ACC 500 TERM PAPER Requirements:

Select a company and get a copy of its annual report

Analyze its financial reports

You should do ratio analysis on the ratios listed below and describe whether the ratio is trending up or down compared to previous years. You should also compare its ratios to a competitor or to the industry average

The paper should be 10 to 12 pages

ACC 500 OUTLINE

1. Introduction

2. Background

3. Liquidity Ratios

4. Activity Ratios

5. Debt Management Ratios

6. Profitability Ratios

7. Conclusion (Is the company doing well and would you invest in the company?)

FINAL PROJECT

Coca-Cola Company

Introduction

Coca-Cola is a well trusted beverage industry that has been in existence since 1886. The company was founded by John Pemberton who was a pharmacist in Atlanta Georgia. Initially Coca-Cola was marketing a beverage which was sold at a local drug store for medical treatment of physical and mental disorders. Some years later a man named Asa Candler developed a recipe and started marketing a product brand of Coca-Cola. The company was incorporated in 1919 and has since then become the largest producer and distributor of beverages that are non-alcoholic (Coca-Cola, 2015).

The Coca-Cola Company is known worldwide with products that are marketed in 200 countries presently. These countries are across North America, Africa, Asia, South America, Eurasia, and Middle East and in Europe. The main and most popular drink marketed by Coca-Cola is Coke. I was raised in Africa and from personal experience; I know that Coca-Cola is a very successful company. In my country Nigeria, Coca-Cola is used as a general name for any kind of beverage. People would often say do you want a Coke? which actually means do you want a beverage of any kind? People also use the sentence lets go have a coke as lets go have a drink, relax and chat.

Beverages marketed by Coca- Cola Company are water, juices, ready to drink teas, coffees, energy and sport drinks. The company also produces five main soda drinks which are Coca-Cola (also known as Coke); diet Coke, Fanta and Sprite. Some other brands produced are Fruitopia, Minute Maid, Dasani Water and Power Ade.

Coco-Cola is effective at distributing their products worldwide which keeps the company as one of the largest beverage company with the largest distribution system. Coca-Cola estimates that 57 billion servings of its beverages are consumed per day which is an indication that the company has a successful business strategy (Coca-Cola, 2015).

The company places huge emphasis on customer satisfaction by providing a wide range of products that can meet the everyday needs and lifestyle of its customers. In addition, the company aims at achieving business success by developing product brands, a versatile distribution system, a strong global connection and a strong commitment to shareholders and business associates.

The companys biggest competitors are; Kraft Food Group Inc., Unilever group, Suntory beverage and Pepsi. There are major competitive factors that impact on the competitive market of Coca-Cola products. These factors have to do with the price of the products, the advertisement strategies used by the company, the efficiency of production, product and brand development, and the rate at which new products are innovated in order to meet the fast changing needs of customers.

The company has some major strength which helps brand marketing to be made easier internationally and locally in the United States. Mainly, Coca-Colas competitive advantages are its brands acceptance among consumers worldwide, unique marketing and distribution systems and dedicated employees worldwide.

Background

Creating value in business management is very important for a successful business. There are different kinds of values that can be created. Some are business values for customers and personal values for business owners and associates (Patrick, 2012). The more important kind of value is the one created for customer satisfaction. Customers are interested in products that add value to their lives and can satisfy their needs and wants.

This paper studies the business strategies and the internal financial structure of Coca- Cola Company by analyzing business process and turnover using basic accounting tools such as liquidity ratios, activity ratios, debt management ratios, and profitability ratios. We examine the present financial situation of Coca-Cola Company and determine if the company is doing well.

For the purpose of investments, this paper also provides insight on the possibility of Coca-Cola Company being a profitable investment by examining the success rate of investments made into the company and the financial status of the company. When a company soars, investors look closely at the companys ability to pay dividends and the liquidity ratio of the company. It is important before investing into any company to study the companys annual report and evaluate the business processes of the company. In this paper, we use annual reports to forecast and make inferences about Coca-Colas operating efficiency and also compare Coca-Colas performance to one of its major competitors Pepsi. We determined the success of Coca-Cola relative to similar company in the beverage industry.

