Economic Value Added (EVA) Analysis Paper.
Investors have number of options and methods to analyze the potential and worth of a company in total and with the help of different methods, investors would become able to take effective and timely economic decisions (Grant, 2003). Most of the school of thoughts regarded finance and accounting as similar things, however the applicability as well as utilization of both of these provisions are totally change to each other. Economic Value Added (EVA) Analysis Paper.
Accounting at one hand is the name of recording the financial transaction of a company, while finance is the name of utilizing the money or funds of a company at a place from where the likelihood of earning would be on a higher scale (Kirsche, 2013). Economic Value Added (EVA) Analysis Paper.There are number of a concept that specifically counts under the name of financial management and every concept has its own recognition and importance lies in a broad nutshell. Analyzing the share of a company in terms of investment is one of the major decisions which have to be taken by an analyst to value the things all along.
According to Warren Buffet, Economic Value Added (EVA) is one of the most dominating tools from which an investor can analyze the effectiveness of the shares of a company (Fischer, 2008) (Jasvir S. Sura, Economic Value Added(EVA) Myths and Realities: Evidences, 2012). The main objective of this assignment is to analyze the effectiveness of a beverage company with the help of EVA and other important measurement tool. The company which has been chosen for the same analysis is Pepsi Co. In the next section, a small description about the chosen company would be included followed by the analytical procedure of EVA. Apart from the EVA, there are other tools as well, which have been considered to complete this piece of work.
Subscribe to Access the entire paper for only $10. This Sample Paper is 14 Pages in length.
[ihc-hide-content ihc_mb_type=”block” ihc_mb_who=”unreg” ihc_mb_template=”1″ ]
Pepsi Co Inc. is basically an American based multinational food and Beverage Company with its headquartering located in New York, United States (US). The company has its interest in manufacturing, marketing, distributing and selling of snack foods, beverages and other products. The company founded in the year 1965 with a proposed and successful merger between Pepsi Cola and Frito Lay. Apart from that merger, some dominating mergers were taken into place in 1998 and 2001 with Tropicana and Quaker Oats respectively to increase its portfolio.
According to statistics, the products of Pepsi Co generated net retail sales of more than US$ 1 billion in the fiscal year 2012. Pepsi Co Inc. has its active recognition in more than 200 countries of the world. Pepsi Co Inc. is known as the 2nd largest company of the world, in terms of net revenue, while in North America, it is the largest company in rank as far as net revenue is concerned (Pepsi Co Inc Financial Highlights 2012).
The company earned net revenue of US$ 66.504 billion in the year 2011 with net income amounting to US$ 6.462 billion in the same year, with more than 270,000 employees all over the world. Total assets provision of the company is amounting to US$ 72.882 billion in the fiscal year (FY) 2012. The brand recognition of the company is extremely high. The shares of Pepsi Co Inc. is actively trading in the New York Stock Exchange (NYSE) and Standard & Poor (S&P) 500, with the name of PEP and it is one of the most dominating share listed on both of these exchanges ((Pepsi Co Inc Financial Highlights 2012).
According to the requirement of the assignment, it is required to analyze the worth of a company from the investor’s perspective and for the same procedure, it is recommended to use EVA along with other investment based ratios. In this particular section, financial ratios would have been taken into account along with the modeling of EVA to conduct a thorough analysis.
ORDER A CUSTOM-WRITTEN, PLAGIARISM-FREE PAPER HERE
Economic Value Added (EVA) is basically a financial based measure used to assess the financial performance of a company based on its residual wealth (Jasvir S. Sura, Economic Value Added (EVA) Myths and Realities: Evidences, 2012). This particular measure was derived by Stern Stewart & Co in order to capture the true economic profit picture of a company in total. The formula for computing the EVA of a company is mentioned below,
Relying only on a single analytical tool like EVA would not give a clear picture to the company’s financial health for the investment purpose; therefore it is essential to use some other measures as well to conduct the solo analysis (Ehrbar, 1998). Such methods include financial ratio analysis as well, which could be used by the investors in total. Investor’s particular concerned with the amount of profit earned specifically by a company and there are certain ratios which used for the same purpose like, Net Profit Margin (NPM), Gross Profit Margin (GPM), Altman Z-Score Ratios and Price to Earnings Ratio of the company.
