PepsiCo Inc. is a publicly traded multinational corporation in the USA with its headquarters in New York, USA. PepsiCo Inc. is the consumer goods industry. PepsiCo manufactures markets and distributes beverages, snack foods and other products. This paper seeks to analyze the long term debt of PepsiCo Inc. This paper also seeks to analyze the debt-to-equity ratio and the times interest earned ratio of PepsiCo Inc. for the last three years, and compare the respective ratios with the most recent industry ratios. Information on the long term debt, debt-to-equity ratio and times earned ratio was obtained from the annual report of PepsiCo for the year 2011.
In the financial year ended 31 December, 2011 PepsiCo Inc. issued long term bonds. From the cash flow statements of the company it is evident that the company raised $3,000 million from long term bond issue. The issued bonds are redeemable. PepsiCo Inc. has the discretion of recalling the bonds before they mature after giving a sufficient notice. The long term bonds are secured on a floating charge. There is no indication as to whether the long term bonds are convertible or not.
The company issued bonds both at par and a discount. In the third quarter of 2011, PepsiCo Inc issued $750 million worth of bonds maturing in 2021 at a 3% discount. The company issued bonds at a discount to make them attractive to prospective investors. PepsiCo uses effective interest amortization method for bonds issued at a discount in order to comply with the requisite accounting standards.
Debt-to- equity ratio is a gearing ratio that is computed by dividing the total debt of a company by the total shareholders’ equity. Debt-to-equity shows the extent to which a company has financed its acquisition of assets and other resources using using fixed charge capital. The lower the debt-to-equity ratio the better a company is because it indicates that the company uses little fixed charged capital to finance acquisition of assets. Generally, a ratio of less than one is considered acceptable. However, a ratio of more than one implies that the company is highly geared.
The debt-to-equity ratio of PepsiCo Inc. for the last three years
Debt to Equity ratio
Source: PepsiCo 2011 Annual Report
Debt-to –equity ratio = Debt÷ Shareholders’ equity
2011: Debt-to –equity ratio = 26,773 ÷ 20,588 = 1.3:1
2010: Debt-to –equity ratio = 24,897 ÷ 21,164 = 1.18:1
2009: Debt-to –equity ratio = 7,864 ÷ 16,804 = 0.47:1
The debt-to equity ratio deteriorated from 0.47:1 in 2009 to 1.18:1 in the year 2010. In the year 2011 the debt-to-equity ratio deteriorated further to 1.3:1. PepsiCo is highly geared in 2010 and 2011 because the debt-to-equity ratio is more than 1.The debt-to equity ratio for the consumer goods Industry in the USA for the most recent year, which was 2011, was 0.99:1. The industry debt-to-equity ratio is better than that of PepsiCo Inc. The company debt-to-equity ratio is higher than the industry’s debt-to-equity ratio because the company has increased its debt over the years at a much higher rate than the increase in shareholders’ equity. The company should thrive to lower the debt-to-equity ratio to at least match that of the industry.
Times interest earned ratio is a solvency ratio that is computed by dividing the total earnings before interest and tax (EBIT) by the interest expense. Times interest earned ratio measures the number of times that interest charges can be settled by operating profits. Therefore, the higher the times interest earned ratio the better the company is because it indicates that the company is having a high operating profit or it has a low interest expense.
Times interest earned ratio of PepsiCo for the last three years
Add back net income attributable to NCI
Add back interest expense
Add back income taxes
Times Interest earned ratio
Source: PepsiCo 2011 Annual Report
Times Interest earned ratio = EBIT ÷ Interest expense
2011: Times Interest earned ratio = 9,690 ÷ 856 = 11.32
2010: Times Interest earned ratio = 9,135 ÷ 903 = 10.12
2009: Times Interest earned ratio = 8,476 ÷ 397 = 21.35
The times interest earned ratio of PepsiCo Inc. dropped significantly from 21.35 in 2009 to 10.12 in 2010. However, there was a slight improvement in 2011 from the 2010 times interest earned ratio. The times interest earned ratio for the consumer goods Industry in the USA for the most recent year, which was 2011, was 12.78. This was higher than the times interest earned ratio of PepsiCo Inc. The times interest earned ratio of PepsiCo was lower than the industry’s times interest earned ratio because PepsiCo Inc. has a higher debt compared to the average debt of other companies in the industry. PepsiCo Inc. should strive to reach or surpass the times interest earned ratio of the industry. This will only be possible if PepsiCo reduces the amount of debt or increases the amount of shareholders’ equity in financing acquisition of assets by the company.
During the financial year ended 31 December, 2011 PepsiCo Inc. received a total of $ 3,862 million from issuing debts. Out of this $ 3,000 million was raised from issuing long term debt while $ 862 million was raised from the issue of short term debt. These amounts raised by PepsiCo were intended to be used general corporate purposes. The management did not reveal the exact purpose for which these funds were to be applied. In the third quarter of 2011, PepsiCo Inc had issued $500 million of 0.8% senior notes which were to mature in 2014 to replace a bond issue that was retired before maturity to take advantage of lower prevailing market interest rates. This was aimed at reducing the overall interest expense.
PepsiCo Inc. used $ 1,596 million to pay for long term debt. It further used $ 771 million to repurchase debt and $ 559 million to pay for short term debt. The $ 1,596 million and $ 559 million were used to settle long term debt obligations and short term debt obligations that had already matured. While the $ 771 million which was used to repurchase debt was intended to retire an old bond and make a fresh issue at a lower interest rate. This was a financial management measure aimed at lowering the financing cost .
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