Coco Cola Ratio Analysis Final (II)

Assignment # 2 Ratio Analysis Business Finance

Balance sheet of Coca-Cola Company :FISCAL YEAR ENDING

Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009

Assets

Current AssetsCash 3744.0 2,440.0 4,093.0 4,701.0 9,151.0

Net Receivables

2998.0 2,587.0 2,587.0 3,317.0 3,758.0

Inventories 2016.0 1,641.0 2,220.0 2,187.0 2,354.0

Other Current Assets

2148.0 1,773.0 2,475.0 2,198.0 2288.0

Total Current Assets

10907.0 8,441.0 12,105.0 12,176.0 17,551.0

Net Fixed Assets

7907.0 6,903.0 8,493.0 8,326.0 9,561.0

Other Non current Assets

19102.0 14,619.0 22,671.0 20,017.0 2,421.0

Total Assets 37917.0 29,963.0 43,269.0 40,519.0 $ 48,671.0

Liabilities and Shareholder's EquityCurrent LiabilitiesAccounts Payable

1226.0 929.0 1,380.0 1,370.0 13,721.0

Short-Term Debt

5283.0 3,268.0 6,052.0 6,531.0 6,800.0

Other Current Liabilities

5191.0 4,693.0 5,793.0 5,087.0

Total Current Liabilities

11701.0 8,890.0 13,225.0 12,988.0 13,721.0

Long-Term Debt

2457.0 1,314.0 3,277.0 2,781.0 5,059.0

Other Non current Liabilities

4046.0 2,839.0 5,023.0 4,278.0 4,545.0

Total Liabilities 18205.0 13,043.0 21,525.0 20,047.0 23,872.0

Shareholder's Equity

Preferred Stock Equity

- - - - - - - - - -

Common Stock Equity

19712.0 16,920.0 21,744.0 20,472.0 24,799.0

Total Equity 19712.0 16,920.0 21,744.0 20,472.0 25,346.0

Shares Outstanding (mil.)

2317.2 2,317.2 2,317.2 2,317.2 2,317.2


Income Statement of Coca-Cola Company:

FISCAL YEAR ENDING

Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009

Revenue 28296.0 24,088.0 28,857.0 31,944.0 30,990.0

Cost of Goods Sold

9981.0 8,164.0 10,406.0 11,374.0 11,088.0

Gross Profit 18315.0 15,924.0 18,451.0 20,570.0 19,902.0

Gross Profit Margin

64.8% 66.1% 63.9% 64.4% 64%

SG&A Expense 10716.0 9,431.0 10,945.0 11,774.0 11,671.0

Depreciation & Amortization

1109.0 938.0 1,163.0 1,228.0 1,236.0

Operating Income

7668.0 6,798.0 8,329.0 7,877.0 9,301.0

Operating Margin

27.2% 28.2% 28.9% 24.7% 20.6%

No operating Income

251.0 297.0 841.0 (902.0) 121.75.0

No operating Expenses

-- -- (220.0) (105.0) (181.67.0)

Income Before Taxes

7296.0 6,578.0 7,873.0 7,439.0 8,946.0

Income Taxes 1674.0 1,498.0 1,892.0 1,632.0 2,040.0

Net Income After Taxes

5622.0 5,080.0 5,981.0 5,807.0 7,605.0

Continuing Operations

5622.0 5,080.0 5,981.0 5,807.0 7,605.0

Continuing Operations

5622.0 5,080.0 5,981.0 5,807.0 7,605.0

Liquid Ratio:Current Ratio 2005 2006

Current ratio = Current assetsCurrent Liabilities

= $10907$11701

= 0.932 cents

Current ratio = Current assets Current Liabilities= $8441

$8890= 0.94 cents

Current ratio = Current assets Current Liabilities= $12105

$13225= 0.915 cents


2007 2008

Interpretation:In 2005, the firm’s ability to cover its current liabilities with its

current assets is 0.932 cents. In 2006, the ratio goes up to 0.94 cents as compared to 2005, which means that the company has the ability to pay its liabilities, as the definition says that higher the ratio, greater the ability of the firm to pay its bills. Then in 2007 again the ratio falls and then increases in 2008. We can analyze that the data varies from year to year.

