Assignment # 2 Ratio Analysis Business Finance

Balance sheet of Coca-Cola Company:

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

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

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 Assets 7907.0 6,903.0 8,493.0 8,326.0 9,561.0

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 Payable 1226.0 929.0 1,380.0 1,370.0 13,721.0

Short-Term Debt 5283.0 3,268.0 6,052.0 6,531.0 6,800.0

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 Debt 2457.0 1,314.0 3,277.0 2,781.0 5,059.0

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

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

Sold
Gross Profit 18315.0 15,924.0 18,451.0 20,570.0 19,902.0

Gross Profit 64.8% 66.1% 63.9% 64.4% 64%

Margin
SG&A Expense 10716.0 9,431.0 10,945.0 11,774.0 11,671.0

Depreciation & 1109.0 938.0 1,163.0 1,228.0 1,236.0

Amortization
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 operating 251.0 297.0 841.0 (902.0) 121.75.0
Income
No operating -- -- (220.0) (105.0) (181.67.0)
Expenses
Income Before 7296.0 6,578.0 7,873.0 7,439.0 8,946.0
Taxes
Income Taxes 1674.0 1,498.0 1,892.0 1,632.0 2,040.0

Net Income After 5622.0 5,080.0 5,981.0 5,807.0 7,605.0

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

Liquid Ratio:
Current Ratio 2005 2006
Current ratio = Current assets Current ratio = Current assets
Current Liabilities Current Liabilities
Current ratio = $10907
Current assets = $8441
Current
$11701Liabilities $8890
=
= $12105
0.932 cents = 0.94 cents
$13225
= 0.915 cents
 Assignment # 2 Ratio Analysis Business Finance

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

Current Ratio

1
0.8
0.6
Ratio

0.4
0.2
0
2005 2006 2007 2008
Interpretation:
Years
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
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
Acid test ratio = Current
911701asset – Inventories $8890
= Current Liabilities
0.759 cents = 0.76
= $12105 – 2220
$13225
= 0.75
 Assignment # 2 Ratio Analysis Business Finance

2007 2008
Acid test ratio = Current asset – Inventories
Current Liabilities
= $12176 – 2187
$12988
= 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
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 debts Debt to equity ratio = Current liabilities + long term debts
Shareholders equity Shareholders equity
Debt to equity ratio = Current liabilities + long term debts
= $14158 = $10204
Shareholders equity
$19712 $16920
= $16502
= 0.718 = 0.60
$21744
= 0.76
 Assignment # 2 Ratio Analysis Business Finance

2007 2008
Debt to equity ratio = Current liabilities + long term debts
Shareholders equity
= $15769
$20472
= 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
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
Total assets
= $16502
$43269
= 0.38
 Assignment # 2 Ratio Analysis Business Finance

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
Total assets
= $15769
$40519
= 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.

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
Long term debt to total =
= $2457
Long term debts = $1314
Capitalization $22169
Total capitalization $18234
=
= 0.11
$3277 = 0.07
$25021
= 0.13
 Assignment # 2 Ratio Analysis Business Finance

2007 2008
Long term debt to total = Long term debts
Capitalization Total capitalization
= $2781
$23253
= 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.

Gross Profit Margin Ratio:

2005 2006
Gross Profit margin ratio = Net sales – CGS Gross Profit margin ratio = Net sales – CGS
Net sales Net sales
= $28296 – 9981 = $24088 – 8164
Gross Profit margin ratio = Net$28296
sales – CGS $24088
= Net
64.7 sales
% = 66 %
= $28857 – 10406
$28857
= 63 %
 Assignment # 2 Ratio Analysis Business Finance

2007 2008
Gross Profit margin ratio = Net sales – CGS
Net sales
= $31944– 11374
$31944
= 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
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
Net profit margin ratio = $28296
Net profit after taxes $24088
= 19.87sales
Net % = 21 %
= $5981
$28857
= 20.7%
Assignment # 2 Ratio Analysis Business Finance

2007 2008
Net profit margin ratio = Net profit after taxes
Net sales
= $5807
$31944
= 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:
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:
 Assignment # 2 Ratio Analysis Business Finance

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:
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:
 Assignment # 2 Ratio Analysis Business Finance

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

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 sales
Receivables
= $28857
$8317
= 8.69 times
 Assignment # 2 Ratio Analysis Business Finance

Receivable activity ratio = Annual credit sales Receivable activity ratio = Annual credit sales
Receivables Receivables
= $28296 = $24088
$2998 $2587
= 10 times = 9.3 times

2007 2008
Receivable activity ratio = Annual credit sales
Receivables
= $31944
$3090
= 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:
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 Receivables Receivable turnover in days= Days in year x Receivables
Annual credit sales Annual credit sales
=
Receivable turnover in days= Days365
in xyear
2998x Receivables = 365 x 2587
28296
Annual credit sales 24088
=
= 39
365days
x 8317 = 39 days
$28857
= 42 days
 Assignment # 2 Ratio Analysis Business Finance