For the analysis, four years of financial data is taken into consideration of Pepsi Co and the years are, 2009, 2010, 2011 and 2012 respectively. EVA analysis would have been performed on the basis of mean values of NOPAT and Cost of Capital. The table of Net Operating Profit after Tax (NOPAT) of the chosen company along with the graph is mentioned below,
| Year | NOPAT in Million US$ |
| 2009 | 5,946 |
| 2010 | 6,320 |
| 2011 | 6,443 |
| 2012 | 6,178 |
From the above mentioned table and graph, it is clear that the provision of net operating profit after tax (NOPAT) of Pepsi Co Inc. is quite high and satisfactory as well. It was US$ 5,946 million in the year 2009, was at the peak in the year 2011 with total NOPAT of US$ 6,443. The average NOPAT of the selected company is US$ 6,222 and this would be included in the analysis and computation of EVA.
In finance, Capital is that amount of money which has been invested by the owner itself. There are number of types of capital which has been deployed by the owner for taking different decisions (Kirsche, 2013). The capital accumulation of the company from 2009 to 2012 is mentioned below in the table and figure based format.
| Year | Capital in Million US$ |
| 2009 | 30 |
| 2010 | 31 |
| 2011 | 26 |
| 2012 | 26 |
The capital accumulation of the company can be seen from the above mentioned table and figure. From the analysis, it is clear that the company is having high amount of capital in total. The mean capital of the company is US$ 28 million in total.
Cost of Capital is the rate which is used to invest the things all along. In order to become effective and financially active, organizations have to invest their belongings at a place from where they can earn higher than their cost of capital in total (Kirsche, 2013). The current Cost of Capital (COC) of Pepsi Co Inc. in the year 2012 was 8.86% and this would be taken into account to compute the EVA of the company, basis on the above mentioned figures.
EVA = 6,222 – (28 * 8.86%)
= 6,222 – 2.4808
EVA = US$ 6,219 Million
From the analysis, it is found that the total Economic Value Added of Pepsi Co Inc. is US$ 6,219 Million which is extremely high and attractive as well, from the viewpoint of an investor. High EVA is an indication that the company is doing an exceptional job as far as increasing the shareholders value is concerned.
Financial Ratio Analysis is basically a tool through which an analyst or researcher would analyze the financial based competitiveness of an organization as a whole (Kirsche, 2013). Though, there are number of financial based ratios that need to be used to assess the financial belongings of an organization, but in this section, some of the major ratios would have been taken into account.
Profitability is an important thing either from the viewpoint of a company and from the viewpoint of an investor as well. A company with high profitability would be more worthwhile for an investor as compared to the other one (Kirsche, 2013). There are two different ratios which would be used here, which are Net Profit Margin (NPM) and Gross Profit Margin (GPM).
Net Profit Margin (NPM) Analysis
Net Profit Margin is an analytical used to assess how much margin a company earned on its net profit in total. High NPM means that the company has high amount of value in terms of recognizing the net income provision. The NPM of Pepsi Co Inc. is mentioned below in the table format
| Year | Sales in Million $ | Net Income in Million $ | NPM |
| 2009 | 43,232.00 | 5,946.00 | 13.75 |
| 2010 | 57,838.00 | 6,320.00 | 10.93 |
| 2011 | 66,504.00 | 6,443.00 | 9.69 |
| 2012 | 65,492.00 | 6,178.00 | 9.43 |
| Average | 10.95 |
From the above mentioned analysis, it is clear that the NPM of Pepsi Co Inc is high and effective in almost every year taken into account for the analysis. In the year 2009, the total NPM of the company was 13.75% and it was the same year in which hundreds of companies across the globe went bankrupt. The NPM of the company decreased for three consecutive years by 2.83%, 1.24% and 0.25% for years (FYs) 2010, 2011 and 2012 respectively. The average NPM of Pepsi Co is 10.95%, which is showing that the company is able to generate 10.95$ from the net sales of $ 100. From this particular analysis, it could be said that the company has enough power and attractiveness factor from which they can attract hundreds of investors throughout the world. Economic Value Added (EVA) Analysis Paper.
