coca cola financial statement analysis

Financial Statement Analysis
ACG203-CE

Marianne Marchant
Margaret Pesikov
Sean Lenehan


Jeff Braga

2


Table of Contents
Questions to be answered

3

Management Discussion & Analysis section and Miscellaneous

3

Income Statement and Profitability

6

Cash Flows

12

Balance Sheet

14

Liquidity and Efficiency

18

Solvency

22

Relevant Documents

25

Balance Sheet

25

Income Statement

26

Evaluation

27

3

Questions to be answered:
Management Discussion & Analysis section and Miscellaneous

1. Read the Management Discussion and Analysis and the

Chairman’s letter to shareholders. Describe the major products
and services of the company.

The Coca-Cola Company is the leading owner and marketer of nonalcoholic
beverage brands. Coca-Cola either owns or licenses 500 of the world’s
nonalcoholic beverage brands. Coca-Cola is recognized as the world’s most
valuable brand. There are approximately 54 billion beverages of all kinds
served worldwide, of the 54 billion Coca-Cola accounts for approximately 1.6
billion of those beverages. Coca-Cola sells syrups, concentrates, and sodas to
bottling companies and retailers.

2. Describe some of the specific details of the company’s

financial and operational performance. Based on what you
read in the Management Discussion & Analysis sections, do
you get a positive or negative impression about the company?
Describe why.

Coca-Cola follows the accounting principles that are generally accepted in the
United States (GAAP). When making decisions, the company executives
always consider the impact on stakeholders of the company and are careful
to behave ethically and follow the policies of Coca-Cola. The company only
records revenue when collectability is assured and delivery of all products
has occurred. The company attempts to be very realistic when recording
information that is not set in stone. Also, Coca-Cola takes potential market

risks into account on their financial statements in order to more accurately
display the state of their company.
We have a very positive impression of this company. It seems to us that it is
very profitable, very dominant, and holds a very large amount of market
power. What makes Coca-Cola very unique is their brand name which is
nearly impossible for other companies to even attempt to compete with.
During the year of 2009, Coca-Cola introduced Minute Maid Pulpy Super Milky
in China, launched a beverage named Frestea Green to target active and
healthy individuals in Indonesia, introduced Burn Energy Shots in Europe and
sponsored several international events. Also, Coca-Cola became the first
company in the beverage industry to commit to disclosing all of their
beverage energy information (calories, kilocalories, etc) on all of their
packaging.
It is evident that Coca-Cola is very focused on the needs of their consumers
and is constantly working on developing products that would benefit their
customers. Coca-Cola adapts its products to the location to which it intends
to market them. For example, in Japan there is a big national interest in
recycling, therefore Coca-Cola took this into consideration and created a

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bottle that is very light and able to be compacted so that it takes up very
little space when recycled. It is this care for its customers and ethical
financial behavior that ensures Coca-Cola’s yearly success and profitability. In
the future, Coca-Cola will always be one of the most dominant companies in
America as well as in other countries, regardless of the state of the economy.

3. Who is the company’s independent auditor and what type of
audit opinion was rendered? What does this opinion mean?

Who is responsible for the company’s financial statements?
Earnest & Young is the independent auditor for Coca-Cola Company. Their
auditor stated that in their opinion Coca-Cola presented all their data fairly
and awarded Coca-Cola a status of unqualified. This means that, to the best
of their knowledge, Coca-Cola’s information is accurate. Since Earnest &
Young gave Coca-Cola an unqualified status, both Coca-Cola and Earnest &
Young are now responsible for the company’s financial statements.

4. What has the company’s stock been selling at over the past
three years? You can use quarterly or yearly information.
What are your observations about the trend in stock price?
What might be the cause(s) for this trend?

Over the past three fiscal years for Coca-Cola, 2007-2009, the company’s
stock has reached a high of $63.81 and a low of $39.10.The fact that the
company has stayed in the same approximate $20 range means that the
company’s sales have stayed somewhat consistent. In the current year of
2010, the company’s stock has reached a high of $64.69 and a low of $49.47.
In 2009, it reached a low of $39.10 and a high of $59.11. In 2008, it reached
a low of $41.50 and a high of $63.77. In 2007, it reached a low of $45.89 and
a high of $63.81. The drop of stock prices was due to a dispute with the
company Costco who, in November 2009, stopped purchasing Coca-Cola and
Diet Coke products.