Financial Ratios

Managers, stockholders and creditors prepare financial statements to access the performance of a company. From the financial statements, financial ratios can be calculated to determine Coca-Colas performance against world competitors. This section uses financial ratios to determine Coca-Colas liquidity, debt management, asset management, profitability and market performance. It is important to note at this point that financial ratios should not be viewed as the only judgement of a companys performance. However, they raise questions about the present state of a companys performance and point out opportunities that the company can take advantage of.

In addition to financial ratios other internal factors should be considered in measuring the performance of a company. Some of such factors are employee knowledge and growth, customer satisfaction, technological changes, changes in the economy and economic indicators of success as it applies to the company. This section first of all goes over the financial ratios while other factors that impact the performance of the Coca-Cola Company are discussed later in this paper.

Liquidity Ratio

A companys assets are fostered by lenders and stockholders. In this section we discuss the liquidity ratio of Coca-Cola Company for the annual report of the year 2014 and 2013. There are three tools that manager use to access the liquidity of a company. These tools are working capital, current ratio and Acid test ratio. Working Capital is the excess of assets over current liabilities. The working capital is calculated as:

Working Capital= Current Assets- Current Liabilities

When a company has enough working capital, this indicates that the company has enough assets to pay creditors at the right time. On the other hand, an excess of working capital can indicate excessive growth in working capital. Managers often like to have minimal working capital that can pay creditors off in due time.

Coca-Colas working capital in 2014= Assets- liabilities ($92, 023-61,462) = $30,561

Pepsis working Capital in 2014= $10,506B, in 2013=$9,688B and 2012=$8,479B

Coca-Cola had a working capital of $33,440B in 2013 and in 2012 it was $33, 168B. In 2014, Cocas working capital decreased compared to 2013 and 2012. Pepsi in 2014 had a lower working capital compared to Coca-Cola, although Coca-Colas working capital has decreased in the last three years while Pepsis working capital increased. Coca-Cola seems to have more working Capital than Pepsi.

Current ratio is a ratio of the companys current assets over the companys current liabilities. It is usually represented as;

Current Ratio = Current Assets

Current Liabilities

In general, when current ratio has a negative sign it indicates a declining or deteriorating financial condition, or stagnant current assets or obsolete inventories. An improving current ratio occurs when the equation above gives a positive sign. A positive current ratio may occur when there is an improvement in the companys financial situation or when there is a stockpiling of inventories. The rule of thumb is that a company has a current ratio of at least 2. However, some company that operates at a current ratio below 2 may be successful. The sufficiency of a companys current ratio depends mostly on its currents assets. From the equation above when assets are more than liabilities the company will have a higher current ratio. On the other hand, a lower current ratio occurs when liabilities are greater than assets.

Coca-Colas Current Ratio 2014= ($92, 023/$61,462) = 1.50

Coca-Colas Current Ratio 2013= 1.591

(Retrieved from the balance sheet Coca-Cola annual report page 69)

Pepsi Current ratio 2014=1.142, and in 2013=1.245, and in 2012=1.095

From the figures above we can infer that in the last three years Coca-Cola has had a bigger current ratio than Pepsi, although Coca-Colas current ratio decreased in 2014. The rule of thumb is 2; both Pepsi and Coca-Cola are not where they need to be. However, Coca-Cola has a higher current ratio than Pepsi.

Acid test ratio like the current ratio test measures the ability of a company to cover its short term debt. It is derived by excluding inventory and prepaid expenses from current Asset and then dividing the result up by current liabilities. The equation is as followed;

Acid ratio test= (Cash +Marketable securities +Account receivable +short term notes receivable) / Current liabilities

Coca-Colas acid ratio 2014 = 8958M+3665M+4466M (net account receivable)

= $(17,089) M / $61,462M=0.28,

In 2013= (10,414M+3,147M+4,873M) = (18434M)/56615M= 0.325

Pepsi acid ratio 2014 = (6,134M, + 2,071M+6651M)/5, 2961M=0.177

In 2013: 9375M+6954M+3147M= (19,476)/53,089 =0.367

From the above figures Coca-Cola has a higher acid ratio compared to Pepsi which shows that Coca-Cola was better able to cover its short term debt than Pepsi in 2014.

