The purpose of the third part of the comprehensive project is to use resources available to obtain industry averages for commonly used ratios. Additionally, you will compare company ratio results to industry averages.Obtain the four-digit primary SIC (Standard Industrial Classification) Code and industry title for your company. Record the primary SIC code and industry title at the top of the Ratio Analysis Worksheet.Obtain industry averages for commonly used ratios in the current period. Industry average information is reported by industry title or SIC code.Look up the following industry-average ratios:Current ratioDebt ratioGross profit marginTimes interest earnedAccounts receivable turnoverInventory turnoverReturn on SalesAsset TurnoverReturn on AssetsFinancial LeverageReturn on EquityNote that some industry averages may not apply to your company.Alternative to Industry Averages:If you are not able to find the industry average for part 3 of your project, please consider the following:Unfortunately, some of the websites where you can find industry averages will require you to pay for them. Instead of using industry average, calculate the same ratios for one of the competitors to the company you used in your project. That will give you the comparative information you need for Part 3 of the project. I believe this will help.Write a 3-5 page report comparing the above ratios to industry averages. Discuss whether your company’s profitability, efficiency, liquidity, and solvency are better than, or worse than, its peers. The report should be well written with cover page, introduction, body of paper (with appropriate subheadings), conclusion, and reference page. References must be appropriately cited. Format: Double-spaced, one-inch margins, using a 12-point Times New Roman font.Financial Statement & Ratio
Analysis
Group Project, Part 3
Financial Analysis
• Assessment of the firm’s past,
present and future financial
conditions
• Done to find firm’s financial
strengths and weaknesses
• Primary Tools:
– Financial Statements
– Comparison of financial ratios to past,
industry, sector and all firms
Financial Statements
• Balance Sheet
• Income Statement
• Cashflow Statement
• Statement of Retained
Earnings
Objectives of Ratio Analysis
• Standardize financial information for
comparisons
• Evaluate current operations
• Compare performance with past
performance
• Compare performance against other
firms or industry standards
• Study the efficiency of operations
• Study the risk of operations
Group Project, Part 3
• The purpose of the third part of the
comprehensive project is to use
resources available to obtain
industry averages for commonly
used ratios. Additionally, you will
compare company ratio results to
industry averages.
Group Project, Part 3
• Obtain the four-digit primary SIC
(Standard Industrial Classification)
Code and industry title for your
company. Record the primary SIC
code and industry title at the top of
the Ratio Analysis Worksheet.
Group Project, Part 3
• Obtain industry averages for
commonly used ratios in the current
period. Industry average
information is reported by industry
title or SIC code.
Group Project, Part 3
• Look up the following industryaverage ratios:
– Current ratio
– Debt ratio
– Gross profit margin
– Times interest earned
– Accounts receivable turnover
– Inventory turnover
Group Project, Part 3
• Look up the following industryaverage ratios:
– Asset Turnover
– Return on Assets
– Financial Leverage
– Return on Equity
Group Project, Part 3
• In Part 2 of the Group Project, the
focus was on Horizontal
analysis or Trend analysis. This is
an analysis technique that shows
changes in the amounts of
corresponding financial statement
items over a period of time. It is a
useful tool to evaluate the trend
situations.
Group Project, Part 3
• In Part 3 of the Group Project, the
focus is on Cross-Sectional
Analysis.
Group Project, Part 3
• Cross-sectional analysis is a type of
analysis where an investor or
analyst compares a particular
company to its industry peers.
Group Project, Part 3
• Cross-sectional analysis is often
used in to assess performance and
investment opportunities using
several key ratios and other items
that may not typically be found
within the financial statement of a
firm.
Group Project, Part 3
• Cross-sectional analysis may focus on a single
company for head-to-head analysis with its
biggest competitors or it may approach it from
an industry-wide lens to identify companies with
a particular strength.
• For Example: Compare Apple Computer to HP.
This will be head-to-head or peer-to-peer. You
may use this approach in Part 3. If you use this
approach, be sure to calculate the same set of
ratios.
Group Project, Part 3
• Cross-sectional analysis may focus on a single
company for head-to-head analysis with its
biggest competitors or it may approach it from
an industry-wide lens to identify companies with
a particular strength. For Example: Compare
Apple Computer to the entire computer industry
using industry-wide ratios. You may use this
approach in Part 3. In that case, you may have
to look for industry-wide ratios for your
company.
Group Project, Part 3
• Cross-sectional analysis may focus on a single
company for head-to-head analysis with its
biggest competitors or it may approach it from
an industry-wide lens to identify companies with
a particular strength.
