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PepsiCo Research Paper

Ratio Analysis

Industry
PROFITABILITY RATIOS Current Year Previous Year Average

Current ratio .862 .989 1.94

(2019) 17,645,000,000/20,461,000,000=

(2018) 21,893,000,000/22,138,000,000=

Quick Ratio .697 .848 1.08

(2019) 17,645,000,000-
3,380,000,000/20,461,000,000=

(2018) 21,893,000,000-
3,128,000,000/22,138,000,000=

Cash Ratio .269 .394 .51

(2019) 5,509,000,000 / 20,461,000,000=

(2018) 8,721,000,000 / 22,138,000,000=

Total Debt Ratio .81 .81 .76

(2019) (in millions) 63,679 / 78,547 =

(2018) (in millions) 63,046 / 77,648 =

Debt-Equity Ratio 4.283 4.32 1.12

(2019) (in millions) 63,679 / 14,867.84 =

(2018) (in millions) 63,046 / 14,602 =

Equity Multiplier 5.28 5.32 3.74

(2019) 78,547/14,867

(2018) 77,648/14,602

Times Interest Earned Ratio 9.2 7.0 3.68

(2019) (in millions) 7,353 +1959 +1,135 /

1,192 =

(2018) (in millions) 12,559 -3370 +1,525 /

1,353 =

Cash Coverage Ratio 11.57 8.2 9.4

(2019) 13,135/1,135

(2018) 12,509/1,525

Inventory Turnover 20.77 XXX 71

(2019) (in millions) 67,161 / 3,233 =

Days Sales in Inventory 39.25 37.62 40

(2019) 365/9.3

(2018) 365/9.7

Receivables Turnover 8.59 XXX 50

(2019) 67,161/7,822

Days Sales In Receivables 46.79 XXX 31.04

(2019) 365 / 7.8 =

Total Asset Turnover .86 .833 1.1

(2019) 67,161/78,096

(2018) 64,661/77,648

Capital Intensity 1.15 1.20 1.17

(2019) 78,096/67,161

(2018) 77,648/64,661

Profit Margin .109 .194 .199

(2019) (in millions) (7,353) / 67,161 =

(2018) (in millions) (12,559) / 64,661 =

Return on Assets .094 XXX .034

(2019) 7,353/78,096

Return on Equity .494 XXX .11

(2019) 7,353/14,868

ROE .495 .86 2.7

(2019) .109*.86*5.28=

(2018) .194*.833*5.32=

Price Earnings Ratio 27.34 XXX 22.5

(2019) 143/ 5.23 =

Market to book Ratio 12.53 9.71 4.63

(2019)127.67/10.19

(2018) 100.62/10.36

EV Multiple 16.66 14.17 14.69

(2019) 218,900,000,000/13,135,000,000

(2018) 177,300,000,000/12,509,000,000

Assessment of the Company PepsiCo

In the company's financial report they said operating profit decreased 2% and operating profit

margin declined 0.5 percentage points. The operating profit performance was driven by certain

operating cost increases and a 6-percentage-point impact of higher commodity costs, partially

offset by productivity savings of more than $1 billion and net revenue growth. They also added

that during the fourth quarter of 2019, they realigned certain of their reportable segments to be

consistent with a recent strategic realignment of our organizational structure and how our Chief

Executive Officer assesses the performance of, and allocates resources to, their reportable

segments. According to the Dupont equation the ROE is 49.5%, NI/EBT is 77.5%,

EBIT/Revenue is 14.04%, the Asset Turnover is 86% and the equity multiplier is 5.28. Based on

these numbers When comparing these numbers to the industry average it is apparent that they are

generally below the industry average which is not a good thing. After looking over the ratios

myself it appears that the income statement indicates a strong profitability because they are

making over seven billion dollars a year after expenses. The statement of cash flow also indicates

a weak cash position. The liquidity ratios show that the company is suffering for cash. All the

ratios like acid ratio, cash ratio, current ratio and working capital ratio all show a poor cash

