Xacc 280 Final: Coke/Pepsi

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Financial Analysis

Edward Kowalski

XACC/280

22July12

Dr. Edward Walden

University of Phoenix

a)PEPSICO, INC.
Trend Analysis of Net Sales and Net Income
For the Five Years Ended 2005

Base Period 2001—(in millions)

| | | 2005| | 2004| | 2003| | 2002| | 2001| | | | | | | | | | | | | (1)| -------------------------------------------------

Net salesTrend| | $32562| | $29261| | $26971| | $25112| | $23512| | | | +38.5%| | +24.5%| | +14.7%| | +6.8%| | 0%| | | | | | | | | | | | | (2)| -------------------------------------------------

Net incomeTrend| | $4078| | $4212| | $3568| | $3000| | $2400| | | | +69.9%| | +75.5%| | +48.7%| | +25%| | 0%|

Significance of Results
The significance of the trend analyses on net sales and net income is that PepsiCo has been steadily increasing its sales over the past 5 years (for a total increase of $9 billion), since 2001. Clearly, they must have sound marketing and advertising strategies, in order to not just maintain their sales figures, but to maintain a growing increase each year. Up until 2005, they were performing equally admirably at increasing their net income as well. While their net income for 2005 is still an impressive 69.9% higher than in 2001, they went from 3 years of massive increases, to a slight decrease. Since the sales figures increased from 2004-2005, it’s not a question of having a “sales slump”. This means they must have increased expenses dramatically during 2005. We know this because net income is tabulated from the income statement, which consists of revenues and expenses. Logically, if sales have continued to increase, yet net income has fallen slightly, then there must have been a substantial increase to expenses (enough to completely offset the 2005 sales increase of about $3 billion, plus the $150 million, that net income decreased from 2004-2005). Those sales and net income figures also had the benefit of a 53rd week in FY 2005 (which added $418 million for sales, and $57 million to net income). Although subtracting the increase to net sales still leaves PepsiCo with a healthy increase, it means that the decrease to net income should have been even larger. I find that to be a bit worrisome, as it appears that PepsiCo may be starting to “bloat”, if they have that much of an increase in expenses. Combine these numbers, with the fact that their return on invested capital also decreased in 2005 (from 27.4% in 2004, to 22.7%. This is only slightly above 2001’s 22.1%). That information tells me that they are investing a lot of money, to little or no benefit. I think this issue needs to be very carefully researched, in order to determine the root causes. Is it a temporary restructuring setback, or is it indicative of a need for some major policy changes?

b) Profitability
Compute for 2005 and 2004 the (1) profit margin, (2) asset turnover, (3) return on assets, and (4) return on common stockholders’ equity for Pepsi Co:

1) Profit Margin
2005:  $__4078_ ÷ $ 32562_= __12.5__%
2004:  $_4212_ ÷ $_29261_ = 14.4_%

2) Asset Turnover
2005:  $32562 ÷ $ 29857 =_1.09_ times
2004:  $_29261_ ÷ $_26657 =_1.1__ times

3) Return on Assets
2005:  $_4078_ ÷ $ _29857_= _13.7_%
2004:  $_4212_ ÷ $_26657_ = _15.8_%

4) Return on Common Stockholder’s Equity
2005:  $_4078_ ÷ $ _13946_= _29.2_%
2004:  $_4212_ ÷ $_12734_ = _33.07_%

Evaluation
Generally speaking, PepsiCo does remain a profitable company. They have a good profit margin, and solid returns on both assets, and common stockholder’s equity. These figures indicate that they are a profitable investment, and are a company that seems to be on...
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