PEPSICO

By: Group 5

Sarvesh Kumar
Surbhi Saini
Aditya Mishra
Ashdeep Sahni
Harsh Choudhary
 Q.1) Comment upon the business model of the company. What are the primary
(core) and secondary activities that the firm is engaged into?

Business Model
• Market Segmentation
• Customer Segmentation
• Distribution Strategy

6 Business segments
Annual Turnover $
63.5 billion in 2017

53% Revenue from Food

47% Revenue from Beverages.

 Continued..
Business Model

QFNA- Quaker Foods North America

DISTRIBUTION STRATEGY
FLNA- Frito Lay North America
BUSINESS MARKET
SEGMENTATION

NAB- North America Beverages

Direct Store Customer Distributor
E-Commerce
Delivery Warehouse Networks
LA- Latin America

ESSA- Europe Sub-Saharan Africa

AMENA- Asia, Middle East & North

America

CUSTOMER
SEGMENTATION

Food and Beverage Food Services Independent

Retailers Bottlers
Distributor Businesses
Continued..
Primary Activities:
Manufacturing, marketing, distribution and sales of beverage products, food and snacks.
Beverages:

Food:

Secondary Activities:
CSR Activities, Partnerships for Environment friendly initiatives,
Funding for waste management technology etc.
 Q.2) What do you think of the company’s management of inventories and receivables? Comment
upon the depreciation policy of the company
• Inventory:
Total Inventory $3 billion with an increase by 6% wrt previous year.

14 % increase in FG inventory
Day’s sale inventory ratio= 39 days

As the food & beverages items are perishable or with certain expiry date for use. So most part of
inventory is considered as FIFO. Only small portion of 5% is considered as LIFO.

• Receivables:
Total receivable $7.2 billion with an increase of 1.25% wrt previous year. i.e sale on credit has
increased.

• Depreciation Policy: Straight Line Method

 Q.3) What do you think of the size of the company’s cash and bank balances and investments?

• Cash & Bank Balance:

Cash size as per 2018 report is $8.7 billion which is comparatively 17.8 % lesser than previous year.

• Investments:
Total return from Investment comes out $4.5 billion.
In 2018 one of the key Investment done is acquisition of Israel based company Soda-stream
International Ltd. at $1.2 billion.
 Q.4) Compare the company’s basic and diluted EPS and explain any difference with calculations.

• EPS (Earning per share) :

Net Income (in $ million) 12515

Basic EPS = = = $ 8.84 per share
Weighted avg. no. of common 1415
or Basic shares (Nos. in million)

Net Income (in $ million) 12515 12515

Diluted EPS = = = = $ 8.78 per share
1415 + 10
Weighted avg. no.
of common shares
+ ( Convertibles bonds, 1425
Stock options, Warrants etc.)

• Diluted EPS comprises of potential shares which comprises of convertible bonds, stock
options, warrants and securities etc along with the ordinary shares.
• Whereas Basic EPS comprises of only ordinary shares excluding of bonds, options and
warrants.
Q.5) Evaluate performance of the company’s segments (if any)

%ge change in Profit

wrt year 2017
+ 4.48 %
- (0.5) %
- (15.7) %
+ 13.5 %
+ 3.65 %
+ 9.23 %
+ 0.5 %
+ 19.3 %
- (1.6) %

There is decrease in overall profit by 1.6% wrt year 2017. Two prime factors are:
• Decrease in profit by more than 15% in NAB (North America Beverage) segment.
• Increase in corporate unallocated expenses by more than 19%
 Q.6) Explain how the information in the chairman’s statement and the directors’ report is useful
in understanding the information in the financial statements

• Mission

• Vision

• Growth Strategy: Faster growth, Stronger brand value and

sense of purpose & Better community

• Company financial position:

From analyzing below key performance indicators, stakeholders and Investors can easily interpret
the financial position of the company and can take decisions suitably.

• key performance indicators

Q.7) Does the company provide information that would enable investors and analysts to
understand its long term direction?

Long Term Goals for connecting more with the people good

• Diversified food portfolio with Positive ingredients

• Advancement in Farming methodology.