position. If I was thinking about investing, I would not invest in PepsiCo due to the following

reasons: First of all the P/E ratio is 25% which means that the market is already paying 25 times

its earnings which is much higher than normal and not good for investment purposes. The

liquidity ratios of the company shows that the company is suffering for cash. This is likely

caused by a lack of cash management. All of the liquidity ratios like quick ratio, cash ratio,

current ratio and market to book ratio prove that this is the case. The dividend payout ratio is also

not good. The return on equity decreased from the previous year which is also highly

disappointing as an investor. At the same time, the profit margin ratio and debt equity ratio is
also not what it would need to be for me to invest. Overall as an investor I would not like to

invest in this company due to low performance according to the above ratios.

Capital Structure

Pepsi was created in 1893 and was later renamed as Pepsi Cola in 1898. Pepsi contained the

digestive enzymes pepsin and kola nuts used in manufacturing Pepsi. Bradham had thought

about creating a drink for people that was delicious and would help in digestion and boost energy

(PepsiCo). PepsiCo Inc. is an American Multinational Corporation headquartered in New York.

The company manufactures markets & sells a range of salty sweet & grain based snacks. It also

produces carbonated & non-carbonated beverages and other food products. PepsiCo has

approximately 285,000 employees working in over 200 countries. “Pepsi Cola Company began

in 1898, but it only became known as PepsiCo when it merged with Frito Lays in 1965. Until

1997 it also owned KFC, Pizza Hut and Taco Bell. In 1998 & 2001 PepsiCo bought Tropicana &

Quaker Oats” (Britannica). In 2005 PepsiCo surpassed Coca-Cola Company in market value for

the first time in 112 years since both companies began to compete. Over the years PepsiCo has

become a global beverage, snack & foods company. PepsiCo owns 5 different billion dollar

brands such as Pepsi, Tropicana, Frito Lay, Quaker Oats & Gatorade. PepsiCo also owns other

brands such as Diet Pepsi, 7UP, Mirinda, Ruffles Potato Chips, Aquafina Bottled Water, Pepsi

Max, Mountain Dew, etc.

Dividends

PepsiCo does have an impressive history of growing its dividends. They went all the way

from paying out a quarterly $0.45 back in 2010, to paying out $1.07 per quarter today. The

dividends have effectively more than doubled over the course of the last ten years. “If we are to
take a look back at the last 10 years, we can see the company managed to grow its dividends on a

7.84% CAGR” (Mirkovic). Charts seem to indicate that the payout ratio has been steadily

increasing over the past couple of years. The company is already overreaching when it comes to

dividends. I don't think it is a good idea to look upon the previous history of dividend increases

and hope for the same in the future. Pepsi is probably one of the most suggested dividend stock

picks and is a frequent resident of many dividend growth lists. The company is more than

capable of delivering on the dividends but given the current financial situation, I find that the

company is going to have a hard time keeping up with the dividend increases.The current annual

dividend yield is 2.5%.

Working Capital

Based on the company's disclosures, Pepsico has a Working Capital of 5.45 billion. This is

179.43% higher than that of the consumer defensive sector and significantly higher than that of

the Beverages Non-Alcoholic industry. The working capital for all United States stocks is

significantly lower than that of the firm (Macroaxis). One of the best ways to assess a company's

working capital is to look at the current ratio. Pepsico’s current ratio is .9. This ratio implies that

PepsiCo is more liquid because it has more liquid assets. These assets can then be converted into

cash if need be and will more than cover the upcoming short term liabilities. Lastly, we will take

a look at the quick ratio. PepsiCo’s quick ratio for the last quarter was .5. This implies that

PepiCo is able to settle half of its current liabilities instantly. In general a quick ratio of less than

one should be treated with caution. When the quick ratio is much lower than the current ratio,

which is the case here, that means that the current assets are heavily dependent on inventories.

International Finance Issues

 Overall, it doesn’t seem like PepsiCo is having many international finance issues.