5. What has the Price Earnings ratio (P/E) been for the past 3
years? What does the P/E ratio tell you about this company?
How does this compare to the industry and nearest
competitor?
Price Earnings Ratio = Current Stock Price per Share / Earnings per Share
Stock Price –

12/31/07
$160
12/31/08
$121
12/31/09
$158

Earnings per Share –

2007 $2.59
2008 $2.51
2009 $2.95

5


Coca-Cola Price Earnings Ratio each year –
$61.78

2007 $160
2008

/

2.59

=

$121

/

2.51

=

$158

/

2.95

=

$48.21
2009
$52.56

In 2007, the Coca-Cola Company had an immensely high Price Earnings Ratio
of $61.78, meaning that investors were optimistic about the future prospects
of the company. However, in 2008, the Price Earnings Ratio fell heavily down
to $48.21, meaning that investors were beginning to question the future
prospects of the company. Once 2009 came around, the ratio rose to $53.56,
showing that the company is beginning to bounce back and is showing more
of a promising future. Over the years, the Coca-Cola Company has steadily
grown in stock price. Over the past few years, even when they were having
difficulties in 2008, they showed that they were still able to surpass their
competition more and more each year.

6


Income Statement and Profitability

6. Calculate and interpret a horizontal analysis on Sales and Net
Income for the years presented in your annual report.
Horizontal Analysis on Sales
Net Operating Revenues (In Millions)

2009
$30,990

2008

$31,944
Dollar Change in Account Balance:
Current Year Balance − Prior Year Balance =>
$(1,004)
Percentage Change in Account Balance:
Dollar Change ÷ Prior Year Balance
3.1%

$30,990 - $31,944 =

=>

$(1,004) ÷ $31,944 = −

Horizontal Analysis on Net Income

Consolidated Net Income (In Millions)

2009
$6,906

Dollar Change in Account Balance:
Current Year Balance − Prior Year Balance
$1,099
Percentage Change in Account Balance:
Dollar Change ÷ Prior Year Balance
18.9%

=>

=>

2008
$5,807

$6,906 - $5,807 =

$1,099 ÷ $5,807 =

As you can see from this analysis, there was an approximately 1 million dollar
increase in the Net Income of this company. This is an 18.9% change from
the year before and is a promising sign for the company. Net Revenues,

7

however, decreased by approximately 3% since 2008. Although, Coca-Cola is
earning less money per year according to the analysis on Sales, they were
able to reduce their expenses for the year (including cost of goods sold) and
greatly impact their net income for 2009 in order to increase their earnings.

7. Describe the trend in sales and net income in the context of
the company’s business situation. What are the major reasons
for the change in Sales? Changes in Net Income? This should
be addressed somewhere in the annual report.
Though Sales in 2009 were less than they were in 2008, the Net Income in
2009 was more than it was in 2008.
Reasons for change in Sales:
The decrease in sales in 2009 since 2008 may be attributed to the fact that
people are still only able to spend only a fraction of what they could have
spent in the past. Though the economy has been doing better than it has in
the past years, prices for certain things are still increasing (ex: Higher
Education, Health Insurance, etc.) and the population is far less able and
willing to make purchases that are not necessary.
Also, increases in health awareness regarding soft drinks, sugar, etc. may
have also resulted in people being more hesitant to purchase Coca-Cola
products due to fear of health risks and obesity. This causes a decrease in
demand and therefore a decrease in sales.
Reasons for change in Net Income:
Certain factors affecting net income were high costs for sugar and aluminum,
bad debt, and an overall weak US economy. Fortunately, in the recent years
there has been evidence that the economy is on its way to recovery, hence
why the Net Income in 2009 may have been higher than the Net Income in
2008. Slowly, the economy is working more in favor of the food and beverage
industry which is why Net Income seems to be increasing at Coca-Cola as well
as companies such as Sara Lee, General Mills, Tyson Foods, and Pepsi Co.