• Water replenishment

• R&D for technology for better

Plastic Recycling and reusage techniques.
Q.8) How is the corporate governance report useful? What additional information would be
useful?

Corporate Governance is useful for :-

• Maintaining strong controls over financial reporting.

• Providing investors with financial results that are complete & transparent.
• Exerting rigorous oversight of the business performance.
• Ensuring compliance of company ethics and policies.

Additional information in the report that could be more useful :-

• A summarized table may comprising of all financial ratios to interpret the KPI (key performance
indicators) as below mentioned. This summarized table we have prepared in last slide.

• Solvency Test Ratios like Debt ratio, Equity ratio etc.

• Efficiency & Liquidity Test Ratio like current ratio, Acid test ratio, etc.
• Profitability Test Ratio like profit margin, ROA, ROE etc.
• Market Prospect Test Ratio like PE ratio, Dividend yield etc.
 Q.9) What additional disclosures would you recommend to the company’s management? What
are the pros and cons of providing these disclosures?

Pepsico has considered all the disclosures in its annual report which are necessary such as
Quantitative & Qualitative disclosure about market risk, Accounting and financial disclosure etc.
So we don’t think there is need of any further disclosure.

• Pros:
• Transparency in reporting.
• Complete information of data.
• Foster authenticity in reporting.
• Trust worthiness among Investors and stakeholders.

• Cons:
• Can make reports complex sometimes.
• Actual assumptions can sometimes raise doubt in understanding.
• Can lead to distort the financial figures as per the suitability of company.
 Q.10) Does the company follow the direct method or indirect method for reporting net cash flow
from operating activities?

• Company follows Indirect method for reporting Net cash flow.

• In this method Income statement start from Net Income and further Inflow and outflow are
included to get Net cash from Operating activity.
• In this system we convert accrual accounting system to Cash system by eliminating the Non-
cash items like Depreciation, Inventory etc.
• So here Depreciation is added in Net Income (for eliminating non cash expense) and Inventory
is deducted (for eliminating non cash revenue) to get Cash Flow.
Depreciation is added

Inventory is deducted
Q.11) How much cash did the company generate from or use in operating, investing and financing
activities?

• Net Cash generated by Operating activities: $9.4 billion.

• Net Cash generated by Investment activities: $4.5 billion.
• Net Cash used for Financing activities: $13.7 billion.
Q.12) Verify that the sum of net cash from or used in operating, investing and financing activities
equal the change in cash and cash equivalents over the reporting period

• Cash from Operating activity: $ 9415

• Cash from Investing activity: $ 4564
• Cash used in Investing: $ (-13769)
• Effect of exchange rate : $ (-98)
• Net Sum = 9415+4564-13769-98 = $ 112

• Net Cash at the end of year 2018: $ 10769

• Net Cash at the end of 2017: $ 10657
• Change in cash equivalent: 10769-10657 = $ 112

• Note: Effect of Exchange Rate changes, on Cash and Cash Equivalents measures the impact on
the value of existing cash balance in the reported currency due to fluctuations in foreign
exchange rates.
Q.13) Are there any non-cash items in the net cash flow from operating activities? How would you
deal with them in your analysis?

• Depreciation / Amortization is a non cash expense whereas Inventory is a non cash Revenue
in accrual accounting system. For going from Accrual system to Cash flow system we need to
eliminate these non-cash items
• So we need to add Depreciation in Net Income (for eliminating non cash expense)
• And deduct Inventory from Net Income (for eliminating non cash revenue)
Depreciation is added

Inventory is deducted
 Q.14) Depreciation is not a source of cash, but it is added to net profit. Why?

• Depreciation / Amortization is a non cash expense in accrual accounting system. For going
from Accrual system to Cash flow system we need to eliminate these non-cash items
• So to get CFS (Cash flow statement) we need to add Depreciation in Net Profit (for eliminating
non cash expense)

Depreciation is added
 Q.15) Does the amount of interest income equal interest received? Why or why not?

• Interest income: $306 million

• Interest received : $53 million
• Interest receivable = Interest income – Interest received = 306 – 53 = $253 million

• So here, Interest income amount is different from actual interest amount received.
 Q.16) Does the amount of dividend income equal dividend received? Why or why not?

