Running head: RATIO ANALYSIS

RATIO ANALYSIS
Name
Institution
Date

RATIO ANALYSIS

Contents
Abstract............................................................................................................................................3
Introduction......................................................................................................................................4
Share price movements....................................................................................................................5
Ratio analysis...................................................................................................................................7
Current ratio.................................................................................................................................7
Quick ratio...................................................................................................................................7
Fixed asset turnover ratio.............................................................................................................8
Total assets turnover ratio............................................................................................................8
Total debt to total assets ratio......................................................................................................9
Profit margin on sales..................................................................................................................9
Return on common equity.........................................................................................................10
Price earnings ratio....................................................................................................................10
Market/book ratio......................................................................................................................11
References......................................................................................................................................13

RATIO ANALYSIS

Abstract
This paper looks at a Fortune 500 company, specifically Coca Cola and analyses its financial
statements using ratio analysis. The purpose of this report is to provide the reader with an
understanding of the financial position of coca cola. The report looks at financial statements
going back 5 years from 2010- to 2014. It will look at the computation of various ratios where
the formulas will be given in the word document and the calculations given in an excel
document. The companys financial condition is stable and it looks to stay so for the foreseeable
future.

RATIO ANALYSIS

Introduction
Coca Cola Company is a beverage company that produces and distributes a number of nonalcoholic drinks all over the globe. The company has 4 out of the top 5 soft drinks worldwide
including Coca Cola, Fanta, Diet Coke and Sprite. It holds position one in non-alcoholic
beverages owning or licensing and marketing over 500 beverage brands (Hoovers.com, 2015).
Its products are mainly sparkling drinks but they also have water, energy drinks, juices and ready
to drink coffee and tea. The companys reach is over 200 countries. As of June 2015, it held
position 63 in the fortune 500 list (Hoovers.com, 2015).
It is considered on the worlds most recognized brands and has remained quite stable financially
over time. However, their profits have been declining over the last five years. This is illustrated
in the table below. This chart has been produced by data taken from morning star
(Financials.morningstar.com).

Net income
14000
11809
12000
10000

8572

9019

8584

8000

7098

6884

42004

42369

6000
4000
2000
0
40543

Part A

40908

41639

41274

RATIO ANALYSIS

Share price movements

I have a graphical representation of Coca Cola Companys movement in share price over the year
2014. I have taken the adjusted close as it has been amended for any corporate actions and
distributions that happened prior to the next day of opening. Yahoo financials gives the historical
share prices for companies over a period of time. I used this and exported the figures to the excel
document which was then used to prepare this graphical representation below. The adjusted
closing share price has been increasing over the years. This means that the company is stable and
that people are willing to invest in them. The risk of losing money with the company is quite low
as the company is growing in value by the day. Since the company produces consumer goods and
is also an industry leader, it will take time before they lose momentum and have their share

RATIO ANALYSIS
prices going down. However, since the external environment is ever changing, the share price.

RATIO ANALYSIS

Adj Close
50.0000

45.0000

43.3858
40.4195

40.0000

38.7445
38.6309
36.6136
35.8936
35.5365

41.0023
39.8088 40.2526

40.8599
40.7824

37.4901

35.0000

30.0000

25.0000

20.0000

15.0000

10.0000

5.0000

0.0000
11/22/2013

3/2/2014

6/10/2014

9/18/2014

12/27/2014

4/6/2015

RATIO ANALYSIS

PART B

Ratio analysis
The latest financial statements available are for the year 2015. This will be used in the
calculation of ratios. The formulas will be given in this word document as the calculations will
be provided in the excel document.

Current ratio
Current ratio= current assets
Current liabilities
It measures the ability of the company to meet current debt obligations, as and when they fall due
using its current assets. The higher the current ratio the better. Any company with a current ratio
of less than 1 would not be able to meets its debt obligations even after the liquidation of all its
current assets.
Coca colas current ratio is 1.01. This shows that if all current creditors demanded their money,
they could be in a position to pay them back. This shows that coke is doing well as far as
liquidity is concerned.

Quick ratio
It is a liquidity ratio that measures the ability of the company to pay off current liabilities using
cash, accounts receivable and marketable securities. It is based on the argument that some
current assets for example prepaid expenses cant be converted back to cash to pay off current
liabilities.
Quick ratio= cash + marketable securities + accounts receivables
Current liabilities

RATIO ANALYSIS

Coca colas quick ratio is 0.80. This means that they could only pay up 80% of current liabilities.
The difference between quick ratio and current ratio is the exclusion of inventory on the former.
This is because conversion of inventory to cash does not happen overnight and may take time
depending on the product.

Fixed asset turnover ratio

It measures the efficiency of a company in using fixed assets in the generation of revenue. The
higher the better. A high fixed assets ratio means that the company utilizes its fixed assets well to
generate revenues for the company. A low fixed assets turnover ratio means that the company has
overinvested in its fixed assets.
Fixed assets turnover ratio=

revenues
Average net fixed assets

Coca colas fixed assets turnover ratio is 3.10. This shows that for every dollar held up in fixed
assets, they make $3.89. This shows that the company has less cash being tied up by fixed assets.

