Final Case Study - Organizational Economics PEPSI
The final case study paper should cover 4 sections including an overview of the company and its competitive landscape along with 3 other sections addressing specific issues, problems, or strategies the company is facing.
Each section should be 1.5 – 2.0 pages (4 sections X 1.5 - 2.0 pages = 6 - 8 pages). 6-8 pages (double-spaced).
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Profitability ratios indicate the capability of a firm to generate profits from the sale of its assets. The gross margin ratio for Pepsi decreased 2018 from 2017 but it increased in 2019 to the extent of exceeding the 2017 mark. The operating profit margin also decrease and increased respectively as the gross profit margin. The net profit margin grew from 2017 to 2018 but had a slight drop inn 2019 but did not get to the 2017 mark. The return on equity increased from 2017 to 2018. The return on assets grew in 2018 compared to 2017 but decreased in 2019 slightly but did not get to the 2017 mark.
Over the past five years, the company has hard return on assets above 15 percent and the highest in 2019 being about 17.5 percent while the return on equity is above 70 percent with the highest at about 84% for 2019. Generally, in terms of profitability, the firm is close to its competitors like coca cola. As of 2019, Pepsi had 9.31% in ROA while coca cola had 10.33% while the ROE was at 49.47% and 46.99% respectively. (Pepsi, 2020). The net profit for the two was 10.89 and 23.94 percent respectively while operating profit margin stood at 15.32 percent and 27.06 percent. The gross profit margin was 55.13 percent and 60.77 percent. Pepsi is doing well in profitability as it is evident from the ratios above. The fact that it is at close range with the its major rival, then it is doing absolutely great.
As of 2020, Pepsi had a decreased leverage ratio to about 4.98 which is above the firm’s leverage ratio. This is associated to the aggregate new debts of about 5.92%. In the same industry as of the 2020, 3 other major firms also got lower leverage ratios than Pepsi had but the total ranks remained unchanged. Compared to coca cola, it had a higher ratio because coca cola had 3.82. This higher ratio clearly indicate that the firm is using more of debt to finance its operations as compared to other firms. It is not a good sign because firms with lower ratios indicate that they may have minimal or no debts and that their operations entirely depend on the sales and revenues generated from the sale of its resources. (Jalagat Jr, Dalluay, & Aquino Jr, 2018). This therefore makes the business look riskier and it may push away potential investors. Also, with the ever-changing economic times, the business may generate loss making it to have credit risks. These kinds of risks may result in bankruptcy.
On the other hand, this may be an assign to retain and attract investors because it may mean that the business is funded by more of debt and less equity. Thus, the return on equity for the current shareholders will be high. However, all is well for the firm because it operates in an industry with few competitors. This means the barriers to entry are many and above average historical profits can be seen. Therefore, the firm can maintain higher loads of debt over a long time. It is also good to get extra funding for its functions because of the ever-changing market dynamics.
The firm’s current ratio decreased in 2018 from 2017 as well as in 2019 from 2018. The quick ratio decreased also respectively. The cash ratio did decrease under the similar patterns. When the liquidity ratios are high, it means that a firm is holding back a lot of cash that could get utilized in other areas. When the ratios are low, it is a sign that a firm may struggle making payment of its short-term debts. However, it should be known that liquidity ratios should be average. Too low ratios indicate that a company is at the risk of experiencing default risks and cannot raise funds. Also, too high ratios might sideline usable assets. Therefore, after all Pepsi is not in a poor financial position because its ratios are not too low.
The firm should embark on understanding these ratios as well as improving them. The ratios indicate the capability of a firm to change short term assets into cash and these is a primary role for managers in the finance department. Liquidity issues greatly impact the profitability and the efficiency of operations. Therefore, if they are not well understood they can hinder the success of a firm. The federal reserve controls liquidity through monetary policies. Pepsi can improve its ratios through making early submissions of invoices to the consumers. (Myšková, & Hájek, 2017). The accounts receivable should be more to grow the current ratio. Also, the firm can change from short to long term borrowing because the monthly installments will decrease as well as the interest rates. Also, any kind of useless assets should get discarded so as to reduce the costs of operation. Besides, the overhead expenses should get controlled to have impressive quick and current ratios. Lastly, the firm should request for longer payment periods.
Common Stock Valuation
The company’s price to earnings ratio declined from 2017 to 2018 but it did increase in 2019 but still did not beat the 2017 mark. The price to operating profit increased from 2017 to 2018 to 2019. The price to sales increased respectively to the price to operating profit ratio. The price to book value declined in 2018 from 2017 but it grew in 2019 but did not get to the 2017 mark. A firm with a lower price multiple in relation to a benchmark form means that firm’s stock is undervalued. On the other hand, if the multiple price of that given firm in relation to the benchmark firm’s is higher, then its stock is overvalued. (Liang, Lu, Tsai, & Shih, 2016). Coca cola stock being the benchmark firm has a higher multiple price than Pepsi and this means that Pepsi’s stock is undervalued. However, it is a positive thing to its because coca cola’s overvalued stock has some implications.
Overvalued stocks force managers to get extra incentives in response to the odds with the shareholder’s interests. This is declining the aggregate performance of the firm. Powerful management can eradicate this aspect of management. Therefore, the board should be vigilant when the growing stock prices bring about conflicts with the company’s fundamental value. Common stock is advantageous because it offers the spirit of free enterprises structure and capitalism. There are benefits that the shareholder, issuer and the society get at large. The issuer will get funds through production of goods and services while the shareholder will get the benefits generated from this business.
Jalagat Jr, R., Dalluay, V., & Aquino Jr, P. (2018). Assessing the Impact of Corporate Social Responsibility (CSR), Corporate Reputation, and Customer Loyalty: The Case of Pepsi-Cola Philippines, Inc. IJAMEE.
Liang, D., Lu, C. C., Tsai, C. F., & Shih, G. A. (2016). Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive study. European Journal of Operational Research, 252(2), 561-572.
Myšková, R., & Hájek, P. (2017). Comprehensive assessment of firm financial performance using financial ratios and linguistic analysis of annual reports. Journal of International Studies, volume 10, issue: 4.
Pepsi, INC. (2020). Analysis of profitability ratios. Retrieved from; https://www.stock-analysis-on.net/NASDAQ/Company/PepsiCo-Inc/Ratios/Profitability