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Ratios Analysis

Professor: Kenneth A. Kim

Huang

Danying

#2011201549

2013/4/14

Index

Ratios Analysis................................................................................................................................... 1 Index.......................................................................................................................................... 2 Brief Introduction of the Coca-Cola Company .......................................................................... 3 Liquidity Ratios .......................................................................................................................... 3 Current ratio ...................................................................................................................... 3 Quick Ratio ........................................................................................................................ 4 Asset Management Ratios ........................................................................................................ 4 Inventory turnover ratio .................................................................................................... 4 Total Asset Turnover ratio ................................................................................................. 5 Debt Management Ratios ......................................................................................................... 5 Debt-to-equity ratio .......................................................................................................... 5 Times-interest-earned ratio .............................................................................................. 6 Profitability Ratios ..................................................................................................................... 6 Net profit margin............................................................................................................... 6 ROE .................................................................................................................................... 7 Market Value Ratios .................................................................................................................. 7 Price/ Earnings (P/E) ratio ................................................................................................. 7 Market/ book Ratio ........................................................................................................... 7 The Du Pont Equation ............................................................................................................... 8 Summary ................................................................................................................................... 8 Appendix ................................................................................................................................... 9 Balance Sheet (2012) ........................................................................................................ 9 Income Statement (2012) ................................................................................................ 10 Industry Average Ratios .................................................................................................. 11

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Brief Introduction of the Coca-Cola Company


The Coca-Cola Company is the worlds largest beverage company, which in 2012 owns or licenses and markets more than 500 nonalcoholic beverage brands, primarily sparkling beverages but also a variety of still beverages such as waters, enhanced waters, juices and juice drinks, ready-to-drink teas and coffees, and energy and sports drinks. The Coca-Cola Company owns and markets four of the worlds top five Non-alcoholic sparkling beverage brands: Coca-Cola, Diet Coke, Fanta and Sprite. Finished beverage products bearing our trademarks, sold in the United States since 1886, are now sold in more than 200 countries in nonalcoholic beverage industry. To understand the financial position of The Coca-Cola Company, we now begin ratio analysis by calculating 10 of the 2012 financial ratios using data from the balance sheet and income statement in the 2012 CCC Annual Report.

Liquidity Ratios
Current ratio Current ratio = current asset/ current liability = 30328/ 27821=1.09 Industry average = 1.11 (Note: the industry average current ratio is adopted from the data of American Beverage Association in 2006) The current ratio is larger than 1, so the company currently has enough money to pay what it currently owes. The Coca-Cola Company has a slightly lower current ratio than the average for its industry. It means that the company has less money tied up in nonproductive assets, such as cash or marketable securities. Or perhaps the inventory holdings are not that large, which is good for the shareholders because more of the companys assets can be used for growing business. But it may not be good enough for the lenders who prefer a high current ratio since it reduce their risk. However, the current ratio is not far
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removed from the average for nonalcoholic industry. Also, we cannot get the comprehensive information about the companys liquidity just from the current ratio.

Quick Ratio Quick ratio = (current assets inventories)/ current liabilities = (30328-3264)/ 27821 = 0.97 Industry average = 0.58 The Coca-Cola Company has a higher quick ratio than the industry average quick ratio, indicating that Coca-Cola has high ability to pay off short-term obligations than the industry in average without relying on the sale of inventories, which is the least liquid of the companys current assets. For example, juice or other drinks sometimes cannot be sold in a short term.

Asset Management Ratios


Inventory turnover ratio Inventory turnover ratio = sales/ inventories = 48017/ 3264 = 14.71 Industry average = 6.56 Approximately, each item of The Coca-Cola Companys inventory is sold out and replaced 14.71 times per year, which is over twice larger than the industry average. It means the company can effectively manage its inventory thus reducing the storage cost. However, it may possibly indicate that Coca-Cola has inadequate inventory level, which may result in decrease in sales next year.

