COCA-COLA FINANCIAL RATIOS FOR ANALYSIS 2021 1
COCA-COLA FINANCIAL RATIOS FOR ANALYSIS 2021 6
Unit VI Scholarly Activity
Columbia Southern University
Liquidity
In this section we will proceed to measure and look at Coca Cola’s ability to pay its immediate obligations that may fall due. This will entail a look at not only its loan obligations, but also the other current liabilities that are inexistence that could include vendor payments, utilities, tax and salaries (CFI Education Inc. 2022). To determine the company ability to meet its current obligations we will look at its current ration and quick ratio.
The current ration of the company is determined using the formula (Current Ratio = Current Asset / Current Liability), a look at the company financials we can observe that the current assets for the year 2021 amounted to 22,545,000,while its current liabilities for the same year were 19,950,000 (The Coca-Cola Company, 2022). In essence therefore the current ratio of the company were (22,545,000/19,950,000) =1.13. Meaning therefore that for the company to pay current liabilities of $ 1, the company has $1.13 of current assets. In essence therefore the company has adequate current assets to settle its current liabilities (CFI Education Inc. 2022). In regards to its quick ratio (Quick Ratio = (Current Assets – Inventory) / Current Liability) = ((22,545,000-3,414,000-2,994,000)/19,950,000) =0.81. Here we are looking at the ability of the company to meet its short-term debts obligations using its most liquid assets. From the calculation it shows that Coca Cola quick ratio is not healthy, as it is in a low solvent position an implication that its current assets are largely stuck in lesser liquid assets that is inventory and prepaid expenses. If we look at it immediate competitor PepsiCo we establish that with a current and quick ratio in 2021 of 0.83 and 0.56 respectively (PepsiCo Inc., 2022). We can conclude that the Coca Cola Company is doing much better, however it is not headed in the right direction for the ideal standard current ratio and quick ration ought to be 2: 1 and 1:1.
Profitability
This are ratios that measure the profit that Coca Cola generates, therefore we will determine this using financial tools that would help us measure the ability of the company to create earnings , given its level of expenditure (CFI Education Inc. 2022). Looking at both its income statement and the balance sheet to assess how the company performed in 2021. In this case a higher value compared to PepsiCo would mean a better performance and vice versa is true. In this case we will look at its return on equity and return on assets.
In the year 2021 as can be established form the company financials we can establish that Coca Cola had net income attributable to shareowners and equity attributable to shareowners amounting to $9,771,000 and $22,999,000 respectively (The Coca-Cola Company, 2022). Therefore, (net income attributable to shareowners/ equity attributable to shareowners) = 9,771,000/22,999,000=42.48%. Meaning therefore that, the company’s return on equity for the year 2021 was 42.48%, thus a comparison of profits earned by the company to the value of its shareholders equity reflects that Coca Cola earns $ 42.48 on every $100 of its share capital. On the contrary we can establish that PepsiCo had a ROE of 47.48 % that is higher than Coca Cola. This means PepsiCo had the higher return on equity and thus the better performing company. We can arguably conclude that with this comparative performance Coca Cola appears to be unhealthy and not headed in the right direction. In regards to return on assets we gather that Coca Cola in the year 2021 had, net income attributable to shareowners and total assets of $9,771,000 and 94,354,000 respectively (The Coca-Cola Company, 2022). Thus, ROA = (Net income attributable to shareowners/Total assets) = $9,771,000/94,354,000=10.36%. Whereas PepsiCo is at 8.25% (PepsiCo Inc., 2022), meaning that Coca Cola had better use of its assets in the generation of returns for the firm compared to PepsiCo.
Solvency
In this section we will look at the ability of Coca Cola Company to pay off its entire liabilities, using cash that is generated by the business internally. Therefore, we will establish whether the cash flows generated by the company is sufficient to cover short-term and long-term liabilities or not. In essence, a higher value reflects a better liquidity position for the company and the vice versa is true (CFI Education Inc. 2022).. To establish this we will look at both debt to equity ratio and debt to asset ratio of the company and compare with PepsiCo’s.
The debt to equity ratio will help us identify the level of company financing that I funded by debt and the level funded by equity. A higher ratio would mean a higher leverage and risk as the company would have a significant debt obligation (CFI Education Inc. 2022). In 2021 we can establish from the financial records of Coca Cola that it had total debts of $42,761,000 and its equity attributable to shareowners was $22,999,000 (The Coca-Cola Company, 2022). Therefore, debt to equity ratio= $42,761,000/$22,999,000=1.86, meaning that the company has a debt to equity ratio that is more than 1 and thus it has a higher leverage and higher risk of bankruptcy. However, given that PepsiCo Inc.’s debt to equity ratio is 2.51 we can establish therefore that Coca Cola is doing much better, appears healthier and headed in the right direction. In regards to debt to asset ratio, given that Coca Cola had total debts of $42,761,000, and total assets of $94,354,000. Its debt to asset ratio for the year 2021 was = Total debt ÷ Total assets = $42,761,000/$94,354,000=0.45. In essence, therefore, we can say that 45% of the total assets of Coca Cola are being funded by debt. A reflection that the company had more assets than debts, and therefore in a position to meet its obligations if required by liquidating its assets. On the other hand, PepsiCo Inc.’s debt to asset ratio was 0.44 (PepsiCo Inc., 2022), which is quite close but Coca Cola is doing better by at least 1%.
In conclusion, therefore we can establish that Coca Cola is indeed healthy and is headed in the right direction compared to PepsiCo Inc. This is because from the liquidity ratio we have observed that the company is liquid and able to meet its immediate obligations even though the ratio compared to its competition is slightly lower. In the same breadth we have observed that its profitability ratios are much better compared to its competition and the company made much better use of its assets to generate revenues. Lastly, we observe that it is doing much better in terms of solvency as even though it is highly leveraged and at a high risk of bankruptcy it is in a much better position compared to PepsiCo Inc. From an investors standpoint Coca Cola would not be a better company to invest in, given its liquidity position and high leverage and risk, and therefore, it does not appear healthy and headed in the right direction. Even though when compared to PepsiCo Inc. it is the healthier company and the one that appears to be headed in the right direction.
References
The Coca-Cola Company (2022). The Coca-Cola Company; Investors Section, Annual Filings, Form 10-K. Retrieved online from https://investors.coca-colacompany.com/filings-reports/annual-filings-10-k
PepsiCo Inc. (2022). The PepsiCo Inc.; Investors Section, Annual Filings, Form 10-K. Retrieved online from https://www.pepsico.com/investors/financial-information/annual-reports-and-proxy-information
Corporate Finance Institute Education Inc. (2022). Financial Ratios eBook. CFI-Financial-Ratios-Cheat-Sheet-eBook. https://corporatefinanceinstitute.com/assets/CFI-Financial-Ratios-Cheat-Sheet-eBook.pdf