Fluctuation of foreign currency exchange rates can affect Sales and Net
Income.

8


8. Prepare a common-sized income statement for the years
represented by your annual report. Be sure to include each
item on the company’s income statement as a percent of net
sales. Use Chapter 12 examples as a guide, and use an excel
spreadsheet with formulas to present this information. Use
this spreadsheet to answer question 9 below.

The Coca-Cola Company and Subsidiaries
Consolidated Statements of Income
Year Ended December 31, 2009
(In millions except per share data)
NET OPERATING REVENUES
Cost of Goods Sold
GROSS PROFIT
Selling, general, and administrative expenses
Other operating charges
OPERATING INCOME
Interest income
Interest expense
Equity income (loss) - net
Other income (loss) - net
INCOME BEFORE INCOME TAXES
Income taxes
CONSOLIDATED NET INCOME

Less: Net income attributable to noncontrolling interests
NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF THE
COCA-COLA COMPANY
BASIC NET INCOME PER SHARE
DILUTED NET INCOME PER SHARE
AVERAGE SHARES OUTSTANDING
Effect of dilutive securities

9

Current Year 2009
$
$
$
$
$
$
$
$
$
$
$
$
$
$

30,990
11,088
19,902
11,358

313
8,231
249
355
781
40
8,946
2,040
6,906
82

$
$
$

6,824
2.95
2.93
2,314
15


AVERAGE SHARES OUTSTANDING ASSUMING DILUTION

2,329

The Coca-Cola Company and Subsidiaries
Consolidated Statements of Income
Year Ended December 31, 2008
(In millions except per share data)

NET OPERATING REVENUES
Cost of Goods Sold
GROSS PROFIT
Selling, general, and administrative expenses
Other operating charges
OPERATING INCOME
Interest income
Interest expense
Equity income (loss) - net
Other income (loss) - net
INCOME BEFORE INCOME TAXES
Income taxes
CONSOLIDATED NET INCOME
Less: Net income attributable to noncontrolling interests
NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF
THE COCA-COLA COMPANY
BASIC NET INCOME PER SHARE
DILUTED NET INCOME PER SHARE
AVERAGE SHARES OUTSTANDING
Effect of dilutive securities
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION

10

Current Year 2008
$
$
$
$
$

$
$
$
$
$
$
$
$
$

31,944
11,374
20,570
11,774
350
8,446
333
438
(874)
39
7,506
1,632
5,874
67

$
$
$

5,807

2.51
2.49
2,315
21
2,336


9. Describe the trend in the Gross Margin Ratio and Profit Margin
ratio over the past three years? What are these ratios
indicating for the company and what might be the major
reasons causing them to change from year to year?
Gross Margin Ratio (Percentage of Selling Price that is a Profit)
IN MILLIONS
2009
(1 – ($11,088 ÷ $30,990)) X 100% =
64.2%
2008
(1 – ($11,374 ÷ $31,944)) X 100% =
64.4%
2007
(1 – ($10,406 ÷ $28,857)) X 100% =
63.9%
Profit Margin Ratio (Net Income/Net Sales) IN MILLIONS
2009
$6,906 ÷ $30,990 = 22.3%
2008
$5,874 ÷ $31,944 = 18.4%
2007
$6,027 ÷ $28,857 = 20.9%

11


The profit margin ratios are indicating that the company was receiving more
profit from sales in 2009 than in 2008 and received less profit in 2008 than in
2007.The gross margin ratio is indicating that the percentage of total revenue
that the company retains. This has very slightly decreased from 2008 to 2009
but the change is very minimal and most likely does not have much to do
with the operation of the company. It increased slightly between 2007 and
2008. The changes in gross margin are very small.
A decrease in gross margin ratio may be caused by an increase in the cost of
goods sold. The more expensive it is to produce an item, the less profit the
company will retain. An increase in cost of goods sold may be related to
scarcity of resources and inflation. An increase in the gross margin ratio is
most likely due to a decrease in the cost of goods sold. Also, a decrease or
increase in revenue may also affect this ratio.
Profit margin ratio may be affected by several factors. An increase may be a
result of an increase in net income from net sales or a decrease in net sales
compared to the net income. The opposite is true of a decrease.

