Professional Documents
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Change and Continuity in Contemporary Business
Change and Continuity in Contemporary Business
Coca-Cola Company
Student ID : CMU_BABM_APRIL12_C5_18
Financial Management for Managers
I; Aruna Kailasanathan
Student Id No : CMU_BABM_APRIL12_C5_18
I hereby confirm that the work presented here in this report and in all other associated
material; is wholly my own work.
Signature : ………………………………
Date : ………………………………
BABM- Batch No - 5
Financial Management for Managers
Acknowledgement
This assignment would not have been possible without the assistance of many people.
Executive Summary
BABM- Batch No - 5
Financial Management for Managers
The objective of this report is to analyse the performance of Coca Cola Company for year
2010 and 2011. Various ratios have been used for this purpose. The performance is assessed
in terms of liquidity, efficiency, profitability, leverage and solvency.
The Coca Cola Company is a global manufacturer and distributer of non-alcoholic beverages.
The performance of the company has been compared against the performance of past four
years and the industry average. Moreover, the performance is compared against its competitor
Pepsi which is a global manufacturer of food, snack and beverage.
Table of Contents
BABM- Batch No - 5
Financial Management for Managers
1 Introduction 1
3 Liquidity Ratios 4
4 Efficiency Ratios 7
5 Profitability Ratios 12
7 Solvency Ratios 16
8 Conclusion 17
9 References 18
BABM- Batch No - 5
Financial Management for Managers
Introduction
Coca Cola Company is a global manufacturer and distributer of non- alcoholic beverages and
syrups. It operates in more than 200 countries and owns around 500 brands including coca
cola, sprite, diet coke etc.
Financial statements can be evaluated through calculating ratios. Financial ratios are
arithmetic relationships between numerical values in the financial statements. They indicate
the performance and financial position of the company. These ratios assess the liquidity,
efficiency, profitability, leverage and solvency of the company. They are compared against
the historical data, competitors and industry averages.
The financial ratios of Coca cola are compared against competitor Pepsi. Pepsi Company is a
global snack and beverage provider. Further, these ratios are compared with historical data of
five years and soft drinks industry average.
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Financial Management for Managers
The financial ratios of Coca Cola Company for year 2011 and 2010 are given in the table
below,
Value
Ratio Equation
2011 2010
Liquidity Ratios
Current ratio Current Assets 25,497/24,283 21,579/18,508
Current Liabilities = 1.05 = 1.17
Quick Ratio (Current assets- Inventory) (25,497-3,092) / (21,579-2,650)/ 18,508
Current Liabilities 24,283 = 1.02
= 0.92
Non-credit Quick assets- Current (22,405- (18,929-18,508)
interval liabilities 24,283)/49.7863 /38.2932
Daily operating expenses = -37.72 = 10.99
Efficiency Ratios
Inventory Cost of goods sold 18,216/3,092 12,693/2,650
turnover Inventory = 5.89 = 4.789
Inventory 365 365/5.89 365/4.789
turnover days Inventory turnover = 61.95 = 76.2
Receivable Sales 46,542/4,920 35,119/4,430
turnover Receivables = 9.459 = 7.927
Collection 365 365/9.459 365/7.927
period Receivables Turnover = 38.587 = 46.04
Payable Cost of goods sold 18,216/2,172 12,693/1,614
turnover Payables* = 8.386 = 7.864
Debt period 365 365/8.386 365/7.864
Payables Turnover = 43.52 = 46.4
Cash conversion Inventory period+ 61.95+38.58-43.52 76.2+46.04-46.4
cycle Collection period- Payable = 57.01 = 75.84
period
Asset turnover Sales 46,542/79,974 35,119/72,921
Assets = 0.581 = 0.481
Profitability Ratios
Return on Profit* 8,572/(31,921+ 13,656) 11,809/
capital Capital employed =0.188 = 18.8% (31,317+14,041)
employed =0.2603= 26.03%
Gross Profit Gross Profit 28,326/46,542 22,426/35,119
Margin Sales turnover =0.6086= 60.86% =0.6385= 63.85%
Net Profit Net Profit* 8,572/46,542 11,809/35,119
Margin Sales turnover =0.1841 = 18.41% =0.3362= 33.62%
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Financial Management for Managers
Solvency Ratio
Interest Coverage ratio EBIT 11,856/417 14,976/733
Interest expense =28.13 =20.43
Table 1 Financial ratios of Coca cola
2011 2010
Accounts payable 2,172 1,614
Accrued liabilities 6,837 6,972
Total 9,009 8,859
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Financial Management for Managers
Liquidity Ratios
These ratios determine to what extent the organization is able to cover its current liabilities.
Current Ratio
Quick Ratio
Non-credit Interval
Coca cola’s current ratio is 1.05 and 1.17 for year 2011 and 2010 respectively. This shows
that the current ratio has reduced by 10.2% in 2011 when compared to 2010. This implies that
the company has enough current assets to pay off its current liabilities. Current ratio of past
five years is as follows,
When compared with historical data, current ratio of Coca cola has been almost consistent
over the five years.
