Finance-Valuation Measure Analyses Coca Cola Companys Pepsi Product - Case Study Example

Reading Header: FINANCE-VALUATION MEASURE ANALYSES COCA COLA COMPANY’S PEPSI PRODUCT Your institution: Course name: Course instructor: March 09, 2010 Introduction The Coca-Cola Incorporation is the largest beverage company in the world manufacturing, distributing and marketing the non-alcoholic beverage syrups and concentrates and also is one of the major companies in USA known for its flagship products like coca-cola which was invented by John Stith Pemberton was a pharmacist in 1886. The Coca-Cola Company was incorporated in 1892 by Asa Candler who had bought the Coca-cola brand. It currently offers over four hundred brands in over 200 countries making servings of over 1.7 billion on daily basis. The corporation only operates a distribution system that is franchised that dates back to 1889 where the corporation only manufactures syrup concentrates which is distributed/sold to various bottlers in the world from different territories. Its headquarters is in Atlanta, Georgia and its stock listed in New York Stock Exchange/NYSE and its also part of the S&P 500 Index, DJIA, Russell 1000 Growth Stock Index and the Russell 1000 Index. The present CEO and President is Kent Muhtar. Coca-Cola Company Brands involve Powerade, Odwalla, Oasis, Minute Maid, Mello Yello, Lift, Fuze, Fresco, Fanta, Diet Coke, Dasani Water, Coke Zero, Barq’s, Glaceau, Full Throttle, Hi-C, Monster Energy, Tab, Pibb, Relentless, Sprite, Urge, Inca Kola, Vault, Thums Up etc. Thesis statement This research paper deals with the analyses of finance-Valuation of Pepsi brand of the Coca-Cola Company. The main goal and objective is to value shares of the company through reports using DuPont chart where the annual financial reports of years 2009, 2008 and 2007 are prepared using charts involving the holding company’s consolidated income statement and balance sheet per annum DuPont chart. The report also discusses the Return on Equity (ROE), market competitors, sales, costs, net incomes structures, profit margins, and turnovers; leverage/stepping stone, the competitive forces determining profitability as they influence costs, prices, required investment of firms in the industry and element of return on investment including the aspects of competitive advantage by Porter Michael. Hence this report would tackle issue of share valuation that would enable individual in selling his/her shares as far as the Pepsi Brand of the Coca-Cola Company is concerned. Coca-Cola Company Revenue The company sales beverage in more 250 countries in the world according to the 2005 Annual Financial Report, and it further postulates that out of the over 50 billion servings of beverage of all the different brands consumed in the world over on daily basis, those that bear Coca-Cola trademarks owned or licensed by it account for over 1.5 billion amounting to 79% of the company’ total gallon sales being Coke trademarks. While according to the 2007 Annual Financial Report, Coca-Cola Company had gallon sales which were distributed with USA bearing 38% while Brazil Mexico Japan and China bore 42%, with only 19% spreading throughout the remaining world. Ratio analysis There exist varied types of models and ratios that have been utilized by companies currently and the commonest being the Price Earnings ratio (P/E), which is the current market price per share divided by the current earnings per share. This ratio is influenced by the company’s sales growth and earnings, the performance volatility or risks, company dividend policy, company debt-equity structure management quality, and a several other factors. The price earnings ratio of one corporation should be compared with those of other firms belonging to the same industry. Liquidity ratios These ratios tell managers about the company ability to meet short-term financial obligations as they fall due Ratio Formula Role Current ratio Total current assets divided by total current liabilities 2009-14,714/13,169=1.12 2008-12,176/12,988=0.94 2007-11,345/11,989=0.95 Indicates ability to pay current debts. 