Acid Test Ratio 2005 2006

Current ratio = Current assetsCurrent Liabilities

= $12176$12988

= 0.93 cents

Acid test ratio = Current asset – Inventories Current Liabilities= $10907 - $2016

911701= 0.759 cents

Acid test ratio = Current asset – InventoriesCurrent Liabilities

= $8441 - $1641 $8890= 0.76


= $12105 – 2220$13225

= 0.75


2007 2008

Interpretation:According to the definition of Acid Test Ratio, the company

should have the ability to pay its liabilities through its most liquid assets. The graph shows that in 2005-06, the firm has the ratios 0.759 cents and 0.76 cents. Then we observe a great decline in 2007 and in the end the ratio goes up again. So we can figure out that through the ratios that the firm is paying its current liabilities through its most current assets effectively.

Debt to Equity Ratio:2005 2006


= $12176 – 2187$12988

= 0.76

Debt to equity ratio = Current liabilities + long term debts

Shareholders equity = $16502

$21744 = 0.76


2007 2008

Interpretation:In 2005, the graph shows that the firm is using borrowed

money from shareholder’s equity. The creditors are providing 0.718 cents of financing for each one dollar being provided by shareholders. Then we can see the increase in 2007 and 2008. This ratio has to be low according to the definition. But here the ratio is moving upwards which shows that the firm has low financing from the shareholder’s side.

Debt to Total Asset Ratio:


Shareholders equity = $14158

$19712 = 0.718


Shareholders equity= $10204

$16920= 0.60


Shareholders equity= $15769

$20472= 0.77


2005 2006

2007 2008

Interpretation:The ratio shows the company’s ability to cover its debts

through its total assets. The ratio is 37 percent in 2005, then falls to 34 percent and then goes up in 2007 and 2008. The ratio has to be low. Now we can interpret that in the last four years, the risk of the firm is getting higher as the ratio goes up.

Long Term Debt to Total Capitalization:2005 2006

Debt To Total Asset Ratio = Total debtsTotal assets

= $1415837917

= 0.373


= $10204$29963

= 0.34


= $16502$43269

= 0.38


= $15769$40519

= 0.389

Long term debt to total = Long term debtsCapitalization Total capitalization

= $2457$22169

= 0.11


= $1314$18234

= 0.07


= $3277$25021

= 0.13


2007 2008

Interpretation:The measure tells us the relative importance of long-term debt

to the capital structure of the firm. The ratio is 0.11 in 2005, decreases in 2006, and then increases in 2007 and ends at 0.12 in 2008.

Gross Profit Margin Ratio:2005 2006


= $2781$23253

= 0.12

Gross Profit margin ratio = Net sales – CGS

Net sales= $28296 – 9981

$28296= 64.7 %


Net sales= $24088 – 8164

$24088= 66 %


Net sales= $28857 – 10406

$28857= 63 %


2007 2008

Interpretation:The ratio should be high according to the definition. Because

higher the ratio, higher will be the firm’s ability to produce goods and services at low cost with high sales. Here in this graph there is small difference between the ratios in four years, but its high, which means it is favorable.

Net Profit Margin Ratio:2005 2006


Net sales= $31944– 11374

$31944= 64%

Net profit margin ratio = Net profit after taxesNet sales

= $5623$28296

= 19.87 %


= $5080$24088

= 21 %


= $5981$28857

= 20.7%


2007 2008

2009 = 7,605/30990= 24.5%

Interpretation:According to the definition, higher the ratio, higher will be the

firm’s ability to pay its taxes. In the first three years, the margin is high but in 2008 the margin falls by 2%. For the company, roughly 0.20 cents out of every sales dollar consists of ‘After Tax Profit’.in 2009the company again suddenly high the ratio 6.4% .

Return on Investment:


= $5807$31944

= 18.1%


2005 2006

2007 2008

2009 = 7605/48671= 15.6%

Interpretation:The ratio should be higher. Here starting from 2005, the ratio

is almost 15% and goes up in 2006 and is static in 2008 and 2009 with 14%-15.6%. The fluctuations show that in 2005, the firm is generating 14.8% and in 2009 15.6% of net profit after taxes by using its total assets.