Pepsico’s International sales jumped 15 percent after the company expanded distribution of

Gatorade sports drinks in markets including China and boosted promotions for the Mirinda soft-

drink brand in Argentina. In the United States, where PepsiCo gets two-thirds of its revenue, it

marketed Quaker oatmeal as healthy for consumers, helping lift sales more than 10 percent

(Todd). “The overseas markets are growth drivers, who manage $1 billion for Greenwood, South

Carolina-based Greenwood Capital Management, including 340,000 PepsiCo shares. Pepsi has

much less exposure internationally than Coke does. Clearly, Pepsi has an opportunity to grow

that as a percentage of their income” (Todd). According to CSN news, “International beverage

volume increased 10 percent, led by gains in the Middle East, China, Argentina and Venezuela,

as noncarbonated drinks surged more than 10 percent. Snacks' sales measured by volume

climbed 3 percent, with more than 10 percent increases in India, China, Russia and Turkey. U.K.

sales declined because of a drop in the Walker's snacks business” (Todd). I think these trends

show that PepsiCo is headed in a great direction internationally and that is becoming a large part

of their business.

Cash Flow

One of the best ways of assessing the cash flow of a company is to look at the cash flow

to sales ratio. Ideally you want this ratio to stay the same as sales increase. Pepsico has done a

pretty good job of this. The ratio has stayed around the 14-15% range ever since 2017. It is hard

to tell how much COVID-19 affected these numbers but, the ratio was actually the highest it has

been in the last five years in 2017. In 2017 the ratio was 15.79% and in 2021 this number was at

just 14.62%. If this trend continues it could mean a number of concerning things for PepsiCo.

One of the possible scenarios is that the firm is pursuing incremental sales that are generating a
smaller amount of cash. The firm could also be offering incremental customers longer payment

terms, so that cash is tied up in accounts receivable. Lastly, the firm must invest in more

overhead as its sales increase, which will help reduce the rate of growth in cash flow. Basically

this may indicate that PepsiCo is growing its sales at the expense of declining cash flows. The

only way to truly tell that this is the case is to wait and see whether or not these trends continue.

Accounts Receivable and Inventory

In 2019 Pepsico had 7.82 billion in total accounts receivable. This was up from just 7.02

billion in 2017. The total accounts receivable has also grown at least 3% in each of the last three

years. In terms of inventory, Pepsico had 2.9 billion dollars in inventory at the end of 2017 and

in 2019 this number had jumped all the way to 3.3 billion. Every single year from 2017 to 2021,

the inventory has increased. In raw materials and packaging in particular Pepsico saw a big jump

from 2019 to 2020. This is most likely because of the COVID-19 pandemic. In 2019 this number

was 1.4 billion and in 2020 it was 1.72 billion. Most years this number had only increased by

about 50 million. Overall, I feel as if Pepsico is in a very good position based on their accounts

receivable and inventory. Their numbers are increasing at a good rate and show that the company

is healthy in this department (WSJ market data).

Short Term Financing Issues

One of the biggest things that can affect a company's short term financing is its reputaion.
In 2017 PepsiCo made what they later deemed to be a big mistake. PepsiCoCola released an
advertisement with Kendall Jenner, an American celebrity, in 2017. In the ad, Jenner attends a
protest and hands a can of Pepsi to a police officer as a peace offering. However, the consumers
were immediately outraged, as they felt the ad trivialized the Black Lives Matter movement and
widespread protests of police brutality that were happening that year. Many interpreted the ad to
say that all it takes for us to get along is to share a can of soda which ignores all the years of
systemic oppression felt by marginalized communities. Afterwards, PepsiCo pulled the ad and
apologized, but it damaged their reputation and standing with American consumers as the brand
experienced nine months of the lowest perception levels it had seen in eight years. In addition,
approval ratings with millennials, a generation with significant purchasing power, fell and
remain low today. This will affect PepsiCo financially due to the short-term nature of the
transaction and the use of collateral. As a result the credit risk to a financial institution will be
limited.

