The selected company is Coca-Cola. The company is in the beverage-carbonated soft drink industry. The industry is highly concentrated with very few players. The key competitor of Coca Cola is PepsiCo. Six financial ratios were selected to conduct an analysis of the financial performance and position of Coca-Cola. The ratios are current ratio, quick ratio, operating profit margin, inventory turnover ratio, price earnings ratio and debt-equity ratio.
Current ratio
Current assets/ current liabilities
33,395/ 26,930 = 1.24
This means that the company has 1.24 dollars of current assets for every dollar of current liabilities. Therefore, it can comfortably settle all its obligations using current assets.
Quick ratio
Current assets-inventory/ current liabilities
33,395-2,902/26,930 = 1.13
This means that the company has 1.13 dollars of its most liquid current assets for every dollar of current liabilities. Therefore, it can comfortably settle all its obligations that are due using the most liquid assets.
Operating profit margin ratio
Operating income/net sales
4483/9605 = 47 47%
It implies that for every dollar of sales, the company generates 0.4747 dollars as operating profit. Coca Cola has a high margin which translates into higher net income.
Inventory turnover ratio
Cost of goods sold/ average inventory
17482/ 2902 = 6.02
This indicates how the company manages its inventory. The inventory of Coca Cola has a turnover of 6.02.
Price earnings ratio
Market value per share/ earnings per share
45.05/ 1.67 = 26.98
The ratio is an indicator of the true worth of the shares. It shows investors the investment they make for every dollar they earn from the company.
Debt-equity ratio
Total liabilities/ shareholder’s equity
64,329/25764 = 2.50 or 250%
The company has liabilities that are 2.5 times the equity. Coca Cola has adopted an aggressive debt growth strategy. This implies a high bankruptcy risk.
Comparing to the Industry
Coca-Cola has the highest earnings per share and dividend payout in the industry (O’Brien, 2015). Pepsi is their biggest competitor in the industry and have had similar raises in dividends each year compared to Coca-Cola but the Pepsi Company is much smaller of a company so they cannot match the amount of shares on the market and what Coke can do in the form of advertisement and other things (O’Brien, 2015). The only big difference that is in the favor of Pepsi is the amount of employees that they have which is shocking because Coca-Cola is a much larger company.
The industry average current ratio is 1.275. It is higher than that of Coca-Cola Company. Coca-Cola has a worse liquidity management and higher liquidity risk relative to the industry with regard to the current assets.
The industry average quick ratio is 1.09. It is lower than that of Coca-Cola Company. Coca-Cola has a better liquidity management and lower liquidity risk relative to the industry with regard to the most liquid assets.
The industry average inventory turnover ratio is 8.23. It is higher than that of Coca- Cola Company. Coca-Cola underperforms in terms of inventory management relative to the industry.
Why Ratios were Picked
The reason the team picked these six ratios was to see exactly how the market can change where the business will head. Coca-Cola has been known for raising dividends to their stockholders each year and that is primarily because of their growth and these ratios that were picked show how they rely a lot on debt which can help to fund those additional dividends (Coca Cola, 2016). The quick ratio was picked to see at a quick glance how much money the company has to pay on their debts because it is such a large company it will be a big part of how they stay profitable (Coca Cola, 2016). The operating profit margin ratio was picked to see how they are doing with their debt obligations. In the 10k report it showed how the company does have 5 series of notes outstanding which could be in the millions outstanding to their bond holders. Creditors will want to know how this ratio will affect them and the risk of lending to the company.
References
Archive of Annual and Other Reports - The Coca-Cola Company. (2016, February 25).
Retrieved March 19, 2016, from http://www.coca-colacompany.com/investors/annual-other-reports/
O'Brien, S. (2015, January 22). Coca Cola Vs. Pepsi: Comparing Sales, Earnings & More.
Retrieved March 19, 2016, from http://www.dividend.com/how-to-invest/7-charts-that-compare-coca-cola-and-pepsico-ko-pep/
Stock Analysis on Net. (2016, March 21). Coca Cola (KO) Liquidity Analysis. Retrieved from https://www.stock-analysis-on.net/NYSE/Company/Coca-Cola-Co/Ratios/Liquidity: https://www.stock-analysis-on.net
Stock Analysis on Net. (2016, March 21). Coca Cola (KO) Short-term (Operating) Activity Analysis. Retrieved from https://www.stock-analysis-on.net: https://www.stock-analysis-on.net/NYSE/Company/Coca-Cola-Co/Ratios/Short-term-Operating-Activity#Ratios-Summary