Activity Ratios

Activity ratios are measures of the operational efficiency of a company. Some of the activity ratios used are; inventory turnover, fixed asset turnover, and account receivable turn over. The average collection turnover is derived by dividing up account receivable by daily sales.

Coca-Colas account receivable turn over in 2014 was: sales/Account receivable

45,998M/4466M= 10.29days

In 2013=46,854M/4873M =9.62 days

Pepsi 2014= 66,683/6651=10.03days

2013= 66,415/6954=9.55days

Comparing the year 2014 to 2013 we can infer from the figures above that it takes both Coca-Cola and Pepsi an average of 10days to collect their account receivables.

Fixed asset turnover measures how efficiently a companys fixed asset is used to recover sales. It can be derived by dividing up sales by the cost of fixed assets. The goal of the company is to increase the fixed asset turnover. This can be done by either increasing sales or decreasing investment. A company with a higher ratio is doing better than a company with a lower ratio.

Coca-Colas fixed asset turnover 2014 is: Sales/total asset= 45,998M/92023=0.50

2013= 46,854M/90055=0.52

Pepsis fixed assets turnover 2014 is 66,683M/70509= 0.95

2013= 66,415M/77478=0.86

The calculations above imply that Coca-Cola asset turnover is low compared to Pepsi. This implies that Coca-Cola needs to increase its assets turnover ratio by either increasing sales or reducing investment.

Inventory turnover ratio is the measure of the frequency at which a companys investment is turned over during a given year. A company producing the same level of sales with higher turnover is better off than a company producing the same level of sales with lower turnover. The ratio is usually compared to other companies in an industry to make good inference on the operating performance of a company. It is usually calculated by dividing up the cost of goods sold by the cost of inventory.

Coca-Colas inventory turnover in 2014 =cost of goods sold/cost of inventory

2014= 17889/3100=5.77 and in 2013= 18421/3277=5.62

Pepsi in 2014= 66683 /3,143=21.22 and in 2013= 66415/3409=19.48

Coca-Colas inventory turnover ratio is much slower than that of Pepsi which could be as a result of too much inventory. Pepsi needed only 17days to sell entire inventory in 2014(365days/21.22) while Coca-Cola needed 63days (365days/5.77).

Debt Management Ratios

It is very important that managers access how they finance their long term creditors and stockholders. The long term creditors measure the companys ability to pay back their loans over a long period of time. On the other hand, stockholders are more concerned with the companys financial leverage which measures the ability of the company to pay back loans taken out for increase in sales and profit. The financial leverage can be either positive or negative. It is positive when the rate of return on total asset is greater than the rate of return owed to creditors. When the rate of return to total asset is less than the rate of return owed to creditors, financial leverage is negative. A positive financial leverage is preferable can be determined using three kinds of debt management ratios.

Times interest earned ratio

The first kind of debt management ratio that will be discussed is the times interest earned ratio. This ratio measures the ability of the company to pay interest to its creditors from earnings. It can be calculated by dividing the earnings before interest expense and income taxes by interest expense. A times interest expense ratio that is less than 1 suggests interest expense is greater than the earnings needed to pay off the interest. An interest expense of 2 or more suggests that the firm may be able to pay off its creditors over a long period of time.

Coca-Colas times interest earned in 2014 = earnings before interest expense and income taxes/interest expense= 9708/ 483 =20.1 in 2013= 10228/463=22.1

Pepsis= 6513/824 =7.90 in 2013= 6740/814=8.28

From the result above we can infer that Coca-Cola and Pepsi both earn sufficiently enough to pay long term creditors. Coca-Cola looks like it can better pay long term creditors from the figures above.

Debt to Equity Ratio

This suggests the ratio of debt and equity of a company at any given time.

Earlier we discussed financial leverage and noted that when financial leverage is positive the rate of return on total asset is greater than the return needed to pay creditors. As debt to equity ratio increases there is an indication that the company is increasing its financial leverage. The debt to equity ratio of Coca-Cola Company in 2014 can be denoted as;

Debt to equity ratio = Total liabilities/equity= 61462/9947=6.18 and in 2013=56,615/10393=5.44

Pepsis=52961/17,548=3.018 and in 2013= 53,089/24389=2.176

The judgement value of the debt to equity ratio depends on whether the company is risk loving or risk averse. Managers that love high risk prefer high debt to equity ratios. On the other hand, managers that avoid risk prefer low debt to equity ratio. Usually, companies stay between the ranges of 0-3 on debt to equity ratio. It is difficult to make any inferences from debt to equity ratio because creditors and stockholders have different preference. Stockholders prefer a high debt to equity ratio in order to increase their financial leverage such that the debt is above the equity. However, creditors because of the need to be protected prefer a lower liabilities and higher equity such that financial leverage is less positive.

