Investment - Case Study Part 4
Case Study Part 5 – Probability (Pepsi Co)
DUE 3/19/19 Late work will not be accepted
For the remainder of this project, Pepsi Co will be the
company you will work on. Make sure to keep all assignments
as you will need it to complete the remaining parts of the case
study.
To view financial statements for your company, please view
Morningstar, Yahoo Finance, or Reuters. Reuters is free but will
require you to sign up.
To begin your analysis of your firm's profitability, you must first find the following ratios for your firm and its industry averages: Total Debt to Equity, Interest Coverage, Net Profit Margin, Total Asset Turnover, Return on Assets and Return on Equity. Please note that Reuters displays all of these ratios as whole numbers, but all except Interest Coverage and Total Asset Turnover should be followed by a % sign. For example, if ROA (TTM) is shown as 16.17, it should be read as 16.17%. Interest Coverage and Asset Turnover are shown in times per year, so turnover of .59 indicates that the firm’s assets turn over less than once per year while interest coverage of 23 indicates its operating income is 23 times larger than its interest expense.
Use, Yahoo Finance, or Reuters to find your firm's financial reports.
Then answer the following 6 questions below:
1. How does your firm’s profit margin compare to that of firms in its industry?
2. How does your firm’s asset turnover compare to that of firms in its industry?
3. Generally we see a trade-off between profit margin and turnover, as high margin products often have lower sales volume than low margin products. Which describes your firm’s ratios best: high margin or high turnover? Does that seem to be consistent with what you know about the firm’s strategy? (Ex. We know Wal-Mart positions itself as having the lowest prices, so we expect them to have low margins and high turnover.) Is
this an industry-wide approach in your industry or are some firms the “low price leaders” while others are the “luxury” brands?
4. Return on Assets (ROA) is one measure of the effectiveness of a firm’s investment policy. Using DuPont Analysis, ROA is equal to Net Profit Margin times Total Asset Turnover. How does your firm’s ROA compare to that of firms in its industry? Would you say your firm’s approach to the trade-off between margin and turnover is successful? (Ex. A firm may lower margins to increase turnover but the resulting increase might not be enough to make the firm’s ROA as good as or better than its competitors. That would be unsuccessful.)
5. Return on Equity (ROE) measures the effectiveness of a firm’s investment policy and its financing or capital structure policy. Using DuPont Analysis, ROE equals ROA (the investment results) times Equity Multiplier (the effect of debt financing); therefore larger differences between ROA and ROE indicate more leverage. Does your firm appear to use a lot of debt to “lever up” ROE? Does your firm’s use of debt seem risky (interest coverage < 4)?
6. Complete or reword the following sentence, filling in the blanks: (Enter your firm’s name) has relatively __________________ margins and ___________________ turnover. Net profit margin times total asset turnover equals ROA, which is a measure of the effectiveness of a firm’s investment policy. ROA times the equity multiplier equals ROE. Firms can therefore boost their return to stockholders by using debt to finance investments. The more debt used, the greater the boost but also the greater the risk of bankruptcy. (Enter your firm’s name) ROE is relatively ________ because __________ (enter margin, turnover, and/or leverage) is ___________. My firm _________ (should or should not) consider using more debt because_____________.
To get full credit (10 points) for this post, you must do the following:
• Fully answer all six questions (6 points)
• Write using complete sentences with minimal typos and other errors (1 point)
• Use data to support your answers. For example, don't just say, "My firm holds a lot of
cash." Say, "At 20% of total assets, my firm's cash holdings are relatively large." (2 points)
• Make a comparison between your firm and at least one other firm posted either in your first
post for this DB or in a follow up post to this DB before the due date. For example, "At 20% of
total assets, my firm's cash holdings are relatively large. However, John Smith's firm Acme Inc. in
the same industry appears to hold even more cash, at 30% of assets. Perhaps Acme is preparing
for an acquisition." The reference should be a meaningful comparison. Here for example, I
don't just compare, I offer a possible explanation for the difference. (1 point)
*** Respond to ONLY 1 classmates post below ****
Guidelines for responding to a class mates post
Read your classmates’ posts and find a firm that differs from yours in regards to either FINANCING,
INVESTMENTS or OPERATIONS. (Choose only one of these three areas.) Describe how they differ and try
to explain why they differ. For example, if your firm is in retail and has high cost of goods sold, you might
compare your firm to a service firm that has low cost of goods sold but high labor expense. These firms
differ because retail is the reselling of items, whereas service firms do not resell items, they offer a
service, generally performed by employees. You can do this either in your first post for this DB or in a
follow up post.
Student 1 Post (Monster Beverage)
1. Monster Beverage Corp has a profit margin of 23.98% while the industry has a profit
margin of 3.92% which means Monster has a higher profit margin than the industry
does.
2. Monster Beverage Corp has a asset turnover of 0.73 while the industry has a asset
turnover of 0.96. The asset turnover is different this time because the industry has a
higher asset turnover rate than Monster Beverage Corp has.