• Dividend declared (Dividend income for shareholder) : $5098 million.

• Dividends paid (Dividend received by shareholder) : $4930 million.
Dividend declared – Dividend paid = 5098 – 4930 = $168 million

• A declared dividend is a dividend that will be paid but has not yet been paid to the
shareholders. A paid dividend is a dividend that has been declared, paid and received by the
shareholders.
• Dividends are corporate profits distributed to shareholders & board of directors has the
authority to pay, omit, suspend, reduce or increase dividends.
 Q.17) Does the amount of interest expense equal interest paid? Why or why not?

• Interest expense: $1525 million

• Interest Paid: $1388 million
• Interest Payable: (1525 – 1388) = $137 million

• So It is not mandatory that Interest expense will always be equal to the Interest paid. As in
above case, actual Interest paid amount is $137 million lesser than the booked Interest
expense amount and balance amount is reflected in Payable in Balance sheet.
 Q.18) Try to reconcile the change in working capital items with the information on these items in
the balance sheet.

• Working Capital = Current Asset – Current Liability

Working Capital = 21893 – 22138 = $ (-245) million
• Here negative working capital shows that company’s current liabilities are more than the
current assets.

• Note: Working capital is different from Free cash flow. We will see further Pepsico has got
positive Free cash flow of $6267 million.
 Q.19) What do you learn from the difference between profit and cash flow from operating
activities?

Net Profit Cash flow

• Profit is the revenue remaining after deducting all • cash flow is the net amount of cash moving into
business costs. It is in terms of overall money tied and out of a business at any given point of time
up in the form of cash, hard assets, accounts
receivables etc.
• Profit is the overall picture of a business and the • It is related to daily operations and operating cost,
basis on which tax is calculated. required for paying taxes, purchasing inventory,
paying employees etc.
• Business can make profit even with Zero cash. • Whereas lack of profit does not mandatorily imply
zero cash, however it may have negative impact on
cash flow in long run.
• Profit is more indicative of the business’s overall • Cash flow is more important to keep the business
success. It can show how successful the business operating on a day-to-day basis.
is, but it can’t tell if the business has the money to
survive long-term.

• In our case of PEPSICO as per annual report 2018, • Whereas Cash flow from operating activities is
net profit is $12515 million $9415 million
 Q.20) Calculate the company’s free cash flow. What does it tell you about the company?

• Company’s Free cash flow is about $6.3 billion.

• Free Cash Flow (FCF) is a financial performance calculation that measures how much operating
cash flows exceed capital expenditures. It represents the cash or working capital a company
generates to support daily operations and maintain its capital assets.

• Company FCF has decreased by 13.4% wrt last year. This is due to fall in cash generation from
operation & increase in capital expenditure.
10% increase in
Capital expenditure

13.5 % decrease
in Cash flow

• FCF = Cash from operation + sale of asset – Capital spending

 Q.21) As you know the statement of Profit and loss, balance sheet and cash flow statement are
interrelated. Prepare a statement explaining changes in balance sheet items using the
information in the statement of profit and loss and cash flow statement.

• Cash Flow statement starts from the Net Income mentioned in the Profit Loss Statement.

• Beginning cash balance (in Balance sheet )+ cash receipts from operating & investing activities
(in cash flow statement )– cash payments for financing activities (in cash flow statement) =
ending cash balance in Balance sheet.

Beginning Cash Balance 10657 10657

(As per Balance sheet year end 2017)
Cash receipt from Operating activity 9415
+
Cash receipt from Investing activity 4564 13979
Sub Total (Cash receipt) 13979 -
Cash paid in Financing activity (-13769)
Effect of exchange rate (-98) 13867
Sub Total (Cash payment) (-13867) =
Ending Cash Balance 10769 10769
(As per Balance sheet year end 2018)
 Q.22) Analyse the financial statements of the company using different ratios. Analyse and
interpret the different types of ratios of the chosen company.

