Your parents are considering investing in PepsiCo, Inc. common stock.

They ask you, as an accounting expert, to make an analysis of the company for them. Fortunately, excerpts from a current annual report of PepsiCo are presented in Appendix A of this text ook. !"# $ake a %&year trend analysis, using '((" as the ase year, of !"# net sales and !'# net income. Comment on the significance of the trend results. a# P)P*IC+, I,C. Trend Analysis of ,et *ales and ,et Income For the Five Years )nded '((%

-ase Period '((".!in millions# '((% !"# ,et sales Trend !'# ,et income Trend
32562 138.5% 4,078 170%

'((/
29261 124.5% 4,212 176%

'((0
26971 114.7% 3,568 149%

'(('
25112 106.8% 3,000 125%

'(("
23512 100% 2,400 100%

An aspect of technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen. (Investopedia) In the above table you can see ! years from "##$ to "##!. %e consider "##$ year as the base year for the trend analysis. &y dividing the ne't year net sales to the base year net sales we can get a picture of trend analysis. (or e'ample when we divided "##" )et sales on "##$ )et sales we got $#*.+, and so on. -ame is the case with )et Income. by dividing the net income of "##" on the base year net income we get $"!, and so on. %hen having a look at the trend analysis it tells us that )et Income of the /epsi0o has been increasing faster as compare to the )et sales of the company. This tells us that the net margin of

the company would have increased in these ! years shown in the above table and it also indicating a better profitability picture for the /epsi0o.

!'# Compute for '((% and '((/ the !"# profit margin, !'# asset turnover, !0# return on assets, and !/# return on common stockholders1 e2uity. 3o4 4ould you evaluate PepsiCo1s profita ility5 Total assets at 6ecem er '7, '((0, 4ere 8'%,0'7, and total stockholders1 e2uity at 6ecem er '7, '((0, 4as 8"",9:;. "# Profit $argin '((%<1 4,0782 1 32,562 3 12.5= '((/<1 4,2122 129,261 3 14.4= '# Asset Turnover '((%<1 32,562 *2 2 1 31,727+ 27,987 > ".(: times '((/<1 29,261*2 2 127,987+25,327 3"."( times 0# ?eturn on Assets '((%<14 #5+6" 2 1 31,727+ 27,987 3 13.7= '((/<1 4,21262 2 127,987+25,327 3 15.8= /# ?eturn on Common *tockholder1s )2uity '((%<1 4 #5+6" 2 1 14,320+13,572 3 29.2= '((/<1 4,21262 2 113,572+11,896 3 33.1=

7ere we can see that to obtain profit margin )et sales are divided by )et income. 8n the other hand Asset Turnover is obtained by dividing )et sales over the sum of total asset of current and previous year and again dividing it by ". In the above case you can see )et sales of "##! (9" !*") divided by the sum of Total Asset in "##! and "##4 and then dividing it again by " we get $.#:,. To obtain ;eturn on Assets sum of Total Assets in current and previous year (&ase

year) is divided by )et Income. In the end to obtain ;eturn on <=uity the sum of Total e=uity of current and previous year is divided by )et Income and then again divided by ". The profitability is lower in "##! as compared to "##4. This has resulted in a lower return on assets which decreases from $4.4, to $".!, and has also been impacted by a lower asset turnover which is decreases from $.$#, to $.#:,. There reduction in return on assets has reduced the return on e=uity also which decreased from $!.+, to $9.5,. In the end ;eturn on e=uity decreased from 99.$, to ":.",.

!c# Compute for '((% and '((/ the !"# de t to total assets and !'# times interest earned ratio. 3o4 4ould you evaluate PepsiCo@s long&term solvency5 "# 6e t to Total Assets '((%<1 17,476 2 1 31,727 > 0.55= '((/<1 14,464 2 127,987 > 0.52= '# Times Interest )arned ?atio '((%<1 6,638 2 1 2563 25.93 times '((/<1 5,713 2 1167 3 34.21 times >ebt ratio indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt?load. (Investopedia) <nsuring interest payments to debt holders and preventing bankruptcy depends mainly on a company@s ability to sustain earnings. 7owever a high ratio can indicate that a company has an undesirable lack of debt or is paying down too much debt with earnings that could be used for

other proAects. The rationale is that a company would yield greater returns by investing its earnings into other proAects and borrowing at a lower cost of capital than what it is currently paying to meet its debt obligations. (Investopedia). To obtain >ebt ratio total Assets are divided by the total liabilities. >ebt ratio for /epsi0o is increased from .!" to .!!. The solvency has reduced since the debt ratio has increased (implying more financing by debt and so higher financial risk). Times interest earned is determined by dividing <arnings &efore Interest and Ta'es (<&IT) over Interest. That is shown in above table that Time Interest <arned decreased from 94."$ to "!.:9. The solvency remains good. (or the reason that the >ebt ratio is not too high and the times interest earned is still very high.

!d# Ahat information outside the annual report may also e useful to your parents in making a decision a out PepsiCo, Inc.5 Annual reports of any company are necessary to view when one likes to invest in the common stock of any company. 8n the other hands outside information is also useful along with annual report for the investment in common stock of a specific company. I would suggest my parents that despite of having a look at annual report trend analysis of ! years Bnowing profitability ;eturn on <=uity /rofit margin Asset turnover ;eturn on Assets Times interest earned ratio and >ebt ;atio of the /epsi 0ompany they should also see that in relation to the market inde' what is the performance of stock of /epsi 0ompany. -econd they should know about the performance of /epsi products in relation to their competitorCs products for e'ample 0oca 0ola. Third it is also necessary to know about the current strategies and future strategies that will be adopted by the /epsi 0ompany whether these strategies are favorable for the company or not

and in what way these strategies will affect the companyCs performance. After taking a look on annual report and outside information I would suggest them to invest in the common stock of the /epsi 0ompany if the outside information and annual report information is favorable.