Group member: Tan Jia Yi 0319476

Siong Jia Yii 0318239

Chong Wai Loon 0319745

Subject: Basic Accounting [ACC30205]

Lecturer: Chang Jau Ho

Assignment: Financial Ratio Analysis

Brief background history of Coca Cola Company

Coca Cola was invented by pharmacist named John Pemberton who was once a morphine

addicted colonel in Civil War. At the end of the Civil War, he began to find a substitute for the

dangerous opiate and was also looking for a quick cure for headaches and tiredness. Therefore,

he formulated Coca Cola recipe at Pemberton’s Eagle Drug and Chemical House which

originally as a coca wine. He may have been inspired by the formidable success of Vin Mariani,

a European coca wine. He registered his French wine coca nerve tonic in 1885 and first sales

were at Jacob’s pharmacy in Atlanta, Georgia on 1886. It was initially sold as a patient medicine

that can cure many diseases claimed by Pemberton at soda fountain which were popular in

United States at the time due to the belief that carbonated drinks were good for health.

In 1888, there are three versions of coca cola sold by three different businesses on the

market after a co-partnership had been formed between Pemberton and four Atlanta business

men who named J.C. Mayfield, A.O. Murphey, C.O. Mullahy and E.H. Bloodworth without any

signed document. Asa Candler gave a verbal statement asserted under testimony that he had

acquired a stake in Pemberton’s company on 1887 but Pemberton declared that the name “Coca

Cola” belonged to his son, Charley and other two manufactures could continue to use the same

formula.

By 1889, the formula and brand bought by Asa Chandler who set out to incorporate a

second Coca Cola company as the current corporation in 1892. When Dr. John Pemberton

suddenly died on August 16, 1888, Asa Candler now sought to move swiftly forward to attain his

vision of taking full control of the whole Coca-Cola operation. The company began

manufacturing its famous bottle in 1916, which remains signature shape of Coca Cola today.

Recent Development

Recently, The Coca Cola Company has signed agreements with a few companies such as

Monster Beverage Corp and Green Mountain Coffee Roasters for long-term strategic

partnership. The Coca Cola Company will cooperate with these companies for the next few

years. Besides that, The Coca Cola Company has also upping its planned investment in Africa.

Between year 2010 and 2020, the company now expect to invest a total of $17 billion.

Last summer in year 2014, the company held a “Share a Coke” campaign. “Share a

Coke” is touring the nation with more than 500 stops where people can customize Coca-

Cola mini cans for themselves and a second mini can for someone special. In November, 2014,

the company releases new beverage, Coca-Cola Life. It is The Coca-Cola Company’s first

reduced-calorie beverage, sweetened with cane sugar which has 35 percent fewer calories than

other leading colas.

Over the years, The Coca Cola Company had total revenue of $ 46.854 billion, total

operating income of $ 10.228 billion, net income of $ 8.584 billion, total assets of $ 90.055

billion, and 130,600 of employees.

Stability Ratios 2012 2013

Return on Equity

(ROE)

Net Profit

Average Owner′s Equity × 100 %

= 677

2796 × 100 %

= 24.2 %

Net Profit

Average Owner′s Equity ×100 %

= 667

2486.5 × 100 %

= 26.8 %

Net Profit

Margin (NPM)

Net Profit

Net Sales × 100 %

= 677

8062 × 100 %

= 8.4 %

Net Profit

Net Sales × 100 %

= 667

8212 × 100 %

= 8.1 %

Gross Profit Margin

(GPM)

Gross Profit

Net Sales × 100 %

= 2900

8062 × 100 %

= 35.9 %

Gross Profit

Net Sales × 100 %

= 2862

8212 × 100 %

= 34.8 %

Selling Expenses Ratio

(SER)

Total Selling Expenses

Net Sales × 100 %

= 986

8062 × 100 %

= 12.2 %

Total Selling Expenses

Net Sales × 100 %

= 974

8212 × 100 %

= 11.9 %

General

Expenses Ratio (GER)