2009 ratio of 1.12 indicate that firm had more capacity to meet its liabilities than in 208 and 2008. this is an improvement in performance. Quick ratio/acid test ratio (Total current assets minus inventory) divided by total current liabilities 2009-(14,714-2,298)/13,169=0.94 2008-(12,176-2,187)/12,988=0.77 2007-(11,345-2,089)/11,989=0.77 Indicate ability to convert current assets to cash to pay current debts. The firm performed better in 2009 with ratio of 0.94 than in 2008 and 2007 which recorded 0.77 respectively. Working capital ratio Total current assets minus current liabilities 2009-14,714-13,169=1,545 2008-12,988-12,176=812 2007-11,989-11,345=644 Indicate the assets available in the firm hence high ratio is not good because it indicate that the company has too much inventory and are not investing their excess cash. The firm in 2009 had extra cash of 1,545 which is an improvement compared to those of 2008 and 2007 which recorded 812 and 644 respectively. Profitability ratios They indicate how well the management has controlled its expenses in order to make maximum profits by the use company assets. Ratio Formula Role Net profit margin Net profit divided by net sales 2009-1,348/7,169 =0.19 2008-995/7,126=0.14 2007-927/6,989=0.13 Indicates the portion of sales that remains after the expenses. 2009 net profit margin of 0.19 is an improvement from 0.14 and 0.13 of 2008 and 2007 respectively. Return on Equity/ROE Earnings divided by shareholders equity 2009-1,348/20,712 =0.07 2008-995/20,472 =0.05 2007-927/20,223=0.05 Indicate the rate of returns that owners receive on their investments. 0.07 of 2009 is an improvement from 0.05 of 2008 ad 2007 respectively hence means company made more profits that previous two years. Return on investment/ROI Net profit divided by total assets 2009-1,348/43,103 =0.03 2008-995/40,519 =0.02 2007-927/38,678=0.02 Indicate the effectiveness overly in generation of profit from investment. 0.03 indicate that firm made more profits compared to ROI of 0.02 of 2008 and 2007. Gross profit margin (Sales minus cost of goods sold) divide by sales 2009-(7,169-2,590)/7,169 =0.64 2008-(7,126-2,624)/7,126=0.63 2007-(6,989-2,897)/6,989/=0.59 Indicate profitability of corporation after cost of sales has been deducted. The company made a slight increase in the profits indicated by increase from 0.63 to 0.64 gross profit margins. Efficiency/management ratios They indicate to management how fast the resource of the company is able to be converted to sales or cash. Ratio Formula Role Inventory turnover Cost of goods sold divided by inventory 2009-2,590/2,298=1.13 2008-2,624/2,187=1.2 2007-2,897/2,089/=1.38 Indicate speed in which inventory is turned to sales. These ratio reveal the number of times inventory is changed into sales hence 2009 1.13 is a drop from 2008 1.2 which had also dropped from 1.38 in 2007. Fixed asset turnover Sales divided fixed assets 2009-(7,169/(43,103-14,714) =0.25 2008-(7,126/(40,519-12,176)=0.25 2007-(6,989/(38,678-11,345)=0.26 Indicate efficiency in utilizing existing fixed assets in sales generation. This ratio indicate how many times fixed assets is changed into sales hence there is slight change in this ratio in the three years. Total asset turnover Sales divided total assets 2009-(7,169/43,103)=0.17 2008-(7,126/40,519 =0.18 2007-(6,989/38,678=0.18 Indicate how efficient the company is using its total resources in sales generation. Indicate how many times total assets are changed into sales hence there is a slight drop from 0.18 to 0.17 in 2009. Average collection period Accounts receivable divided by average daily credit sales 2009-(3,139 /4,310)=0.73 2008-(3,090 /3,975 =0.78 2007-(2,897/3,498)=0.83 Indicate how fast company is able to collect its debts/receivables. This ratio also reveal time duration that company debts become collectible hence ratio of 0.73 indicate an improvement in debt collection period compared with those of previous years. Leverage/Debt Management It indicates the effect and degree in which the corporation uses of debt financing is to its operations. Ratio Formula Role Debt ratio Total debt is divided by total assets 2009-(3,139 /43,103)=0.07 2008-(3,090 /40,519 =0.08 2007-(2,897/38,678)=0.07 Indicate extent in which total assets are financed through debt borrowing. Also indicate extent in which debts are covered by total assets hence thee is slight changes in debt ratio in the three recording either a 0.07 or 0.08. Debt to equity ratio Total debt is divided by total stockholder’s equity 2009-(3,139 /20,712 )=0.15 2008-(3,090 /20,472 =0.15 2007-(2,897/20,223)=0.14 Indicate ratio of debt to stockholders investments. The extent in which debt is covered by equity has remained constant for the two consecutive years with ratio of 0.15. Times interest earned Earnings before interest and taxes divided by total interest charges 2009-(1,863/85)=21.9 2008-(1,874/117)=16.0 2007-(1,898/123)=15.4 Show ability to corporations to meet its interest’s obligations should profit plummet. 