Gross Profit Margin (GPM) is yet another important financial measure use to assess the financial belongings of an organization (Kirsche, 2013). It is used to assess that how much the company has earned subtracted the cost of goods sold in total. The GPM of the selected company is mentioned below in the table and graph,
| Year | Sales in Million $ | Gross Income in Million $ | GPM |
| 2009 | 43,232 | 23,133 | 53.51 |
| 2010 | 57,838 | 31,661 | 54.74 |
| 2011 | 66,504 | 34,957 | 52.56 |
| 2012 | 65,492 | 34,201 | 52.22 |
| Average | 53.26 |
From the analysis, it is found that the Gross Profit Margin (GPM) of the company in the year 2009 was 53.51%, which increased to a level of 54.74% in 2010. The GPM of the company decreased by 2.18% and 0.34% for years (FYs) 2011 and 2012 respectively. The average GPM of the company is 53.26%, showing that the company is able to generate $ 53.26 from the net sales of US$ 100 of Sales. From this particular analysis, it is clear that Pepsi Co Inc. is doing a great and exceptional job as far as increasing the financial belongings of the company is concerned including enhancing the shareholder’s based equity as well, and it would be a prior choice for the investors.
Return on Equity (ROE) Analysis
Return on Equity (ROE) is yet another important measure of profitability and it an important measure used to assess how much a company could earn over its equity (Kirsche, 2013). High ROE is basically an indication that the company is doing a good job,
| Year | Equity in Million $ | Net Income in Million $ | ROE |
| 2009 | 17,442.00 | 5,946.00 | 34.09 |
| 2010 | 21,476.00 | 6,320.00 | 29.43 |
| 2011 | 20,899.00 | 6,443.00 | 30.83 |
| 2012 | 22,399.00 | 6,178.00 | 27.58 |
| Average | 30.48 |
From the analysis, it is clear that the ROE of the company is in a good range. ROE of Pepsi Co Inc. was 34.09% in the year 2009, which remained in the same line of business for a long span of time. The average ROE of the company is 30.48%, showing that the company is able to earn $ 30.48 from the net equity of $ 100, which is quite high and attractive as well. If a company has high amount of ROE, then it is clear that the investors have enough power from which it is found that the company is able to generate high amount of net income on money of their investors, which is a clear indication that the company is able to utilize their money accordingly. Economic Value Added (EVA) Analysis Paper.Investors all over the world are now focusing heavily over the analysis of Pepsi Co Inc. Up till now; it is found that the company is doing an exceptional job as far as facilitating the shareholders is concerned.
Price to Earnings Ratio Analysis
In the net of investment, there are number of things that come under the umbrella of the same provision and in the name of investment based analytical vision, the name of Price to Earnings Ratio is one of them (Kirsche, 2013). Investors all over the world utilize this particular ratio to analyze the effectiveness of their investment accordingly.
| Year | Market Value | EPS | Price to Earnings |
| 2009 | 84.56 | 3.81 | 22.19 |
| 2010 | 86.00 | 3.97 | 21.66 |
| 2011 | 85.98 | 4.08 | 21.07 |
| 2012 | 86.03 | 3.96 | 21.72 |
| Average | 21.66 |
From this particular analysis, it is clear that the Price to Earnings Ratio of the chosen company lies in a specific range and it is high as well. The P/E of the selected company was 22.19%, decreased to a level of 21.66% and 21.07% for years (FYs) 2010 and 2011 respectively. In the year 2012, it went on a level of 21.72% which is again quite high as compared to other companies operating in the same line of business. The average Price to Earnings Ratio of the chosen company is 21.66%, showing that the company is able to generate 21.66$ from their shares. This particular figure is quite attractive from the viewpoint of an investor in total. Up, till now, it is clear that Pepsi Co’s shares are extremely effective and attractive from the viewpoint of an investor and it will remain in the same jurisdiction for a long span of time. It is also important from the viewpoint of the investor to check out how much potential a company has in not having a bankruptcy. Economic Value Added (EVA) Analysis Paper.