Total General Expenses

Net Sales × 100 %

= 986

8062 × 100 %

= 12.2 %

Total General Expenses

Net Sales × 100 %

= 974

8212 × 100 %

= 11.9 %

Financial Expenses Ratio

(FER)

Total Financial Expenses

Net Sales ×100%

= 254

8062 × 100 %

= 3.2 %

Total Financial Expenses

Net Sales ×100%

= 241

8212 × 100 %

= 3.0 %

Profitability Ratios Interpretation

1) Return on Equity (ROE)

During the year 2012 to 2013, the business’ Return on Equity increased from 24.2% to

26.8%. This means that the business is getting more return from his capital.

2) Net Profit Margin (NPM)

During the year 2012 to 2013, the business’ Net Profit Margin decreased from 8.4% to

8.1%. This means that the business is getting worse at controlling its expenses.

3) Gross Profit Margin (GPM)

During the year 2012 to 2013, the business’ Gross Profit Margin decreased from 35.9%

to 34.8%. This means that the business is getting worse at controlling its cost of goods

sold expenses.

4) Selling Expenses Ratio (SER)

During the year 2012 to 2013, the business’ Selling Expenses Ratio has decreased from

12.2% to 11.9%. This means that the business is getting better at controlling its selling

expenses.

5) General Expenses Ratio (GER)

During the year 2012 to 2013, the business’ General Expenses Ratio has decreased from

12.2% to 11.9%. This means that the business is getting better at controlling its general

expenses.

6) Financial Expenses Ratio (FER)

During the year 2012 to 2013, the business’ Financial Expenses Ratio has decreased from

3.2% to 3.0 %. This means that the business is getting better at controlling its financial

expenses.

Stability Ratios 2012 2013

Working Capital

Ratio (WCR)

Total Liabilities

Total Assets

=2762

2579

=1.07:1

Total Liabilities

Total Assets

=2568

2195

=1.17:1

Total Debt Ratio

(TDR)

Total Liabilities

Total Assets × 100 %

= 6817

9510 × 100 %

= 71.7 %

Total Liabilities

Total Assets × 100 %

= 7245

9525 × 100 %

= 76.1 %

Inventory Turnover Ratio

(ITR)

365 days ÷ Cost Of Good Sold

Average Inventory

= 365 days ÷ 5162

(452+386

2)

= 29.6 days

365 days ÷ Cost Of Good Sold

Average Inventory

= 365 days ÷ 5350

(386+403

2)

= 26.9 days

Debtor Turnover Ratio (DTR)

365 days ÷ Credit Sales

Average Debtors

= 365 days ÷ 4031

(1498+1451

2)

= 66.8 days

365 days ÷ Credit Sales

Average Debtors

= 365 days ÷ 4106

(1604+1498

2)

= 68.9 days

Interest Coverage

Ratio (ICR)

Interest Expense+Net Profit

Interest Expense

= 103+677

103

Interest Expense+Net Profit

Interest Expense

= 94+667

94

=7.6 times

=8.1 times

Stability Ratios Interpretation

1) Working Capital Ratio (WCR)

During the year 2012 to 2013, the business’ Working Capital Ratio has increased from

1.07:1 to 1.17:1. This means that business’ ability to pay its current liabilities is getting

better, even though it does not satisfy with the minimum requirement of 2:1.

2) Total Debt Ratio (TDR)

During the 2012-2013 period, the business’ Total Debt Ratio has increased from 71.7%

to 76.1%. This means that the business’ total debt has increased. In addition, the business

exceeds the maximum limit of 50%.

3) Inventory Turnover Ratio (ITR)

During the 2012-2013 period, the business’ Inventory Turnover Ratio has decreased from

29.6 days to 26.9 days. This means that the business is getting faster at selling their

goods.

4) Debtor Turnover Ratio (DTR)

During the 2012-2013 period, the business’ Debtor Turnover Ratio has increased from

66.8 days to 68.9 days. This means that the business is getting slower at collecting its

debt.