2009 ratio of 21.9 indicate that interest is covered by earnings 21 times while in 2008, it covers 16 times while in 2007, it covers 15.4 times hence it means that there is an improvement in earnings capacity of the firm. Ratio analysis ROE is a key indicator of financial health in business hence concerns the role in management reporting which is all about communication. This key measure of financial health can be very difficult for non-financial managers and could be difficult to comprehend because of all the fuss associated with its calculation. It indicates the rate of returns that owners receive on their investments. 0.07 of 2009 is an improvement from 0.05 of 2008 ad 2007 respectively hence means company made more profits that previous two years The ROE compares the company sales with growth rate hence should growth rate be faster than ROE then financial structure is weakened while slower growth would strengthen it. Slightly over-simplified, your ROE compares directly with your growth rate in sales. If you grow faster than your ROE, you weaken your financial structure; if you grow more slowly than your ROE, you strengthen your financial structure. It’s also difficult to use ROE because it’s a Top-level ratio that normally affected virtually by all the other financial performance measures. The ROE is equal to the product of three ratios according to the DuPont formula and these ratios involve profit margin, which is attained by dividing net profit by sales, Assets-turnover ratio which is obtained by dividing sales by total assets, and the leverage ratio attained by dividing total assets by beginning net worth normally approximated to be equal with one plus debt to equity ratio. The report above maps out the associations between the balance sheet and the income statement as they amalgamate together to generate the three ratios that are combined hence generate the Return on Equity/ROE. Trend analysis refer to comparison of ratios over time as especially years hence this year to year comparison is able to highlight the trends and flag out the need to take corrective actions and this trend analysis work best with five to three years ratio trend. Hence in our analysis Coca-Cola is on an upward trend in its profit margin hence the company should institute measures that would enable it meet the growing demand for its product. The cross sectional ratio analysis on the other hand compares the ratio of two or more corporations in similar business lines and also compares to the industry average and these averages are normally available from trade associations and are annually updated. 2009 DuPont Chart This chart illustrates the relationship between the business components and the key ratios hence the data should only be entered into the boxes in order to calculate the business key ratios. Top of Form Income Statement Sales 6,989 Other Incomes - COGS 2,467 G&A 2,345 Depreciation 200 Other Expense 76 Gross Profit 4,345 Operating Expenses 2456 Earnings before interest & taxes (EBIT) 1,663 Interest Paid 26 Taxes 413 Net Profit 1,059 Sales 6,989 EBIT 0.15 Total Assets 42,103 Profit Margin 0.15 EBIT on Assets 0.3 Return on Equity 2.96 Assets Cash 6,716 Receivables 2,090 Inventory 2,098 Other Assets 1,493 Fixed Assets 27,389 Current Assets 13,714 Current Liabilities 12,169 Sales 6,989 Total Assets 42,103 Working Capital 1,545 Assets Turnover 0.26 Liabilities & Equity Payables 5,451 Notes Payables 6,601 Other Liability 2,644 Current Liabilities 12,169 Non-Current Liabilities 4,917 Capital 19,712 Retained Earnings 37,911 Total Liabilities 20,130 Ending Net Worth 19,712 Total 42,103 Beginning Net Worth 39,519 Leverage 1.05 Bottom of Form 2008 DuPont Chart This chart illustrates the relationship between the business components and the key ratios hence the data should only be entered into the boxes in order to calculate the business key ratios. Top of Form Income Statement Sales 7,379 COGS 2,624 G&A 2,796 Depreciation 230 Other Expense 85 Gross Profit 4,755 Operating Expenses 2796 Earnings before interest & taxes (EBIT) 1,959 Interest Paid 117 Taxes 448 Net Profit 1,511 Sales 7,379 EBIT 0.20 Total Assets 40,519 Profit Margin 0.14 EBIT on Assets 0.2 Return on Equity 0.05 Assets Cash 4,701 Receivables 3,139 Inventory 2,187 Other Assets 1,733 Fixed Assets 28,343 Current Assets 12,176 Current Liabilities 13,169 Sales 7,169 Total Assets 40,514 (993) Assets Turnover 0.17 Liabilities & Equity Payables 6,205 Notes Payables 6,066 Other Liability 3,011 Current Liabilities 13,169 Non-Current Liabilities 6,878 Capital 20,472 Retained Earnings 38,513 Total Liabilities20,047 