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Assignment # 2 Ratio Analysis Business Finance

Balance sheet of Coca-Cola Company:


Assignment # 2 Ratio Analysis Business Finance

FISCAL Dec Dec Dec Dec Dec


YEAR 2005 2006 2007 2008 2009
ENDING
Assets
Current Assets
Cash 3744.0 2,440.0 4,093.0 4,701.0 9,151.0

Net 2998.0 2,587.0 2,587.0 3,317.0 3,758.0


Receivables
Inventories 2016.0 1,641.0 2,220.0 2,187.0 2,354.0

Other Current 2148.0 1,773.0 2,475.0 2,198.0 2288.0


Assets
Total Current 10907.0 8,441.0 12,105.0 12,176.0 17,551.0
Assets
Net Fixed 7907.0 6,903.0 8,493.0 8,326.0 9,561.0
Assets
Other Non 19102.0 14,619.0 22,671.0 20,017.0 2,421.0
current Assets
Total Assets 37917.0 29,963.0 43,269.0 40,519.0 $
48,671.0
Liabilities
and
Shareholder's
Equity
Current
Liabilities
Accounts 1226.0 929.0 1,380.0 1,370.0 13,721.0
Payable
Short-Term 5283.0 3,268.0 6,052.0 6,531.0 6,800.0
Debt
Other Current 5191.0 4,693.0 5,793.0 5,087.0
Liabilities
Total Current 11701.0 8,890.0 13,225.0 12,988.0 13,721.0
Liabilities
Long-Term 2457.0 1,314.0 3,277.0 2,781.0 5,059.0
Debt
Other Non 4046.0 2,839.0 5,023.0 4,278.0 4,545.0
current
Liabilities
Total Liabilities 18205.0 13,043.0 21,525.0 20,047.0 23,872.0

Shareholder's
Equity
Preferred Stock -- -- -- -- --
Equity
Common Stock 19712.0 16,920.0 21,744.0 20,472.0 24,799.0
Equity
Total Equity 19712.0 16,920.0 21,744.0 20,472.0 25,346.0

Shares 2317.2 2,317.2 2,317.2 2,317.2 2,317.2


Outstanding
(mil.)
Assignment # 2 Ratio Analysis Business Finance

Income Statement of Coca-Cola Company:

FISCAL Dec Dec Dec Dec Dec


YEAR 2005 2006 2007 2008 2009
ENDING
Revenue 28296.0 24,088.0 28,857.0 31,944.0 30,990.0

Cost of 9981.0 8,164.0 10,406.0 11,374.0 11,088.0


Goods
Sold
Gross 18315.0 15,924.0 18,451.0 20,570.0 19,902.0
Profit
Gross 64.8% 66.1% 63.9% 64.4% 64%
Profit
Margin
SG&A 10716.0 9,431.0 10,945.0 11,774.0 11,671.0
Expense
Depreciati 1109.0 938.0 1,163.0 1,228.0 1,236.0
on &
Amortizati
on
Operating 7668.0 6,798.0 8,329.0 7,877.0 9,301.0
Income
Operating 27.2% 28.2% 28.9% 24.7% 20.6%
Margin
No 251.0 297.0 841.0 (902.0) 121.75.0
operating
Income
No -- -- (220.0) (105.0) (181.67.0)
operating
Expenses
Income 7296.0 6,578.0 7,873.0 7,439.0 8,946.0
Before
Taxes
Income 1674.0 1,498.0 1,892.0 1,632.0 2,040.0
Taxes
Net 5622.0 5,080.0 5,981.0 5,807.0 7,605.0
Income
After
Taxes
Continuing 5622.0 5,080.0 5,981.0 5,807.0 7,605.0
Operations
Continuing 5622.0 5,080.0 5,981.0 5,807.0 7,605.0
Operations
Assignment # 2 Ratio Analysis Business Finance

Liquid Ratio:
Current Ratio 2005 2006
Current ratio = Current assets Current ratio = Current assets
Current Liabilities Current Liabilities
= $10907 = $8441
$11701 $8890
= 0.932 cents = 0.94 cents

2007 2008
Current ratio = Current assets Current ratio = Current assets
Current Liabilities Current Liabilities
= $12105 = $12176
$13225 $12988
= 0.915 cents = 0.93 cents

C u rre n t R a tio

1
0 .8
0 .6
Ratio

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 2005 2006


Acid test ratio = Current asset – Inventories Acid test ratio = Current asset – Inventories
Current Liabilities Current Liabilities
= $10907 - $2016 = $8441 - $1641
911701 $8890
= 0.759 cents = 0.76

2007 2008
Acid test ratio = Current asset – Inventories Acid test ratio = Current asset – Inventories
Current Liabilities Current Liabilities
= $12105 – 2220 = $12176 – 2187
$13225 $12988
= 0.75 = 0.76

Acid Test Ratio

0.8

0.6
Ratio

0.4

0.2

0
2005 2006 2007 2008
Years

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 2006
Debt to equity ratio = Current liabilities + long term Debt to equity ratio = Current liabilities + long
debts term debts
Shareholders equity Shareholders equity
= $14158 = $10204
$19712 $16920
= 0.718 = 0.60