• SOLVENCY TEST

1. Debt Ratio = Total Liability / (Total liability + Total equity) = 63046 / (63046 + 14602) = 0.81
It measures a firm's total liabilities as a percentage of its total assets. It implies company’s ability to pay off its
liabilities with its all assets.
Lesser the ratio, better is the firm position.

2. Equity Ratio = Total Equity / (Total liability + Total equity)= 14602/(63046 + 14602) = 0.18
measures the amount of assets that are financed by investors.
Higher the ratio, better is the firm position.

3. Debt to Equity Ratio = Total Liability / Total equity = 63046 / 14602 = 4.32
It is a measure of the degree to which a company is financing its operations through debt versus wholly-owned
funds. It reflects the ability of company to cover all debts with shareholder equity during business downturn.
Lesser the ratio, better is the firm position.

4. Times Interest Earned = Income before interest & Taxes / Interest expense = 9189 / 1525= 6.02
It is a measure of a company's ability to honor its debt payments based on its current income. It also shows how
many times a company could cover its interest charges with its pretax earnings.
Higher the ratio, better is the firm position.
• LIQUIDITY & EFFICIENCY TEST
5. Current Ratio = Current asset / Current Liability = 21893 / 22138 = 0.99
It measures a company's ability to pay short-term obligations within 1 year with cash or current assets.
Higher the ratio, better is the firm position.

6. Acid Test Ratio = (CA-Inventory-prepaid expense)/ Current Liability = (21893-3128-633) / 22138 = 0.82
It measures a company’s ability to pay off its current debts with only cash or quick assets.
Higher the ratio, better is the firm position.

7. Account receivable Turnover = Net sales / Avg receivables = 64661/7243 = 8.93

It is a measure of the liquidity of a company’s accounts receivable. It implies the measure of expectation of
future cash flow from credit sales.
Higher the ratio, better is the firm position.

8. Inventory Turnover = Cost of goods sold / avg. inventory = 29381/3128 = 9.4

This shows how effectively inventory is managed by comparing COGS with average inventory for a period. This
measures how many times average inventory is “turned” or sold during a period.
Higher the ratio, better is the firm position.

9. Day’s sales uncollected = (Account receivables / Net sales) X 365= (7243/64661)X365 = 40.88 days
measurement used to estimate the number of days before receivables will be collected. It is an activity ratio and
gives information about the efficiency of sales collection activities.
Lesser the days, better is the firm position.

10. Day’s sales inventory = (Ending inventory / COGS) X 365 = (3128/29381)X365= 38.86 days
It indicates the average days that a company takes to turn its inventory into sales.
Lesser the days, better is the firm position.

11. Total asset Turnover = Net sales / Avg total asset = 64661 /77648 = 0.83
It measures the ability of a company to use its assets to generate sales.
Higher the ratio, better is the firm position.
 Continue..
• PROFITABILITY TEST
12. Profit Margin = Net income / Net sales= 12515/ 64661 = 0.19
It measures the degree to which a company or a business activity makes money. It represents what percentage of sales
has turned into profits.
Higher the ratio, better is the firm position.

13. ROA (Return on Total Asset) = Net Income / avg total asset = 12515 / 77648 = 0.16
It measures the net income produced by total assets during the period.
Higher the ratio, better is the firm position.

14. ROE (Return on equity) = (Net Income – preferred dividends) / avg. common stakeholders equity
= (12515-0)/ 14518= 0.86
ROE is considered a measure of how effectively management is using company’s equity to create profits.
Higher the ratio, better is the firm position.

• MARKET PROSPECT TEST

15. PE (Price Earning Ratio) = Market price per share / Basic Earning per share = 136.5/8.84 = 15.44
It is also known as the price multiple or earnings multiple as it relates a company's share price to its earnings per share.
Lower the ratio, better is the return prospect.

Net Income (in $ million) 12515

Basic EPS = = = $ 8.84 per share
Weighted avg. no. of common 1415
or Basic shares (Nos. in million)
16. Dividend Yield = Annual cash dividend per share / Market price per share = 3.5875/136.5 = 2.63%
The dividend yield is the ratio of a company's annual dividend per share compared to its share price.
Higher the %ge, better is the return prospect.
THANK YOU