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  • Published on: 14th September 2019
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EXECUTIVE SUMMARY

This report has found out the financial performance of Coca-Cola Amatil Ltd (CCA) for a period of 3 years (2014-2016) . Analysis were conducted on the financial reports of the company using various financial ratios.  Evaluation was then made from these ratios namely; Return on Assets, Efficiency, Asset Turnover, Liquidity, Solvency, and Share Market Performance Ratios. It further reveals not just the financial performance but also challenges that the company faces in the industry as a whole. Conclusion was then made based on the past trend and current performance of the company. Finally, recommendations were made on the company's indebtedness and share yield so as to enhance its financial performance and stability.

ORGANIZATION'S  BUSINESS PROFILE

Coca-Cola Amatil Limited (CCL) incorporated in England in 1904 as British Tobacco Co.(Australia) Ltd manufactures, distributes and sells ready-to-drink beverages in the Asia-Pacific region. The Company's divisions comprises of Non-Alcohol Beverages; Alcohol & Coffee Beverages, and Corporate, Food & Services. The Company's businesses include Australian Beverages, Indonesia & PNG, New Zealand & Fiji, Alcohol & Coffee and SPC Ardmona. The Non-Alcohol Beverages segment is engaged in the manufacture, distribution and marketing of sparkling drinks and other non-alcohol beverages. The Alcohol & Coffee Beverages segment manufactures and distributes spirits, beer and coffee products. The Corporate, Food & Services division is engaged in the processing and marketing of fruit and other food products business (SPC), and the provision of certain support services to the Company and third party customers business.

 The company can boast of a trading revenue of AUD$ 5.15 billion, a net income of AUD$ 188 million, 270 million potential consumers and employs approximately 14,000 employees. (Anon, 2017)

FINANCIAL RATIO ANALYSIS

PROFITABILITY

These are financial metrics that are used to estimate the nature of a business's ability to generate earnings in comparison to its expenses and other relevant costs incurred during a specific period of time. When a profitability ratio, for example; Net Profit margin Ratio has a higher value relative to a competitor's ratio or relative to the same ratio from a previous period, there is an indication that the company is doing well. This ratio shows precisely how profitable a business is compared to its cash flow. Additionally, it makes it possible to compare the profitability of two or more businesses regardless of their differences in size as it is expressed in percentage. Finally, net profit margin can be used to forecast profits based on revenues.

Similarly, Return on assets (ROA) stipulates how profitable a company in relation to its total assets. This points out how efficient management is using its assets to generate earnings.

The net profit margin ratio shows that Coca-Cola is profitable and its profitability increased slightly in 2015 from the previous year as a result of increased Net Profit After Tax (NPAT before abnormals) and Operating Revenue respectively. However, the company experienced a sharp decline in profit of almost 3% in the year 2016. Both NPAT and Operating Revenue reduced. This may be due to factors affecting revenue or expenses. By tracking this fluctuation in the net profit margin, Coca-Cola can assess its current practices that are not working. (See Appendix 1.1)

The assets of Coca-Cola are financed by both debt and equity finance. Similar to the Net Profit Margin Ratio, the higher the Return On Assets (ROA) figure the better as this gives an indication to investors on how effective the company is, in turning the money it has to invest into net income. The 3 years analysis of this ratio shows a constant decline (8% in 2014 to 5.23% in 2016) which really puts the company in a terrible position.(See Appendix 1.2) This may be due to the company acquiring more assets at the expense of earning more income. The company will look unpleasant to investors if this persist as it can't earn more money on less investment. Management must therefore prioritise and  make wise choices in distributing its resources.

EFFICIENCY

Efficiency ratios measure the ability of a company to use its assets and manage its liabilities effectively and efficiently. These ratios include the inventory turnover ratio and Asset turnover ratio. Analysis are also made using these ratios to evaluate a company's current performance.

Over the 3  years analysed, Coca-Cola recorded the least turnover in 2015. This implied that, there was weak sales and the company held on to excess inventory. Lesser stock were held in 2014 and 2016 compared to 2015.(See Appendix 2.1) This ensured that the company had a higher ratio and suggest there was strong sales. These high sales may be due to factors such as discounts, etc.