Ethical Issues

I think that you should always aim to improve your procurement practices by leveraging your

resources at all levels efficiently. PepsiCo, one of the largest firms in the world in consumer products,

remains a role model for being both socially and environmentally responsible, placing third worldwide in

the “World’s Most Ethical Companies”. PepsiCo has adopted strict corporate standards that govern their

operations and show that they are accountable for their actions. Such policies cover areas of Corporate

Governance, Human Sustainability, Environmental Sustainability and Talent Sustainability. Despite all

the effort applied in these policies and standards, the company has still faced some problems related to

unethical practices. One of the things that Pepsico does a great job of is that they make employees feel

comfortable about voicing their own opinions. “We encourage employees to voice their opinion

fearlessly to raise concerns about unethical business practices. In addition, all employees have an

obligation to report what they suspect or believe to be a violation of the Code or applicable law”

(Pepsico). In response to this issue Pepsico has created their own “speak up hotline.” “Our speak

up hotline is operated by an independent third-party vendor to provide employees, consumers,

business partners and community members with a 24/7 anonymous and confidential means of

reporting alleged violations of our Code or applicable law” (Pepsico).

Secondly, Pepsico is a big component of anti corruption. “PepsiCo prohibits all forms of

bribery and corruption in our operations, and we expect our third parties, including suppliers,

service providers, agents and contractors to do the same. Many of our third parties are required

through mandatory contract provisions to comply with our Supplier Code of Conduct, which

prohibits corruption and bribery and incorporates by reference the Anti-Bribery Policy”

(Pepsico). Pepsico even takes this a step farther by offering anti corruption training. This is

something that very few companies offer and makes Pepsico stand out from the rest in this

department. “The importance we place on maintaining an effective anti corruption program is

reflected in our annual online anti-bribery training which is completed by all salaried employees”

(Pepsico).

Interestingly, in 2016 PepsiCo made some attempts to try and sell healthier foods, but it

wasn’t as successful as planned because that wasn’t what the public wanted. “The goal isn’t to

turn PepsiCo into a health-food company, he says, but to provide consumers with choice. When

consumers want to indulge, we have indulgent products. When consumers want to eat healthy,

we have healthy products (Esterl). However the article also said “I don’t know too many

consumers who compromise on taste for something that’s more nutritious, says Gregory Yep,

PepsiCo’s senior vice president of long-term research” (Esterl). Sure enough this hypothesis

came true when they decided to try and test one of their new healthy products. “For starters, taste

trumps everything. Sproutzels, a pretzel made from nutrient-rich sprouted whole grains, seemed

like a good idea. The company tested it in Costco stores about 2½ years ago but Costco dropped

it after sales underwhelmed” (Esterl). Pepsico also has veggie chips among a few other healthy
alternatives. Clearly, it seems that Pepsico has good intentions about trying to make their

products healthier. In addition to this, PepsiCo has also made efforts to lessen the environmental

impact on the planet “To that end, PepsiCo has spent the last several years investing in a variety

of initiatives to make its products healthier and lessen their impact on the planet. The Beyond the

Bottle Campaign launched in 2019 seeks to significantly reduce the amount of single-use plastic

involved in delivering its beverage products” (Flavell). I think it is fair to say that this journey to

make the products healthier has taken a financial hit to the company as well. Pepsico seems to be

acting ethically in this department.

In 2016 Darren Walker, the president of the Ford Foundation who also has a track record

of helping the needy, joined the board of PepsiCo. To some, this may seem ethically

questionable because PepsiCo makes the bulk of its money by selling sugary drinks and fatty

snacks. “I will bring my perspective as the leader of a social justice organization. I will bring my

perspective as someone who is deeply concerned about the welfare of people in poor and

vulnerable communities” (Gelles). However, some people argue that the hiring of Walker was

just a cover up. “Some critics contend that such arrangements are simply ways for companies to

neutralize potential detractors. The best tactic is to bring your critics into the fold. It’s a great

way of managing your reputation and softening your image” (Gelles). Mr. Walker adamantly

denied this claim, but that doesn’t mean that it is still a cause for concern. Mr Siegel of Boston

University stated “This is the way corporations operate. Pepsi is not in the business of public

health; they’re in the business of selling soda.” Whether or not this is true is up for debate, but it

seems like a logical explanation.

