Pepsi Co. Financial Analysis

Overview

Pepsi Cola and Coca-Cola; their names are synonymous in the soft drink industry. Although both companies appear to offer the same type of product; their histories, business strategies, and culture are equally as unique and diversified as the lines of products they offer. Since Coca-Cola's founding in the late 1886, and Pepsi's founding in 1965, both Coca Cola and Pepsi have come a long way from their humble beginnings, and today employ more than 100,000 employees worldwide and serve more than 1.4 billion beverages daily around the globe, and produce, market, and sell more than 200 different products. In this paper we will look at the financial activities of Pepsi and Coca-Cola for 2004 and 2005. Specifically, the financial data that this report will focus on will be the; cash generated, assets and liabilities, and of course, the debt to income ratios for both companies. The financial statements that will be utilized in assessing this information will be each company's Consolidated Balance Sheets and consolidated statement of incomes. However, these financial statements are the beginning point for the financial analysis. In addition, the report will also include ratio analysis for both companies that will enable us to evaluate the success, failures, and progress of each company. The report will also include recommendations on how each company could improve on deficiencies or build on strengths.

PepsiCo

ANALYSIS

To start things off, we will take look at PepsiCo's net income. Specifically, we will be focusing on 2004 and 2005's figures. 2005 saw a decrease of $330 ($4212-$4078) in Net Income for Pepsi. This figure represents a decrease of just over 1% which can be, at least partially attributed, to an increase in overall liabilities between 2004 and 2005. This point will be addressed a little later in this section, It is important to note however, that given Pepsi's fiscal reporting period (Jan 1st through the last Saturday December), an additional week will usually result every five to six years(Axia College, 2010, Week Seven Supplement). 2005 was such a year, with a total of 53 weeks for that years accounting period, as opposed the normal 52 weeks of a year.

2004 2005

Net Income $ 4212 $4078

$4212 / $4078

= 1.032859245 or 1.03%

Despite this decrease in Net Income however, the company's total assets did increase by a margin of 11%, up from $27987 in 2004 to 31727 in 2005. Of the company's total assets in 2005, property, plant and equipment made up 27% of the total.

2005 2004

Total Assets $31727 $27987

$31727 / $27987

=1.1336334 or 11%

Property, Plant, and Equipment

$8681/31727 = 0.2736155 or 27%

As is the case with many organizations experiencing growth, PepsiCo did inevitably see an increase in its liabilities. Specifically; Income Taxes payable saw a significant increase, rising a staggering 451% from its marginal amount of $99 million in 2004. This high margin can be directly attributed to tax deferment benefits that have since become due. According to Axia College Week Seven Supplement (2010) Total tax benefits for PepsiCo were $125 million in 2005, $183 million in 2004 and $340 million in 2003.

2005 2004

Income Taxes Payable $ 546 - $ 99 = 447

$447 / $ 99

= 4.5151515 or 451%

Pepsi also saw an increase in short term obligations, although much more moderate than what was seen in their income taxes payable account. Short term obligations increased by a moderate 1.74% in 2005 and accounted for 9% of the company's total liabilities and stockholders equity.

2005 2004

Short Term Obligations $ 2889 - $1054 = 1835

$1835 / $ 1054

=1.7409867 or 1.74%

Short Term Obligations

$ 2889 / $ 31727

= .0910580893 or 9%

RECOMMENDATIONS

In analyzing the data above; the greatest deficiency noted was the rise in income taxes payable. With any organization experiencing heavy growth, rising costs are inevitable however; inevitable does not, under any circumstances, reference unmanageable and thus, any organization can control the costs associated with operating.

My first recommendation addresses the high surge in income taxes payable. As was noted above, PepsiCo saw an increase of 451% in income taxes payable. This high number was a clear result of tax deferments that became payable during fiscal year 2005. Although there is clearly no legal way to eliminate the paying of income taxes, PepsiCo could continue to take advantage of tax deferment benefit while continuing to expand into other markets. Specifically, I would recommend that Pepsi take advantage of current market conditions by building operations in communities heavily affected by the recent recession. Once again, any tax deferments will inevitably have to be paid off however the benefits of tax deferment during expansions are great, and if used correctly, can ultimately pay off in dividends.

My next recommendation addresses the drop in Net Income that PepsiCo experienced in 2005. Although certainly attributable to rises in income taxes payable, other areas could be improved to raise total earned income. One such measure would be to closely look at its monthly expenditures as they related to daily operations. For example in 2005 PepsiCo's total spending on selling, general and administrative charges were $12314 while in 2004 total spending added up to $11031 and $10148 in 2003. The 2005 total represents a 4.68% increase from 2003. Thus we can project, based on this number, that Pepsi's administrative expenses are increasing an average of about 2% per fiscal year. Continued expansion will inevitably lead to higher administrative expenses however, in the tough economic climate, particularly in light of the number of corporate scandals peppering the media, I would recommend that PepsiCo closely monitor its monthly expenditures and ensure that all facets of its financial reporting fall within the

...