10. What were the Return on Assets and Return on Equity ratios over the past
three years? Interpret the trend in each of these ratios.
ROA

ROE

2009
15.30%
2009
30.15%

2008
13.82%

2007
16.33%

2008
27.44%

2007
30.94%

The above data was taken directly off of the Mergent Online Database. There
was no calculation required to attain these percentages.
From the year 2008, both the Return on Assets and the Return on Equity
ratios have increased in the year 2009.
The increase in Return on Equity is a good thing for stockholders and
indicates that a company uses the equity provided by stockholders during
that specific year effectively and uses it to generate more equity for the
owners.
The increase in Return on Assets indicates that the company is generating
more profits from all of its resources and not just the resources provided by
the owners. The higher both of these ratios are, the better for the given
company. Therefore this increase in Coca-Cola’s ratio is indicating that the
company is prospering.

12

From these ratios and the ratios in #4, it is evident that Coca-Cola had a
decrease in profitability as well as efficiency in the year 2008 and then made
a significant rebound in the year 2009.

11. Did the company report any special, unusual, non-operating, or
non-routine items in net income over that past 3 years? (This
would be found on the income statement below operating
income (EBIT) and may be explained in the notes to the
financial statements). If so, what are they? If not what might
be a possible non-operating item?
In the company’s notes to the financial statements, it reported non-operating
items as being sale of equity securities, equity income, other-than-temporary
impairment charges, and impairments of North American franchise rights.

Cash Flows

12. What was the overall cash flow in each of the past two years?
What does this mean and comment on the trend.
The overall cash flow for the 2009 year is $7,021 million. The overall cash
flow for the year 2008 is $4,701 million. These numbers show that CocaCola’s sales and production has increased and also that the price of these
things may have also increased due to the recession. The increase of cash
flow from 2008 to 2009 most likely pushed Coca-Cola to invest more, as you
can see from the nearly 2 billion dollar increase in cash from investing
activities from 2008 to 2009.

13. Analyze the trend in Operating activities, Investing, and
Financing Activities over the years presented on your annual
report. Comment on these trends?
The cost of goods sold in 2009 was $11,088 million and the net operating
revenues were $30,990 million. The cost of goods sold in 2008 was $11,374

million and the net operating revenues were $31,944 million. The gross
profits for 2009 and 2008 were $19,902 million and $20,570 million
respectively. There were 3% decreases for both cost of goods sold and net
operating revenues from 2009 to 2008. The decreases may have been due
to the dispute with Costco in November 2009. Over the past two years the

13


company has stayed relatively even as far as profit, costs and revenue. This
shows that the company is stable and still able to make sales despite the
world’s current economic condition. Total Cash Flow from Operating Activities
was 8,186 million in 2009 and was 7,571 million in 2008. Total Cash Flows
from Investing Activities was 4,149 million in 2009 and was 2,363 million in
2008.
Total Cash Flows from Financing Activities was 2,293 million in 2009 and was
3,985 million in 2008. After looking back over Coca-Cola’s cash flow history, I
found that the numbers for investing and financing activities alternate every
year. For example, in 2009, more money was spent in investing as opposed
to financing. In 2008, more money was spent in financing and less was spent
in investing. In 2007, more money was spent in investing activities than
financing activities. Judging by this pattern, they go back and forth between
financing and investing as their main focus for the year.

14. Calculate Free Cash Flow and Cash Flow Adequacy Ratios for
the past two years. Interpret these ratios. What is your
assessment of the company’s ability to generate cash over the
past two years?
Free cash flow is Net Cash Flow from Operations - Capital Expenditures –
Dividends

2009 Free Cash Flow=8,186 million-1,993 million-3,800 million=2,390
million
2008 Free Cash Flow=7,571 million-1,968 million-3,521 million=2,082
million
Cash Flow Adequacy Ratio = (Cash Flow from Operations) / (Long-term debt
paid + Fixed assets purchased + Cash dividends distributed)
2009: 8,186 million/(5,059 million+9,561 million+3,800 million)= .44
2008:7,571 million/(7,281 million+8,326 million+3,521 million)= .40

14


Free cash flow for the 2009 year was 2,390 million. In 2008, the free cash
flow was 2,082 million. The cash flow adequacy ratio for 2009 and 2008 were
.44 and .40 respectively. As a general rule of thumb, if a company’s cash
flow adequacy ratio is at 1, it is able to generate money freely. If it is below
1, the company may have a large debt or may be operating inefficiently.
With the ratio having increased, this shows that the company is recovering
but is still not able to generate cash freely.