The accusation has been made by the International Union of Food Workers (IUF). The

union alleges that the soft drink and snack foods manufacturer has, since 2013, blocked attempts
by workers at its food factory to form a trade union. “Furthermore, the union states that a group

of workers have become unemployed directly as a consequence of their attempt to form a union”

(Sandle). The union reported that there were ‘mass dismissals' after workers formed a union at

PepsiCo snack foods warehouses in West Bengal. The campaign organization LabourStart said

“PepsiCo’s refusal to recognize and to remedy ongoing human rights violations makes it

complicit in human rights abuses – complicity that leaves their supplier code and their claimed

dedication to human rights in tatters'” (Sandle).

Pepsico Strengths and Weaknesses

There are many strengths of PepsiCo however the main strength of PepsiCo lies in the

large number of brands under its portfolio spanning across the food and beverage sector. Many

of these brands are marketed as completely different entities outside of PepsiCo. For example

Cheetos and Tostitos are both known for their great commercials and advertising, but they are

never marketed together in the same ad. If you had not known they were both owned by PepsiCo

you might think that they are competitors. PepsiCo also uses direct store delivery (DSD) for its

supply chain and distribution network, which ensures that independent bottlers and distributors

deliver beverages, snacks, and foods directly to retail stores. DSD ensures faster restocking,

better in-store promotion and maximum visibility.

Like I touched on before, PepsiCo understands the importance of marketing because of

the amount of advertising that they do. Advertising for the Super Bowl halftime show is perhaps

what they are most known for. “They have done this for the past seven years, reaching an

audience of 100 million people in 2019. In 2020, Pepsi Super Bowl LIV Halftime Show featured

renowned performers and drew 104.1 million viewers” (Adgate). The kind of exposure that
PepsiCo is able to receive during the superbowl can’t be matched by any other event. This allows

PepsiCo to have a serious competitive edge over its competitors and gain exposure to their

products. Another significant strength is that PepsiCo has an extremely loyal customer base.

Their fan base spans across all geenrations of people who love the iconic taste of the company’s

soft drinks. “Recently, Pepsi has launched a first-ever cash back loyalty program ‘PepCoin’ to

reward their loyal customers with cash prizes for pairing their favorite soft drink and snack”

(Pymnts). This was a great decision by PepsiCo, and was also likely responsible for creating

more loyal customers.

One of the primary weaknesses that PepsiCo has to face is that its products are perceived

as unhealthy. Perception is everything when it comes to consumer products such as soft drinks

and snacks. Most of PepsiCo’s carbonated soft drinks contain high sugar concentrates while its

snacks are excessively salted with chemical additives and flavors. This is a major weakness,

particularly in the current health-conscious consumer markets. As I explained in the ethical

analysis portion, PepsiCo has made some attempts to make their products healthier, but they

have not done nearly enough to change its reputation. I think part of the reason why PepsiCo has

this negative stigma is because when people hear the name PepsiCo they automatically think of

their flagship product which is pepsi. As many people know, pepsi, just like other sodas, are very

unhealthy. I think that if they were to quickly get rid of the stigma PepsiCo would have to

rename the brand. However, if they were to do this then they would lose their brand recognition

which would cause even more harm.

Lastly, PepsiCo has had a poor environmental Record: PepsiCo was named one of the

world’s top three plastic polluters by Break Free from Plastic. The company has failed to adopt

meaningful measures to increase the recycling of its bottles. “Despite the company’s recent
voluntary commitments to halve the use of virgin plastic by 2030, PepsiCo will need to make a

more ambitious shift to reusable containers in order to move down the list, given the sheer

volume of PepsiCo branded plastic pollution being collected around the world” (Admin).

