An Analysis Of Pepsico Multinational Company Finance Essay - Free Essay Example

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 firms 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 majo r 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 invest ments, 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 PepsiCos 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: PepsiCos real Objective Analysis: PepsiCos 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 firms 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 rati os 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