15. Did the company pay cash dividends during the past year? If

so, what percentage of net income were the cash dividends?
Does the company have a pattern of paying cash dividends?
Why do you think the company pays dividends? If not, why do
you think it did not?

3,800 million/6,906 million= 55%
3,521 million/5,874 million= 59%
The company paid $3,800 million in dividends in 2009 and $3,521 million in

2008. The cash dividends were 55% and 59% of the net income respectively.
The company has paid over 3,000 million in dividends over each of the past
three years. The net income has stayed relatively the same so this means
that the company normally pays about half of their net income to dividends.
The company pays dividends so that they can keep their investors happy and
continue to be given money by them.

Balance Sheet

16. Calculate and interpret a horizontal analysis on total assets for
the years presented in the annual report.
Total Assets:
2009
$48,671

2008
$40,5
19

2007
$43,26
9

2006
$29,96
3

2005
$29,427

Horizontal Analysis:
Dollar Change from 200807

Dollar Change from 2009-08

15


$40,519 - $43,269 =
($2,750)
Dollar Change from 200605
$29,963 - $29,427 = $536
Percentage Change of
2008-07
($2,750) ÷ $43,269 =
(6.4)%
Percentage Change of
2006-05
$536 ÷ $29,427 = 1.8%

$48,671 – $40,519 = $8,152
Dollar Change from 2007-06
$43,269 - $29,963 = $13,306
Percentage Change from
2009-08
$8,152 ÷ $40,519 = 20.1%
Percentage Change from
2007-06
$13,306 ÷ $29,963 = 44.4%

The total assets of the Coca-Cola Company in 2005 were $29,427 and
increased by a few hundred dollars that next year in 2006. In 2007, the
company’s total increased dramatically up to $43,269 but dropped slightly in
2008 to $40,519. The reason for this decrease in total assets could have been
due to the major Recession that occurred during that time. By the next year
in 2009, however, Coca-Cola was able to get back on its feet and increase its
assets even more than they had before as they ended the year with $48,671.
Coca-Cola has always been a big name in the refreshment business and has
become bigger than ever over the past few years.

17.
For the past year, what is the asset account that
represents the largest percentage of total assets? Does this
seem to make sense for this type of company? Why? Show the
numbers.
In thousands (except share
data)
ASSETS

16


Jan. 3, 2010
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, trade, less allowance for doubtful accounts
of $2,187 and $1,188, respectively
Accounts receivable from The Coca−Cola Company
Accounts receivable, other

Inventories
Prepaid expenses and other current assets
Total current assets

$ 17,770
4,500
92,727
4,109
17,005
59,122
35,016
230,249

Intangible Assets:
Property, plant and equipment
Leased property under capital leases
Other assets

326,701
51,548
46,508
520,672
102,049
5,350

*Franchise rights
Goodwill
Other identifiable intangible assets
Total
*Asset account with the largest percentage of total assets

$ 1,283,077

Franchise Rights / Total Assets = $520,672 / 1,283,077 = 40.6%
This seems to make sense for Coca-Cola to have franchise rights as being
their largest percentage of total assets. When you sell franchise rights, you
are expanding your business quickly with a minimum of capital. It is a very
large company that has numerous other brands of drinks such as Sprite,
Fanta and Dasani. Franchise rights give Coca-Cola the ability to spread their
business and becoming a successful company.

18.
Does the company have any intangible assets? If so,
what are they and describe what they mean? If not, what are
intangible assets and what is an example of an intangible
asset?
• Property, plant and equipment – The money that the company spends
in order to be capable of owning property, building plants, and purchasing
the equipment that are necessary to have for the company.