Ending Net Worth/equity 20,472: Total 40,519 Leverage 2.04 Bottom of Form 2007 DuPont Chart This chart illustrates the relationship between the business components and the key ratios hence the data should only be entered into the boxes in order to calculate the business key ratios. Top of Form Income Statement Sales 7,379 Other Incomes - COGS 2,624 G&A 2,796 Depreciation 230 Other Expense 85 Gross Profit 4,755 Operating Expenses 2796 Earnings before interest & taxes (EBIT) 1,959 Interest Paid 117 Taxes 448 Net Profit 1,511 Sales 7,379 EBIT 0.20 Total Assets 40,519 Profit Margin 0.14 EBIT on Assets 0.2 Return on Equity 0.05 Assets Cash 4,701 Receivables 3,139 Inventory 2,187 Other Assets 1,733 Fixed Assets 28,343 Current Assets 12,176 Current Liabilities 13,169 Sales 7,169 Total Assets 40,514 Working Capital 993 Assets Turnover 0.17 Liabilities & Equity Payables 6,205 Notes Payables 6,066 Other Liability 3,011 Current Liabilities 13,169 Non-Current Liabilities 6,878 Capital 20,472 Retained Earnings 38,513 Total Liabilities20,047 Ending Net Worth 20,472 Total 40,519 Beginning Net Worth 19,879 Leverage 1.97 Bottom of Form The DuPont Chart The DuPont Corporation has helped create a financial analysis chart that is basically based on the relationships between the various ratios hence it’s the best chart financial tool available and is recommendable. The chart itself is demonstrated as below and it shows that company management has three levels that it can use to control ROE: The company net margin ratio The company asset turnover ratio The company financial leverage ratio Any decision that regards the sales volume, prices or the assets and the ratio debt to equity has an impact on the Return on Equity/ROE; hence this chart helps in considering global positioning of the organization. Comparison The Return on Equity is on an upward trend from 2007 to 2009 where the rate recorded increased from 1.97 to 2.04 in 2008 and then to 2.96 in 2009 hence the company ought to prepare to increase its capacity to accommodate more increases. The leverage on the other hand has also decreased meaning that the company should adjust its capital structure by reducing the debt portion of its capital though it’s on a safer trend at present as the rate decreased from 2.04 in 2008 to 1.06 in 2009. Earnings before interest and tax on the other hand has increased from 0.2 in previous years to 0.3 in 2009 hence the company has made more profits this season compared to previous years. The asset turnover ratio has also increased from 0.2 to 0.26 hence there is an upward trend in business operations. Coca-Cola Financial Statements The financial information above belonging to Coca-Cola Corporation should be analyzed in conjunction with the discussion and analysis of results and conditions of notes and operations of management to the consolidated statements of finance that are contained in the 2008 and 2009 financial quarterly reports and 2008 annual reports. Hence as result the Securities and Exchange Commission/SEC Rule Release No. 33-9002 head lined, "Interactive Data to Improve Financial Reporting," company is mandated to submit Interactive Data inform of attachment EX-101 for certain Securities Act and Exchange Act filings and this Rule is effective for the Corporation as from the beginning with second quarter 2009 interim statements of financial filed on Form 10-Q. The DuPont Formula This is a method which Coca-Cola has used over the years to measure its financial performance and was originated by f. Brown Donaldson in the 1920s who the treasurer of I.E de Pont du Nemours & Company in 1912 and he used this formula to analyze profitability at General Motors Corporation as well as at DuPont. The Coca-Cola Company integrates both elements of balance sheet and the income statement in order to equate Return on Equity with leverage, profitability and asset utilization. The company multiplies Turnover Profit with Asset Equity Return on Margin and by Multiplier in order to obtain Equity, hence at broader perspective this would show the relationship between the five main/key financial ratios with the ROI i.e. Return on Investment being an integrating concept. Margin Turnover Investment return on Investment/Return on Equity X Multiplier = Profit Asset Return on X. Comprehending the deeper underlying measures reveal the mechanisms on how this formula monitors the health pulse of financial performance of the company and these five components involve the dividend of the two key measures of accounting involving Total Assets X Net Income Revenue = Total