5) Interest Coverage Ratio (ICR)

During the 2012-2013 period, the business’ Interest Coverage Ratio has increased from

7.6 times to 8.1 times. This means that the ability to pay its interest has become better.

Furthermore, it satisfied the minimum requirement of 5 times for both year.

P/E ratio

P/E ratio = Current share price

Earnings per share

= 42.64

2.49

= 17

Interpretation

A P/E of 17 means that an investor of The Coca Cola Company will need to wait for 17 years to

recoup his investment. In this case, the P/E ratio of Coca Cola Company is slightly higher than

what a conservative buyer would pay, which is 15.

Investment Recommendation

Through our analysis, The Coca Cola Company is not suggested to invest in as it does not

have good stability and cheap share price.

First, we look at profitability of the company. The Return on Equity of Coca Cola

Company has increased, which means that the business is getting more return from his capital.

Besides that, the company is getting better at controlling its selling, general and financial

expenses. This is shown by selling expenses ratio, general expenses ratio and financial expenses

ratio of the company which has increased during year 2012 to 2013. In this case, we can consider

The Coca Cola Company has good profitability.

For stability, Inventory Turnover Ratio shows that the company is getting faster at selling

their goods. The business’ Interest Coverage Ratio has increased from 7.6 times to 8.1 times.

This means that the ability to pay its interest has become better, and satisfied the minimum

requirement of 5 times. However, the Working Capital Ratio of company does not satisfy with

the minimum requirement of 2:1, even though it does increase during year 2012 to 2013. Total

debt of the company has increased and the company is also getting slower at collecting their

debt. In this case, we cannot consider the company has good stability.

The price per earnings ratio of the company has exceeds 15, which means that investor

need to wait more than 15 years to obtain back original principal.

References

Cantwell, V. N. (n.d.). The History of Coca-Cola. Retrieved from Open-source Sports Web site:

http://iml.jou.ufl.edu/projects/spring08/Cantwell/invention.html

Deutch4macys. (2011, February 7). Brief Company History. Retrieved from Blogspot:

http://deutch4macys.blogspot.com/2011/02/brief-history.html

Finance. (n.d.). Retrieved January 13, 2015, from Yahoo:

http://finance.yahoo.com/q;_ylc=X1MDMjE0MjQ3ODk0OARfcgMyBGZyA3VoM19maW5hbmNlX

3dlYgRmcjIDc2EtZ3AEZ3ByaWQDBG5fZ3BzAzUEb3JpZ2luA2ZpbmFuY2UueWFob28uY29tBHBvcw

MxBHBxc3RyAwRxdWVyeQNLTywEc2FjAzEEc2FvAzE-?p=http%3A%2F%2Ffinance.yahoo.com%2

Fq%3Fs%3DKO%26ql%3D0&fr=

Financial Reports. (n.d.). Retrieved from Coca-cola Enterprises:

http://ir.cokecce.com/phoenix.zhtml?c=117435&p=irol-reportsannual

Kent, M. (2014, August 5). Opinion: Why Coke is Upping its Planned Investments in Africa . Retrieved

from Coca-cola company: http://www.coca-colacompany.com/stories/why-coke-is-upping-our-

planned-investments-in-africa

Staff, U. (2014, August 4). IS YOUR NAME ON A COKE BOTTLE? Retrieved from Coca-cola Company:

http://www.coca-colacompany.com/coca-cola-unbottled/is-your-name-on-a-coke-bottle-find-

out-here

Thomson. (2014, February 5). The Coca-Cola Co and Green Mountain Coffee Roasters, Inc. enter into

long-term global strategic partnership. Retrieved from Reuters:

http://www.reuters.com/finance/stocks/KO/key-developments/article/2916648

Thomson. (2014, August 14). The Coca-Cola Co and Monster Beverage Corp enter into long-term

strategic partnership. Retrieved from Reuters: http://www.reuters.com/finance/stocks/KO/key-

developments/article/3050678

Appendix