This report presents the financial analysis of Pepsi Company based on the financial statements for three consecutive fiscal years ending 31 st December 2017, 31 st December 2018, and 31 st December 2019. To analyze a company's financial status, we look at three core financial reports; cash flow statement, income statement, and balance sheet. Financial statements also enable financial calculation ratios, which give more accurate information on the corporation's status.
Balance Sheet
From the financial reports, Pepsi's total assets decreased by 2.7% between 2017 and 2018 and later increased by 1.15% between 2018 and 2019. The company's total liabilities decreased by 8.394% between 2017 and 2018 and increased by 1.0% between 2018 and 2019. The current liabilities and total equity were equal to the company's total assets, which increased by 1.15% between 2018 and 2019. Pepsi's current ratio was 1.15:1 in 2017, 1.23:1 in 2018, and 1.23:1 in 2019. The current ratios indicate that the company was in an excellent position to cover its short term obligations. The company's debt/equity ratio is 2.15, which implies that it is in an excellent financial position and can conduct its operations with its own money.
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The variation in the current ratio for Pepsi is depicted in Figure 1. There is a decline in the current ratio from 2017 to 2019. The company's current ratio shows a higher value compared to Coca Cola, which was at 0.7567, while Pepsi was running at 1.23 in 2019. However, both companies show a declining trend in their current ratio, as depicted in Figure 2 for Coca Cola. The values for both companies were below the current industrial ration, which stood at 3.73 in 2019. Therefore, Pepsi runs bellow Coca Cola in terms of total assets and liabilities.
Figure 1: Pepsi Current Ratio Variations
Figure 2: Coca Cola Current Ratio Variations
The Income Statement
The income statement helps a company understand its expenditure and earnings over the financial period (Jonas, 2005). The statement gives the net profit of the company. The company's gross profit margin decreased from 54.6698% in 2017 to 54.5615 in 2017 but later increased to 55.1347 in 2019. This means that the company increased the cost of goods sold in 2019 to achieve a higher profit margin. The company's operating profit margin decreased since 2017 to 2019 from 16.17% to 15.3% in 2019, which implies that the company experienced a low number of goods sold and low prices over the period and had an increase in the operating expenses over these years. The company's net profit margin increased between 2017 and 2018 at a very high percentage from 7.6% to 19.35% but later dropped between 2018 and 2019 to 10.89%. This means that Pepsi’s sales reduced and the cost of goods sold in 2019, resulting in a decrease in the profit margin.
Figure 3: Pepsi Gross Margin Trend
Comparing the income with Coca Cola, the gross margin decreased from 62.1093 to 61.9038 between 2017 and 2018. There was a decrease between 2018 and 2019 from 61.9038 to 60.7712. However, the values are higher compared to Pepsi Company over the same period. The general trend in Pepsi was increasing, while for Coca Cola, there is a decline in the margin, as depicted in figure 3 and 4.
Figure 4: Coca Cola Gross Margin Trend
The Cash Flow Statement
The cash flow statement is an essential tool (Jonas, 2005). Based on the Pepsi Co. cash flow statement for the three years, the current liability coverage ratio increased from 2017 to 2018. This implies that the company was in an excellent position to generate enough cash to cover immediate obligations. Pepsi, therefore, shows some room for further improvement and growth in the business. The cash flow from Pepsi's operating activities decreased between 2017 and 2018 from $ 10,030 million to $9,415 million and later increased to $ 9649 million in 2019. Comparing the value to Coca-cola in 2019, the total cash from operating activities was $ 10471 million. The cash flow from Pepsi's investing activities was increasing between 2017 and 2018 from $ -4403 million to $ 4564 million while there was a decrease from 2018 to 2019 to $-6437 million. Comparing to Coca-cola, the cash flow from investing activities increased from 2017 from $-2312 million to $5927 million and later decreased to $-3976 in 2019. Comparing these values shows that Pepsi had low cash flow from operating activities than Coca-cola the same year. However, in both cases, the cash flow from operating activities does not cover the investing activities due to the negative change in values.
Conclusion
From the analysis of the three primary financial statements on Pepsi Company, it is possible to note a slight decrease in the company's profit between 2017 and 2018. Nevertheless, the company shows hope for improvement from 2018 to 2019. Therefore, Pepsi is in an excellent position to handle its obligations and increase profit margins from its operations. The company has enough capital to run its operations and does not rely on debts for operations. The company is in a better position to compete with other businesses in the market due to its stability and sound financial health.
References
Jonas, G. (2005). Moody's Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations - Part I. SSRN Electronic Journal . doi: 10.2139/ssrn.959001
PepsiCo Income Statement 2005-2020 | PEP. (2020). Retrieved 5th July 2020, from https://www.macrotrends.net/stocks/charts/PEP/pepsico/income-statement?freq=A