The average current ratio of soft drinks industry is 1.2 (msn money, 2012). Current ratio of
coca cola is slightly below the average. Pepsi, the direct competitor of Coca cola has the
below current ratios,
This signifies that current ratios of Pepsi and Coca cola are approximately similar.
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Financial Management for Managers
Quick ratios of Coca cola for year 2010 and 2011 are 1.02 and 0.92 respectively. The quick
ratio has decreased by 10.86% in 2011 when compared to 2010. This implies that Coca cola
cannot meet its short term obligations by selling its quick assets.
The historical data shows an increasing trend, but there is a minor decrease in 2011.
The industry average quick ratio is 1(msn money, 2012). The quick ratio of Coca cola is
marginally below the industry average. Pepsi has the below quick ratios,
The non-credit interval of Coca cola is -37.72 and 10.99 for 2011 and 2010 respectively. It
has shown a decreasing trend. This indicates that the company doesn’t have the capability to
finance the operational expenses with the cash left available to the company after deducting
the current liabilities from the quick assets in year 2011.
Over the five years non-credit interval has shown a fluctuating trend. Coca cola wasn’t
capable of financing the operational expenses from the cash left after netting current
liabilities from quick assets except for 2009 and 2010.
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Financial Management for Managers
In relation to current, quick ratio and non-credit interval Coca cola has moderate liquidity. It
has the capability to avoid potential liquidity issues. The ratios of year 2011 are lower than
year 2010. Compared to Pepsi, Coca cola’s liquidity ratios are better off. But, they are a bit
below than the industry averages.
Moreover, the company cannot meet its short term obligations by selling the quick assets. It
cannot finance its operational expenses from the cash left after netting current liabilities from
quick assets in year 2011.
Therefore, it is advisable to improve the liquidity ratios through increasing current assets or
reducing current liabilities.
Efficiency Ratios
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Financial Management for Managers
These ratios show how the company use its assets to generate cash. Efficiency could be
measured through the below mentioned ratios,
Inventory turnover
Inventory turnover days
Receivable turnover
Collection period
Payable turnover
Debt period
Cash conversion cycle
Asset turnover
Inventory turnover of Coca cola are 5.89 and 4.789 for 2011 and 2010 respectively. The
inventory turnover days of the company are 62 and 76 days for year 2011 and 2010
respectively. This implies that Coca-Cola has taken 62 days to sell their inventory on hand in
year 2011. There has been a significant improvement in the inventory turnover.
According to the data above, inventory turnover has shown a positive trend from year 2010.
The industry average inventory turnover is 7 (msn money, 2012). This means it takes 52 days
to convert inventory to sales. Compared with industry standard, coca cola takes more time to
turn inventory to sales.
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Financial Management for Managers
In relation to inventory turnover, the time taken for Pepsi to convert inventory to sales is less
than coca cola. This may be due to Pepsi’s sale of snacks and differences in distribution
methods.
The corresponding receivable turnover of Coca cola for year 2011 and 2010 are 9.4 and 7.9.
The collection period is 39 and 46 days.
The industry average receivable turnover is 8.66 (NASDAQ, 2012). Therefore the average
collection period is 42 days. Thus, coca cola has a better collection period than the industry
average.
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Financial Management for Managers
The payable turnover of Coca cola for 2011 and 2010 are 8.39 and 7.86. The debt period for
2011 and 2010 are 44 and 46 days respectively. This shows that, in 2011 the company was
able to pay its suppliers in 46 days.
Analysis of past five years shows a consistent trend in payable turn over.
Coca cola has the capability to pay its suppliers faster than Pepsi.
The cash conversion cycle of Coca cola for 2011 and 2010 are 57and 76 days. Cash
conversion cycle has improved in 2011 as it has taken a shorter period for Coca cola to create
cash.
In analysing the past data, it is evident that cash conversion cycle has a fluctuating trend. It
has increased until 2009 and then it shows a decreasing trend.
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Financial Management for Managers
In 2011, Pepsi has a shorter cash conversion cycle which means that it is able to generate
cash in a short period than Coca cola.
The Asset turnover of Coca cola for 2011 and 2010 are 0.58 and 0.48. This shows a 21%
improvement in asset turnover.
The industry average asset turnover is 0.66(msn money, 2012). Coca cola has a lower asset
turnover ratio than the industry. This shows that Coca cola is moderately effective in
generating sales from its asset base compared to the industry.
In relation to efficiency ratios calculated above Coca cola is moderately efficient. When
compared with year 2010, the ratios of 2011 are better. It means that Coca cola was able to
use its assets more efficiently in 2011 to generate sales.
But the ratios indicate that Coca cola’s efficiency in using assets is lower than the industry.
Moreover, when compared with Pepsi, Coca cola’s efficiency is lower.
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Financial Management for Managers
Therefore, Coca cola Company should try to improve its efficiency in using assets to generate
sales. For example it should increase its inventory turnover and reduce time taken to convert
inventory on hand to sales.