17


• Leased property under capital leases – money in the company that is
depreciated over the lease term.
• Franchise rights – Selling your business in order to expand quickly with
a minimum of capital.
• Goodwill- Valued according to the advantage or reputation a business
has acquired.
• Other identifiable intangible assets - Primarily represents the customer

relationships and distribution rights in the company.

19. What are the numbers for Plant Assets at cost, accumulated
depreciation, and Plant Assets (net)? How does the
depreciation method chosen affect these numbers?

Plant Assets at Cost: $1,283,077
Accumulated Depreciation: $567,283
Plant Assets at Cost – Accumulated Depreciation = Net Plant Assets
$1,283,077 – 567,283 = $715,794 (Net Plant Assets)
The Coca-Cola Company uses the straight-line method for depreciation when
calculating its costs. By choosing to use the straight-line method, Coca-Cola
ends up yielding the same expense each year.
20.
What is accumulated depreciation as a percent of total
Plant Assets? Show the numbers. What general conclusions
can you make about this percentage?
Accumulated Depreciation: $567,283
Total Plant Assets: $1,283,077
Accumulated Depreciation / Total Plant Assets = Percentage of
Accumulated Depreciation
$567,283 / 1,283,077 = 44.2%
The percentage of accumulated depreciation shows that, although the
percentage is not too high, it tells the company that the assets that they
have are beginning to reach their half-life.

21.
Is there an Allowance for Doubtful Accounts and, if so,
what percent of A/R does this represent? What conclusions can
you draw from this percentage? If there is no Allowance for

Doubtful Accounts, what does this say about the company’s
A/R balance?

18


The Coca-Cola Company does have an Allowance for Doubtful Accounts.:
Allowance for Doubtful Accounts: $2,187
Accounts Receivable: $94,914
Allowance for Doubtful Accounts/Accounts Receivable=Percent of Allowance
for Doubtful Accounts
$2,187 / 94,914 = 2.3%
From observing the outcome of the percentage that was found, this result
shows that the Coca-Cola Company does not need to worry about their
Allowances for Doubtful Accounts very much. The reason for such a low
percentage could be due to the fact that Coca-Cola is more of a cash-based
company than a credit-based company.
22.
How many shares of common stock are outstanding?
What does this mean? Why is the number of outstanding
shares important to the company
The Coca-Cola Company owns about 2.32 billion shares of common stock that
are outstanding. This is quite a large number of shares that are outstanding.
This means that a good amount of the Coca-Cola shares are held by people
who are not part of the company. The number of outstanding shares is
important to the Coca-Cola Company because by giving out portions of
company control, they can then raise more money to invest, and therefore
grow their revenue.

Liquidity and Efficiency

19


23. Define liquidity and efficiency. Compute the following ratios
for the past 2 years. Show the formula used and the specific
numbers used to calculate your ratio. For each ratio, comment
on the specific numbers calculated and what these numbers
are telling you about your company’s liquidity and efficiency.
For the turnover ratios, does the ratio make sense for your
company? COMPARE YOUR RESULTS TO THE INDUSTRY
AVERAGE FOR THESE RATIOS AS WELL AS TO THE NEAREST
COMPETITOR FOR YOUR COMPANY. COMMENT ON THIS
COMPARISON.
Current Ratio and Quick Ratio (Acid Test Ratio)
Receivables Turnover and Day’s Sales Uncollected
Inventory Turnover and Days Sales in Inventory
Liquidity is the ability for a company to satisfy its short term obligations.
Formula
Current Ratio

Current Assets / Current Liabilities

Quick Ratio

Cash + Short-term Investments + Accounts
Receivable) / Current Liabilities

Receivables
Turnover

Average
Receivables
Day’s Sales
Uncollected
Inventory
Turnover
Average Inventory
Days Sales in
Inventory

Credit Sales / Average Receivables
(Beginning receivables + Ending Receivables) / 2
365 / Receivables Turnover Ratio

Cost of goods sold / Average Inventory
(Beginning Inventory + Ending Inventory) / 2
365 / Inventory Turnover Ratio

20


Coca-Cola (2009)

