Financial ratios are calculated to determine a company’s performance and position by investors. The purpose is to identify whether a company is stable and if it is worth investing in.
PepsiCo Data
The balance sheet provides further data as follows (all data in billions)
Current market price for PepsiCo share is 91.51
Key Financial Ratios
Based on this data the following ratios were calculated –
- Liquidity and solvency ratios to see if a company can deal with its debts
- Current ratio = Current assets/Current liabilities = 1.24
- Quick ratio = Quick assets/Current liabilities = 0.93
- Debt ratio = Total liabilities/Total assets = 0.69
- Debt to equity ratio = Total liabilities/Total equity = 2.17
- Asset management ratios to understand a company’s operations
- Inventory turnover ratio = Cost of sales/Average inventory = 8.94
- Total asset turnover = Net sales/Total assets = 0.86
- Profitability ratios to measure financial performance
- Profit margin = Net income/Net sales = 10.1%
- Return on investment (ROI) (as per Dupont analysis) = Profit margin* total asset turnover = 0.86 * 10.1% = 8.7%
- Return on equity (as per Dupont analysis) = ROI * Assets/equity = 27.6%
- Valuation ratios to compare a company’s performance to its stock price
- Earnings per share = Dividend per share + (Change in retained earnings/Total outstanding shares) = 4.36
- Book value per share = Total equity/Total shares = 15.84
- Price to earnings ratio = Market price/Earnings = 91.51/4.36 = 21.0
- Price to book value = Market price/book value = 91.51/15.84 = 5.8
Comparison with Competitors
We compare PepsiCo’s valuation ratios with its competitors -
Earnings per share indicate the value current shareholders make per share. This is highest for PepsiCo which indicates that existing shareholders make good returns. However, for investing Warren Buffet suggests looking at P/E and P/BV ratio. P/E ratio indicates the possible returns possible based on current prices while P/BV ratio indicates how overvalued the stock is. As per Buffet, the product of P/E and P/BV should be less than 22.5 to be considered worth investing. Pepsi at 121.34 is very high but it is better than Coca Cola and Monster.
