Kabajeh, AL Nu’aimat and Dahmash (2012) affirm the importance and necessity for financial analysis in making economic decisions which is generally carried out through various formulas which assess firm profitability, financial leverage, efficiency and liquidity, among others. This paper analyses financial performance of PepsiCo using financial ratios provided in appendix 1.
With regards to profitability, the increase in Return on Equity (ROE) demonstrates management’s ability in usage of investments or available equity in generation of earnings growth while the decrease Return on Assets signifies that the firm earned less money on investments available. Further, the decrease in Return on Net Assets indicates a less than efficient and effective use of firm assets and working capital from 2007 to 2008 hence a decrease in profit and general financial performance for the period. The figures provided of Return on Sales and operating profit margin, though highlighting a similar downward trend in operational efficiency and profit performance, are markedly different in their percentages despite representing the same calculation as ROS is also known as the operating profit margin (Eades et al., 2010). The picture presented by the percentages indicate declining profits in light of amounts of dollars in sales gained which implies less efficiency in firm growth and greater potential for financial challenges. Generally, the level of profitability has gone down in comparison to previous years despite an increase in ROE which can be explained as usage of equity by management compared to use of assets incorporated in the other ratios. Saleem and Rehman (2011) affirm that profitability and liquidity ratios have a significant effect on firm financial positions.
Regarding financial leverage, the increase in Debt-to-equity percentage highlights greater reliance on the use of debt to finance assets or firm growth, implying higher risk levels especially in relation to volatility in earnings due to added interest expenses even though greater earnings outweighing cost of debt may enhance shareholder value (Tracy, 2012). The increase in the Debt-to-total capital percentage highlights a relatively poor financial structure and strength as the firm has more debt compared to equity which increases risk of insolvency. The Times Interest Earned ratios highlight a favourable ability to pay its debts even though the ability seems inconsistent with a decrease as most current. Essentially, the firm is able to generate earnings capable of meeting interest payments as well as debt obligations. Generally, the firm is highly leveraged with all ratios highlighting reliance on debt financing with increased financial risk.
With regards to efficiency, the decrease in the Asset Turnover ratio highlights a decrease in efficiency in deployment of firm assets necessary in revenue generation which implies challenges in production or management. Further, the decrease in revenue growth percentage highlights decreasing expansion and revenue growth for the firm while asset growth at 3.9 percent does not present a picture of stable growth rate potential. The decrease in the Days Receivables (DSO) figure highlights increased efficiency in collection of accounts receivables or monies for goods sold on credit. The decrease noted in the Days Inventory (DSI) figure highlights a relatively shorter period (greater effectiveness) in which the firm turns its inventory into sales. Generally, increased efficiency and effectiveness is noted in inventory management unlike asset management which can be explained in terms of range of assets integrated in calculations (DSI/DSO include inventory only while all assets are included in the other ratios).
In terms of liquidity, the current ratio indicates good financial health for the company in both financial years but the decrease in the figure between years highlights a decrease in the firm’s ability to cover its current debt with current assets. The quick ratio provides a more accurate measure of liquidity by excluding inventories in calculations of current assets in settling current liabilities. The quick ratios provided indicate an inability to pay back its current liabilities which is worsened by a decline between the years from 0.32 to 0.26. The two ratios depict different pictures (anomaly) of the firm’s liquidity posture (current ratio-positive, quick ratio-negative) which can be explained in terms of firm current assets being difficult to convert to cash in a timely manner so as to honour current debt obligations. Further, Kirkham (2012) adds that these (traditional ratios) may be inadequate to truly understand the liquidity position of businesses.
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- Kabajeh, M.A.M., AL Nu’aimat, S.M.A. & Dahmash, F.N. (2012). The relationship between the ROA, ROE and ROI ratios with Jordanian insurance public companies market share prices. International Journal of Humanities and Social Science, 2(11), 115-120.
- Kirkham, R. (2012). Liquidity analysis using cash flow ratios and traditional ratios: the telecommunications sector in Australia. Journal of New Business Ideas & Trends, 10(1), 1-13.
- Saleem, Q & Rehman, R.U. (2011). Impacts of liquidity ratios on profitability (Case of oil and gas companies of Pakistan). Interdisciplinary Journal of Research in Business, 1(7), 95-98.
- Tracy, A. (2012). Ratio analysis fundamentals: How 17 financial ratios can allow you to analyse any business on the planet. Sydney: RatioAnalysis.net.
