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BUS 300

FINANCIAL MANAGEMENT
EVALUATING AND FORECASTING
FINANCIAL PERFORMANCES
SUBMITTED BY: SUBMITTED TO:

DEEPALI BHATTARAI SUJIT GOPINATHAN
BISHAL SHERCHAN

INTRODUCTION TO FINANCIAL
STATEMENT ANALYSIS
• The process of reviewing and evaluating a company's financial statements
to gain an understanding of the financial health of the company and to
enable effective decision making.

• Financial statements provide this summary of collected data.

• The three primary financial statements include:
1. Income Statement
2. Balance Sheet
3. Cash flow Statement




IMPORTANCE OF FINANCIAL
STATEMENT ANALYSIS
• Reviewing and analysing financial statements help in making decisions
regarding:
1. Holding Of Shares (Shareholders)
2. Extension Of Credit (Creditors)
3. Investment (Prospective Investors)
4. Company plans (Management of the Company)

METHODS FOR ANALYSING
FINANCIAL STATEMENTS
One of the most important financial tools for analysis of financial statements is
Ratio.

Ratios express a relationship between two or more financial statement totals,
and compare to budgets and industry benchmarks.

The various types of Ratios are:
1. Liquidity Ratios
2. Asset Management Ratios
3. Financial Leverage Ratios
4. Profitability Ratios
5. Market-based Ratios
6. Dividend Policy Ratios
LIQUIDITY RATIOS
• Liquidity ratios analyse the ability of a company to pay off both its current
liabilities as they become due as well as their long-term liabilities as they
become current.

• Two major liquidity ratios used in our calculations are:
1. Current Ratio
2. Quick Ratio
ASSET MANAGEMENT RATIOS
• Asset Management Ratios compare the assets of a company to its sales
revenue. Asset management ratios indicate how successfully a company is
utilizing its assets to generate revenues.

• Major Asset Management Ratios used in our calculations are:
1. Collection Period Ratio
2. Inventory Turnover Ratio
3. Fixed Asset Turnover Ratio
4. Total Asset Turnover Ratio

FINANCIAL LEAVARAGE RATIOS
• Any ratio used to calculate the financial leverage of a company to get an
idea of the company's methods of financing or to measure its ability to meet
financial obligations.

• The various types of Leverage Ratios used in our calculations are:
1. Debt Ratio
2. Debt-to-Equity Ratio
3. Times Earned Ratio
PROFITABILITY RATIOS
• A class of financial metrics that are used to assess a business's ability to
generate earnings as compared to its expenses and other relevant costs
incurred during a specific period of time.

• The various types of Profitability Ratios used in our calculations are:
1. Return on Investment Ratio
2. Return on Equity Ratio
3. Gross Profit Margin Ratio
4. Net Profit Margin Ratio

MARKET-BASED RATIOS
• Market ratios measure investor response to owning a company's stock and
also the cost of issuing stock. These are concerned with the return on
investment for shareholders, and with the relationship between return and
the value of an investment in company’s shares.

• Major types of Market-Based Ratios are:
1. P/E Ratio
2. Market to Book Ratio

FINANCIAL ANALYSIS: COMPANY
WISE
COCA COLA PEPSICO
BRIEF INTRODUCTION: COCA
COLA
• The company of Atlanta, Georgia registered on the trademark of the Coca-
Cola Company in US since March 27, 1944.

• The company has other cola drinks under the brand name of Coke such as
Diet Coke, Coca-Cola Zero, Coca-Cola Vanilla, Caffeine Free Coca-Cola,
Thums Up, Sprite, Fanta, Limca, Mazza, Pulpy Orange and so on.

• Based on the Interbrand’s best global brand study of 2011, Coca-Cola stood
as one of the most valuable brand.

BRIEF INTRODUCTION: PEPSICO
• PepsiCo is an American multinational food and beverage corporation
headquartered in Purchase, New York.

• Formed in 1965 with the merger of Pepsi-Cola Company and Frito-Lay,
Inc.

• As of Jan.26
th
,2012 the products were distributed across more than 200
countries, resulting in the annual net revenues of $43.3 billion.

• Based on net revenue, PepsiCo is the second largest food and beverages
business in the world.

• The popular products manufactured under the trademark of PepsiCo are
7UP, Aquafina, Cheetos, Lay’s , Pepsi, Nimbooz, Lehar, Tropicana,
Mountain Dew and Kurkure.
FINANCIAL STATEMENTS: COCA
COLA
FINANCIAL STATEMENTS: COCA
COLA
FINANCIAL STATEMENTS: COCA
COLA
FINANCIAL STATEMENTS:
PEPSICO
FINANCIAL STATEMENTS:
PEPSICO
FINANCIAL STATEMENTS:
PEPSICO
LIQUIDITY RATIOS
Current Ratio:

• This ratio determines whether or not the company has enough resources to pay
its debts over the next 12 months.