• Cross-sectional analysis focuses on many
companies over a focused time period.
• Cross-sectional analysis usually looks to
find metrics that show unusual pattern.
Such unique patten will produce an
additional insights for that industry.
Group Project, Part 3
• Key Points to Earning Good Grade on Part 3:
1. Organize your work
2. Provide Cover Page to include the class
information, professor, group members who
participated, and date. Include only the group
members who participated.
3. Organize your ratios in good form and show
calculations of the ratios. If you use Peer-topeer cross-sectional method, show calculations
of ratios for your company and for the peer.
Group Project, Part 3
• Key Points to Earning Good Grade on Part 3:
4. If you use industry-wide cross-sectional method,
show calculations of ratios for your company and
provide industry ratios similar to the ones you
calculated.
5. Provide a thorough comparative discussion of
each ratio. Ratios themselves do not tell us
anything. You have to explain and them.
Group Project, Part 3
• Key Points to Earning Good Grade on Part 3:
6. Provide a concluding remarks based on your
analysis.
7. Provide heading/subheading for each section of
your work.
8. Use APA throughout.
9. Avoid copy-and-paste. High Turnitin score
(greater than 25%) will be investigated and may
result to zero grade.
Running head: FINANCIAL RATIO ANALYSIS
PepsiCo Financial Ratio Analysis
Course: BA62070H320
Tutor: Dr. Sunny Onyiri
Sudha Battu – 560233
Sidhartha Ananthula – 558639
Shravya Jannu – 565485
Ravindra Reddy Daggula – 566164
Rahul Maram – 548129
1
FINANCIAL RATIO ANALYSIS
2
Introduction
Financial ratio analysis is used by a business owner, investors, and other stakeholders to
evaluate the profitability and performance of a company and compare it with similar companies
in the industry. They measure the relationship between two or more elements of the financial
statement (Wen, 2019). Effective comparison is achieved when different periods are compared.
The external analyst will use them to determine aspects of a company such as liquidity, solvency,
and profitability. The management will use it to determine its efficiency.
PEPSI CO FINANCIAL RATIOS FOR FY 2019
Ratio
Formula
2019
2018
Evaluation
1
Debt ratio
Total debts/total assets
0.81
2
Gross profit margin
Gross profit/net sales
Operating Cash Flow Capital Expenditures
55.31%
54.55% Weaker
5,417.00
6,133.00 Weaker
EBITDA/Interest expense
Net credit sales/avg accounts
receivables
10.97
9.46 Quicker
1.23
1.19 Slower
Net sales/avg inventory
20.12
20.67 Weaker
10.89%
19.36% Weaker
Net assets/total revenue
1.17
1.20 Weaker
Net income / total assets
9.31%
16.12% Weaker
3
Free cash flow
4
Times interest earned
5
Accounts receivable
turnover
6
Inventory turnover
0.81 Equal
DuPont Analysis of ROE
7
8
9
10
11
Return on Sales
Asset Turnover
Return on Assets
Financial Leverage
Return on Equity
Operating income/revenue
Debt/equity
Net income / equity
4.28
49.19%
4.32 Less risk
85.71% Weaker
FINANCIAL RATIO ANALYSIS
3
Evaluation of Trends
The debt ratio measures the leverage of a company. It is a ratio of the firm’s total debt to
its total assets. It is, therefore, a proportion of the assets of a company that have been financed by
debt. A ratio that is more than one shows that a huge amount of debt funds the assets of the
company (Easton, 2018). Therefore there are more liabilities in the firm than assets. A high ratio
indicates that a company is at risk of defaulting its loans if the interest rates rise suddenly. A
ratio that is less than one shows that the assets of the company are mainly funded by equity.
Pepsi’s debt ratio was 0.81 in 2018 and 2019. The ratio did not change. The ratio is less than one,
hence, a greater proportion of its assets are funded by equity. The company is not at risk of
defaulting on its loans.
Gross profit margin refers to a ratio of a company’s gross profit to its net sales. It assesses
the financial health of a company. A high gross profit margin indicates that a company is
healthy. Pepsi’s gross profit margin was 55.31% in 2019. This was a slight improvement from
2018 when the company had a gross profit margin of 54.55%. This indicates that the company is
profitable, and it is improving in its financial health. The gross profit margin should also not
fluctuate wildly. This is a sign of poor management practices or inferior products. Pepsi’s change
was small.
Free cash flow refers to the amount of money that a firm generates after cash outflows are
accounted for. It supports the operations of the firm and also maintains its capital assets. It is a
measure of profitability. A negative free cash flow shows that the company is not profitable.