Assets Total Equity X Net Income Total Assets = Crystal/Total Equity. At apex of this Du Pont chart is the ROTA/ Return on Total Assets, which is distinct as the product of the TATR/Total Assets Turnover Ratio and the NPM/Net Profit Margin hence as a formula, it can be demonstrated as: (Net profit/Total asset)= (Net profit/Net sales) X (Net sales/Total assets)             (ROTA)                         (NPM)                           (TATR) This disintegration enables managers of Coca-Cola Company to comprehend how the ROTA / return on total assets are affected by the total assets turnover ratio and the net profit margin. The DuPont chart’s left side demonstrates the details that underlie the ratio net profit margin, and a detailed analysis/examination of this section reveal areas that require cost reductions to be effected in order to improve the net profit margin of the company. On the other hand, right side of this chart demonstrate determinants of ratio total assets turnover, and should this be supplemented by the analyses of other ratios like debtors, inventory, fixed asset turnover ratios, hence deeper understanding into inefficiencies/efficiencies of utilization of assets would be sought. The Du Pont analysis basics are able to be extended to discover ROE/ Return on Equity determinants, hence: ROE/Return on equity= Net profit Margin X Asset turnover X Leverage (Net profit/Equity)= (Net profit/Sales) X (Sales/Total assets) X (Total assets/Equity)             (ROE)               (NPM)                           (TATR)                     1/ (1-DR) N/b- DR is the debt ratio= debt (D)/assets (A) Disintegrating the Return on equity into these three component parts enables evaluation of managers can well manage the assets of the company, its expenses, and debts, hence directors have three ways basically for improving performance operations in terms of Return on Assets and Return on Equity, and these include: Increasing the capital asset turnover Increasing the operating profit margins Changing financial leverage All of these main primary drivers are affected by the particular decisions on efficiency, productivity, cost control, marketing choices etc.  Importance of DuPont analysis The end product of DuPont formula is the Return on Equity hence its sensical to just skip to end and divide net income by total hence time pressed analysts are seduced to this expedient approach but however this exercise of using all root components reveal a lot about relative financial health of company that is easily overlooked should highly distilled Return on Equity ratio is utilized. It also provide trends both well and ill through the computation of basic components over time, just as Brown used originally the formula within the company with direct application within purchasing and sales departments in order to explain the ROA/ Return on Assets. This formula is also useful in analyzing changes over time and teaching workers on impacts on company results and purchasing and also helps analyze merits of prospective investments. This formula is also useful for any size investment environment for corporate financial decisions as it helps attain efficient information using accurate data extracted from the financial statements. The managers use The DuPont formula for stock selection. All decisions that affect per unit costs, product prices, efficiency or volume have effects on the turnover ratios or profit margin. Also decisions that affect the ratio and amount equity or debt used will also affect the overall cost of capital and the financial structure of the company. Hence these financial concepts are very significant in evaluating performance since every industry/business is competing for the limited capital resources, therefore making the understanding of the interrelationships among the different ratios like leverage, turnover ratios, and profitability ratios paramount as it helps companies to invest in areas where the expected risk of return adjusted optimal/maximum. References Brother ton B. (2003), The International hospitality industry: structure, characteristics and issues: Hospitality management, 2nd Ed., Butterworth-Heinemann: ISBN0750652950, 9780750652957. Icon Group International, Inc. Staff, (2001), Sofia’s place Hospitality Corp.: Competitive International Financial Gap Analysis and Benchmarks, Icon Group International: ISBN059713118X, 9780597131189. Standard and Poor’s Corporation, (2008), Standard & Poor's register of corporations, directors And executives, Issue 2, Standard & Poor's Corp, University of California. Read More