lead to the financial growth of

PepsiCo. Besides, this paper also highlights how different ratios; working capital ratio, collection

ratio, and inventory ratio, helps in identifying the efficiency of working capital of Pepsi Co, in

addition to identifying the type of relationship exist between the net trade cycle and profitability

of Pepsi Co. Lastly, the financial sustainable reporting along with following sustainable practices

within Pepsi Co.’s financial systems are reviewed in the paper, where the grants of sustainability

in shared value creation; socio-economic, environmental and firm’s value are briefly highlighted.

(Pepsi Co, n.d.)

PepsiCo, Inc. Background

PepsiCo, Inc. was established back in 1965, through a merger between Frito-Lay and Pepsi-Cola

with its headquarters in Purchase, New York. After the merger acquisition, the brands included

are Tropicana juices, Lipton, Rold, Pepsi cola, Frito-Lay snack products, and many more.

Moreover, its form of seven divisions; Europe; PepsiCo Beverages North America; Frito-Lay

North America; Africa, Middle East; Latin America; Europe; Australia/New Zealand; the Asia

Pacific and China. Having said that, at present Pepsi Co has 20 offices all over the world and is

highly focused about its expansions in other countries, mainly in Russia as the largest food and

Beverage Company in (Pepsico, Inc., 2020)

Sustainable practices in PepsiCo

The Corporate social responsibility of PepsiCo is maintained by a sustainable food supply

system, where the firm integrates the green approach into its business strategy. And the approach

is known as, 2025 sustainability agenda to fulfill changing societal and consumer needs, which

focuses on three priorities; protecting the planet, empowering people worldwide, and helping to

improve health through its product lines (Pepsico, 2016). And Pepsi Co tends to implement the

approach by offering nutritious and diet conscious food products along with lessening the

possible negative environmental impacts, thus protecting the planet. Besides, Pepsi Co takes care
of the communities, including its employees as part of CSR, since all these are inevitable for the

firm’s long term sustainable growth. (CSR wire, n.d.) And similar corporate actions are vital for

the firm as this will add value to the firm, through employing the financial managers to make

better decisions, through integrating the firm’s financial systems with its sustainable policies.

(Nobanee & Alkabi, A Study on Financial Management in Promoting Sustainable Business

Practices & Development, 2019) Furthermore, renewable energy plants are now part of Pepsi

Co’s sustainable food system, to combat the climate change challenges, so that PepsiCo can keep

the continuity of its sustainable food and supply system. And more than 97% of the renewable

electricity will be generated in U.S direct operations as a global goal to lessen the emissions to a

range of 10-20%, by 2030 as confirmed by Pepsi Co. (Peters, Fast Company, 2020) A research

article discussed similar initiative regarding the creation of shared value by sustainability, but by

following Islamic and Western financing systems. It is mentioned that these financial systems

lead the sustainable projects practiced by businesses in different forms like; short terms green

loans, renewable energy programs, community micro-financing projects, and many more

(Almansoori and Nobanee, 2019). Similarly, a recent article about financial growth and

sustainability states that Islamic and western financing models evaluate as well as identifies any

financial distress within companies. Distresses like; company unable to pay its obligations in due

time, insolvency issue when a firm’s assets exceed its liabilities, etc. and predicted

macroeconomic and non-financial factors; the rate of inflation, money supply, etc. are reasons

behind the distress (Al Nuaimi and Nobanee, 2019). However, such financial systems and

models along with latest sustainable agendas, allowing PepsiCo to be successful in creating

better food products, protecting socio-environmental differences across different communities as

well as ensuring higher efficiency in PepsiCo’s assets utilization in the long run of the company.

Working capital management analysis

Working capital is the difference of balance sheet aggregated accounts; current assets and current

liabilities, and ensuring the efficiency of a firm’s operation utilizing its current assets as well as
its liabilities to the fullest, is termed as working capital management or current asset

management. This strategy also allows the firm to sustain enough cash flow to meet the short-

term operating costs and debt obligations. The current assets denote the assets for the working

capital management are highly liquid; cash, inventory, accounts receivables, and many more,

whereas the current liabilities include obligations due within the next one year; long term debt

payments and operating expenses. (Tuovila, 2019)

However, there are three ratios used for working capital management; the working capital or

current ratio; inventory turnover, and the collection ratio. To measure the liquidity of a business,

the working capital ratio is used by companies to measure the capability of paying their

obligations. If the ratio is below 1, then the business doesn’t have enough liquidity, whereas a

firm having a ratio of 2 is considered of having good short term liquidity for the company

(Alkaabi and Nobanee, 2019).