2007 2008
Receivable turnover in days= Days in year x Receivables
Annual credit sales
= 365 x 3090
$31944
= 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
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 sold Inventory activity turnover ratio= Cost of good sold
Average inventory Average inventory
= $9981 = $8164
Inventory activity turnover ratio= $2016of good sold
Cost $1641
= 5 times inventory
Average = 5 times
= $10406
$2220
= 4.7times
 Assignment # 2 Ratio Analysis Business Finance

2007 2008
Inventory activity turnover ratio= Cost of good sold
Average inventory
= $11374
$2187
= 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
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 Inventory turnover in days= Days in year x Inventory
CGS CGS
Inventory turnover in days=
= Days
365 x in year x Inventory
2016 = 365 x 1641
9981 CGS $8164
=
= 365 x 2220
73 days = 75 days
10406
= 78 days
 Assignment # 2 Ratio Analysis Business Finance

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

Inventory Turn Over in Days

100
80
60
Ratio

40
20
0
2005 2006 2007 2008
Years

Interpretation:
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
Total assets turnover = $28296
Net sales = $24088
Total
$37917assets $29963
= 74 %
$28857 = 80 %
$43269
= 66 %
Assignment # 2 Ratio Analysis Business Finance

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

2009 = 30990/48671
= 63%

Total Asset Turn Over Ratio

100
80
60
Ratio

40
20
0
2005 2006 2007 2008
Years

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:
Assignment # 2 Ratio Analysis Business Finance

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,
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:
 Assignment # 2 Ratio Analysis Business Finance

The assignment is about the trend analysis of any firm.

Therefore, we have selected the balance sheet and the income
statement of Coca-Cola Company. Four years’ data 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 analysts and what
are those things they should keep in mind.

Balance Sheet of Coca-Cola Company:

Assets Dec 08 Dec 07 Dec 06 Dec

2005
Current Assets

Cash 4,701.0 4,093.0 2,440.0

3744
Net Receivables 3,090.0 3,317.0 2,587.0
2998
Inventories 2,187.0 2,220.0 1,641.0
2016
Other Current Assets 2,198.0 2,475.0 1,773.0
2148
Total Current Assets 12,176.0 12,105.0 8,441.0
10907
Net Fixed Assets 8,326.0 8,493.0 6,903.0

7907
Other Noncurrent Assets 20,017.0 22,671.0 14,619.0

19102
Total Assets 40,519.0 43,269.0 29,963.0
37917

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

Dec
Current Liabilities
2005
Accounts Payable 1,370.0 1,380.0 929.0

4046 1226
Short-Term Debt 6,531.0 6,052.0 3,268.0

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

182055283
Total Current Liabilities 12,988.0 13,225.0 8,890.0 5191

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

11701
Other Noncurrent Liabilities 4,278.0 5,023.0 2,839.0 --

19712

19712

2317.2
 Assignment # 2 Ratio Analysis Business Finance

Total Liabilities 20,047.0 21,525.0 13,043.0

Shareholder's Equity

Preferred Stock Equity -- -- --

Common Stock Equity 20,472.0 21,744.0 16,920.0

Total Equity 20,472.0 21,744.0 16,920.0

Shares Outstanding (mil.) 2,317.2 2,317.2 2,317.2

Income Statement of Coca-Cola Company:

Revenue 31,944.0 28,857.0 24,088.0 28296

Cost of Goods Sold 11,374.0 10,406.0 8,164.0 9981

Gross Profit 20,570.0 18,451.0 15,924.0 18315

Gross Profit Margin 64.4% 63.9% 66.1% 64.8%

SG&A Expense 11,774.0 10,945.0 9,431.0 10716

Depreciation & Amortization 1,228.0 1,163.0 938.0 1109

Operating Income 7,877.0 8,329.0 6,798.0 7668

Operating Margin 24.7% 28.9% 28.2% 27.2%

Non operating Income (902.0) 841.0 297.0 251

Non operating Expenses (105.0) (220.0) -- --

Income Before Taxes 7,439.0 7,873.0 6,578.0 7296

Income Taxes 1,632.0 1,892.0 1,498.0 1674

Net Income After Taxes 5,807.0 5,981.0 5,080.0 5622

Continuing Operations 5,807.0 5,981.0 5,080.0 5622

5622
Discontinued Operations -- -- --
--
5622
Total Operations 5,807.0 5,981.0 5,080.0
20%

2.40

1.37
Assignment # 2 Ratio Analysis Business Finance

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

Net Profit Margin 18.2% 20.7% 21.1%

Diluted EPS from Total Net Income 2.49 2.57 2.16

($)

Dividends per Share 1.52 1.36 1.24