Coca-Cola Company has a higher financial leverage for the years 2013 and 2014 compared to Pepsi.

Equity multiplier

The equity multiplier is another debt management ratio that indicates the exact proportion of the assets of a company financed by the companys equity. This ratio can be denoted as;

Equity multiplier= Average total assets/ average stockholder equity

Coca-Colas equity multiplier in 2014 = 92023/9947=9.25 90055/10393=8.66

Pepsis=70509/17548 =4.018 and in 2013 77478/24389=3.18

When the equity multiplier increases a company increases its financial leverage, which means that the company is relying on greater proportion of debt rather than equity to finance total assets. When the equity multiplier decreases the company decreases its financial leverage and mainly increases its liabilities over total assets.

Coca-Cola relies on a greater proportion of debt to finance total assets because the company has a higher equity multiplier in both 2013 and 2014 compared to Pepsi.

Profitability Ratios

Profitability ratios enable managers to access the amount of profit that can be earned from the sales activities of the company, total assets and stockholders equity. In this section we discuss four profitability ratios. These four ratios are: Gross margin percentage, net profit margin percentage, return on total assets and return on equity.

Gross margin percentage

The gross margin percentage is a percentage of profitability that shows the relationship between gross margin and the sales of a company: It can be mathematically denoted as;

Gross margin percentage= Gross margin/Sales Coca-Colas gross margin percentage 2014= 0.611% and in 2013=0.606%

Pepsis gross margin percentage 2014=0.54% and in 2013 0.53%

The value cost of goods sold indicates the percentage of the gross margin. When fixed costs are included into the cost of goods sold we derive high gross of margin percentage with an increase in sales. When fixed cost is excluded from Costs of goods sold, there is a lower gross margin percentage as sales volume decreases. When sales volume increases the company can spread its fixed cost across more sales and the gross margin percentage increases.

Coca-Colas gross margin percentage for 2014 and 2013 suggests that the company has a bigger gross margin than Pepsi. This may mean that Coca-Cola has a larger sales volume which allows the company to more efficiently spread out its fixed costs across more sales.

Net profit margin percentage

This is another ratio which measures the profitability of a company. The net profit percentage is different from the gross margin percentage. The latter focuses on the costs of goods sold whereas the former focuses on the impact of income tax expense, selling and administrative expense and interest expense on performance. The two ratios both focus on how profitability can be derived from sales volume. The net profit margin percentage can be mathematically denoted as:

Net profit margin percentage=net income/sales

Coca-Colas net profit margin percentage 2014=7124/45998=0.154% and in 2013, 8626/46854=0.184%

Pepsis= 0.098% (6558/66683) and in 2013= 0.101% (6787/66415)

Coca- Cola has a higher net profit margin than Pepsi.

Return on total Assets

The return on total assets which is another measure of profitability based on total assets and it can be denoted as;

Return on total Asset= Net income + (interest expense *1- tax rate)

Average total assets

Coca- Colas return on total assets in 2014 = 7124 + (483*1- 0.24) = 7491.08 and in 2013 8626+ (463*1-0.2484) = 8973.99

Pepsi in 2014= 6558 + (909*1- 0.251) == 7238.84 and in 2013, 6787+ (911*1-0.237) =7482.093

Coca-Cola has a higher return on total asset than Pepsi.