CCL's asset turnover ratio was 0.81 in 2014 which decreased to 0.75 in 2015. Ratio decrease even after company's revenue ($5033 millions) for 2015 increase from ($4882 millions) that of 2014. Which shows that during that period company purchase more assets (6667.40 - 6039.80 = $627.6 millions) than increase in revenue (5033 - 4882 =$51 millions). Ratio again increased to 0.79 in 2016.(See Appendix 2.2) CCL can increase its assets turnover ratio by continuously using its assets, reducing purchase of inventory and  increasing sales without purchasing new assets.

LIQUIDITY

Liquidity ratios shows the ability of a company to pay off its short-term obligations. It is done by comparing a company's most liquid assets, which can be easily converted into cash with its short-term liabilities. It's better for a company to have high level of coverage of liquid assets to short-term liabilities.

    

Current ratio indicates company's ability to cover its short-term liabilities with its current assets. Here we have all current ratios for 2014-2016, for all three years it's greater than 1 which shows the company is in a better position to cover its current short-term liabilities. Having a current ratio less than 1 is a red sign for the company that, if they run into financial trouble it's hard for them to get out of it in the short term. Increase in current ratio for CCL from 1.53 in 2014 to 1.68 in 2016 is a good sign for the company because it's shows that CCL's assets increase more than its liabilities. This indicates the company is more likely to pay back its creditors.. It's also a sign that it's safe to invest in the company or lend money to the company . But very high current ratio does not always mean that the company is in good position, it can also mean that the company does not efficiently utilise its current assets.

    

Quick ratios are more helpful than current ratios to determine liquidity because it excludes all those assets which may not easily be liquidated, like prepaid expenses and inventory. Higher quick ratio means more liquid current position. Like current ratio, CCL having quick ratio greater than 1 (1.13 in 2014 , 1.20 in 2015 , 1.32 in 2016 ) shows that the company is in a good position to meet its short-term obligations. Increase in CCL's quick ratio 1.12 in 2014 to 1.32 in 2016 indicates CCL is presumably experiencing revenue growth, collecting its account receivable and turning them into cash quickly and  turning over its inventories quickly. Quick ratio of CCL in 2016 is 1.32 means that company have $1.32 of liquid assets available to cover each $1 of current liabilities. (Wohlner, 2017) (See Appendix 3.2)

SOLVENCY

These ratios aim to analyze the financial structure of the company, and particularly the external financing of the company. They determine the ability to meet long-term commitments. They allow us to know how stable or consolidated the company is by looking at it in terms of the composition of liabilities and their relative weight with capital and equity. It also measures the risk taken by those who offer additional financing to a company. They also determine who has made the greatest effort to contribute to the funds that have been invested in the assets: the owner or "third parties". It should be clear that indebtedness is a cash flow problem and that the risk of borrowing consists on the ability of the company's management to generate the funds necessary and sufficient to pay the debts as they mature. It is as harmful to be indebted as not to do so, since the liability is an important tool for the growth and development of any firm.

With the Debt to Equity ratio we can see that Coca-Cola's creditors have a bigger share of assets than the stockholders. Though this number has been decreasing since 2014, the ratio is still greater than 1. This means that the company has been taking on too many debt, therefore putting it at high risk. From the 2016 financial report we calculated the ratio to be at 1.68 or 168%, still very high risk but on the bright side, this risk has decreased in almost 100% from 2014. (See Appendix 4.1)

We can make similar assumptions from the Debt to Total Assets Ratio. From the 3 years analyzed, we can observe that creditors own more than 60% of the company. Again, this puts the company at high risk. This also means that the company has a high degree of leverage thus financial risk. Coca-Cola Amatil Ltd has very low financial flexibility. Although its been decreasing from 2014 to 2016; the current ratio sits at 62%, still extremely high and risky for a company. Overall, from the solvency ratios we can conclude that the company's financial risk profile has been slowly improving; from worse to bad.

SHARE MARKET PERFORMANCE

The Share Market Performance ratios relate to the market value of the company, as measured by the market price of its shares, with certain book values. These ratios give a very clear explanation of how well the company performs in terms of risk and return, according to market investors. They reflect, in a relevant way, the shareholders' assessment of all aspects of past and future performance of the company. Taking into account that if liquidity, asset ratio, solvency and profitability ratios are satisfactory, the Share Market Performance ratios will be high as well as the share price.