Current Ratio

Equation
17,551,000 / 13,721,000

Quick Ratio

(7,021,000 + 2,130,000 + 3,758,000) /
13,721,000

Receivables Turnover

30,990,000 / 3,424,000

Average Receivables
Day’s Sales
Uncollected

(3,090,000 + 3,758,000) / 2

Inventory Turnover

11,088,000 / 2,270,500

Average Inventory
Days Sales in
Inventory

365 / 9.05

Total
1.28

0.94
9.05
3,424,00
0

40.33

(2,187,000 + 2,354,000) / 2

365 / 4.88

4.88
2,270,50
0

74.79

Coca-Cola (2008)

Equation
Current Ratio

12,176,000 / 12,988,000

Quick Ratio

(4,701,000 + 0 + 3,090,000) /
12,988,000

Receivables Turnover

31,944,000 / 6,203,500

Average Receivables

Day’s Sales Uncollected

(3,317,000 + 9,090,000) / 2

Inventory Turnover

11,374,000 / 2,203,500

Average Inventory
Days Sales in Inventory

365 / 5.15

Ratio
0.94

0.6
5.15
6,203,50
0

70.87

(2,220,000 + 2,187,000) / 2

365 / 5.16

5.16
2,203,50
0

70.74

21


Pepsi (2009)

Current Ratio

Equation
12,571,000 / 8,756,000

Quick Ratio

(3,943,000 + 192,000 + 4,624,000) / 8,756,000

Receivables Turnover

43,232,000 / 4,653,500

Average Receivables
Day’s Sales Uncollected

(4,683,000 + 4,624,000) / 2

Inventory Turnover

11,088,000 / 2,570,000

Average Inventory
Days Sales in Inventory

365 / 9.29

Total
1.44
1
9.29
4,653,50
0

39.29

(2,522,000 + 2,618,000) / 2

365 / 4.31

4.31
2,570,00
0

84.69

Pepsi (2008)

Equation
Current Ratio

10,806,000 / 8,787,000

Quick Ratio

(2,064,000 + 213,000 + 4,683,000) /
8,787,000

Receivables Turnover

31,944,000 / 4,536,000

Average Receivables
Day’s Sales Uncollected

(4,389,000 + 4,683,000) / 2

Inventory Turnover

11,374,000 / 2,406,000

Average Inventory
Days Sales in Inventory

365 / 7.04

Total
1.23
0.79
7.04
4,536,00
0

51.85

(2,290,000 + 2,522,000) / 2

365 / 4.73

4.73
2,406,00
0

77.17

Current Ratio: The current ratio for Coca-Cola in 2009 was 1.28, which is a
huge improvement from the ratio of 2008 when Coca-Cola was at 0.94. In
2008 Coca-Cola was unable to pay their short term debts with their current
assets putting Coca-Cola in a very vulnerable state. This tells me that CocaCola is improving their liquidity and efficiency, because their current ratio is
improving. They are better able to pay off their current debts in 2009 than
they were in 2008. Coca-Cola’s closest competitor, Pepsi, however has a
better current ratio that Coca-Cola, Pepsi’s ratio for 2008 was 1.23 and
increased to 1.44 in 2009. Since the numbers are rising in both companies we

22


know that they are both becoming more liquid, however as Pepsi’s ratio is
already quite high I would be worried about it getting too high and staying
too high, where as Coca-Cola’s ratio remains closer to 1, This tells us that
Coca-Cola invests their assets in more productive-higher yielding assets than
Pepsi does.