Having said that, when a firm tries to increase its payable deferral period, the company

might ruin its credit reputation, so realizing the optimal levels of account payables, providing

accurate insights of efficiency of working capital management of the company is important

(Nobanee and Alhajjar, 2014)

The collection ratio calculation calculates the average number of days a company requires to

collect payments after a credit sales transaction. The lower the collection ratio of a company is,

the more efficient is the cash flow of the company. (Tuovila, 2019) Again, if a firm attempts to

reduce its receivable collection period, then it could overlook its better credit customers, hence

recognizing the ideal level of account receivables will justify the actual working capital

management of the company (Nobanee and Alhajjar, 2014).

The inventory turnover ratio measures how rapidly a firm's inventory is being sold and refilled.

A low turnover ratio denotes implies weak sales, like overstocking and a higher turnover ratio

measures the insufficient inventory levels of a company. (Tuovila, 2019) And such case of

inventory shortages can happen, when a company tries to reduce the inventory conversion period
to balance the inventory levels, hence, identifying optimal levels of inventory is needed similar

to payable and collection period to ensures efficient working capital management of the firm.

And the efficiency of current assets management of a firm will be achieved by quickening the

cash collection period and slowing down the cash payments as this principle is linked with

traditional concepts of the net operating cycle; the amount of time needed to convert net current

liabilities and assets into cash and the cash conversion cycle; the time between a firm's purchase

of stocks and getting receipts of cash from receivables related to the sale of finished goods.

Although the operating cycle measures the financial flows from receivables and inventory,

it neglects the financials for payables, and about this Loughlin and Richards (1980) stated the

cash conversion cycle (CCC) as a better measure for working capital management. However,

CCC concentrates only on the amount of time flow of the financials continues in the cycle but

does not measure the amount of finance needed for a product, as it goes along the CCC (Nobanee

and Alhajjar, 2014). Hence, Soenen and shin (1998) recommend the net trade cycle; the amount

of time needed to form inventory, sell and collect on invoices to customers, as another option to

measure working capital management. (Investing answers, 2019) It is a good measure of the

efficiency of working capital, as it mentions the count of "day sales" a firm needs to fund and the

manager of working capital can estimate the company’s fund needs expressing as the function of

awaited sales increment (Nobanee and Alhajjar, 2014).

However, all these cycles and ratios will only justify the optimal levels of inventories,

receivables, and payables by shortening these cycles, as mentioned earlier. Because, this will

inflate the internal operation’s efficiency of the firm, resulting in higher liquidity, profitability,

and increased market value of the firm (Nobanee and Alhajjar, 2014).

Data and methodology

The data here is collected for four consecutive years; 2016 to 2019 of Pepsi Co and mentioned

below in table 1. The source of data is the financials of yahoo finance.

The methodology used here is the horizontal analysis since the financial data is compared and

differentiated for a consecutive reporting interval of four years.

Table 1: Financial Data of Pepsi Co

Item/Year 2019 2018 2017 2016

Inventories 3,338,000 3,128,000 2,947,000 2,723,000

Receivables 6,447,000 6,079,000 5,956,000 5,709,000

Accounts Payables 8,013,000 7,213,000 6,727,000 6,158,000

Sales 67,161,000 64,661,000 63,525,000 62,799,000

Cost of Goods 30,132,000 29,381,000 28,785,000 28,209,000

Sold

Ratios used in the analysis :

The formulas used for computing the working capital ratios, discussed earlier are;

 Inventory Period = (Inventory /Cost of Goods Sold) x 365

 Receivable Period = (Receivables/ Sales) x 365

 Payable Period = (Accounts Payables/ CGS)/ 365

 Operating Cycle = Inventory Period + Receivable Period

 Cash conversion cycle (CCC) = Operating Cycle –Accounts Payables

 Net Trade Cycle = {(Receivables + Inventory + Payables) / Sales} x 365

Results and Discussion

Table 2 : Liquidity Ratios of Pepsi Co

Ratio/Year 2019 2018 2017 2016

Inventory Period 40.43 38.86 37.37 35.23

 Receivable Period 35.04 34.31 34.22 33.18

Payable Period 97.06 89.61 85.30 79.68

Operating Cycle 75.47 73.17 71.59 68.42

Cash Conversion -21.59 -16.43 -13.71 -11.26

Cycle
Net Trade Cycle 9.63 11.26 12.50 13.22

Chart Title
120

100

80

60

40

20

0
2019 2018 2017 2016

Inventory Period Receivable Period Payable Period

Figure 1 : Inventory Period , Receivable Period and Payable Period of PepsiCo

The inventory period or inventory days measures the average number of days, goods are kept in

