Accounting

PepsiCo Inc. is one of the worlds largest manufacturers of soft drinks and snack foods. While many of the PepsiCo brands are over 100 years old, the corporation itself is relatively young. The company was formed in 1965 with the merger of the Pepsi-Cola Co. and Frito-Lay Inc. at the time, this merger created one of the largest consumer products in the markets. Traditionally Pepsi-Cola had been in the business of sale of soft drink concentrates to licensed independent and company-owned bottlers that manufactured, sold and distributed Pepsi-Cola soft drinks. Frito-Lay was into manufacturing and sales of a variety of extremely popular snack foods. PepsiCo began its international snack food operations in 1966, and has presently its operations in 40 countries with its products being available in 120 countries across the world. At the time of the merger, PepsiCo also owned Pizza hut, Kentucky Fried Chicken, and Tack bell, but made the strategic decision to focus on packaged goods. With this aim, Tropicana was acquired in 1998 and PepsiCo merged with Quaker Oats Company, including Gatorade, in 2001. This merger made Pepsi Co the fourth largest consumer-goods company in the world. (Bachmeier, 2009, 6-8 Gillespie, Jeannet, Hennessey, 2009, pp. 575)

The company underwent a massive restructuring process in the year 2006 and is now organized into two major divisions North America and PepsiCo International. the company is organized into three business units PepsiCo Americas Foods (PAF) consisting of Frito-Lay North America (FRNA), Quaker Foods North America (QFNA) and the Latin American Food and Snacks (LAF) PepsiCo Americas Beverages (PAB) including PepsiCo Beverages North America (PBNA) and the Latin American beverage business and PepsiCo International (PI) consisting of all the businesses in US, Europe, Asia, Africa and Middle East. The UK and Europe businesses are reported as UKEU, while the remaining territory i.e. middle east, Africa  Asia report as MEAA. In yet another minor restricting in the year 2009, Turkey and certain Central Asian territories were brought under the UKEU, as against their historical reporting to MEAA. (Plunkett, 2007 PepsiCo, 2009, pp.43)

PepsiCo is headquartered in Purchase, New York which is about 45 minutes from the New York City. The corporation has more than 143,000 employees worldwide. India-born Indra Nooyi became PepsiCos CEO on 1st October 2006, making the corporation the largest US Company by market cap to put a woman in charge and the company continues to excel under her leadership. PepsiCo attributes its success to superior products, high performance standards, and distinctive competitive strategies and on the high quality and integrity of the people working in the company. (Slatter, 2007, pp. 278)

PepsiCo is a publicly traded company (Symbol PEP) with its shares being traded principally on the New York Stock Exchange (NYSE) in the United States. In addition, PepsiCo is also listed on several other major stock exchanges in Amsterdam, Chicago, Switzerland, and Tokyo. PepsiCo has consistently paid cash dividends since the corporation was founded in 1965. Currently i.e. in 2008, PepsiCo pays  1.65 per share in dividends to its stock holders, which was a increase over the .1425 per share paid in the year 2007 and 1.16 paid in the year 2006. PepsiCos stock currently trades on NYSE at 59.74 on 28th January 2010. (PepsiCo, 2009 Cartagena, Demetropoulos Martin, 2006, pp. 6)

2 Financial Analysis of PepsiCo
Some Financial Highlights PepsiCos total net revenue in the year 2008 increased to 43,251 million in the year 2008 from 39,474 million in 2007. In addition to this, the core division operating profit increased to 8,475 million in 2008 from 8,025 million in 2007 and core total operating profit increased to 7,824 million in 2008 from 7,253 million in 2007. The net income too increased to 5,887 million from 5,587 million in 2007. Finally the earnings per share (EPS) also increased during this period, to 3.68 in 2008 from 3.37 in 2007. In the year 2008, the cash flow from operations was 7 billion, while the core return on invested capital was 29. (PepsiCo, 2009, pp. 2, 5) The figure below shows the cumulative total shareholders return for the last 5 years for PepsiCos as compared to SP 500 and SP average of Industry groups.
Fig  1 Cumulative Total Shareholders Return (PepsiCo, 2009, pp. 2)

2.1 Financial Ratio Analysis of PepsiCo
Return-on-investments ratio (Return-on-assets ratio)
Basic earning power (Operating return on assets) ratio   EMBED Equation.3
This value gives the rate of return provided by the book value of the companys assets. The higher this value, the higher will be the profitability of the company. (Drake, n.d., pp. 1) PepsiCos ratios have slightly declined in the last three year period, though these values definite show the ability of Pepsi to generate revenues from its assets base.
200820072006699935994  19.44693434628  20.02608429930  20.32
Return on assets   EMBED Equation.3

This value gives the income generated by the book value of the companys assets. The higher this value, the higher will be the profitability of the company. . (Drake, n.d., pp. 2) PepsiCos ratios have been fluctuating over the last three year period, though these values definite show the ability of Pepsi to generate revenues from its assets base.
200820072006154335994  4.28142634628  4.11140629930  4.69
Liquidity Ratio
Current Ratio   EMBED Equation.3

This ratio analyzes the ability of a company to meet its requirements for cash  necessary for both expected and unexpected cash demands. This is also known as current ratio, and refers to the companys ability to pay short-term obligations. A ratio less than 1, shows that the company is not in good financial health, but not necessarily that it will go bankrupt a high value can however detract from profits. The liquidity ratio of PepsiCo has been steadily declining over the past three year period, though it is still comfortably higher than 1, showing that that the company has been balancing the values such that not too much of liquid assets are kept as spare because of such assets being low returning investments.
200820072006108068787  1.23101517753  1.3191306496  1.40

Total debt-equity ratio
Debt in itself is not harmful it is practically a required for any company looking to expand its operations. However, it does require timely payout of interest to debt holders. Hence, companies with high level of debt must have positive earnings and a steady cash flow. A high value of ratio shows that the company has been aggressive in financing its growth with debt, which might in turn result in volatile earnings ratios. The values of debt ratios below show this nature in Pepsi which is probably the reason for its erratic earning figures. The values for long-term debt ratio are much more stable for the company, though these values too are steadily on a rise.