From the P/E ratio we can measure how much investors are willing to pay for $1 profit from Coca-Cola's shares. High P/E as what we see in year 2014 suggests that investors are expecting a high earning and growth in the future. An individual P/E ratio doesn't tell us much, it would give us far much insight if we could compare Coca-Cola's P/E ratios with other companies in the sector. Let's keep in mind that debt and leverage can have some effect on the P/E ratio. Firms with high debts usually show a lower P/E ratio. But this same companies can also develop higher earnings because of the risks it has engaged. From the Solvency ratios, we know for a fact that Coca-Cola Amati Ltd has been highly indebted in recent years. (See Appendix 5.1)

The Earnings Yield Ratio, reverse of the P/E ratio, shows us the returns each share gives back to the investor. A higher percentage is always better.  In Coca-Cola, the Earnings Yield has been very low in the past 3 years. We have to take into consideration the amount of risk this company has had. Some investors may find that 4% or 5% is enough return for their investment. That is why comparing this ratio with other companies within the sector might help, same as with the previous ratio.

CONCLUSION

Historical data from the past 5 years, shows us that CCL's share price has been declining since 2013. And this is in big reason because of the fierce competition Australian retailers have been putting on. Firms like Woolworths and Coles, have been getting stronger on the Australian market. They have their own store brands of soft drinks, offered at a much lower price. The big brands are no longer strong and sought after, households are trying store or private brands. Coca-Cola Amatil has been losing a big chunk of the market, giving more strength to its competitors. It's hard for Coca-Cola to compete with Woolworths and Coles when they both are the biggest distributors of CCL's products.

Another reason that might be affecting Coca-Cola Amatil is the big stigma that sugary drinks carry. Most of CCL's products are known for their high levels of sugar. Even though they do have some sugarless products, it's not enough to fight this trend. Consumers have been changing their habits and this might be affecting Coca-Cola. They just launched a new “Coca-Cola No Sugar” but we believe they should've done it a long time ago.

After analyzing the company's financial information and studying the corresponding ratios, we have come to the conclusion that this firm's trend will remain the same or could even decline more. The company's finances have been on the negative side for the past years. It is true that from 2014 to 2016 some ratios have shown an improvement. But even with this “improvement” the ratio is still on the negative side. The firm has moved from “very bad” to just “bad”. Still not good. (Asx.swingtradebot.com, 2017)

RECOMMENDATION

From our ratio analysis we found out that in the past 3 years, CCL has been indebted. Coca-Cola's creditors have a larger portion of assets than the stockholders. Without a doubt we can say that the company has been taking too much debt meaning that the firm is at risk. The amount of risk may be too high for some investors who would rather sell their shares in fear of losing more.

Adding up the increasing competition, the new “health aware buyer” and the negative numbers, our recommendation for CCL's shares would be to hold them. The shares have been at a low for some weeks. There's no point in selling them at the current price, it is best to hold them. Even though some numbers might not look appealing, the company is still making some profit.  The firm also maintains some attractive characteristics and even though it is not performing well at the moment, it's Coca-Cola we are talking about. We don't feel they will outdo or surpass the current market over the next couple of years.  

APPENDICES

Net Profit Margin (Appendix 1.1)

Net Profit Margin is net profit after taxation before abnormals divided by net operating revenue, expressed in the form of a percentage. This ratio is a functional evaluation of the effectiveness of the company's cost control policies. The higher the net profit margin is, the more effective the company is at transforming revenue into actual profit. This ratio can be used in making comparative analysis of companies in the same industry as companies are generally subject to similar business conditions.

  2014 2015 2016

NPAT before abnormal $376.20 $403.40 $257.30

Operating Revenue $4,882.00 $5,033.30 $5,091.20

Net Profit Margin 7.70% 8.01% 5.05%

Return On Assets (Appendix 1.2)

[Net Income + Interest Expense*(1-Corporate Tax Rate)]/[Total Assets - Outside Equity Interests] ROA is a lead measure of a company's profitability, equal to a fiscal year's earnings divided by its total assets. Return on assets fundamentally reveals how much profit a company is making on the assets used in its business.

  2014 2015 2016

Net Income $376.20 $403.40 $257.30

Interest Expense $153.10 $120.80 $114.80

Corporate Tax Rate 30% 30% 30%

Total Assets $6,039.89 $6,667.40 $6,464.20

Outside Equity Interest 70% 10% 11.20%

ROA 8.00% 7.32% 5.23%

Inventory Turnover (Appendix 2.1)

Operating revenue / current inventory. Inventory turnover gives an insight to  the analyst to then decide on how productively the company has been utilising their inventory.