Return on Equity:

Return on Investment = Net profit after taxesTotal assets

= $5623$37917

= 14.8 %


= $5080$29963

= 17 %


= $5981$43269

= 14 %


= $5807$40519

= 14.33 %


2005 2006

2007 2008

2009 = 7605/25,346= 30%

Interpretation:The ratio should be higher. Here starting from 2005, the ratio

is 29% and goes up in 2006 and fluctuates in 2007 and 2008 in 2009 the ratio again high to 30%. The fluctuations show that in 2005, the firm is generating 29% and in 2009 the firm generating 30% of net profit after taxes through Shareholder’s Equity.

Receivable Activity Ratio:2005 2006

Return on equity = Net profit after taxesShareholders equity

= $5623$19712

= 29 %


= $5080$16920

= 30 %


= $5981$21744

= 27 %


= $5807$20472

= 28 %

Receivable activity ratio = Annual credit sales

Receivables= $28857

$8317= 8.69 times


2007 2008

2009 = 30,990/3,758= 8.25 times

Interpretation:This ratio shows that how effectively the firm is using their

assets, the higher the turn over between the sales and cash collection. For Coca-Cola company , the turnover in 2005 is 10 times, 9.3 times in 2006, 8.69 in 2007, 10 times in 2008 and 8.25 in 2009. The ratio should be low and it is low as shown in the graph.

Receivable Turnover in Days:2005 2006


Receivables= $28296

$2998= 10 times


Receivables= $24088

$2587= 9.3 times


Receivables= $31944

$3090= 10 times

Receivable turnover in days= Days in year x Receivables

Annual credit sales= 365 x 2998

28296= 39 days



24088= 39 days



$28857= 42 days


2007 2008

Interpretation:The ability of the firm of collecting the receivables in the

specific time. Here in 2005 the turnover in days is 39 and remains the same in 2006, but the collection days increase in 2007 which shows that the collection is slower as compared to the previous years. The collection period should be low to get the payments on time.

Inventory Activity Turnover Ratio:2005 2006



$31944= 37 days

Inventory activity turnover ratio= Cost of good sold

Average inventory= $9981

$2016= 5 times



$1641= 5 times



$2220= 4.7times


2007 2008

Interpretation:Generally, the higher the inventory turnover, the more efficient

the inventory management of the firm and fresher, more liquid, the inventory. The ratios is constant in 2005-06, falls in 2007 and goes up in 2008 and then finally again fall down in 2009. The ratio is high so it is a favorable situation. It shows the efficient management of the firm.

Inventory Turnover in Days:2005 2006



$2187= 5.2 times

Inventory turnover in days = Days in year x Inventory

CGS= 365 x 2016

9981= 73 days


CGS= 365 x 1641

$8164= 75 days


CGS= 365 x 2220

10406= 78 days


2007 2008

Interpretation:The figure tells us how many days, on average, before

inventory is turned into accounts receivable through sales. So in 2005, the turn over in days is 73. In the next four years the turn over ratio in days differs from each other. Lowest of all is 2008’s ratio, which is 70 days.

Total Asset Turnover Ratio:2005 2006


CGS= 365 x 2187

11374= 70 days

Total assets turnover = Net salesTotal assets

= $28296$37917

= 74 %


= $24088$29963

= 80 %


= $28857$43269

= 66 %


2007 2008

2009 = 30990/48671= 63%

Interpretation:The ratio is supposed to be high. Here we can see that the coca-

cola company’s total asset turn over ratio in 2005 is 0.74, which means that the company generated less revenue per dollar of asset investment. The ratio goes up in 2006 and then comes down in 2007. in 2008 the firm manages to stabilize and generate moderate revenue. But in 2009 the again slow down to 0.63 total turn over ratio.

Conclusion:


= $31944$40519

= 78%


After applying all the formulas we got an idea that the Coca Cola Company is a profitable firm. Because through out the trend analysis of four years, we found that the company is getting profitable return on short term and long term investment, their receivable conversion rate has reduced as well and they are in the position to pay its debts with in their resources.

Limitations of Financial Statement Analysis:Although financial statement analysis is highly useful tool, it

has two limitations. These two limitations involve the comparability of financial data between companies and the need to look beyond ratios.

Comparison of Financial Data:Comparison of one company with another can provide valuable clues about the financial health of an organization. Unfortunately, differences in accounting methods between companies sometimes make it difficult to compare the companies' financial data. For example if one firm values its inventories by LIFO method and another firm by the average cost method, then direct comparison of financial data such as inventory valuations and cost of goods sold between the two firms may be misleading. Sometimes enough data are presented in footnotes to the financial statements to restate data to a comparable basis. Otherwise, the analyst should keep in mind the lack of comparability of the data before drawing any definite conclusion. Nevertheless, even with this limitation in mind, comparisons of key ratios with other companies and with industry average often suggest avenues for further investigation.

