Sample Finance Paper on EVA Analysis

Economic Value Added (EVA) Analysis

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.
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) . 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, 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.

Pepsi Co: A Detailed Overview
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

Running Head: EVA Analysis 4
of the world. Pepsi Co Inc. is known as the 2 nd 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).

Analysis & Findings
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.
What exactly is an EVA?
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

Running Head: EVA Analysis 5
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.
EVA Analysis of Pepsi Co Inc
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

5,600
5,700
5,800
5,900
6,000
6,100
6,200
6,300
6,400
6,500

5,946

6,320

6,443

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.

Running Head: EVA Analysis 6
Capital Analysis
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

23
24
25
26
27
28
29
30
31
32

30

31

2626

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
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

Running Head: EVA Analysis 7
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
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 Ratio
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

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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

0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00

13.75

10.93

9.699.43

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.
Gross Profit Margin (GPM)
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

Running Head: EVA Analysis 9
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

50.50
51.00
51.50
52.00
52.50
53.00
53.50
54.00
54.50
55.00

53.51

54.74

52.56

52.22

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.

Running Head: EVA Analysis 10
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

0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00

34.09

29.4330.83

27.58

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. Investors

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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

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20.40
20.60
20.80
21.00
21.20
21.40
21.60
21.80
22.00
22.20
22.40

22.19

21.66

21.07

21.72

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.
Altman Z-Score Analysis
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

Running Head: EVA Analysis 13
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
Liabilitie
s 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

Running Head: EVA Analysis 14
Z-Score (PEPSI CO INC) = 2.33
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.

Conclusion & Recommendations
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 certain 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

Running Head: EVA Analysis 15

References

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 .

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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.
Pepsi Co Inc Financial Highlights (2012), [Online], retrieved from <
http://investing.money.msn.com/investments/stock-balance-
sheet/?symbol=US%3APEP&stmtView=Ann>, Accessed on 2013-November-16 th