Return on Equity

The return on equity is a measure of profitability based on stock holders equity. It can be mathematically denoted as;

Net income

Average of stockholders equity

Coca- Cola ROE 2014= 7124/ 30320=0.235 and in 2013= 8626/ 33173 = 0.26

Pepsis=6558/17578= 0.373 and in 2013= 6787/24409=0.278

Based on the net profit margin, the total assets turn over and the equity multiplier, the return on asset can also be denoted as;

Net profit margin* equity multiplier* total asset turn over

The result of this arithmetic should give the same answer as the return on equity derived from average stock holders equity. Coca-Cola in both 2013 and 2014 had lower ROE compared to Pepsi

Internal Factors that indicate growth

We have discussed the financial ratios that impact on the operating efficacy of the Coca-Cola Company. This section discusses other indications of growth and operating performance such as customer satisfaction, technological changes, employee knowledge and economic indicators.

Customer satisfaction

The Coca-Cola Company as they expand to developing countries of the world is increasingly raising its standards to satisfy customers. From product safety to occupational safety of employees the company does it best to employ organizations such as the Coca-Cola operating requirements (KORE), to govern all business practices and customer relations (Staff, 2012).

In satisfying customers the company focuses on the 5 As; affordability, acceptability, availability, activation and attitude (Coca-Cola, 2014). Affordability has to do with the price of products. The company emphasizes on affordable prices for customers. Acceptability focuses on providing a wide range of products that meet up to high standards that appeal to customers. Activation refers to building brand strength, quality and features that motivate customers to demand products. Availability refers to efficiency in distribution and production, creating effective communication channels and building strong distribution channels across all countries. Attitude refers to organizational behavior, building strong network and communication between customers and sales representatives, meeting customers needs with the objective to have them return, and creating value by offering quality customer services.

Technological changes

This section reviews how Coca-Cola uses technological changes to gain advantage. Over the last century there have been major technological changes such as the green movement, social networking, use of internet for advertisement and the use of vending machines for dispensing soda drinks (Ireland, 2014). Coca-Cola takes advantage of technological changes by engaging more in internet advertisement on different website and using pop up ads also on different websites. The company produces their product with less petroleum and recently started using greener and more efficient packaging. Coca-Colas dispensing machines allow customers to be able to choose from a broader range of products and access the brands more easily and with less mobility. The company engages in the use of social media (such as Facebook and Twitter) to create a sense of community and partnership between customers and sales representatives.

Employee knowledge

Coca-Colas business success also depends on its employees. The company focuses on empowering employees and motivating workers to be outstanding their careers. Coca-Cola is concerned about developing employees professional and communication skills, providing good opportunities for employees to have medical checkup, active lifestyles by creating outdoor events such as community sports and health awareness activities (Coca-Cola, 2014).

Economic Indicators

There are certain economic indicators that can be used to access the operating efficiency of a company. Some of them are stock prices are economic growth. Based on the stock market information, Pepsi which is a large competitor of Coca-Cola is positioned for growth in 2015 and beyond. The US economy is predicted to also grow by 3.3% this year (PepsiCo.inc, 2015). When the economy does well large companies such as Coca-Cola are predicted to grow too. As of August 20, 2015, 12:43pm Coca-Cola stock is going for $52.35 with a dividend yield of 1.12% (Finance Yahoo, 2015). Pepsi stock goes for $98.28 with a bigger Market Cap of 144 B and a dividend yield of 2.81% while Coca-Cola has a Market cap of 12B (Finance Yahoo, 2015) . From these information and economic indicators we can infer that Pepsi is a better investment than Coca-Cola.

Conclusion

In this paper, we have been able to study the operational efficiency of Coca-Cola using financial ratios and internal factors such as: customer satisfaction, technological changes, employee knowledge, and economic indicators. We compared the operational efficiency of Coca-Cola to Pepsi. From the liquidity ratios, we discovered that Coca-Cola has a higher working capital, current ratio and acidity ratio than Pepsi. This indicates that the company has enough assets to cover its debt in the short term. Although the liquidity ratios of Coca-Cola could improve, we can observe that the company is currently not deteriorating financially and liabilities do not exceed assets.

From the activity ratios we can infer that Pepsi has better activity ratios than Coca-Cola. The company needs to increase its assets turnover ratio and the rate at which investments are turned over by either increasing sales or reducing investments.

From the debt management ratios we can infer that Coca-Cola has higher debt management ratios than Pepsi. Coca-Cola uses a greater proportion of its debt to fund assets. Based on the profitability ratios, compared to Pepsi, Coca-Cola has higher profitability ratios.

