kuaiji005 - 0 o Z l:ll m c m:II 1 Prepare and analyze...

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0 ... 1. Prepare and analyze common-size 4. Compute and interpret measures of l:ll m financial statements. (p. 206) liquidity and solvency. (p. 218) c.. » m :II 2. Compute and interpret measures of return 5. Appendix 5A: Measure and o Z on investment, including return on equity analyzethe effect of operating ... - (ROE), return on assets (ROA),and return activities on ROE. (p. 225) - Z on financiai leverage (ROFL). (p. 211) <a m 6. Appendix 58: Prepare pro forma (I) 3. Disaggregate ROA into profitability financial statements. (p. 227) (profit margin) and efficiency (asset turnover) components. (p. 213)
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C HAP T E R Analyzing and Interpreting Financial Statements In 2008, PepsiCo CEO Indra K. Nooyi wrestled with a dilemma. As she reviewed the performance of the company's three operating divisions, it became clear that the company's flagship brand, Pepsi, was losing market share and profitability. The food products division, including Frito-Lay and Quaker Oats, was performing well. So was PepsiCo's international operation, which was expanding in markets such as China and Russia. However, demand for Pepsi had declined 29% since 2000 as consumer preferences shifted away from soft drinks toward juices and bottled water. The North American beverage division was relying on sales of noncarbonated products to maintain revenue and earnings growth and, as the recession deepened, she expected that sales of those products would decline along with soft drink revenues. PepsiCo was created by the merger of Pepsi-Cola and the Frito-Lay Company. Since then, the company has grown through selective acquisitions and creative marketing of its products. By 2008, itssales topped $43.25 billion and the company ranked 52nd in the Fortune 500 ranking of the largest companies based on revenues. Between 2003 and 2008, PepsiCo's stock price outperformed that of its chief competitor, Coca-Cola, as well as the sap 500. ..--- --- ----PE'PSICO -- . 'I SIOCk Price Index (2003 = 100) 200 180 160 140 120 100 80 60 40 20 o ~ ./ ........... J.",ollI'" ~ loo"'" ~ "'/ C 10 ..... -- .... 08 -S&P500 ~PepsiCo ~Coca"cora 2003 2004 2005 2006 2007 20 (continued on next page) 205
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Q (continued from previous page) As is the case in most companies, PepsiCo's management employs a number of financial measures to assess fhe perfor- mance and financial condition of its operating units. These measures include ratios related fa profitability and asset utilization as well as return on investment. Outside stakeholders-investors, creditors and financial analysts-use similar measures to evaluate company performance, assess credit risk, and estimate share value. This chapter focuses on the analysis of information reported in the financial statements. We discuss a variety of measures that provide insights into a company's performance to answer questions such as: Is it managed efficiently and profitably? Does it use assets efficiently? Is the performance achieved with an optimal amount of debt? We pay especially close atten- tion to measures of return. Although profitability is important, it is only part of the story. More meaningful insights are gained by comparing the level of profitability with the amount of investment. All return metrics follow
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