2007 2008
Debt to equity ratio = Current liabilities + long Debt to equity ratio = Current liabilities + long
term debts term debts
Shareholders equity Shareholders equity
= $16502 = $15769
$21744 $20472
= 0.76 = 0.77

Debt to Equity Ratio

1
0.8
0.6
Ratio

0.4
0.2
0
2005 2006 2007 2008
Years

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 2006
Debt To Total Asset Ratio = Total debts Debt To Total Asset Ratio = Total debts
Total assets Total assets
= $14158 = $10204
37917 $29963
= 0.373 = 0.34

2007 2008
Debt To Total Asset Ratio = Total debts Debt To Total Asset Ratio = Total debts
Total assets Total assets
= $16502 = $15769
$43269 $40519
= 0.38 = 0.389

Debt to Total Asset Ratio

0.5
0.4
0.3
Ratio

0.2
0.1
0
2005 2006 2007 2008
Years

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 2006
Long term debt to total = Long term debts Long term debt to total = Long term debts
Capitalization Total capitalization Capitalization Total capitalization
= $2457 = $1314
$22169 $18234
= 0.11 = 0.07

2007 2008
Long term debt to total = Long term debts Long term debt to total = Long term debts
Capitalization Total capitalization Capitalization Total capitalization
= $3277 = $2781
$25021 $23253
= 0.13 = 0.12

Long Term Debt to Total Capitalization

0.15

0.1
Ratio

0.05

0
2005 2006 2007 2008
Years

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 2006
Gross Profit margin ratio = Net sales – Gross Profit margin ratio = Net sales –
CGS CGS
Net sales Net sales
= $28296 – 9981 = $24088 – 8164
$28296 $24088
= 64.7 % = 66 %

2007 2008
Gross Profit margin ratio = Net sales – Gross Profit margin ratio = Net sales –
CGS CGS
Net sales Net sales
= $28857 – 10406 = $31944– 11374
$28857 $31944
= 63 % = 64%

Gross Profit Margin Ratio

80

60
Ratio

40

20

0
2005 2006 2007 2008
Years

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 2006
Net profit margin ratio = Net profit after taxes Net profit margin ratio = Net profit after taxes
Net sales Net sales
= $5623 = $5080
$28296 $24088
= 19.87 % = 21 %

2007 2008
Net profit margin ratio = Net profit after taxes Net profit margin ratio = Net profit after taxes
Net sales Net sales
= $5981 = $5807
$28857 $31944
= 20.7% = 18.1%

2009 = 7,605/30990
= 24.5%

Net Profit Margin Ratio

25
20
Ratios

15
10
5
0
2005 2006 2007 2008
Years

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 2006
Return on Investment = Net profit after taxes Return on Investment = Net profit after taxes
Total assets Total assets
= $5623 = $5080
$37917 $29963
= 14.8 % = 17 %

2007 2008
Return on Investment = Net profit after taxes Return on Investment = Net profit after taxes
Total assets Total assets
= $5981 = $5807
$43269 $40519
= 14 % = 14.33 %

2009 = 7605/48671
= 15.6%

Return on Investment

20

15
Ratio

10

0
2005 2006 2007 2008
Years

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 2006
Return on equity = Net profit after taxes Return on equity = Net profit after taxes
Shareholders equity Shareholders equity
= $5623 = $5080
$19712 $16920
= 29 % = 30 %

2007 2008
Return on equity = Net profit after taxes Return on equity = Net profit after taxes
Shareholders equity Shareholders equity
= $5981 = $5807
$21744 $20472
= 27 % = 28 %

2009 = 7605/25,346
= 30%

Return on Equity

40
30
Ratio

20
10
0
2005 2006 2007 2008
Years
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 2006
Receivable activity ratio = Annual credit Receivable activity ratio = Annual credit
sales sales
Receivables Receivables
= $28296 = $24088
$2998 $2587
= 10 times = 9.3 times

2007 2008
Receivable activity ratio = Annual credit Receivable activity ratio = Annual credit
sales sales
Receivables Receivables
= $28857 = $31944
$8317 $3090
= 8.69 times = 10 times

2009 = 30,990/3,758
= 8.25 times

Receivable Activity Ratio

12
10
8
Ratio

6
4
2
0
2005 2006 2007 2008
Years

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 2006
Receivable turnover in days= Days in year x Receivable turnover in days= Days in year x
Receivables Receivables
Annual credit sales Annual credit sales
= 365 x 2998 = 365 x 2587
28296 24088
= 39 days = 39 days

2007 2008
Receivable turnover in days= Days in year x Receivable turnover in days= Days in year x
Receivables Receivables
Annual credit sales Annual credit sales
= 365 x 8317 = 365 x 3090
$28857 $31944
= 42 days = 37 days