Every company strives and thrives hard for the economic prosperity and in order to accomplish the same, organizations have to take certain economic decisions in total (Kirsche, 2013). Shareholders are the end users of a company and they are the one who have the highest amount of risk association with the company. Filing of bankruptcy is always being devastating for an organization and it is also painful from the viewpoint of shareholders as well (Kirsche, 2013).
In order to accomplish the same thing, Altman Z Score is one of the formulas used for the same thing. Commonly known as Z-Score is used for predicting the bankruptcy and this formula was introduced by Edward Altman in the year 1968 (Kirsche, 2013). This particular formula is used to predict the probability of a firm in going to bankruptcy. Financial health of a company depends heavily upon this particular formula in total. Altman Z Score is basically a credit score used to assess the variability of the product in total. The formula of Altman Z-Score is mentioned below along with its interpretation.
A = Working Capital / Total Assets
B = Retained Earnings / Total Assets
C = Earnings before Interest & Tax / Total Assets
D = Market Value of Equity / Total Liabilities
E = Sales / Total Assets
All of the analysis would be depend upon the latest figures of the 2012 annual result in total.
| Working Capital | Total Assets | Retained Earnings | Total Assets | EBIT | Total Assets | Total Equity | Total Liabilities | Sales | Total Assets |
| 1,631 | 74,638 | 43,158 | 74,638 | 8,304 | 74,638 | 22,417 | 52,221 | 65,492 | 74,638 |
A = 0.0219
B = 0.5782
C = 0.1113
D = 0.4293
E = 0.8775
Z score = 1.2 (0.0219) + 1.4 (0.5782) + 3.3 (0.1113) + 0.6 (0.4293) + 1 (0.8755)
= 0.0262 + 0.8095 + 0.3671 + 0.2575 + 0.8774
Z-Score (PEPSI CO INC) = 2.33
ORDER A CUSTOM-WRITTEN, PLAGIARISM-FREE PAPER HERE
The computed result of Altman Z-Score is 2.33, showing that the company lies in an active range and lies in the “Safe Zone”, as well, which is certainly a sign of relief for the company as a whole. It will certainly assist the company to attract large number of customers towards them. By considering this particular computation and assumptions, it could be said that Investors should divert their knowledge towards the investment in this particular company as it will certainly help out them to inflate the market value of their portfolio. Economic Value Added (EVA) Analysis Paper.
Inevitably, there are number of options and concepts that specifically comes under the ambit of financial management and among them, the name of analyzing a company from the financial viewpoint is one of the concepts (Kirsche, 2013). There are certain methods and implications which would be taken into account to accomplish the same target (Kirsche, 2013).
Analysis would be done on the basis of measuring the financial position of a company or analyzing the shares movement of a company in total. There are ce
[/ihc-hide-content]rtain methods to accomplish the same thing, and among them, the name of EVA is one of them. The main objective of this assignment is to analyze a beverage company and the company which has been selected for this assignment is Pepsi Co Inc. Apart from the EVA, there are certain methods and tools which have been applied for the same purpose. From the entire analysis, it is found that the financial position of the company is perfect from the standpoint of investors. The company has high figures of NPM, GPM and Price to Earnings (P/E) as well, which is again a positive sign for the investors. Altman Z-Score computation reveals that the company lies in the Safe Zone; therefore there is no probability that the money of investors get sunk. Mentioned below are some of the major recommendations for the investors,
- New Investors should park their money in the stocks of the company, as almost every economic indicator is in the favor of the company
- Existing investors have to hold the shares of the company because the company has enough potential to grow further in the near future
Ehrbar, A. (1998). EVA: The Real Key to Creating Wealth. Sydney: Adventure Work.
Fischer, F. (2008). Economic Value Added und Market Value Added. New York: Saga Publications.
Grant, J. L. (2003). Foundations of Economic Value Added. Chicago: McGraw Hill .
Jasvir S. Sura, . J. (2012). Economic Value Added (EVA) Myths and Realities: Evidences. New York: Pearson Group.
Jasvir S. Sura, . J. (2012). Economic Value Added(EVA) Myths and Realities: Evidences. New York: Pearson Group.
Kirsche, C. (2013). Economic Value Added: A Detailed Walkthrough. Chicago: John Wiley & Sons. Economic Value Added (EVA) Analysis Paper.