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Analysing Financial Performance of Coca-Cola Essay Sample

  • Pages: 5
  • Word count: 1,305
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Introduction of TOPIC

Current ratio measures the ability of Coca Cola to meet its liabilities or debts over the next year or so. Coca Cola have a current ratio of 1.17:1, which has increased from 2010’s 1.05:1. This shows that they are able to meet costs of current liabilities without needing to sell fixed assets or raising long-term finance. However, Coca Cola should aim to improve their current ratio to closer to 1.6:1. They could do this by selling fixed assets or negotiating long-term loans. On the other hand, the increase in the current ratio from 2010 to 2011 may suggest that Coca Cola are focusing on improving it. Acid test measures the very short-term liquidity of the business, by comparing current liabilities with liquid assets. Coca Cola’s acid test ratio has improved from 0.92:1 to 1.02:1. This means that they are able to pay their current assets by using purely liquid assets. However, Coca Cola should not operate over long periods with a high acid test ration, therefore should aim to keep it near a 1:1 ratio.

This is because holding assets in the form of cash is not profitable and does not represent an effective use of resources. Current and acid test ratios are a measure of liquidity, thus showing the ability of the business to settle its debts in the short term. Coca Cola are currently maintaining ratios above 1:1, therefore meaning they are able to pay for any short-term debts incurred. Gearing measures the long-term liquidity of a business. This measure of Coca Cola’s performance is important because by raising too high performance of capital through fixed interest capital firms become to vulnerable to increases in interest rates. Coca Cola have maintained a gearing of around 42% during 2010 and 2011. This means that they are a low-geared business and therefore less long-term borrowing. If Coca Cola were to become too low0geared then they may be considered too cautious and not expanding as quickly as possible, however because Coca Cola have been able to maintain a stable gearing figure, this should not cause any problems.

Gearing examines the relationship between internal sources and external sources of finance. It is therefore concerned with the long-term financial position of the company. It is often considered to be a liquidity ratio. Coca Cola have been able to maintain a stable gearing ration, with a change of only 0.3% between 2010 and 2011. Shareholders, managers and creditors will be concerned with gearing ratios, so it is important that Coca Cola have managed it carefully. Asset turnover ratio measures a business’s sales in relation to the assets used to generate these sales. Coca Cola have maintained a steady asset turnover ratio 0f 2.51 and 2.50 in 2010 and 2011 respectively. Due to Coca Cola having high sales and relatively low assets, their asset turnover is likely to be high and earn a low profit on each sale. If Coca Cola wish to improve their asset turnover ratio, they could improve their sales performance or dispose of surplus or underutilised assets. Inventory turnover measures the co

mpany’s success in converting inventories into sales. Coca Cola’s current inventory turnover has

been 62 days in 2010 and 76.2 days in 2011.

This is a relatively high number, meaning Coca Cola sell their entire inventories 5.89 and 4.79 times a year. This high figure could be due to obsolete inventories, whereas a lower figure would indicate a more efficient business, because they would sell their inventories more times a year. To improve their inventory turnover, Coca Cola could hold lower levels of inventories or achieve higher sales without increasing their levels of inventories. Receivables (or debtors’) days calculates the time typically taken by a business to collect the money that it is owed, This is an important ratio, because granting customers lengthy periods of trade credit may result in a business experiencing liquidity and cash flow problems. Coca Cola have had receivables days of 38.6 days in 2010 and 46 days in 2011. The lower the figure the better, so Coca Cola were in a stronger debtor position in 2010. The rise in this ratio may be due to a number of causes, such as a period of improved trade credit. Coca Cola should aim to keep this ratio closer to their 2010 figure in order to be as efficient as possible. Payables (or creditors’) days calculates the time typically taken by the business to pay the money it owes to suppliers and other creditors. This is an important ratio, because delaying payment for as long as possible can help a business to avoid liquidity problems.

Coca Cola have had payables days of 70.7 days in 2010 and 92.1 days in 2011. Due to payables days being greater than receivables, Coca Cola are unlikely to experience any liquidity problems. This is because they have cash going into the business up to 46.1 days prior to it going out. However, having such a high payables ratio may result in poor relationships with suppliers who may then suffer liquidity problems as a result of the delay in payment. Furthermore, Coca Cola may be charged interest on delayed payments. This would lead to added costs and a weakened liquidity position for Coca Cola. Efficiency ratios measure the effectiveness with which an enterprise uses the resources available to it. Although Coca Cola have a relatively low inventory turnover ratio, their income statements and balance sheets show that they are in a strong enough financial position to cope with this.

Furthermore, Coca Cola’s payables and receivables days show that they are efficient in terms of handling cash flow, therefore putting them in a stronger liquidity position. Gross profit margin compares the gross profit received by a business with its revenue. Coca Cola have maintained a gross profit margin of above 60%, achieving 63.9% in 2011. This is a relatively high profit margin, suggesting that Coca Cola have maximised prices whilst reducing direct costs. However, this may be dramatically reduced by direct costs, such as administration expenses, are deducted. Net profit margin calculates the percentage of a product’s selling price that is net profit, after all costs have been deduced. Because this ratio includes all of a business’s operating expenses, it may be regarded as a better indication of performance than gross profit margin. Coca Cola have recorded a net profit margin of 24.6% in 2010, which increased to 40.6% in 2011. Coca Cola have enjoyed a stable gross profit margin, however their net profit margin has fluctuated greatly. His may mean that they are failing to control indirect costs effectively. However, a net profit margin of 24.6% is respectable.

Return on capital employed is an important ratio, comparing the operating profit earned with the amount of capital employed by the business. It allows an assessment to be made of the overall financial performance of the business. Coca Cola have experienced a decreasing ROCE ratio, falling from 18.2% in 2010 to 15.5% in 2011. A typical ROCE may be expected to be in the range of 20-30%, therefore meaning Coca Cola are not showing significant results. To improve their ROCE, Coca Cola may wish to increase operating profits without raising further capital, or by reducing the amount of capital employed, perhaps by repaying some long-term debt. Profitability ratios assess the amount of gross or net profit made by the business in relation to the business’s turnover or the assets or capital available to it. They provide a fundamental measure of the success of the business, and are important to shareholders, creditors, managers, competitors and employees. Coca Cola currently show high gross and net profit margins, however their ROCE is relatively low. This means that they making a low operating profit compared to the amount of capital employed. Coca Cola should aim to improve this, thus increasing their competitive advantage by increasing their profitability.

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