inventory before they got sold. That means, it measures how long a company takes to sell its

existing current inventories. Here, in Pepsi Co, the inventory days during 2016 and2017 were

low; 35 and 37 days, compared to 2018 and 2019. This means the company was capable of

quickly turning its inventory into sales. But the number of days increased slightly during 2018

and 2019; 39 and 40 days and this indicates, in recent times Pepsi Co not able to generate sales

from its inventories quicker compared to its past two years. And holding excess inventory can

negatively impact the cash flow of the company.

The receivable period measures the number of days needed to collect payments of credit

customers by the company. Here, for Pepsi Co the collection period kept increasing slightly
every year from 2016 to 2019; 33, 34.22, 33.31, and 34 days. And this means comparative to the

past 2-3 years, Pepsi Co, in recent times requires to communicate better with customers about

paying their outstanding debts, and the company is currently not able to perform good collection

or credit assessment.

The payable period or days purchase measures the average number of days a company takes to

pay its suppliers. If the number of days is high, then it means the financial condition of the

company is strong as it paying its suppliers slowly, holding the cash. Here, in Pepsi Co, the

payable period kept increasing over four years; 2016 -2019, wherein 2016, the number of days

purchase was 80, which later got increased to 85 by 2017. Similarly, the number of days

increased by 10 during 2018 compared to 2016; 90 days and finally increased to 97 days during

2019, which means Pepsi Co is utilizing its available cash properly for paying its suppliers.

Summary

The receivable period and payable period for PepsiCo during 2016, highlights that, all the three

ratios were comparatively low, which means during that period firm was more capable of

collecting cash quickly from customers, followed by quicker sales of inventory and thus able to

pay its suppliers in due time, since there was enough flow of cash due to efficient working

capital management. Contrarily, the efficiency and liquidity of the company gradually reduced

over the next three years due to higher levels of inventory, days of collections, and payments.

Overall the liquidity ratios were not good for Pepsi Co in recent years; 2017, 2018, and 2019.

Chart Title
100
80
60
40
20
0
2019 2018 2017 2016
-20
-40

Operating Cycle Cash Conversion Cycle Net Trade Cycle

Figure 2 : Operating Cycle, Cash Conversion Cycle and Net Trade Cycle of Pepsi Co

The operating cycle is the measure of the average time required for a company to make its first

expenditure to produce goods, sell them and collect cash from customers for the sale of goods

The lower the cycle is, the higher is the efficiency of the working capital management of a

company, as its generating enough liquidity, from customers even before it pays the suppliers for

inventories. Here for PepsiCo, the operating cycle was shorter during 2016; 68 days,

comparatively to the next three years; 72, 73, and 75 days during 2017, 2018, and 2019. That

means, PepsiCo in recent times needs to extend its payment terms for its supplies and inventories

to shorten its operating cycle.

The cash conversion cycle denotes the number of days a company takes to convert its

investments in inventory into cash flows resulted from sales that is the operating cycle is longer

than the payable period of a company. The lower the cash conversion cycle is, the better it is for

the company as it can increase the stocks of a company through earning more profits, before its

payments to the suppliers. Because the payments are due only when the operating cycle ends.

Here, Pepsi Co is having positive outcomes in recent years out of this cycle as the CCC in 2018

and 2019 were negative; -16 and -22, likewise in 2016 and 2017 the cycle started to get lower,

staring from -11 in 2016 to -14 during 2017. This means, there is an increment in the efficiency

of Pepsi Co, with higher profitability and liquidity.

Lastly, the net trade cycle measures how long the cash is held or tied up in each of these

accounts; accounts receivable, inventory, and accounts payable. That means it indicates about

day sales’ the firm needs to fund its working capital, expressed as the function of predicted sales

increment. The lower the net trade cycle is, the efficient is the working capital management of

the company. Here, for Pepsi Co, the net trade cycle kept decreasing gradually, every year since

2016 to 2019; 13, 12.50, 11 and 10 days and this means, Pepsi Co in recent times is generating

higher revenues as it is getting paid for its products and services before it pays its suppliers,

which is very advantageous for Pepsi Co.