Quick Ratio (Acid Test Ratio): Coca-Cola’s quick ratio in 2009 was 0.94
which is an improvement from 2008 when their quick ratio was 0.6; however
Coca-Cola still cannot pay off their current liabilities without using their
inventory. This ratio gives us a better understanding of Coca-Cola’s liquidity
and efficiency than the previous, current ratio, because we now understand
that Coca-Cola cannot pay its debts without its inventory. This leads us to
believe that Coca-Cola is a somewhat risky business, even though it is the
largest in the nonalcoholic beverage industry. Their closest competitor, Pepsi,
did better than them only be a tiny bit, getting 0.79 in 2008 and 1 in 2009.
Receivables Turnover: The receivables turnover ratio for Coca-Cola in 2009
is high as expected, since it operates primarily on a cash basis. Between
2008 and 2009 the ratio for receivables turnover almost doubled. This means
Coca-Cola is good at generating and collecting Sales. Coca-Colas closest
competitor, Pepsi, however is doing better than Coca-Cola, in 2008 Pepsi beat
Coca-Cola with a ratio of 7.04 and in 2009 with a ratio of 9.29. Coca-Cola has
been catching up however, since there is a greater leap between 5.15 (2008)
and 9.05 (2009) for Coca-Cola and 7.04 (2008) and 9.29 (2009) for Pepsi.
Day’s Sales Uncollected: In 2008 it took Coca-Cola 70.87 days to collect
their average accounts receivables, and in 2009 it only took them 40.33 days
which is a great improvement. Pepsi only took 51.85 days in 2008 and 39.29
in 2009 to collect their average accounts receivables.
Inventory Turnover: Both Coca-Cola and Pepsi’s ratios stayed similar over
the two years, which means that their ability to sell inventory is relatively
stable. In 2008 Coca-Cola had a ratio of 5.16 and in 2009 had a ratio of 4.88.
Pepsi had a ratio of 4.73 in 2008 and 4.31 in 2009. These ratios were not
what we expected; we assumed that the ratios would be much higher
because Coca-Cola and Pepsi sell their syrup to bottling partners around the
world so they do not need to deal with the storing of the bottled product.
Days Sales in Inventory : In 2008 Coca-Cola had 70.74 days worth of
inventory left over and 74.79 days worth of inventory left over in 2009. These

numbers are not good, because it means they would have be losing money
storing these inventories instead of re-investing the assets. Pepsi’s days sales
in inventory ratio is even worse than Coca-Cola’s because they had 77.17
days worth of inventory left over at the end of the year, in 2008, and 84.69
days worth left in 2009.

23


Based on the ratios examined, it appears that Coca-Cola has sufficient
liquidity, however Coca-Cola is less liquid than Pepsi, its leading competitor.
One cause for Pepsi to be more liquid the Coca-Cola could stem from the fact
that Coca-Cola invests its assets more than Pepsi does which generates more
revenues.

Solvency

24. Define solvency. Compute the following ratios for the past 2
years. Show the formula used and the specific numbers used
to calculate your ratio. For each ratio, comment on the
specific numbers calculated and what these numbers are
telling you about your company’s solvency. COMPARE YOUR
RESULTS TO THE INDUSTRY AVERAGE FOR THESE RATIOS AS
WELL AS TO THE NEAREST COMPETITOR FOR YOU COMPANY.
COMMENT ON THIS COMPARISON.
Debt to Total Assets Ratio
Times interest earned
Solvency is the company’s ability to pay its long-term obligations.
Formula
Debt to Total Assets Ratio

Total Liabilites / Total Assets

Debt to Total Equity
Ratio

Total Liabilities / Total Equity

Times interest earned

(Net Income + Interest Expense + Income Tax Expense) / Interest Expense

Coca-Cola (2009)

Equation

Total

Debt to Total Assets Ratio

23,872,000 / 48,671,000

0.49

Debt to Total Equity
Ratio

23,872,000 / 24,799,000

0.96

24


Times interest earned

(6,824,000 + 355,000 + 1,687,000) / 355,000

24.98

Coca-Cola (2008)

Equation

Total

Debt to Total Assets Ratio

20,047,000 / 40,519,000

0.49

Debt to Total Equity
Ratio

20,047,000 / 20,472,000

0.98

Times interest earned

(5,807,000 + 438,000 + 1,993,000) / 438,000

18.81

Pepsi (2009)

Equation

Total

Debt to Total Assets Ratio

23,044,000 / 39,848,000

0.58

Debt to Total Equity
Ratio

23,044,000 / 16,804,000

1.37

Times interest earned

(5,946,000 + 397,000 + 1,835,000) / 397,000

20.60

Pepsi (2009)

Equation

Total

Debt to Total Assets Ratio

23,888,000 / 35,994,000

0.66

Debt to Total Equity
Ratio

23,888,000 / 12,106,000

1.97

Times interest earned

(5,142,000 + 329,000 + 1,634,000) / 329,000

25

21.60