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Ratio Analysis

Business Finance

Balance sheet of Coca-Cola Company:

Assignment # 2

Ratio Analysis

Business Finance

**FISCAL YEAR ENDING
**

Assets Current Assets Cash Net Receivables Inventories Other Current Assets Total Current Assets Net Fixed Assets Other Non current Assets Total Assets Liabilities and Shareholder's Equity Current Liabilities Accounts Payable Short-Term Debt Other Current Liabilities Total Current Liabilities Long-Term Debt Other Non current Liabilities Total Liabilities Shareholder's Equity Preferred Stock Equity Common Stock Equity Total Equity Shares Outstanding (mil.)

Dec 2005

Dec 2006

Dec 2007

Dec 2008

Dec 2009

3744.0 2998.0 2016.0 2148.0 10907.0 7907.0 19102.0 37917.0

2,440.0 2,587.0 1,641.0 1,773.0 8,441.0 6,903.0 14,619.0 29,963.0

4,093.0 2,587.0 2,220.0 2,475.0 12,105.0 8,493.0 22,671.0 43,269.0

4,701.0 3,317.0 2,187.0 2,198.0 12,176.0 8,326.0 20,017.0 40,519.0

9,151.0 3,758.0 2,354.0 2288.0 17,551.0 9,561.0 2,421.0 $ 48,671.0

1226.0 5283.0 5191.0 11701.0 2457.0 4046.0

929.0 3,268.0 4,693.0 8,890.0 1,314.0 2,839.0

1,380.0 6,052.0 5,793.0 13,225.0 3,277.0 5,023.0

1,370.0 6,531.0 5,087.0 12,988.0 2,781.0 4,278.0

13,721.0 6,800.0

13,721.0 5,059.0 4,545.0

18205.0

13,043.0

21,525.0

20,047.0

23,872.0

-19712.0 19712.0 2317.2

-16,920.0 16,920.0 2,317.2

-21,744.0 21,744.0 2,317.2

-20,472.0 20,472.0 2,317.2

-24,799.0 25,346.0 2,317.2

Assignment # 2

Ratio Analysis

Business Finance

**Income Statement of Coca-Cola Company:
**

FISCAL YEAR ENDING

Revenue Cost of Goods Sold Gross Profit Gross Profit Margin SG&A Expense Depreciati on & Amortizati on Operating Income Operating Margin No operating Income No operating Expenses Income Before Taxes Income Taxes Net Income After Taxes Continuing Operations Continuing Operations

Dec 2005

28296.0 9981.0

Dec 2006

24,088.0 8,164.0

Dec 2007

28,857.0 10,406.0

Dec 2008

31,944.0 11,374.0

Dec 2009

30,990.0 11,088.0

18315.0 64.8%

15,924.0 66.1%

18,451.0 63.9%

20,570.0 64.4%

19,902.0 64%

10716.0 1109.0

9,431.0 938.0

10,945.0 1,163.0

11,774.0 1,228.0

11,671.0 1,236.0

7668.0 27.2% 251.0

6,798.0 28.2% 297.0

8,329.0 28.9% 841.0

7,877.0 24.7% (902.0)

9,301.0 20.6% 121.75.0

--

--

(220.0)

(105.0)

(181.67.0)

7296.0

6,578.0

7,873.0

7,439.0

8,946.0

1674.0 5622.0

1,498.0 5,080.0

1,892.0 5,981.0

1,632.0 5,807.0

2,040.0 7,605.0

5622.0 5622.0

5,080.0 5,080.0

5,981.0 5,981.0

5,807.0 5,807.0

7,605.0 7,605.0

Assignment # 2

Ratio Analysis

Business Finance

**Liquid Ratio: Current Ratio
**

Current ratio = =

2005

Current ratio = =

2006

Current assets Current Liabilities $8441 $8890 0.94 cents

=

Current assets Current Liabilities $10907 $11701 0.932 cents

=

2007

Current ratio = = = Current assets Current Liabilities $12105 $13225 0.915 cents Current ratio = = =

2008

Current assets Current Liabilities $12176 $12988 0.93 cents

C u rre n t R a tio

1 0 .8

Ratio

0 .6 0 .4 0 .2 0 2 0 05 2 0 06 20 07 2 0 08

Interpretation: Ye ars 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

Assignment # 2

Ratio Analysis

Business Finance

ratio falls and then increases in 2008. We can analyze that the data varies from year to year.