In satisfying customers the company focuses on the 5 As; affordability of product, acceptability of products, availability of product, activation of interest in products and attitude of employees to customers. These 5 As are key factors for success. Coca-Cola takes advantage of technological changes by using the internet and social media to make personal connections with customers. The company empowers and emphasizes on the professional career of employees. Economic indicators show that Coca-Cola has a lower Market cap and dividend yield in the stock market compared to Pepsi.

Overall, Coca-Cola has enough assets to cover its debt, has higher profitability ratio, however, the company needs to increase its asset and inventory turnover. The debt management ratio of Coca-Cola needs to be better by raising the value of current assets over liabilities, although the company has higher debt management ratios than Pepsi.

Based on the financial ratios and economic indicators, I suggest that investments made into Coca-Cola be made with caution. Pepsi has a higher market cap, dividend yield, and assets and inventory turnover ratio which are great indications that the company is doing well. Pepsi is a great company for investment. On the other hand, Coca- Cola has a lower market cap and dividend yield, higher profitability ratios, higher liquidity ratio (which indicate the company is a better financial shape than Pepsi) but higher financial leverage which indicates that the company is taking higher financial risk than Pepsi. It is important to note that although the financial risk of Coca-Cola is higher than Pepsi, Coca-Cola has enough assets to cover its liabilities and also enough funds to finance its long term creditors. We do not understand the reason why Coca-Cola has a lower market cap and dividend yield, however we know that Coca-Cola has a lower asset turnover ratio and inventory turnover ratio which indicates that an increase in sales or decrease in investments is very necessary.

In conclusion, any investments into Coca-Cola have to be done with proper knowledge of the operational efficiency of the company and a review of what the investor finds beneficial. Both Pepsi and Coca-Cola are great companies to invest in; however, they both have their flaws. Coca-Cola has a good operational efficiency, investments could be made into this company but there are certain policies about assets turn over, inventory turnover and also the level of financial risk and debt management ratios that need to improve compared to other competitors in the beverage industry. The debt to equity ratios indicate that the Coca-Cola Company will not run into financial problems, however compared to its major competitor Pepsi, the ratio may indicate high level of risk. Coca-Cola, however, is a successful company with a good operational efficiency from our calculations. Investing into Coca-Cola will yield good dividend but may not yield as much as other competitors in the beverage industry.

References

Coca-Cola 2014. Annual report http://assets.coca-colacompany.com/d2/78/7d7cad454f3fbd033d55d786b890/2014-annual-report-on-form-10-k.pdf. (balance sheet on Page 75 and income statement on page 73)

Coca-Cola Company, 2014. Our people. Retrieved from http://www.coca-colahellenic.com/aboutus/ourpeople

Coca-Cola Company, 2014. Customers. Retrieved from http://www.coca-colahellenic.com/aboutus/customers

Coca-Cola Company, 2013. Annual report http://assets.coca-colacompany.com/d0/c1/7afc6e6949c8adf1168a3328b2ad/2013-annual-report-on-form-10-k.pdf (balance sheet is on page 69 and income statement page 47)

Finance Yahoo, 2015. CCEhttp://finance.yahoo.com/q?s=CCE

Finance Yahoo, 2015. PEPhttp://finance.yahoo.com/q?s=CCE

Ireland, 2014. Does Coca-Cola use technology to gain an advantage? http://smallbusiness.chron.com/cocacola-use-technology-gain-advantage-27339.html

Patrick, Josh 2012. Creating Value The New York Times. retrieved from: http://boss.blogs.nytimes.com/2012/09/13/introducing-creating-value/?_r=0

PepsiCo. Inc (PEP), 2015. PepsiCo Is Poised For Growth In 2015 And Beyond

http://seekingalpha.com/article/2831206-pepsico-is-poised-for-growth-in-2015-and-beyond

PepsiCo. 2014. Annual report: working capitalhttp://www.pepsico.com/docs/album/default-document-library/pepsico-2014-annual-report_final.pdf (balance sheet for Pepsi page 71, and income statement page 67)

Ray H. Garrison, Eric W. Noreen, Peter C. Brewer, 2015. Managerial Accounting ISBN: 007802563x Copyright year: 2015

Staff, Journey 2012. Quality Retrieved from http://www.coca-colacompany.com/stories/quality