Corporate Finance, in a nut shell is the effective management of the monetary support of any enterprise. It deals with the financial decisions of the company whereby providing enough tools and analysis for the organization to make strong financial decisions. This is not that simple as it is explained. This forms the base of any corporate organization for it to manage its financial resources and markets. This report critically analyses Pepsi Co.'s financial structure, ratios analysis, risk portfolio, and a comparative view of its leverage against its competitors. Further it details down an extensive analysis of its debt rating qualitatively and quantitatively. An excellent and a challenging scenario which puts me as an analyst to explore every inch of Pepsi Co.'s financial statements and to provide necessary suggestions and recommendations regarding for it to maintain its investment grade debt rating. An understanding of the firm's current position and the reasons behind every individual value of the exhibits are defined and critically evaluated.
Background:
PepsiCo is an American Multinational Company, who has been in the game for more than a century by now. It manufactures and markets over a dozen different products stretching out in the international market. It has got 3 major business units further broken down into 6 reportable segments across the globe. In the year 1965 Pepsi-Cola Company merged with Frito-Lays and formed PepsiCo. From then it had an amazing average compound annual growth rate ACAGR of about 15%, whereby the sales doubling up every 5 years. PepsiCo had a strong urge of entering into the international markets, where it started to invest the capital strategically in industry segments, marketable securities, acquisitions and unconsolidated affiliates. International transactions contributed to the most.
The Financial leverage is calculated in the basis of both market-value and historical basis. PepsiCo appears to be quite conservative in their accounting. Their market leverage is very evident of their accounting style, where they use net basis for measuring debts, which eventually takes in the short term assets outside United States.
Net Debt Ratio:
PepsiCo always measure debts on net basis, which remits the net short term investments, thereby reducing the total debt value. The significance of off-balance sheet accounting is evident here. The total debt includes the Present value of the operating leases as well. Thus the market value measurement of net debt is
Net Debt = Total Debt + PVOL - Short term investments
Hence the net debt ratio is given as
L* = ((D+PVOL-CMS) / (NP+D+PVOL-CMS))*100,
Where,
D - Market Value of Total Debt
= $9453 Million
PVOL - Present value of Operating Leases
= 5*Annual Rental Expense
= 5*479
= $2395 Million
CMS - Cash and Marketable Securities (remits tax and transactions equal 25%)
= $1123.5 Million
N - Number of Outstanding Shares
= 788 Million
P - Current Share Price
= $55.875
L = ((9453 + 2395 - 1123.5) / (44029.5 + 9453 + 2395 - 1123.5))*100
(10724/54753.5)*100
0.1959*100
19.59%
Ratios:
The given exhibit 5 has got a list of companies along with their important financial data. This section gives a comparative view of PepsiCo's financial ratios against its major competitors.
The financial ratios are,
Interest Coverage ratio:
Ratio explains how easily a company could pay off its interest expenses [1].
Interest Coverage Ratio = EBIT / Interest Expenses
PepsiCo
4.566
Cadbury Schweppes
4.896
Coca Cola
16.911
CocaCola Enterprises
1.445
McDonalds
7.379
Fixed Charge Coverage Ratio:
PepsiCo's real Objective Analysis:
PepsiCo's real objective is to maintain the Single 'A' senior debt rating, with its long term target net debt ratio of 20% to 25%. The current net debt ratio is calculated to be 19.58%, which is approximately equal to the target net debt ratio of 20%. This explains that the company is capable of paying off its debt very easily.
Moreover the current financial risk indicative ratios, which favour credit rating like,
Financial Risk Indicative
Values
Profile
Cash flow/Debt
39.5%
Intermediate
Debt Leverage
17.7%
Minimal
Debt/Ebit
3.03 times
Intermediate
The table explains that the company is financially not so risky
Quantitative Analysis:
The financial ratios contribute a lot to the firm's credit rating. There are various important financial ratios, which needs to be analysed for a firm to be rated. They include,
Liquidity ratios
Leverage ratios
Asset Management ratios
Debt Management ratios
Profitability ratios
Market Value ratios
Liquidity:
Current
1.06042065
Leverage:
Debt to Equity
21.46969645
Net Debt/Ebitda
3.443962749
Asset Management:
fixed assets turnover
3.082168186
total assets turnover
1.196170179
Debt Management ratio:
debt ratio:
71.24488833
times int earned
4.565982405
ebit coverage
3.094745909
Profitability:
Profit margin on sales
5.279247888
basic earning power
12.24441648
Return on assets
6.314878893
Return on equity
22
Market Value:
Price earning
27.9375
Price cashflow = share price/ c.f per share
11.76630136
Market to book
6.031438356