**Acid Test Ratio
**

Acid test ratio = = =

2005

Acid test ratio = = =

2006

Current asset – Inventories Current Liabilities $8441 - $1641 $8890 0.76

Current asset – Inventories Current Liabilities $10907 - $2016 911701 0.759 cents

2007

Acid test ratio = = = Current asset – Inventories Current Liabilities $12105 – 2220 $13225 0.75 Acid test ratio = = =

2008

Current asset – Inventories Current Liabilities $12176 – 2187 $12988 0.76

Acid Test Ratio

0.8 0.6

Ratio

**0.4 0.2 0 2005 2006 2007
**

Years

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

Assignment # 2

Ratio Analysis

Business Finance

ratios that the firm is paying its current liabilities through its most current assets effectively.

**Debt to Equity Ratio: 2005
**

Debt to equity ratio = Current liabilities + long term debts Shareholders equity = $14158 $19712 = 0.718 Debt to equity ratio term debts = =

2006

= Current liabilities + long Shareholders equity $10204 $16920 0.60

2007

Debt to equity ratio term debts = = = Current liabilities + long Shareholders equity $16502 $21744 0.76 Debt to equity ratio term debts = =

2008

= Current liabilities + long Shareholders equity $15769 $20472 0.77

Debt to Equity Ratio

1 0.8

Ratio

**0.6 0.4 0.2 0 2005 2006 2007
**

Years

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

Assignment # 2

Ratio Analysis

Business Finance

moving upwards which shows that the firm has low financing from the shareholder’s side.

**Debt to Total Asset Ratio: 2005
**

Debt To Total Asset Ratio = = = Total debts Total assets $14158 37917 0.373 Debt To Total Asset Ratio = =

2006

= Total debts Total assets $10204 $29963 0.34

2007

Debt To Total Asset Ratio = = = Total debts Total assets $16502 $43269 0.38 Debt To Total Asset Ratio = =

2008

= Total debts Total assets $15769 $40519 0.389

**Debt to Total Asset Ratio
**

0.5 0.4

Ratio

**0.3 0.2 0.1 0 2005 2006 2007
**

Years

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.

Assignment # 2

Ratio Analysis

Business Finance

**Long Term Debt to Total Capitalization: 2005
**

Long term debt to total = Capitalization = = Long term debts Total capitalization $2457 $22169 0.11 Long term debt to total = Capitalization = =

2006

Long term debts Total capitalization $1314 $18234 0.07

2007

Long term debt to total = Capitalization = = Long term debts Total capitalization $3277 $25021 0.13 Long term debt to total = Capitalization = =

2008

Long term debts Total capitalization $2781 $23253 0.12

**Long Term Debt to Total Capitalization 0.15 0.1 0.05 0 2005 2006 2007
**

Years

Ratio

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.

Assignment # 2

Ratio Analysis

Business Finance

**Gross Profit Margin Ratio: 2005
**

Gross Profit margin ratio CGS = = = Net sales – Gross Profit margin ratio CGS = = Net sales $28296 – 9981 $28296 64.7 %

2006

= Net sales – Net sales $24088 – 8164 $24088 66 %

2007

Gross Profit margin ratio CGS = = = Net sales – Gross Profit margin ratio CGS = = Net sales $28857 – 10406 $28857 63 %

2008

= Net sales – Net sales $31944– 11374 $31944 64%

**Gross Profit Margin Ratio
**

80 60

Ratio

**40 20 0 2005 2006 2007
**

Years

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

Assignment # 2

Ratio Analysis

Business Finance

small difference between the ratios in four years, but its high, which means it is favorable.

