Accounting - the Ratios - Case Study Example

Accounting - the Ratios According to the dollar change, Coca-Cola depicted a positive economic performance in 2010. Using 2009 as the base period, the company financial performance revealed a growth trend of all the current assets and fixed assets. Coca-Cola trend analysis shows that the company revenue increased by 113.32% while the cost of goods sold increased by1166.64%. As a result of the increase in the cost of goods sold, the company gross profits depicted a slower growth of 112.68% in 2010. In 2009, Coca-Cola working capital was 383000.00% that reduced to 307100.00% in 2010. Since the two ratios are positive, this is an indication that the company current assets are able to pay the short-term obligations. The financial statements of Coca-Cola depict cash ratios of 46.76% and 51.62% in 2010 and 2009 respectively. This indicates that in 2009 the company could quickly repay its debts. In addition, creditors were more willing to extend a debt to the company. According to the Coca-Cola financial reports, the company recorded cash to current asset ratio was 40.11% 40.36% in 2009 and 2010 respectively. This means that the company was reasonably able to cover current debt as well as effectively allocate its resources for the expansion of its operations. The inventory turnover was 478.98% in 2010 and 471.03% in 2009. This indicates that the company made high sales in 2010 as compared to 2009. The number of days inventory in 2009 was 7749.47% while in 2010 it was 7620.04%. This shows that in 2009 the demand for the company products was less than in 2010. On the other hand, the low number of inventory ratio in 2010 depicts that there was a possibility that the company had not enough inventory to meet the market demand. Fixed asset turnover in 2010 was 68.40% while in 2009 it was 99.58%. This is an indication that in 2010, Coca-Cola was more effective as compared to 2009 in terms of utilizing fixed assets to generate revenues. Total asset turnover in 2009 was 63.67% while in 2010 it stood at 48.16%. This depicts that in 2009, the company was more effective at using its assets to generate total revenue and sales. In 2009 and 2010 the company profit margin on sales ratios were 22.00% and 34.00 % respectively. This implies that the company had net incomes of $0.22, $0.34 for each dollar of sales in 2009 and 2010. ROI was 16.00% and 14.00% in 2010 and 2009 respectively. This shows that the investments undertaken by Coca-Cola in 2010 were more efficient leading to more returns in that financial year. In 2009 and 2010 Coca-Cola gross margin ratio was equal (64.00%). This indicates that in 2009 and 2010, the company retained equal percentage of its sales to cater for future obligations and other expenses. In 2009 the operating cash flow to income was 80.38% while in 2010 it was 118.53%. This was due to high consolidated income in 2010 as compared to 2009.In addition, the company obtained high incomes from deferred income taxes, foreign currency adjustments as well as stock based compensation scheme. The book value/shares ratios in 2009 and 2010 were 1366.36% and 1100.56% respectively. This indicates that in the Coca-Cola books of accounts a share was valued at $13.66 in 2010 and $11 in 2009. Fixed asset to equity capital ratios in 2009 was 122.78% while in 2010 it stood at 163.94%. Since the ratios were great than 100% in both years, it means that most of the company’s productive capacity was financed by debt and long-term loans instead of retained earnings and shareholders investments (Billie, 2011). An appropriate fixed asset to equity capital ratio should be 65%. Net tangible asset to long-term debt ratios were 104.89% and 188.99% in 2010 and 2009 respectively. Since the ratio was high in 2009, it indicated that it was easier for Coca-Cola to raise funds through debt capital due to the fact that lenders were guaranteed of the security of their money in case the company experienced liquidation. Cash flow/share ratio in 2009 was 355.45% while in 2010 it was 415.88%. This implies that the company had more effective business model and its operations were stronger in 2010 than in 2009. On the other hand, total debt ratios were 57.05% and 47.92% in 2010 and 2009 respectively. Since the ratios were less than 100%, it indicated that in both financial years, the company had more assets than debt. In 2009, Coca-Cola registered a total debt to equity ratio of 92.03% while in 2010 it was 132.85%. This means that Coca-Cola aggressively financed its activities with debt in 2010 as compared to 2009 financial year. According to the company cash flow statement, operating cash flow in 2009 stood at 8,186 while in 2010 it was 9,532(figures in millions $). This implies that in 2010, Coca-Cola generated more cash from its business operations than in 2009. This led to a strong liquidity that enabled the company to meet short term obligations in 2010. Analysis of Coca-Cola performance According to 2010 and 2009 consolidated statements of income, Coca-Cola financial performance was better in 2010. For instance, the company gross profit increased from 19,902 to 22,426 in 2010. This was equivalent to 12.68% increase in profits. In addition, the increased operating incomes in 2010 led to an increment of income before tax in the same year. In terms of shareholders returns, the company income per share increased from $2.93 in 2009 to $5.06 in 2010. This led to enhancement of shareholders trust towards the company due to effective strategies emulated by the company’s top management team (Laermer and Simmons, 2007). Despite the high long-term debt that Coca-Cola experienced in 2010, the company total equity remained high as compared to 2009 financial year. Major factors that led to high current assets in 2010 were increases in short-term investments, marketable securities, inventories, prepaid expenses as well as accounts receivables. The consolidated statements of cash flows indicate a 16.44% increase of cash from operating activities in 2010 as compared to 2009. Key factors that led to the improved financial performance in 2010 include the acquisition of Coca-Cola Enterprises Incorporation, a Northern American based firm, product diversification and promotional strategies especially during the FIFA world cup in South Africa. References Billie, N. (2011).Fixed Assets to Equity Ratio. Available from http://www.ehow.com/info_8512641_fixed-assets-equity-ratio.html Laermer, R., Simmons, M. (2007). Punk Marketing. New York: Harper Collins. Read More