Financial Analysis of Pepsi Co.

Topics: Financial ratios, Financial ratio, Generally Accepted Accounting Principles Pages: 6 (2587 words) Published: April 28, 2013
Financial Analysis of Pepsi Co.

Pepsi Co. was Created and developed in 1898. It was first introduced as "Brad's Drink" to be later renamed as Pepsi-Cola on June 16, 1903, 60 years later removing the “Cola” and leaving just Pepsi. "Brad's Drink" got its name in New Bern, North Carolina, United States, in 1898, after his creator, Caleb Bradham He made it in his home where the drink was sold. It was later labeled Pepsi Cola, named after the digestive enzyme and kola nuts used in making the beverage. Bradham sought to create a drink that not only was delicious but would also boost energy. In 1903, Bradham moved the bottling of Pepsi-Cola from his drugstore to a rented warehouse. That year, Bradham sold 7,968 gallons of syrup. In 1926, Pepsi received its first logo redesign since the original design of 1905. In 1929, the logo was changed again. In 1931, at the depth of the Great Depression, the Pepsi-Cola Company entered bankruptcy. A major part was due to financial losses, brought on by speculating on fluctuating sugar prices as a result of World War I. Assets were sold and Roy C. Megargel bought the Pepsi trademark. Megargel was unsuccessful in making the company profitable. Pepsi's assets sold to Charles Guth, the President of Loft Inc. Loft was a candy manufacturer with retail stores that contained soda fountains. He wanted to replace “Coca-Cola” at his different store locations. Guth then had Loft's chemists reformulate the Pepsi-Cola syrup formula. Pepsi gained popularity following the introduction in 1936 of a 12-ounce bottle. Pepsi encouraged price-watching consumers to switch. The campaign succeeded in boosting Pepsi's status. From 1936 to 1938, Pepsi-Cola's profits doubled. Pepsi's success under Guth came while the Loft Candy business was faltering. Since he had initially used Loft's finances and facilities to establish the new Pepsi success, the near-bankrupt Loft Company sued Guth for possession of the Pepsi-Cola company. A long legal battle, Guth v. Loft, then ensued, with the case reaching the Delaware Supreme Court and ultimately ending in a loss for Guth. Today Pepsi is one of the leading manufactures in soft drinks. They are known worldwide and distributed globally. The success of Pepsi Co has grown astronomically over the past century, becoming a world leader in the soft drink market. When determining a company’s financial ratios an over view of all financial statements must be assessed. A company’s current ratio is a liquidly ratio. It is an indication of a firm’s ability to service its current financial obligations. Typically the higher the ratio the greater the barrier is between the current obligations a firm has and their ability to pay them. The current ratio is found by taking the Current Assets/ Current Liabilities. Pepsi Co. has a current ratio of 1.11 for 2010 (17,569/15,892 in millions) and 1.44 for 2009 (12,571/8,756 in millions). In one year from 2009 to 2010 the change between them is -.33. Compared to the “soft drink industry” average for 2009 is slightly below by .1. The industry average is 1.5 while in 2009 Pepsi Co. is at 1.4. This falls in the middle percentile. For 2010 the industry’s average is 1.1. Pepsi Co. was dead on while also having a current ratio of 1.1 falling in the 3rd or last percentile. The drop in the current ratio of -.33 could be due to a higher current assets and liabilities in the 2010 year. The Acid test ratio determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. This is found by taking the company’s Cash + Accounts receivable/ Current Liabilities. For 2009 Pepsi had an Acid ratio of .978 (3,943 + 4,624/ 8,756 in millions). For 2010 it was at .771 (5,943 + 6,323/ 15,892 in millions). From 2009 to 2010 their acid ratio decreased by .207. This change could be brought on by Pepsi’s Accounts receivables as well as Current Liabilities decreased, therefore were able to cover their current immediate...
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