**Net Profit Margin Ratio: 2005
**

Net profit margin ratio = = = Net profit after taxes Net sales $5623 $28296 19.87 % Net profit margin ratio = = =

2006

Net profit after taxes Net sales $5080 $24088 21 %

2007

Net profit margin ratio = = = Net profit after taxes Net sales $5981 $28857 20.7% Net profit margin ratio = = =

2008

Net profit after taxes Net sales $5807 $31944 18.1%

2009

=

=

7,605/30990 24.5%

Net Profit Margin Ratio 25 Ratios 20 15 10 5 0 2005 2006 2007 Years 2008

Interpretation:

Assignment # 2

Ratio Analysis

Business Finance

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: 2005
**

Return on Investment = = = Net profit after taxes Total assets $5623 $37917 14.8 % Return on Investment = = =

2006

Net profit after taxes Total assets $5080 $29963 17 %

2007

Return on Investment = = = Net profit after taxes Total assets $5981 $43269 14 % Return on Investment = = =

2008

Net profit after taxes Total assets $5807 $40519 14.33 %

2009

= =

7605/48671 15.6%

Return on Investment

20

Ratio

**15 10 5 0 2005 2006 2007
**

Y ears

2008

Interpretation:

Assignment # 2

Ratio Analysis

Business Finance

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: 2005
**

Return on equity = = = Net profit after taxes Shareholders equity $5623 $19712 29 % Return on equity = =

2006

= Net profit after taxes Shareholders equity $5080 $16920 30 %

2007

Return on equity = = = Net profit after taxes Shareholders equity $5981 $21744 27 % Return on equity = =

2008

= Net profit after taxes Shareholders equity $5807 $20472 28 %

2009

=

=

7605/25,346

30%

Return on Equity

40 Ratio 30 20 10 0 2005 2006 2007 Years 2008

Assignment # 2

Ratio Analysis

Business Finance

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
**

Receivable activity ratio sales = = = Annual credit Receivable activity ratio sales = = Receivables $28296 $2998 10 times

2006

= Annual credit Receivables $24088 $2587 9.3 times

2007

Receivable activity ratio sales = = = Annual credit Receivable activity ratio sales = = Receivables $28857 $8317 8.69 times

2008

= Annual credit Receivables $31944 $3090 10 times

2009

=

=

30,990/3,758 8.25 times

**Receivable Activity Ratio
**

12 10 8 6 4 2 0 2005 2006 2007

Years

Ratio

2008

Interpretation:

Assignment # 2

Ratio Analysis

Business Finance

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
**

Receivable turnover in days= Receivables = = Days in year x Annual credit sales 365 x 2998 28296 39 days Receivable turnover in days= Receivables = =

2006

Days in year x Annual credit sales 365 x 2587 24088 39 days

2007

Receivable turnover in days= Receivables = = Days in year x Annual credit sales 365 x 8317 $28857 42 days Receivable turnover in days= Receivables = =

2008

Days in year x Annual credit sales 365 x 3090 $31944 37 days

**Receivable Turn over in Days
**

50 40

Ratio

**30 20 10 0 2005 2006 2007
**

Years

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

Assignment # 2

Ratio Analysis

Business Finance

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
**

Inventory activity turnover ratio= Cost of good sold Average inventory = $9981 $2016 = 5 times

2006

Inventory activity turnover ratio= Cost of good sold Average inventory = $8164 $1641 = 5 times

2007

Inventory activity turnover ratio= Cost of good sold Average inventory = $10406 $2220 = 4.7times

2008

Inventory activity turnover ratio= Cost of good sold Average inventory = $11374 $2187 = 5.2 times

Inventory Activity

6 5 4 3 2 1 0 2005 2006 2007

Years

Ratio

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

Assignment # 2

Ratio Analysis

Business Finance

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
**

Inventory turnover in days Inventory = = = Days in year x Inventory turnover in days Inventory = = CGS 365 x 2016 9981 73 days

2006

= Days in year x CGS 365 x 1641 $8164 75 days

2007

Inventory turnover in days Inventory = = = Days in year x Inventory turnover in days Inventory = = CGS 365 x 2220 10406 78 days