Pepsis free cash flow was positive in both periods. However, it reduced from 6133 in 2018 to
5417 in 2019. This means that in 2019, the company had less money to maintain its capital assets
and to support its operations compared to 2018.
FINANCIAL RATIO ANALYSIS
4
Times Interest Earned ratio measures the ability of a business to meet its liabilities based
on current income. It shows the number of times the company can cover its interest in using
pretax earnings (Ptak-Chmielewska, 2018). Pepsi could cover its interest charges 10.97 times in
2019 and 9.46 times in 2018. This shows it has become quicker and hence a sign of
improvement.
The accounts receivable quantify how well a company is managing its credit by
evaluating the time it takes to collect its debt in an accounting period. The turnover was 1.23 in
2019 compared to 1.19 in 2018. This shows that the time taken increased slightly. This measure
is an activity ratio showing the efficiency of a firm is using its assets (Easton, 2018). The
turnover is low, and hence Pepsi is efficient in using its assets. Inventory turnover, on the other
hand, shows the number of times a company has replaced or sold inventory in the given period.
A low turnover shows weak sales and excess inventory. It is an indication of a problem with
items being sold. A high ratio shows strong sales. Pepsi inventory turnover was 20.12 in 2019
and 20.67 in 2018. This indicates a slight reduction in the strength of the company’s sales. The
management needs to engage in more marketing to maintaining the strong sales of the company.
Return on sales is a ratio that is used to evaluate the operational efficiency of a company
as well as its profitability (Wen, 2019). It provides a company with insights on how much profit
it is producing per sale. If the return in sales is high, this indicates that the firm is growing
efficiently. If the return on sales is low, it indicates impending financial troubles. The ROS of
Pepsi Company was 10.89% in 2019. This shows a significant reduction from 19.36 in 2018.
This is an indication that the company is not growing efficiently. It reduced the efficiency of
generating profit from its sales revenue. The amount of sales revenue converted to operating
FINANCIAL RATIO ANALYSIS
5
profit was very low. Creditors and investors rely a lot on this ratio since it is more accurate in
communicating the amount of income a company gets from revenues.
Asset turnover refers to the value of sales by a company relative to the value of assets. It
indicates the efficiency of a company is using its available assets to generate sales revenue. A
high asset turnover ratio shows a more efficient company. Pepsi’s asset turnover ratio was 1.17
in 2019 and 1.2 in 2018. This shows a slight reduction in the company’s efficiency. However, the
ratio is still high and greater than one indicating that the company is efficiently using its assets.
Financial leverage measures the ability of a company to use its debt to acquire assets. If a
company uses debt to control a high amount of assets, this makes the return on investment
reduce. Pepsi’s financial leverage reduced from 4.32 to 4.28. The leverage is, however, still high,
and the company is at a higher risk of loss if the value of assets decreases.
Finally, ROE measures the financial performance of a company. This is calculated by
dividing the net income of the company by the amount of shareholder equity. A high return on
equity indicates that a company is profitable. Pepsi’s ROE was 85.71% in 2018 and 49.19% in
2019. This shows a significant drop in the profitability of the company to the stockholder’s
equity. The company reduced its efficiency in handling shareholders’ money to create more
profit. However, it was still a high ratio indicating that the company is still profitable. The
management needs to examine the factors that led to a sharp decrease and implement measures
that will ensure it is more efficient in generating growth and income from equity financing
(Errandonea, 2020).
Conclusion
Based on the ratio analysis, the Pepsi Company was less profitable in 2019 compared to
2018. It was also less efficient in generating profits using its assets and its stockholder’s equity.
FINANCIAL RATIO ANALYSIS
6
However, profitability is impressive for both years. The liquidity ratios indicate that the company
is not strong enough, and it needs to improve its ability to meet its obligations. The activity ratios
also indicated a reduced business performance in 2019 compared to 2018. On the contrary, the
company increased its gross profit margin, and its time’s interest period also improved. This
indicates that the company is still financially strong.
References
Easton, P. D., McAnally, M. L., Sommers, G. A., & Zhang, X. J. (2018). Financial statement
analysis & valuation. Boston, MA: Cambridge Business Publishers.
Errandonea Ochoa de Zabalegui, J. (2020) Financial Analysis of the Financial Statements and
Industry Comparison: THE COCA-COLA COMPANY and PEPSICO.
Ptak-Chmielewska, A., & Matuszyk, A. (2018). The importance of financial and non-financial
ratios in SMEs bankruptcy prediction. Bank i Kredyt, 49, 45-62.
Wen, H., & Zhu, T. (2019). Interpretation of Financial Statements.

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