# Pepsi Co. Analysis of Company

Topics: Pepsi, PepsiCo, Financial ratio Pages: 10 (3650 words) Published: November 4, 2010
Introduction:
“Our approach to superior financial performance is straightforward - drive shareholder value. By addressing social and environmental issues, we also deliver on our purpose agenda, which consists of human, environmental, and talent sustainability” (Pepsi Co.). Since 1898, Pepsi Co. has been satisfying the thirst of people all over the world. The history, corporate governance, culture, and management philosophy of Pepsi Co., is what has made this Corporation prosper for the last 112 years. Pepsi Co. thrives through its financial stability. To learn more about Pepsi Co., we will need to start back in 1898 when Pepsi Co. first became. Return on Asset Ratio:

Return on assets measures a company’s earnings in relation to all of the resources it had at its disposal (the shareholders’ capital plus short and long-term borrowed funds). To calculate the return on asset ratio (ROA): (Net Income + Interest Expense)/Total Assets = ROA. The lower the profit per dollar of assets, the more asset-intensive a business is. The higher the profit per dollar of assets, the less asset-intensive a business is. All things being equal, the more asset-intensive a business, the more money must be reinvested into it to continue generating earnings. This is a bad thing. If a company has a ROA of 20%, it means that the company earned \$0.20 for each \$1 in assets. As a general rule, anything below 5% is very asset-heavy (manufacturing, railroads); anything above 20% is asset-light (advertising firms, software companies). Pepsi Co.’s ROA for the year ending 2008 is 15.2%. For the year ending 2009, Pepsi Co’s ROA is 15.9%. In translation, for the year ending 2009 Pepsi Co. has earned \$0.159 of every \$1.00 in assets. The year before, Pepsi Co.’s ROA was 15.2%; a .7% increase from 2009. Calculations were done as followed:

Year| 2009| 2008|
Net Income| \$5,946,000.00| \$5,142,000.00|
Interest Expense| \$397,000.00| \$329,000.00|
Total Assets| \$39,848,000.00| \$35,994,000.00|

2008 ROA:
(\$5,142,000.00 + \$329,000.00) / \$35,994,000.00 = 15.2%
2009 ROA:
(\$5,946,000.00 + \$397,000.00) / \$39,848,000.00 = 15.9%
This is an important ratio for companies deciding whether or not to initiate a new project. The basis of this ratio is that if a company is going to start a project they expect to earn a return on it, ROA is the return they would receive. Simply put, if ROA is above the rate that the company borrows at then the project should be accepted, if not then it is rejected. Pepsi Co.’s ROA is considered to be very high, meaning they can take on new projects if they arise.