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Total Asset Turnover ratio Total asset turnover ratio = sales / total asset = 48017 / 3264 = 0.56 Industry average = 0.6 Coca-Colas ratio is somewhat below the industry average, indicating that the company is not generating a sufficient volume of business given its total asset investment. We can guess maybe Coca-Cola is expanding its facilities which will drive future growth but hurt on the short-term. According to the annual report, there are new investments in Aujan, one of the largest independent beverage companies in the Middle East, and Mikuni, a bottling partner located in Japan. The increase was also due to the impact of the merger of Andina and Polar, foreign currency translation adjustments and additional equity income recorded during 2012. Anyway, it is suggested that sales should be increased, some assets should be sold, or a combination of this step should be taken.

Debt Management Ratios


Debt-to-equity ratio Debt-to-equity ratio = total liabilities / (total asset total liabilities) =53006 / (86174-53006) = 1.60 Industry average = 1.01 The data shows Coca-Cola has $1.6 of debt for every dollar of equity, which is higher than the industry average. It is generally not considered good, because the company has a high amount of debt, and we are reasonably worried about its ability to service its debt. In order to address this concern, lets look at the times-interest-earned ratio.

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Times-interest-earned ratio Times-interest-earned ratio = EBIT / interest expense = 10779 / 397 = 27.02 Industry average (2011) = 30.44 Comparing 27.02 and 30.44, we know that Coca-Cola cannot cover its interest payment as well as the industry. Fewer earnings are available to meet interest payments. Thus, the TIE ratio reinforces the concern from analysis of debt-to-equity ratio that Coca-Cola would face difficulties if it attempt to borrow additional funds. To figure out these problems, lets take a look at the annual report, especially the balance sheet and income statement. Loans and notes payable increased $3,426 million, or 27 percent, primarily due to an increase in the Companys commercial paper balance. Liabilities held for sale increased $796 million due to their consolidated Philippine and Brazilian bottling operations being classified as held for sale. Long-term debt increased $1,080 million, or 8 percent, primarily due to the Companys issuance of long-term debt during the first quarter of 2012. Maybe the companys debt problem is not that huge, however, it will more or less influence its financial position and make itself less prospective thus driving down the stock price.

Profitability Ratios
Net profit margin Net profit margin = net income available to common stockholders / sales = 9019 / 48017 = 18.78% Industry average = 11.6% Coca-Cola is more efficient at converting sales into actual profit and its cost control is good.

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ROE Return on common equity = net income available to common stockholders / common equity =9019/ 32790 = 27.51% Industry average = 24.50% The Coca-Cola Company uses investment dollars to generate profits and generate cash internally better than its average competitors, which is good for its investors.

Market Value Ratios


Price/ Earnings (P/E) ratio Price/ Earnings (P/E) ratio = price per share / earnings per share = 36.25 / 2 = 18.13 Industry average = 18.90 Coca-Colas P/E ratio is below the average, this suggests that the company is regarded as being somewhat riskier than most, as having poorer growth prospect, or both. Check the information about Cokes historical stock price, I found that it was slightly moving down during the second half of year 2012 and it was $ 36.25 on Dec 31th, 2012, and is moving up to $41.08 in on April 12th, 2013. The stock price was underestimated so the P/ E ratio was quite low. This is due to lots of factors maybe including high debt-to-equity presented to the investor, some other risks and concerns. Market/ book Ratio Book value per share = common equity / shares outstanding = 33168 / 4504 = 7.36 Market / book ratio = stock price /book value per share =36.25 / 7.36 = 4.92 Industry average = 5.49
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Investors are willing to pay relatively little for a dollar of Cokes book value. Still, investors are willing to pay more for stocks than their accounting book value as M/B ratio exceeds 1.

The Du Pont Equation


ROE = (Net Income / Sales) (Sales / Total assets) (Total assets / Common equity) = Profit margin total assets turnover equity multiplier For Coca-Cola, ROE = 18.78% 0.56 (86174 / 32790) = 18.78% 0.56 2.63 = 27.51% For industry, ROE = 11.60% 0.60 3.52 = 24.50%

(Note: I get equity multiplier of the industry according to the debt ratio which is equal to 71.59%) Clearly, Coke is a very good company with an excellent expense control, although it was perceived less prospectively by the market in 2012. The Coca-Cola Company can do better through improving its ability to use asset to generate sales and to utilize its debt.