PepsiCo as well as other big companies have pretended like they are trying to help the

environment, while at the same time doing the exact opposite. “These companies claim to be

addressing the plastic crisis, yet they continue to invest in false solutions while teaming up with

oil companies to produce even more plastic. To stop this mess and combat climate change,

multinationals like Coca-Cola, PepsiCo, and Unilever must end their addiction to single-use

plastic packaging and move away from fossil fuels” (Admin).

My primary recommendation for PepsiCo would be to try and clean up their past

mistakes by creating new advertisements that counteract what they have previously done. This

would help show the world that they are truly sorry for their actions. It would also help if they

donated to charitable causes that their customers support. I also think that they should push their

loyalty programs even further. I think having a loyal customer base is very underrated in today's

day and age. When your customers are loyal, they will go to great lengths in order to support and

buy your product.

References:

“Ethics and Integrity.” PepsiCo, Inc. Official Website,

https://www.pepsico.com/esg-topics-a-z/ethics-and-integrity

Esterl, Mike. “PepsiCo Wants to Sell Healthy Food, Consumers Want Chips.” The Wall Street
Journal, Dow Jones & Company, 14 Dec. 2016, https://www.wsj.com/articles/pepsico-
wants-to-sell-healthy-food-consumers-want-chips-1481481896
Gelles, David. “An Activist for the Poor Joins Pepsi's Board. Is That Ethical?” The New York
Times, The New York Times, 28 Oct. 2016,
https://www.nytimes.com/2016/10/30/business/an-activist-for-the-poor-joins-pepsis-
board-is-that-ethical.html

“Pep: PepsiCo Inc.. Annual Balance Sheet.” MarketWatch,

https://www.marketwatch.com/investing/stock/pep/financials/balance-sheet

Flavell, David. “World's Most Ethical Companies: PepsiCo - David Flavell.” Ethisphere
Magazine, 15 Apr. 2021, https://magazine.ethisphere.com/worlds-most-ethical-
companies-pepsico-david-flavell/

PYMNTS. “Pepsico Launches First Cash-Back Loyalty Program.” PYMNTS.com, 12 Sept. 2019,
https://www.pymnts.com/news/loyalty-and-rewards-news/2019/pepsico-launches-first-
cash-back-loyalty-program

Adgate, Brad. “Facts about Super Bowl LV: Advertising, Ratings, Halftime Show and Tom
Brady.” Forbes, Forbes Magazine, 2 Feb. 2021,
https://www.forbes.com/sites/bradadgate/2021/02/01/facts-about-super-bowl-lv-
advertising-ratings-halftime-show-and-tom-brady/?sh=5ea654677da7

“PepsiCo, Inc..” Encyclopædia Britannica, Encyclopædia Britannica, Inc.,

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

Admin. “The Coca-Cola Company and PepsiCo Named Top Plastic Polluters for the Fourth Year
in a Row.” Break Free From Plastic, 25 Oct. 2021,
https://www.breakfreefromplastic.org/2021/10/25/the-coca-cola-company-and-pepsico-
named-top-plastic-polluters-for-the-fourth-year-in-a-row/

Mirkovic, Petar. “PepsiCo (PEP): The Dividend Growth Story Has Come to an End.”
SeekingAlpha, Seeking Alpha, 14 Dec. 2021, https://seekingalpha.com/article/4475065-
pepsico-the-dividend-growth-story-has-come-to-an-end

Macroaxis. “Company.” All Equities Traded in United States,

https://www.macroaxis.com/invest/companyDirectory

“PepsiCo Earnings Rise as Overseas Sales Surge.” Convenience Store News, 7 Aug. 2017,
https://csnews.com/pepsico-earnings-rise-overseas-sales-surge

Journal, Wall Street. “Pep | Pepsico Inc.. Annual Cash Flow - WSJ.” The Wall Street Journal,
Dow Jones & Company,
https://www.wsj.com/market-data/quotes/PEP/financials/annual/cash-flow

“PepsiCo, Inc. (PEP) Stock Price, News, Quote & History.” Yahoo! Finance, Yahoo!, 30 Apr.
2022, https://finance.yahoo.com/quote/PEP/