DebtEquity    EMBED Equation.3
200820072006785812203  0.643420317325  0.24255015447  0.165
Long-term debttotal equity   EMBED Equation.3
2008200720062388812203  1.951739417325  1.001456215447  0.94

3 SWOT Analysis
3.1 Strengths
PepsiCo brands have traditionally enjoyed an extremely high profile global presence, which has steadily maintained itself even in the presence of powerful brands from its arch rival Coke. PepsiCo constantly follows constant product innovation based on extensive market researches to understand the consumer mind and follows aggressive adversitingmarketing strategies involving famous celebrities  a move that has guaranteed the company a loyal fan-base. The company also has a broad portfolio of products catering to all types of consumers  health conscious to junk food addicts. With the demand continuously shifting to healthier products the company has acquired several brands and companies sparkling juice company IZZE, a licensing agreement with Ben  Jerrys for the sale of milkshakes, a deal with Starbucks to distribute its Ethos water brand, and the launch of a coffee-flavoured cola, Pepsi Max Cino in the UK. The company has also shifted its product innovation strategies to formulate its products to include more nutritional ingredients.
Financially also PepsiCos cumulative total shareholder return, as seen above has been much higher than the industry average continuously for the past five years. In 2008, the values for both core division operating profit and total operating profit increased by 6 and 8 respectively over the 2007 figures, as did the core earnings per share by 9, while the net revenue showed a double digit rise by 10

3.2 Weaknesses
The major weakness for PepsiCo is the rapid and steady decline of the carbonated drinks market in the last couple of years. Further, PepsiCo beverage brand enjoys highest popularity in the already saturated North American market and targets mostly the younger generation for its products. Even the CEO of the company agreed that the overall weakness trigged by the weak US economy did affect the beverage volume overall and declined by 1 and hence the core operating profit due to this decreased by 7. A major risk of the company that have been operating in international markets is the exposure to movements in currency exchange rates which impacts the international operational operating profits. According to PepsiCo estimates an unfavourable 10 change in the exchange rates would have decreased the net unrealised gains by 70 million and contracts that do not qualify for hedge accounting resulted in a net loss of 28 million 2008. (PepsiCo, 2009, pp. 51 Cartagena, Demetropoulos Martin, 2006, pp. 28)

3.3 Opportunities
The major opportunity for PepsiCo, one which the company has already leveraged, is the increased consumer concerns with regards to drinking water. The concern is especially more in developing countries like India and China  among the largest growing markets. The growth in the demand and requirements for healthier beverages too provides additional opportunities for the company for future innovation. There has also been an increase in the growth of Asian tea beverages and functional drinks industry.

3.4 Threats
The majority of the accounting risks for PepsiCo arise from adverse changes in commodity prices. This is because these affect the cost of raw materials. The company has hedging strategies for managing the volatility in the raw material and energy costs. The corresponding contracts resulting in net unrealised losses of 117 million as on 27th December 2008 for PepsiCo, which would have further increased by 19 million if there was a 10 decrease int he underlying commodity price. The derivative contracts that were not qualified for hedge accounting, on the other hand, resulted in net losses of 343 million in 2008, which would have further increased by 34 million, if there was a 10 decrease in the underlying commodity price. (PepsiCo, 2009, pp. 50) Other threats for the company come from increasing obesity and health concerns. The operations outside US generated 48 of the companys net revenue, which is definitely a risk since the companys multibillion empire rests 50 on the recession-hit US market.

4 Conclusions  Recommendations from the Analysis
First and foremost, PepsiCo needs to reduce its dependence on the US market. This is not merely because of the present economic downturn. The rise of the US market is also expected to be cautious and slow. Also the possibility that the economy, and hence the consumers, would reach the previous state of financial security is remote in the next few years, even if the market does jump. Hence, diversification from US market to other international markets is extremely important at this stage.

The asset turnover ratio of the company is volatile and needs to be at a higher level. The company needs to increase its asset turnover by increasing its production efficiency, or price levels, or reduce current or non-current assets. In addition, the company needs to reduce its debt-reliance and needs to increase its capital efficiency also. In addition expense control is also required. In this context, the company has started a program known as Productivity for Growth, which is expected to generate more than 1.2 billion in pre-tax savings over the next three years. (PepsiCo, 2009, pp. 42) This shows that the company is already aware of its problem with asset and capital management. Finally, the company has faced both currency exposure losses and losses due to high material costs in recent quarters. The company needs to manage the hedging of such risks. The upside however is that the companys global sales have increased furthering its growth potential and also brought in strong revenue, which have offset these risks to a large extent.