2014 2015 2016

Operating Revenue $4,882.00 $5,033.30 $5,091.20

Current Inventor

$686.10 $733.90 $676.40

Inventory Turnover 7.12 6.86 7.53

Asset Turnover (2.2)

Asset Turnover Ratio = Operating revenue / total assets :-  Asset turnover ratio shows a revenue or net sales generated compare to company's assets. This ratio  generally used for indication of company's efficiency to measure how good company generating revenue from using its assets. More higher assets turnover ratio means company is doing very well, since higher ratio indicate that company generating more revenue per dollar of assets. In some sectors like retails have tendency to have way more asset turnover ratio compare to sector like utilities and telecommunication.

2014 2015 2016

Operating Revenue 4882.00 5033.30 5091.20

Total Assets 6039.80 6667.40 6464.20

Asset Turnover Ratio 0.81 0.75 0.79

Current Ratio (Appendix 3.1)

Current assets / current liabilities. Current assets divided by current liabilities. This ratio is a useful measure of the short term debt-paying ability of the company. The higher the ratio, the more liquid the company is. Whilst a ratio of 2 or more was traditionally considered desirable many companies have reduced this in recent years as operating cycles have shortened. It is more relevant to understand the ratio in the context of the sector average and the trend over the last few years.

2014 2015 2016

Current Assets 2593.50 3128.00 3104.80

Current Liabilities 1694.20 2001.30 1843.10

Current Ratio 1.53 1.56 1.68

Quick Ratio (Appendix 3.2)

(Current assets - current inventory) / current liabilities. Also known as the "acid test", the quick ratio is similar to the current ratio but excludes the value of inventory or stocks in the current asset calculation. The reasoning for this is that inventories are not always immediately realisable as a source of cash. Inventory can also be subject to valuation problems. The formula is current assets less inventory divided by current liabilities. As with the current ratio it, it is important to understand the ratio in the context of the sector average and the trend over the last few years.

  2014 2015 2016

Current Assets $2,593.50 $3,128.00 $3,104.80

Current Inventory $686.10 $733.90 $676.40

Current Liability $1,694.20 $2001.30 $1,843.10

Quick Ratio 1.13 1.20 1.32

Debt to Equity (Appendix 4.1)

Total Liabilities / Total Equity. This ratio measures the relationship between the funds obtained from third parties, items of liabilities in general, and the company's own funds, which constitute its assets. A ratio of 1 indicates that both the creditors and stockholders evenly fund the assets. A ratio lower than 1 shows that the stockholders provide more to the assets than the creditors. And a ratio greater than one signifies that the creditors´ share of the assets is bigger than the one of the stockholders. Companies usually aim for a 1:1 ratio.

  2014 2015 2016

Total Liabilities $4,353.10 $4,257.60 $4,053.90

Total Equity $1,686.70 $2,409.80 $2,410.30

Debt to Equity Ratio 2.58 1.77 1.68

Debt to total Assets(Appendix 4.2)

Total Liabilities / Total Assets. It measures the proportion of total assets granted by a company's creditors. This participation is the participation of third parties in the company. It shows the degree of risk of the company. A high ratio means that creditors own a significant portion of the company.  A low ratio is better for creditors (third parties) because their investment is protected, and then for shareholders, as they are the owners of the firm.

  2014 2015 2016

Total Liabilities $4,353.10 $4,257.60 $4,053.90

Total Assets $6,039.80 $6,667.40 $6,464.20

Debt to Assets Ratio .72 = 72% .63 = 63% .62 = 62%

Price/Earnings (P/E) (Appendix 5.1)

Market Value per share / Earnings per share. It measures the relationship between the profits generated by a company and the price of its shares. It also tells us how much market will pay for $1 of profit. This ratio is interpreted as an indicator that measures how many years we have to wait for the profits generated by the company to recover the investment made in the share. So, the lower the P/E ratio, the more attractive the investment is, since the waiting period to recover it is lower.

  2014 2015 2016

Year End Share Price   9.32 9.30 10.12

Earnings per Share .36 .52 .32

P/E 25.89 17.88 31.62

Earnings Yield (Appendix 5.2)

Earnings per share / Market price per ordinary share. This ratio would indicate the profitability that the earnings represent in relation to the share price, and can be interpreted as an interest rate paid by the company. Obviously, the greater the Earnings Yield or profitability created by the company, the more attractive the investment is. This ratio doesn't take into account the growth of the business.

  2014 2015 2016

Earnings per Share .36 .52 .32

Year End Share Price   9.32 9.30 10.12

P/E 3.86% 5.91% 3.16%

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