The Need to Look Beyond Ratios:An inexperienced analyst may assume that ratios are sufficient

in themselves as a basis for judgment about the future. Nothing could be further from the truth. Conclusions based on ratios analysis must be regarded as tentative. Ratios should not be viewed as an end, but rather they should be viewed as starting point, as indicators of what to pursue in greater depth. They raise many questions, but they rarely answer any question by themselves.

In addition to ratios, other sources of data should be analyzed in order to make judgment about the future of an organization. The analyst should look, for example, at industry trends, technological changes, changes in consumer tastes, changes in broad economic factors, and changes within the firm itself. Introduction:


The assignment is about the trend analysis of any firm. Therefore, we have selected the balance sheet and the income statement of Coca-Cola Company. Four years’ data has been collected through secondary source in which the calculations, graphical presentations and interpretations are covered in detail.

In the end the limitations are also mentioned which give us an idea that what kind of problems are faced by the analysts and what are those things they should keep in mind.

Balance Sheet of Coca-Cola Company:

Assets Dec 08 Dec 07 Dec 06

Current Assets

Cash 4,701.0 4,093.0 2,440.0

Net Receivables 3,090.0 3,317.0 2,587.0

Inventories 2,187.0 2,220.0 1,641.0

Other Current Assets 2,198.0 2,475.0 1,773.0

Total Current Assets 12,176.0 12,105.0 8,441.0

Net Fixed Assets 8,326.0 8,493.0 6,903.0

Other Noncurrent Assets 20,017.0 22,671.0 14,619.0

Total Assets 40,519.0 43,269.0 29,963.0

Liabilities and Shareholder's Equity Dec 08 Dec 07 Dec 06

Current Liabilities

Accounts Payable 1,370.0 1,380.0 929.0

Short-Term Debt 6,531.0 6,052.0 3,268.0

Other Current Liabilities 5,087.0 5,793.0 4,693.0

Total Current Liabilities 12,988.0 13,225.0 8,890.0

Long-Term Debt 2,781.0 3,277.0 1,314.0

Other Noncurrent Liabilities 4,278.0 5,023.0 2,839.0

Dec 2005

3744

2998

2016

2148

10907

7907

19102

37917

Dec 2005

1226

5283

5191

11701

4046

18205


Total Liabilities 20,047.0 21,525.0 13,043.0

Shareholder's Equity

Preferred Stock Equity -- -- --

Common Stock Equity 20,472.0 21,744.0 16,920.0

Total Equity 20,472.0 21,744.0 16,920.0

Shares Outstanding (mil.) 2,317.2 2,317.2 2,317.2

Income Statement of Coca-Cola Company:

Revenue 31,944.0 28,857.0 24,088.0

Cost of Goods Sold 11,374.0 10,406.0 8,164.0

Gross Profit 20,570.0 18,451.0 15,924.0

Gross Profit Margin 64.4% 63.9% 66.1%

SG&A Expense 11,774.0 10,945.0 9,431.0

Depreciation & Amortization 1,228.0 1,163.0 938.0

Operating Income 7,877.0 8,329.0 6,798.0

Operating Margin 24.7% 28.9% 28.2%

Non operating Income (902.0) 841.0 297.0

Non operating Expenses (105.0) (220.0) --

Income Before Taxes 7,439.0 7,873.0 6,578.0

Income Taxes 1,632.0 1,892.0 1,498.0

Net Income After Taxes 5,807.0 5,981.0 5,080.0

Continuing Operations 5,807.0 5,981.0 5,080.0

Discontinued Operations -- -- --

Total Operations 5,807.0 5,981.0 5,080.0

28296

9981

18315

64.8%

10716

1109

7668

27.2%

251

--

7296

1674

5622

5622

--

5622

5622

20%


Total Net Income 5,807.0 5,981.0 5,080.0

Net Profit Margin 18.2% 20.7% 21.1%

Diluted EPS from Total Net Income

($)

2.49 2.57 2.16

Dividends per Share 1.52 1.36 1.24

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Coco Cola Ratio Analysis Final (II)