Receivable Turn over in Days

50
40
30
Ratio

20
10
0
2005 2006 2007 2008
Years

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 2006
Inventory activity turnover ratio= Cost of good Inventory activity turnover ratio= Cost of good
sold sold
Average inventory Average inventory
= $9981 = $8164
$2016 $1641
= 5 times = 5 times

2007 2008
Inventory activity turnover ratio= Cost of good Inventory activity turnover ratio= Cost of good
sold sold
Average inventory Average inventory
= $10406 = $11374
$2220 $2187
= 4.7times = 5.2 times

Inventory Activity

6
5
4
Ratio

3
2
1
0
2005 2006 2007 2008
Years

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 2006
Inventory turnover in days = Days in year x Inventory turnover in days = Days in year x
Inventory Inventory
CGS CGS
= 365 x 2016 = 365 x 1641
9981 $8164
= 73 days = 75 days

2007 2008
Inventory turnover in days = Days in year x Inventory turnover in days = Days in year x
Inventory Inventory
CGS CGS
= 365 x 2220 = 365 x 2187
10406 11374
= 78 days = 70 days

Inventory Turn Over in Days

100
80
60
Ratio

40
20
0
2005 2006 2007 2008
Years

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 2006
Total assets turnover = Net sales Total assets turnover = Net sales
Total assets Total assets
= $28296 = $24088
$37917 $29963
= 74 % = 80 %

2007 2008
Total assets turnover = Net sales Total assets turnover = Net sales
Total assets Total assets
= $28857 = $31944
$43269 $40519
= 66 % = 78%

2009 = 30990/48671
= 63%

Total Asset Turn Over Ratio

100
80
60
Ratio

40
20
0
2005 2006 2007 2008
Years
Assignment # 2 Ratio Analysis Business Finance

Interpretation:
The ratio is supposed to be high. Here we can see that the coca-
cola 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 has been
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
and what
are those things they should keep in mind.
2998

Balance Sheet of Coca-Cola Company: 2016

2148
Assets Dec 08 Dec 07 Dec 06
10907
Current Assets
7907
Cash 4,701.0 4,093.0 2,440.0
19102
Net Receivables 3,090.0 3,317.0 2,587.0 37917
Inventories 2,187.0 2,220.0 1,641.0

Dec
Other Current Assets 2,198.0 2,475.0 1,773.0
2005
Total Current Assets 12,176.0 12,105.0 8,441.0

Net Fixed Assets 8,326.0 8,493.0 6,903.0


1226

5283

5191

11701
Assignment # 2 Ratio Analysis Business Finance

Other Noncurrent Assets 20,017.0 22,671.0 14,619.0

Total Assets 40,519.0 43,269.0 29,963.0

Liabilities and Shareholder's Equity Dec 08 Dec 07 Dec 06

Current Liabilities

Accounts Payable 1,370.0 1,380.0 929.0

Short-Term Debt 6,531.0 6,052.0 3,268.0

Other Current Liabilities 5,087.0 5,793.0 4,693.0

Total Current Liabilities 12,988.0 13,225.0 8,890.0

Long-Term Debt 2,781.0 3,277.0 1,314.0

Other Noncurrent Liabilities 4,278.0 5,023.0 2,839.0 4046

Total Liabilities 20,047.0 21,525.0 13,043.0 18205

Shareholder's Equity

28296
Preferred Stock Equity -- -- -- --
9981
Common Stock Equity 20,472.0 21,744.0 16,920.0 19712
18315
Total Equity 20,472.0 21,744.0 16,920.0 19712
64.8%
Shares Outstanding (mil.) 2,317.2 2,317.2 2,317.2
2317.2
10716
Income Statement of Coca-Cola Company:
1109

Revenue 31,944.0 28,857.0 24,088.0


7668

Cost of Goods Sold 11,374.0 10,406.0 8,164.0 27.2%

Gross Profit 20,570.0 18,451.0 15,924.0 251


--
Gross Profit Margin 64.4% 63.9% 66.1%

SG&A Expense 11,774.0 10,945.0 9,431.0 7296

Depreciation & Amortization 1,228.0 1,163.0 938.0 1674

Operating Income 7,877.0 8,329.0 6,798.0 5622

5622

--
Assignment # 2 Ratio Analysis Business Finance

Operating Margin 24.7% 28.9% 28.2%

Non operating Income (902.0) 841.0 297.0

Non operating Expenses (105.0) (220.0) --

Income Before Taxes 7,439.0 7,873.0 6,578.0

Income Taxes 1,632.0 1,892.0 1,498.0

Net Income After Taxes 5,807.0 5,981.0 5,080.0

Continuing Operations 5,807.0 5,981.0 5,080.0

Discontinued Operations -- -- --

Total Operations 5,807.0 5,981.0 5,080.0 5622

Total Net Income 5,807.0 5,981.0 5,080.0 5622

Net Profit Margin 18.2% 20.7% 21.1% 20%

Diluted EPS from Total Net Income ($) 2.49 2.57 2.16 2.40

Dividends per Share 1.52 1.36 1.24 1.37