Profitability Ratios
Profitability ratios measure company’s ability to generate earnings. The ratios used to
measure profitability are as follows,
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Financial Management for Managers
Coca cola’s return on capital employed has dropped to 18.8% in 2011 from 26.03% in 2010.
This implies that the company has generated less profit using shareholder equity and long
term debts in 2011.
The past data shows a fluctuating trend in Return on capital employed. Year 2011 has the
lowest ROCE compared to previous four years.
The industry average ROCE is 13.3 (msn money, 2012). Coca cola performs better in
generating sales using equity compared to the industry.
Compared with Pepsi, Coca cola has a better ROCE which implies that Coca cola is more
efficient in generating sales.
The gross profit margin of coca cola has dropped to 60.86% in 2011 compared to 63.85% in
2010.
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Financial Management for Managers
The above data proves that gross margin has remained almost consistent over the past four
years. Gross margin of year 2011 is the lowest margin among the past five years. Further it is
below the four year average of 64.1%. This indicates that Coca cola has been less efficient in
its manufacturing process in 2011.
The industry standard gross profit margin is 55.18 %( msn money, 2012). Coca cola has a
substantially better gross profit margin than the industry average.
The net profit margin of Coca cola has substantially dropped from 33.62% in 2010 to 18.41%
in 2011.
Net profit margin of Coca cola has been relatively consistent except for 2010 when the
margin has escalated to 33.62%. This shows that company was able to maintain control over
its overheads.
The average net profit margin of soft drinks industry is 13.93% (msn money, 2012). Coca
cola has a significantly better net profit margin than the industry average.
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Financial Management for Managers
Coca cola has a considerably better net profit margin than Pepsi, which reveals that Coca cola
has better control over its costs than its competitor.
As illustrated above, the profitability ratios have been almost consistent over the past four
years. But, the results show that the ROCE, gross profit margin and net profit margin has
slightly decreased in 2011.
The profitability ratios are extensively higher than the industry averages. Further these ratios
are better than Pepsi’s profitability ratios.
Therefore, Coca cola’s profitability is robust and consistent. The management has been able
to control the costs and use the capital efficiently to generate profits.
These ratios are about how a company finance its operations using various sources of funds.
This can be measured through the below ratio,
Leverage ratio
Coca cola’s leverage ratio for 2011 and 2010 are 0.428 and 0.448 respectively.
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Financial Management for Managers
This shows an increasing trend in the leverage ratio. The leverage ratio has spiked up to 0.448
in 2010 when compared to 2009. This was mainly due to the increase in long term liabilities
by 177% in 2010.
The industry average leverage ratio is 1.04 (msn money, 2012). Coca cola’s leverage ratio is
extensively below the industry average.
Coca has a much lower leverage ratio than Pepsi which implies that Coca cola is less exposed
to financial risk than Pepsi.
Coca cola’ leverage ratio is lower than Pepsi and the industry average. This implies that
financial risk of Coca cola is low.
Solvency Ratio
Solvency ratios helps in measuring financial risk associated with the business. This could be
measured through the below ratio,
Interest coverage ratio of Coca cola has increased to 28.3 in 2011 compared to 20.4 in 2010.
This implies that company’s ability to meet the interest payment has increased. Therefore, the
financial risk is low.
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Financial Management for Managers
In analysing the past data of four years, 2011 has the highest interest coverage ratio.
The industry average interest coverage ratio is 9.1(msn money). This reveals that Coca cola
has a significantly higher interest coverage ratio.
Coca cola has a higher ability than Pepsi to pay off its interest. Therefore Coca cola’s
financial risk is lower than Pepsi.
In terms of solvency, Coca cola has lower financial risk than the industry average and
competitor.
Conclusion
The financial ratios of Coca Cola Company have been compared with historical data,
competitor and industry average.
The liquidity of Coca cola is moderate but, below the industry average. According to the
efficiency ratios Coca cola is moderately efficient. Moreover it is below the industry averages
and competitor’s ratios. The profitability of the company is substantially better than the
industry average and competitors. In relation to the leverage ratio, Coca cola has a low
financial risk compared to the industry and competitor. Solvency ratio is higher than the
competitor and the industry average which indicates that financial risk associated with Coca
cola is low.
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Financial Management for Managers
Therefore it is advisable for Coca Cola to increase its liquidity ratios through increasing
current assets or reducing current liabilities. Further it should increase its inventory turnover.
Moreover the company should use its assets more efficiently to generate sales and profits.
Overall, the financial condition of Coca cola is satisfactory and the performance is excellent.
References
Bloomberg business week, 2012, Coca cola Co, [online] Available at:
<http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=KO >
[Accessed 27 December 2012]
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Financial Management for Managers
msn money, 2012, The Coca cola Co, [online] Available at:
<http://investing.money.msn.com/investments/key-ratios?symbol=us
%3ako&page=ManagementEfficiency> [Accessed 27 December 2012]
NASDAQ, 2012, 21 highly efficient consumer goods stock, [online] Available at:
<http://www.nasdaq.com/article/21-highly-efficient-consumer-good-stocks-
cm58878#.UN64rG_qnQh > [Accessed 27 December 2012]
BABM- Batch No - 5 18