Formula = Current Assets / Current Liability

• Acceptable current ratio for a healthy business is between 1.5 and 3. – It
indicates good financial strength.

• If CR>1(too low) problems meeting its short term obligation
If the current ratio is too high(exceeding 3) the company may not be using its
current assets.

Coca-Cola: 31,304/27811= 1.126
PepsiCo: 22203/17839=1.245


LIQUIDITY RATIOS
Quick Ratio:

• This ratio measures the company’s ability to use its near cash or quick
assets to meet its current liabilities immediately.

• Formula of Quick ratio= Current assets-inventory/ current liabilities.

• If QR<1, company cannot currently fully pay back its current liabilities.

• Generally QR is considered to be better if it is 1:1 or higher.
Higher ratio preferred because the company is able to meet current obligations
using liquid assets quickly.

Coca-Cola: 31304-3277/ 27811=1.008
Pepsi Co: 22203-3409/ 17839=1.054

.

ASSET MANAGEMENT RATIOS
Debtor Collection Period Ratio:

• This ratio indicates the average time taken to collect the trade debts.

• Debtor turnover ratio=Accounts receivable/ Annual Credit sales/365

• The reducing period of time denotes the increasing efficiency of the
company.

• Long collection period may indicate problems with credit quality or credit
granting procedures.

Coca-Cola: 365/9.62= 38 days
PepsiCo: 365/9.511=38days
ASSET MANAGEMENT RATIOS
Inventory Turnover Ratio:

• This ratio is a measure of the number of times inventory is sold or used in a
time period such as a year.

• Inventory Turnover=Cost of Sales/Average Inventory

• High turnover preferred to low turnover.

• Low Turnover Rate: overstocking, obsolesces, deficiencies in the product line
and marketing effort.

• A high ratio may be indicative of lost sales from stock-outs.

Coca-Cola: 18421/3277= 5.62
PepsiCo: 31243/3409= 9.165
ASSET MANAGEMENT RATIOS
Fixed Asset Turnover Ratio:

• Fixed asset turnover ratio= Sales/Net fixed assets

• This ratio indicates how well the business is using its fixed assets to
generate sales.

• High ratio is preferred as that indicates the business has less money tied up
in the fixed assets.

• The declining ratio may mean that the business has over-invested in plants,
equipment and/or other fixed assets.

Coca-Cola: 66415/18575= 3.575
PepsiCo: 46854/14967= 3.130



ASSET MANAGEMENT RATIOS
Total Asset Turnover Ratio:

• The total asset turnover ratio measures the ability of a company to use its
assets to efficiently generate sales.

• Total Asset Turnover Ratio: Net Sales/Total Asset

• The lower the total asset turnover ratio as compared to historical data for
the firm and industry data, the more sluggish the firm's sales.

• This may indicate a problem with one or more of the asset categories
composing total assets - inventory, receivables, or fixed assets.

Coca-Cola: 46854/90055= 0.520
PepsiCo: 66415/77478= 0.857

FINANCIAL LEAVARAGE RATIOS
Debt Ratio:

• This financial ratio indicates the percentage of company’s assets that are
provided via debts.
• Debt Ratio=Total Debt/Total Assets
• The amount of debt per dollar of total assets.
• A high number indicates more risk for creditors and may also indicate low
borrowing capacity, lowering firm’s financial flexibility.
• This ratio should be compared with the industry average or other
competing firms.
• A low number indicates that the assets have been financed mainly by the
shareholders.

Coca-Cola: 56615/90055=0.6286
PepsiCo: 53089/77478=0.685


FINANCIAL LEAVARAGE RATIOS
Debt-to-Equity Ratio:

• A financial ratio indicating the relative proportion of shareholders'
equity and debt used to finance a company's assets.

• Debt-to-equity Ratio: Total Debt/Total Equity

• The amount of debt per dollar of equity.

• A high ratio indicates that more of the firm is financed by creditors (higher
risk of default).

• A low ratio indicates that more of the firm is financed by the shareholders
(but harder to earn a high return on equity).

Coca-Cola: 56615/33440= 1.693
PepsiCo: 53089/24389=2.177



FINANCIAL LEAVARAGE RATIOS
Times Interest Earned Ratio:

Times interest earned (TIE) or interest coverage ratio is a measure of a
company's ability to honour its debt payments.

• Times Interest Earned Ratio: EBIT/Interest Charges

• Indicates the extent of which earning are available to meet interest
payments

• Lower means less earning are available to meet interest payments and that
the business is more vulnerable to increases in interest rates.

Coca-Cola: 11477/463=24.788
PepsiCo: 8891/911=9.7596


PROFITABILITY RATIOS
Return on Investment Ratio:

• Return on investment (ROI) is the concept of an investment of some
resource yielding a benefit to the investor.

• Return on Investment Ratio: Earning after taxes/Total assets

• Both shareholders & creditors prefer a high ROI.

Coca-Cola: 8626/90055=0.0957
PepsiCo: 6787/77478=0.0875

PROFITABILITY RATIOS
Return on Equity Ratio:

• This ratio indicates the amount of net income returned as a percentage of
shareholders equity.

