Assessing Pepsi Company’s financial status requires a closer look at some financial reports. The most significant financial reports that analysts evaluate are balance sheets, income statements, and cash flow statements. The income statement is an essential financial report in helping the company determine how much revenue it has and whether it is profitable by looking at the margins. Two methods are used to assess the income statement; the vertical analysis and horizontal analysis. In vertical analysis, we look at metrics such as the Cost of Goods Sold (COGS), Gross profit as the percentage of revenue, depreciation as a percentage of the total revenue, net earnings, earnings before tax compared to the revenue and net earnings. In horizontal analysis, we focus on the Year-over-year (YoY) assessment of all the metrics.
The balance sheet is another financial report that is essential in determining the business's efficiency. Several metrics from the income statement are compared with the balance sheet's capital assets to give more insight. The main categories to look at include liquidity, leverage, and operation efficiency based on balance sheet metrics. Liquidity ratios include; quick ratio, current ratio, and net working capital. For leverage ratios, the assessment focuses on the debt to capital, debt to equity, debt to EBITDA (earnings before interest, taxes, depreciation, and amortization), and interest coverage. We also focus on accounts receivable days, inventory turnover, and accounts payables for operation efficiency, among others.
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The cash flow statement is essential in taking note of all the cash from operations, cash from financing, and cash used in investments. Most investors will focus on the cash flow statement to determine the global company's performance. Therefore, depending on the values on the cash flow statement, investors can make decisions on whether to invest in the company or not.
The evaluation of a company's financial performance helps us understand its ability to sustain its operations and generate a profit for its shareholders. The following data elements help determine the company's current state in terms of assets and liabilities and efficiency in operations.
The total assets of the company from the balance sheet.
The total liabilities of the company from the balance sheet.
The net profit margin from the company’s income statement
The current liability coverage ratio from the cash flow statement.
These variables help determine the company's current state based on the income generated expenses and the possible profits. Through these variables, it is possible to determine the company's ability to stabilize in terms of debt capability to generate income.
Observations from Financial Statements
The company shows an increase in the total assets from the balance sheet, which shows growth in revenue and financial stability. The company's current ratio also indicates a positive growth, which means that Pepsi is in a good position to handle its short-term debts and grow as a company. The company's debt-to-equity ratio shows an increase, which leaves Pepsi in a better position to operate with its cash. With the huge cash reserves, the company is able to pay its workers on time and carry out its operations as expected without fear of running into a deficit.
The income statement shows a definite increase in the profit margin, operating profit margin, and net profit. This implies the ability of the company to grow and maintain a stable financial position. The cash flow statement indicates an increase in the current liability coverage suggesting the company can cover its immediate obligations with the cash generated.
Question
Based on the financial statements of Pepsi Company, how can the company improve the debt coverage ratio in the future years for the business to find better chances of operating with minimal debts?