Total assets turnover ratio

It measures managements efficiency to effectively utilize the companys assets to generate sales.
Together with the fixed asset turnover ratios, they are asset turnover ratios. This ratio is also
industry specific to an extent with retail businesses having a high ratio due to competitive pricing
and cut throat competition.
Total assets turnover ratio= revenues
Average total assets
Cokes asset turnover is 0.51 meaning that it turns over 0.51 times its assets at a time. It may
mean that the company operates in an environment that is capital intensive.

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10

Total debt to total assets ratio

This is a solvency ratio that measures the extent to which debt is used to finance the total assets
of a company. A high value may mean that the company uses financial leverage which may affect
the company in different ways for example high fixed amounts of interest payment or tax
benefits associated with debt.
Total debt to total assets ratio= total liabilities
Total assets
67.05% of cokes total assets are financed by debt. The company has more liabilities than assets
but this may be due to the capital intensity of the industry.

Profit margin on sales

Gross profit margin is used to measure the percentage of gross profit a company earns per unit of
sales after deducting the cost of goods sold. It shows the amount of money left up to pay for
other expenses. The gross profit margin should be consistent over a period of time but might
suffer due to increased competition. Competition leads to lowering of prices which in turn affects
profits as the cost of goods sold will remain constant.
Gross profit margin= revenue cost of goods sold
Revenue
Coca colas gross profit margin is 61.11%. This means that for every dollar they sell, they make
$0.611 as gross profit. This metric is used to compare with competitors as a high gross profit
margin signifies that the company is efficient.
Return on total assets

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11

This ratio looks at how efficient a company is in generating profits relative to its assets. A high
return on assets means that the company efficiently uses assets to generate income. It means that
the company is making more from less investment. It is highly dependent on the industry and
comparison should only be done against previous performance or similar companies.
Return on total assets= net income
Total assets
Coke return on assets is 1.94%. This is quite low for the company and it needs to make better
returns from their assets.

Return on common equity

Return on equity measures the return shareholders get out of the amount of money they invest in
the company. It considers the amount of debt financing used as debt magnifies this ratio. In case
of substantial discrepancies between ROA and ROE, the firm needs to look at the level of debt or
perhaps check if their solvency and liquidity ratios are at the acceptable levels. Industries that
experience rapid growth will often have a high ROE. It is also good to look at the ratio over a
number of years to get a good indication of the real idea of a companys historical growth.
Return on equity=

net income
Shareholders equity

Cokes ROE is 23.41%. This means that the company generates $23.41 for every $100 invested
by equity holders.

Price earnings ratio

It is used for the valuation of a company and measures the current share price in relation to
earnings per share. It indicates the amount of dollars investors have to invest for them to earn a

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12

dollar of the companys earnings. A high P/E is an indication that companies are expecting high
earnings growth in future as compared to a company with a low P/E ratio. A low P/E ratio may
mean that the company is undervalued currently or it is experiencing exceptional performance as
compared to its previous years. Taking the P/E ratio for a company over a number of years can
be used to calculate the expected benchmark for determining whether a share is worth buying or
not.
Price earnings ratio= market value per share
Earnings per share
Cokes P/E ratio is 25.17. For better interpretation of this ratio, it is important to look at the P/E
ratio of similar industries.

Market/book ratio
This ratio is used to determine a companys value by undertaking a comparison of the book value
and the market value. The book value is calculated using by looking back at the historical cost of
the company or the accounting value. The market value on the other hand is determined through
market capitalization in the stock market. It is used to determine if a stock is over or
undervalued. It helps determine if investors will be paying over and above what would be left
behind if the business went bankrupt.
Market to book ratio= market value of stock
Book value
Cokes 2015 market to book ratio is 4.47 according to my calculation. This shows that investors
pay 4.47 times of the book value for the companys shares. It is a different case in different
industries. For such a high ratio, it would mean that either the market value of cokes assets is

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13

higher than their book value or that management are expected to create additional value from the
given assets.
Financial position of coca cola
The companys overall financial position is stable. Its liquidity, solvency, efficiency and
profitability ratio all signify that they are doing well financially. Their net income annually is
however, declining generally and could be attributed to competition or increased operational
costs.

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14

References
Finance.yahoo.com,. "KO Historical Prices | Coca-Cola Company (The) Common Stock Yahoo! Finance". N.p., 2016. Web. 12 Jan. 2016.
Financials.morningstar.com,. "Income Statement For Coca-Cola Co (KO) From
Morningstar.Com". N.p., 2015. Web. 12 Jan. 2016.
Hoovers.com,. "!Company_Name! | Company Profile From HooverS". N.p., 2016. Web. 12
Jan. 2016.