• Return on Equity Ratio: Earnings After taxes/Shareholder’s Equity
• ROE is compared with the companies of the same industry.

• High ROE yields no immediate benefit.(determined by stock price)

• The benefit comes from the earnings in the company at a high RIE rate
which in turn gives the company a high growth rate.

Coca-Cola: 8626/33173=0.26
PepsiCo: 6787/24409=0.2780

PROFITABILITY RATIOS
Gross Profit Margin Ratio:

• The gross profit margin ratio expresses the gross profit as a proportion of
sales.

• Gross profit margin= Revenue- COGS/ Revenue

• It shows how efficiently the company is using its materials and labor in the
production process and gives an indication of the pricing.

• The higher the gross profit margin, the better it is for business.

• The more the business retains of each dollar of sales which means more
money is left over for deducting other operating expenses.

Coca-Cola: 46854-18421/46854= 0.607
PepsiCo: 66415-31293/66415=0.529


PROFITABILITY RATIOS
Net Profit Margin Ratio:

• This measure indicates how much of each dollar earned by the company is
translated into profit.

• Generally indicated in percentage.

• It is one of the most closely followed numbers in finance.

• Net Profit Margin Ratio: Net profit/ Sales Revenue

• Companies that are able to expand their net margins over time will
generally be rewarded with share price growth, as it leads directly to higher
levels of profitability.

Coca-Cola: 8626/46854= 0.184
PepsiCo: 6787/66415= 0.102


MARKET-BASED RATIOS
P/E Ratio:

• This ratio is the valuation ratio of a company's current share price
compared to its per-share earnings.

• P/E Ratio: Market Price Per Share/Earnings Per Share

• If one stock has P/E twice of another stock, all things being equal, it is less
attractive investment.

• Comparisons should be made only between the companies of the same
sector.

Coca-Cola: 36.25/1.94=18.19
PepsiCo: 68.43/4.37=15.65 ( Date: 31
st
December, 2012, Source: Yahoo
Finance)
HORIZONTAL AND VERTICAL
ANALYSIS

• Horizontal analysis compares financial information over a series of time,
typically from past quarters or years.

• Horizontal analysis is performed by comparing financial data from a past
statement, such as the income statement.

• When comparing this past information one will want to look for variations
such as higher/lower earnings.

• Vertical analysis is a proportional analysis of financial statements.

• Each line item listed in the financial statement is listed as the percentage of
another line item.

• For example, on an income statement each line item will be listed as a
percentage of gross sales.


PROBLEMS IN FINANCIAL
STATEMENT ANALYSIS
Conglomerate Firms:

• Many firms, particularly the large ones, have operations spanning a wide
range of industries.

• Given the diversity of their product lines, it is difficult to find suitable
benchmarks for evaluating their financial performance and condition.

• Hence, it appears that meaningful benchmarks may be available only for
firms which have a well defined industry classification.
PROBLEMS IN FINANCIAL
STATEMENT ANALYSIS
Window Dressing:

• Firms may resort to window dressing to project a favourable financial
picture.

• For example, a firm may prepare its balance sheet at a point when its
inventory level is very low.

• As a result, it may appear that the firm has a very comfortable liquidity
position and a high turnover of inventories.

PROBLEMS IN FINANCIAL
STATEMENT ANALYSIS
Variations in Accounting Policies:

• Business firms have some latitude in the accounting treatment of items like
depreciation, valuation of stocks, research and development expenses,
foreign exchange transactions.

• Due to diversity of accounting policies found in practice, comparative
financial statement analysis may be vitiated.

PROBLEMS IN FINANCIAL
STATEMENT ANALYSIS
Interpretation of Results:

• Though industry average and other yardsticks are commonly used in
financial ratios, it is somewhat difficult to judge whether a certain ratio is
good or bad.

• A high current ratio, for example may indicate a strong liquidity position
(something good) or excessive inventories (something bad).

• Likewise a high turnover of fixed asset may mean efficient utilization of
plant and machinery or continued flogging of more or less fully depreciated
worn, out and inefficient plant and machinery.

CONCLUSION
• From the analysis, it is evident that the gross profit ratio is good whereas
operating ratios are at optimum level to the industry standards.

• The companies must improve its profit margins as they are below industry
level. this improvement may also bring up its returns on investment and
overall efficiency to the companies.

• The business environment of both companies is reasonably good. The
companies track records are always oriented towards profitable growth and
with strong fundamentals.

BIBLIOGRAPHY
• http://www.stock-analysis-on.net/NYSE/Company/Coca-Cola-Co

• https://in.finance.yahoo.com/

• http://assets.coca-
colacompany.com/d0/c1/7afc6e6949c8adf1168a3328b2ad/2013-annual-
report-on-form-10-k.pdf

• http://www.pepsico.com/Assets/Download/PEP_Annual_Report_2013.pdf