Running head: FINANCIAL EVALUATION 1

Financial Evaluation

Raymon Zuilan

New England College of Business and Finance

QSM 475

Professor Ferguson

August 5, 2019
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Financial Evaluation

It is best to utilize income statements and annual reports when reviewing a company’s

financial reports from the previous three years to see how they fair in today’s market. Financial

evaluation is defined as the process of decision making with respect to investments in fixed

assets, which makes the process of evaluating a profitable company that much easier (Keown,

2017). We can factor in basic financial tools, i.e. gross proft and margin, net income, and debt to

income ratio. These tools coupled with capital budgeting will give us a clear view as to how a

company is fairing, and the company that I chose to review is Coca-Cola.

By taking a look at Coca-Cola’s gross profit margin, we are able to see if the company is

profitable in regards to revenue versus direct costs and direct labor to produce the goods sold.

Gross profit is the absolute dollar amount and gross margin is a percentage. The gross profit for

the past three years is as followed: GP 2015 = Net Sales – COGS = $72,030, GP 2016 = $79,662,

GP 2017 = $91,686. Coca-Cola has a healthy, steady increase in GP. The gross profit margin is

hovering at a respectable 44% rate, which tells us that the revenue can definitely cover the direct

labor and direct materials to produce the goods. The rest of the income and expenses listed are

operating expenses, or indirect costs. These will eventually bring us to Coca-Cola’s net income

for the past three years. 2017 was a rough year for Coca-Cola domestically because they took a

$11,654 net loss, but recouped by the exchange differences on the translation of foreign

operations and associates, which attributed to a $15,207 gain.

Next, we will take earnings per share (EPS) into account to analyze Coca-Cola’s financial

position. Again, 2017 was a rough year domestically for Coca-Cola because they had a negative

EPS for the year, -6.12. EPS is calculated by dividing the net income by the average number of
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shares outstanding during the period adjusted for the weighted average of own share purchased

in the year. A negative EPS tells us that Coca-Cola lost money in 2017. Since it is the first

negative occurrence in three years for the company, it is nothing to be alarmed about. Coca-cola

is a well-established company that gain recoup their losses in a short amount of time. With that

being said, a -6.12 EPS is fairly low compared to Coca-Cola’s biggest competitors, i.e. Pepsico,

Constellation Brands Inc., and Monster Beverage Corporation.

Finally, let’s look at Coca-Cola’s debt to equity ratio. The debt to income or debt to

equity ratio is calculated by taking a company’s financial leverage and dividing it by its long-

term debt by stockholder’s equity. Coca-cola’s debt to equity ratio for the past three years are

1.10, 1.28 and 1.64. This indicates that Coca-Cola has increased its leverage, as well as narrates

the fact that creditors have a bigger stake in the company than equity holders. As we look at

Coca-Cola’s cash flow, we see that they have had an average cash flow-to-debt ratio of 19.61%.

This tells us that Coca-Cola has been overly dependent on leverage and poses a mild amount of

risk since part of their assets are financed by debt.

The financial assessment of Coca-Cola is generally positive as we glimpsed at their basic

numbers for the past three years. Their 2017 anomaly of a negative EPS has already been

recouped in the international sector, meaning the future is still looking bright for the company.

Personally, I would invest in Coca-Cola with mild confidence because of their debt to equity

ratio.
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References

Hernando, J. (2018, February 21). Coca-Cola Annual Report 2017. Retrieved from

https://www.coca-colafemsa.com/kof2017/pdf/financial-statements-2017.pdf

Keown, A., Martin, J. & Petty, J. (2017). Foundations of finance : the logic and practice of

financial management. Boston: Pearson.