3. When it comes to Monster Beverage Corp, their ratio is best called when it comes to
high margin. Since Monster has a much higher profit margin than the industry, I would
say that some firms are low price leaders while others are luxury. Some products of the
industry cost $1.81 while Monster products are $2.50 or higher. Monster is considered a
luxury in the industry due to the higher price of their products. When it comes to
turnover, the industry is higher than Monster except for the inventory turnover. The
industry receivable turnover is 10 while Monster's receivable turnover is 6. 36. In the
Inventory turnover, Monster is 6.44 while the industry has the inventory turnover of 6.39.
4. Monster Beverage Corp's ROA is 17.55% while the industry ROA is 3.42%. It seems to
be successful due to Monster raising their margin by lowering turnover. Although it
appears to be risky to do this kind of strategy, it has worked really well for Monster
Beverage Corp.
5. Monster Beverage Corp has a ROE of 21.96% while the industry ROE is 8.49%.
According to the website Gurufocus.com, Monster has no debt at all currently. On
Reuters, it states that Monster Beverage Corp has a interest coverage of 563.67 which
indicates there is no risky use of debt. 563.67 is definitely a bigger number compared to
the other numbers of the ratios Monster has ain't it.
6. Monster Beverage Corp has relatively high margin and low turnover. Monster
Beverage Corp ROE is relatively high because their profit margin and leverage is high.
My firm should not at all consider using more debt since it has no debt at all and great
financial strength. It would not make any sense for Monster Beverage Corp to get
themselves in debt to get more revenue when they have no debt and holding strong
financially.
Comparison
Monster Beverage Corp has a much higher profit margin of 23.98% than General Mills
profit margin of 8.95% It is also true that Monster Beverage Corp has a higher asset
turnover rate of 0.73 than General Mill's asset turnover rate of 0.62. Monster's ROA is
17.55% and higher as well than General Mill's ROA of 5.54%. However when it comes to
the ROE, General Mills has the higher number of 27.71% compared to Monster Beverage
Corp's ROE of 21.96%. I believe that General Mills has a higher equity multiplier than
Monster Beverage Corp due to the larger ROE that General Mills has. Even though that
Monster Beverage Corp has the edge over General Mills, they are the same in regards to
their industries offering low price products and luxury products. Another similarity is
that General Mills has a high profit margin and leverage as well in their industry. The
difference is that Monster is doing better at selling more costly products than General
Mills is doing according to their ROA. I think of it like this-it doesn't take long at all to
drink a Monster energy drink so someone might buy one and drink it and buy another
one a day or two later. When it comes to General Mills and their cereal products, it will
be rare for someone to eat an box of cereal in one day. My point is that Monster
products since they are quickly consumed are bought more often than General Mill
products.
Student 1 Post (General Mills)
1.General Mills, Inc has a higher profit margin compared to the industry, its net profit margin is 8.95%
while the industry’s is 7.97%. The average net profit margin over the last five years alone for General
Mills is 9.3% while the industry’s is 5.6%.
2.General Mills has a lower asset turnover than the industry. General Mills’ asset turnover is 0.62 while
the industry’s is 0.93.
3.General Mills’ ratios are best described as high margin. General Mills has several well-known food
product brands. Name brand products cost more than the generic store versions, so it makes sense that
General Mills has high margins and low turnover as a result of their brand name. In this case, I think
General Mills would be considered the “luxury” brand because it is the well-known brand and has the
higher price tag. For instance Honey Nut Cheerios cost $0.20 per ounce while Great Value Honey Nut O’s
cost $0.14 per ounce and Malt-O-Meal Honey Nut Scooters cost $0.15 per ounce. With money conscious
buyers it makes sense that many will reach for the cheaper cereal allowing these lower cost leaders to
reap the higher turnovers. As such there are “low price leaders” and “luxury” brands in the industry.
4.General Mills has a lower ROA than the industry. General Mills has a ROA of 5.54% while the industry
has an ROA of 7.6%. I would say that General Mills’ approach to the trade-off between margin and
turnover is unsuccessful. The high margin of General Mills results in lower turnover. If they were
successful in this trade-off their ROA should be at or above the industry’s, but since their ROA is lower
than the industry it looks to me like they are not benefiting from selling few products at a high price.
5.There is a large difference between General Mills’ ROA and ROE. General Mills has a ROA of 5.54% and
a ROE of 27.71%. This approximate 20% difference indicates leverage and it seems that General Mills
uses a lot of debt to lever up ROE. Although it uses a lot of debt, General Mills’ use of debt does not
seem risky as it has an interest coverage of 8.94, meaning it has its interest payments covered 8.94
times over.
6.General Mills, Inc has relatively high margins and low turnover. General Mills, Inc has a relatively high
ROE because profit margin and leverage are high. My firm should not consider using more debt because
it could cause financial distress. General Mills has done a great job of managing their debt thus far,
however there is a point where too much debt can cause problems. General Mills should be careful not
to find this point by adding additional debt without first paying off some of its liabilities.
Comparison