Principles of Accounting and Marketing

Principles of Accounting and Marketing

Trends in Profitability

One of the ratios used to measure profitability is the return on equity (ROE), which measures how effectively a company turns equity capital into net profit. Coca-Cola’s ROE was relatively high in 2016 at 28.21%. However, it dropped significantly to 6.23% the following year. That could have probably been due to reinvestment of profits or inefficiency (Lesakova, 2007). In 2017 ROE jumped to 35.30%. Such a high ROE indicates that the company was operating efficiently and that shareholder capital was utilized well. However, ROE alone cannot determine profitability because it rises automatically if a company accrues more debt, hence the need to reference other profitability ratios before concluding.

On the other hand, Coca-Cola registered a positive return on assets (ROA) ratio throughout the three years, indicating that the company made profits. ROA shows how well a company is utilizing company assets to make profits (Lesakova, 2007). Other than 2017, when the ROA was relatively low, the ratio was high in 2016 and 2018, indicating that the company made good profits.

The profit margin, another profitability ratio, is used to show how a business activity makes money. Profit margins represent the percentage of sales turned into profits (Fabozzi & Peterson, 2003). Coca-Cola’s profit margin in 2016 was 15.60, implying that for every dollar of sales, the company gained $0.156 in profits. Like the other ratios, the profit margin dropped significantly in 2017 but rose again in 2018. Coca-Cola did not record losses from sales for the three years.

Trends in Debt

The debt-to-equity ratio measures how a company finances its operations using debt versus its wholly-owned funds. The ratio determines whether a business can settle all debts using shareholder capital in case of insolvency (Nasution, Putri, & Dungga, 2018). Coca-Cola maintained relatively low debt-to-equity ratios throughout the three years; 1.97, 2.51, and 2.29, implying that it did not borrow aggressively to finance its operations. Therefore, Coca-Cola is in an excellent position to finance its creditors.

The ability of the Company to meet its Financial Obligations

Liquidity ratios measure a company’s ability to meet its debt obligations without relying on external funding. Liquidity ratios include the current ratio and quick ratio. A quick ratio excludes stock from current assets since it seeks items that can be transferred into cash quickly to meet quick financial obligations (Durrah et al., 2016). Coca-Cola maintained a healthy quick ratio of 1.18 and 1.25 in 2016 and 2017, respectively, but it fell to 0.95 in 2017. That means the company could easily offset its obligations for the first two years but was overwhelmed in 2018. On the other hand, the company maintained an ideal (above 1) current ratio throughout the three years, implying the company was in a position to settle its short-term financial obligations dating one year or less (Breuer et al., 2012).

How Efficiently Is the Company Using Its Assets

The asset turnover and inventory turnover ratios are used to measure a company’s efficiency. The asset turnover ratio measures a company’s ability to use its assets to make revenue (Nurlaela et al., 2019). Coca-Cola maintained low asset turnover ratios of less than 1, implying that it did not use its assets optimally. On the other hand, Coca-Cola’s inventory turnover which shows the times a company has replaced stock was low throughout the three years (Kwak, 2019).

References

Breuer, A., Frumusanu, M. L., Breuer, B. L., & Manciu, A. (2012). Cash and liquidity/liquidity and liquidity ratio. Annals-Economy Series, 4, 78-82.

Durrah, O., Rahman, A. A. A., Jamil, S. A., & Ghafeer, N. A. (2016). Exploring the relationship between liquidity ratios and indicators of financial performance: An analytical study on food industrial companies listed in Amman Bursa. International Journal of Economics and Financial Issues, 6(2).

Fabozzi, F. J., & Peterson, P. P. (2003). Financial management and analysis (Vol. 132). John      Wiley & Sons.

Kwak, J. K. (2019). Analysis of Inventory Turnover as a Performance Measure in Manufacturing             Industry. Processes, 7(10), 760.

Lesakova, L. (2007, June). Uses and limitations of profitability ratio analysis in managerial practice. In International Conference on Management, Enterprise and          Benchmarking (pp. 1-2).

Nasution, A. E., Putri, L. P., & Dungga, S. (2018). The Effect of Debt to Equity Ratio and Total Asset Turnover on Return on Equity in Automotive Companies and          Components in Indonesia. Advances in Economics, Business and Management Research      (AEBMR), 92, 182-188.

Nurlaela, S., Mursito, B., Kustiyah, E., Istiqomah, I., & Hartono, S. (2019). Asset Turnover,         Capital Structure and Financial Performance Consumption Industry Company in    Indonesia Stock Exchange. International Journal of Economics and Financial         Issues, 9(3), 297.

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PRINCIPLES OF ACCOUNTING AND MARKETING
Examine the following table of ratios for Coca-Cola Co. Consider what story these ratios tell you about the financial health of the company. In a 2-page paper, comment on the following, specifying which ratios you used to draw your conclusions:

Principles of Accounting and Marketing

Trends in profitability
Trends in debt
The ability of the company to meet its financial obligations
How efficiently the company is using its assets
Coca-Cola Ratio Analysis