2008

= Days in year x CGS 365 x 2187 11374 70 days

Inventory Turn Over in Days

100 80

Ratio

**60 40 20 0 2005 2006 2007
**

Years

2008

Interpretation:

Assignment # 2

Ratio Analysis

Business Finance

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
**

Total assets turnover = = = Net sales Total assets $28296 $37917 74 % Total assets turnover = = =

2006

Net sales Total assets $24088 $29963 80 %

2007

Total assets turnover = = = Net sales Total assets $28857 $43269 66 % Total assets turnover = = =

2008

Net sales Total assets $31944 $40519 78%

2009

= =

30990/48671 63% Total Asset Turn Over Ratio

100 80 Ratio 60 40 20 0 2005 2006 2007 Years 2008

Assignment # 2

Ratio Analysis

Business Finance

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

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,

Assignment # 2

Ratio Analysis

Business Finance

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 Dec statement of Coca-Cola Company. Four years’ data 2005 been has 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 analysts3744 what and are those things they should keep in mind.

2998 2016 2148

Assets Current Assets Cash Net Receivables Inventories Other Current Assets Total Current Assets Net Fixed Assets 4,701.0 3,090.0 2,187.0 2,198.0 12,176.0 8,326.0 4,093.0 3,317.0 2,220.0 2,475.0 12,105.0 8,493.0 2,440.0 2,587.0 1,641.0 1,773.0 8,441.0 6,903.0 Dec 08 Dec 07 Dec 06

Balance Sheet of Coca-Cola Company:

10907 7907 19102 37917

Dec 2005

1226 5283 5191 11701

Assignment # 2

Other Noncurrent Assets Total Assets

Ratio Analysis

20,017.0 40,519.0 22,671.0 43,269.0

Business Finance

14,619.0 29,963.0

Liabilities and Shareholder's Equity Current Liabilities Accounts Payable Short-Term Debt Other Current Liabilities Total Current Liabilities Long-Term Debt Other Noncurrent Liabilities Total Liabilities

Dec 08

Dec 07

Dec 06

1,370.0 6,531.0 5,087.0 12,988.0 2,781.0 4,278.0 20,047.0

1,380.0 6,052.0 5,793.0 13,225.0 3,277.0 5,023.0 21,525.0

929.0 3,268.0 4,693.0 8,890.0 1,314.0 2,839.0 13,043.0

4046 18205

Shareholder's Equity

28296

Preferred Stock Equity Common Stock Equity Total Equity Shares Outstanding (mil.) -20,472.0 20,472.0 2,317.2 -21,744.0 21,744.0 2,317.2 -16,920.0 16,920.0 2,317.2

-19712 19712 2317.2

9981 18315 64.8% 10716

**Income Statement of Coca-Cola Company:
**

Revenue Cost of Goods Sold Gross Profit Gross Profit Margin SG&A Expense Depreciation & Amortization Operating Income 31,944.0 11,374.0 20,570.0 64.4% 11,774.0 1,228.0 7,877.0 28,857.0 10,406.0 18,451.0 63.9% 10,945.0 1,163.0 8,329.0 24,088.0 8,164.0 15,924.0 66.1% 9,431.0 938.0 6,798.0

1109 7668 27.2% 251 -7296 1674 5622

5622 --

Assignment # 2

Operating Margin Non operating Income Non operating Expenses Income Before Taxes Income Taxes Net Income After Taxes

Ratio Analysis

24.7% (902.0) (105.0) 7,439.0 1,632.0 5,807.0 28.9% 841.0 (220.0) 7,873.0 1,892.0 5,981.0

Business Finance

28.2% 297.0 -6,578.0 1,498.0 5,080.0

Continuing Operations Discontinued Operations Total Operations Total Net Income Net Profit Margin

5,807.0 -5,807.0 5,807.0 18.2%

5,981.0 -5,981.0 5,981.0 20.7%

5,080.0 -5,080.0 5,080.0 21.1%

5622 5622 20%

Diluted EPS from Total Net Income ($) Dividends per Share

2.49 1.52

2.57 1.36

2.16 1.24

2.40 1.37

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