Summary

All three cycles; the operating cycle, the cash conversion cycle, and the net trade cycle of

PepsiCo for 4 consecutive years; 2016 to 2019 highlighted that the cycles are getting shorter

from old to recent times. That means, there is an increment in the efficiency of Pepsi Co.’s

working capital due to shorter operating and net trade cycle in addition to increased negative

cash conversion cycle from 2016 to 2019. Hence, overall the profitability, liquidity, and net

present value of the cash- flow of Pepsi Co are higher in recent years; 2018 and 2019, compared

to 2016 and 2017.

Conclusion

Based on the calculations and ratio analysis results of PepsiCo of the previous four consecutive

years, it’s proved that there exists a positive relationship between the net trade cycle and the

liquidity of the company a comprehensive measure of the efficiency of working capital

management of the company. This means the company is managing its working capital

efficiently, having a negative cash conversion cycle, and a slightly shorter operating cycle. Since

the net trade days are positive and shorter compared to the past three years, therefore the

company is paying for its products before paying its vendor AP. Besides the operating cycle in

recent times is getting longer for PepsiCo, which means, the company needs to extend the

payment terms for its inventories as well as supplies for having an optimal operating cycle,

leading to increased liquidity and profitability of Pepsi Co.

On the other hand, except for the payable period of working capital, other ratios; collection ratio,

and payable ratios show a negative and significant relationship towards the current asset

management of Pepsi Co in recent times. The ratios overall indicate the subtle financial health of

the firm in recent years, with increment in all three ratios And it means, Pepsi Co is not so

efficient in collecting its cash quickly after generating sales on inventory and able to pay its

suppliers early, thus the company is not able to collect its cash flow from the current assets

smoothly, managing to keep the higher liquidity and profitability of the company.
However, Pepsi Co is efficient in managing its working capital in terms of its cash conversion

and the net trade cycle and is expected to manage the same during its crisis period having such

sustained positive relationships for the coming years. It’s optimal and sustainable working

capital management aspects as well as the inclusion of innovations from time to time will

manage its current assets well, with less complexity and low costs.

Bibliography
(2016, October 17). Retrieved from Pepsi Co:

https://www.pepsico.com/news/press-release/pepsico-launches-2025-sustainability-

agenda-designed-to-meet-changing-consumer-a10172016

(2019, October 1). Retrieved from Investing answers:

https://investinganswers.com/dictionary/n/net-operating-cycle

Peters, A. (2020, January 15). Retrieved from Fast Company:

https://www.fastcompany.com/90451782/pepsicos-u-s-operations-will-be-powered-by-

100-renewable-electricity-this-year

Nobanee, H. , AlHajjar, M. (2014) An Optimal Cash Conversion Cycle. International Research

Journal of Finance and Economics. March (120), 13-22.

Tuovila, A. (2019, October 4). Retrieved from Investopedia:

https://www.investopedia.com/terms/w/workingcapitalmanagement.asp#:~:text=There

%20are%20three%20ratios%20that,use%20of%20a%20company's%20resources.

Britannica. (2020, May 12). PepsiCo, Inc. Retrieved from Britannica:

https://www.britannica.com/topic/PepsiCo-Inc

CSR Wire. (n.d.). CSR Profile of PepsiCo. Retrieved from CSR Wire:

https://www.csrwire.com/members/10363-PepsiCo
Pepsi Co. (n.d.). About the Company. Retrieved from https://www.pepsico.com/about/about-the-

company

Almansoori, Alia and Nobanee, Haitham, How Sustainability Contributes to Shared Value

Creation and Firms’ Value (October 19, 2019) Retrieved from:

https://ssrn.com/abstract=3472411

Al Nuaimi, Aysha and Nobanee, Haitham, Corporate Sustainability Reporting and Corporate

inancial Growth (October 19, 2019) Retrieved from: https://ssrn.com/abstract=3472418

Alkaabi, Hamda and Nobanee, Haitham, A Study on Financial Management in Promoting

Sustainable Business Practices & Development (October 19, 2019). Retrieved from:

https://ssrn.com/abstract=3472415