Summary
In conclusion, The Coca-Cola Company is in a strong financial position. It can easily pay what it owes, and excellently control its expenses, although it may meet some troubles in asset management currently which can be dealt in the future when its new investments turn to perform profitably. In addition, performing in the beverage industry, Coca-Cola is inevitably facing some risks and concerns arising nowadays. These consist of factors like obesity and other health concerns; water scarcity and poor quality; changes in the nonalcoholic beverage business environment and retail landscape; increased competition; increased demand for food products and decreased agricultural productivity; and so forth. If Coca-Cola is to maintain its large market shares, it has to solve this all kinds problem.
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Appendix
Balance Sheet (2012)
ASSETS CURRENT ASSETS Cash and cash equivalents Short-term investments OTAL CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Marketable securities Trade accounts receivable Inventories Prepaid expenses and other assets Assets held for sale TOTAL CURRENT ASSETS EQUITY METHOD INVESTMENTS OTHER INVESTMENTS, PRINCIPALLY BOTTLING COMPANIES OTHER ASSETS PROPERTY, PLANT AND EQUIPMENT net TRADEMARKS WITH INDEFINITE LIVES BOTTLERS FRANCHISE RIGHTS WITH INDEFINITE LIVES GOODWILL OTHER INTANGIBLE ASSETS TOTAL ASSETS LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses Loans and notes payable Current maturities of long-term debt Accrued income taxes Liabilities held for sale TOTAL CURRENT LIABILITIES LONG-TERM DEBT OTHER LIABILITIES DEFERRED INCOME TAXES THE COCA-COLA COMPANY SHAREOWNERS EQUITY Common stock, $0.25 par value; Authorized 11,200 shares; Issued 7,040 and 7,040 shares, respectively Capital surplus Reinvested earnings
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$8,442 5,017 13,459 3,092 4,759 3,264 2,781 2,793 30,328 9,216 1,232 2,585 14,476 6,527 7,405 12,255 1,150 86,174

8,680 16,297 1,557 471 796 27,821 14,736 5,468 4,981

1,760 11,379 58,045

Accumulated other comprehensive income (loss Treasury stock, at cost 2,571 and 2,514 shares, respectively EQUITY ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY EQUITY ATTRIBUTABLE TO NONCONTROLLING INTEREST TOTAL EQUITY TOTAL LIABILITIES AND EQUITY
Note: in millions except par value

3,385 35,009 32,790 378 33,168 86,174

Income Statement (2012)


Net operating revenues Cost of goods sold Gross profit Selling, general and administrative expenses Other operating charges Operating income Interest income Interest expense Equity income (loss)--net Other income (loss)--net Income before income taxes Income taxes Consolidated net income less: net income attributable to non-controlling interests Net income attributable to shareholders Basic net income per share Diluted net income per share Average shares outstanding Effects of dilutive securities Average shares outstanding assuming dilution December 31 stock Price
Note: Dollars in millions, except per share data and stock price.

$48,017 19,053 28,964 17,738 447 10,779 471 397 819 137 11,809 2,723 9,086 67 9,019 2.00 1.97 4,504 80 4,584 31.73

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Industry Average Ratios Types Current Quick Inventory Turnover Total Asset Turnover Debt Ratio TIE Market / Book Debt-to-Equity Profit Margin ROE Price / Earnings Market / Book Ratios 1.11 0.58 6.56 0.6 71.59% 30.44 5.490 1.01 11.60% 24.50% 18.90 5.490 Yahoo Finance Data: http://biz.yahoo.com/p/sum_conameu.h tml CsiMarket.com yarely data for 2012 http://csimarket.com/index.php An exception is TIE ratio is for 2011 Source
2006 American Beverage Association data

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