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Profitability is the capacity to make a profit and the efficiency of a company at generating earnings. Profitability ratios indicate to which extent a business is able to generate earnings. They are used to assess a company’s ability to generate earnings when compared to its expenses over a given time period. (Boundless and money chimp, 2014)
Graph 3: Profitability Analysis of the Coca Cola Company 2010-2012 (Source: Appendix 8)
The Net profit margin decreased considerably from 0.34% in 2010 to 0.18% in 2011 and slightly increased to 0.19% in 2012. There has been a constant decrease in the net profit margin.
Despite the fact that sales revenue increased from $35119 million in 2010 to $46542 million in 2011 and further increased to $48017 million in 2012, the net profit margin still fell because of increases in selling, and general administration expenses from $13194 million in 2010 to $17422 million in 2011 and $17738 million in 2012. This fall in net profit margin is also explained by an increase in income taxes paid from $2370 million in 2010 to $2812 million in 2011 and $2723 million in 2012.
All the revenues and expenses are obtained from carrying out business outside the U.S, hence explaining a greater risk exposure to exchange rate risks. For example, when the value of the $ increases, it means that the net sales revenue is reduced since fewer $ will be exchanged for the local currency. Other reasons for the fall in net profit margin are due to increases in costs, packaging materials or low quality raw materials.
Advertising costs included in the line item selling, general and administrative expenses in the consolidated statements of income were $3.3 billion, $3.3 billion and $2.9 billion in 2012, 2011 and 2010, respectively. (Coca Cola annual report, 2012)
After the acquisition of former CCE’s business in North America, the amount of shipping and handling costs recorded under selling, general and administrative expenses increased significantly in 2011 when compared to 2010. (Coca Cola annual report, 2011)
During the years ended December 31, 2012 and 2011, the Company recorded shipping and handling costs of $2.8 billion and $2.4 billion, respectively, in the line item selling, general and administrative expenses. (Coca Cola annual report 2012)
How profitable a company’s assets are in generating income is shown by the return on assets (ROA) ratio. (Wikipedia, 2014)
The ROA declined significantly from 0.32 % in 2010 to 0.11% in 2011 and remained constant at 0.11% in 2012. A decrease in the ROA indicates a deterioration in profitability and this may be normally caused by a fall in annual net income or an incline in the assets caused by the purchase or by an improvement in the asset.
We find that the consolidated income fell significantly from $11837 million in 2010 to $8646 million in 2011 and then slightly increased to $9086 million in 2012. This fall in revenue explains partly the overall decrease in ROA.
On the other hand, assets held for sale increased to $2,973 million due to Coca Cola’s consolidated Philippine and Brazilian bottling operations which were classified as held for sale. More of the cash balances are being transferred into short-term investments as well as high-quality marketable securities. As a result of this change in strategy, short-term investments increased to $3,929 million and marketable securities increased to $2,948 million. (Annual report of Coca Cola 2012)Other factors affecting the total assets are: the deconsolidation of certain entities, a hyperinflationary economy, investments in joint ventures and finally increases in cash and cash equivalents. (Annual report of Coca Cola Company, 2011)
ROI can be used to measure the performance of the pricing policies, inventory investment, and capital equipment investment and so on. (Entrepreneur, 2014)
The ROI has equally decreased from 0.22 % in the year 2010 to 0.15% in the year 2011 and then it has increased slightly to 0.16% in the year 2012. The overall decrease in ROI is because of a decline in the consolidated income $ 11837 million in 2010 to $8646 million in 2011 and then a small increase to $ 9086 million in 2012. Moreover, there was a slight increase in total equity from $31317 million in 2010 to $ 31921 million in 2011 and a further increase of $ 33168 million in 2012.
During the year 2010, the cost of many investments which were classified as available-for-sale securities was greater than their fair value. Each of these investments was accessed by management individually to see whether the fall in fair value was temporary or were there other reasons. After assessing these investments, management found that the fall in fair value was due to other reasons rather than being temporary. Consequently, the company found impairment charges amounting to $26 million. These were accounted for in the other income (loss). During the year 2010, there was no sale of any securities available-for-sale. (Annual report of Coca Cola 2010)
Due to a change in the Company’s overall cash management program, in 2012, purchases of other investments amounted to $5,266 million. Hence, Coca Cola started making additional investments in high-quality securities so as to manage counterparty risk and consequently diversify their assets. (Annual Report of Coca Cola, 2012),
In 2011, purchases of other investments were $787 million, primarily related to long-term investments made by the Company for nonoperating activities. These investments are primarily classified as available-for-sale securities. (Annual report of Coca Cola, 2011)
Return on equity measures a company’s profitability by showing how much profit a company makes with the money invested by shareholders. (Investopedia, 2014)
The ROE decreased from 0.38% in 2010 to 0.27% in 2011 and increased slightly in 2012. The increase in 2012 is due to an increase in revenue as well as a rise in shareholders’ equity.
Normally, Coca Cola does not raise capital by issuing shares. Instead, Coca Cola uses debt financing to lower their overall cost of capital and consequently increase their return on shareowners’ equity. (Annual report of Coca Cola 2012)
Table 1: Profitability Ratios (Source: Appendix 10)
Graph 4: Profitability Analysis of Coca Cola Company and PepsiCo.Inc 2012 only
The net profit margin for Coca Cola decreased considerably from 2010 to 2011 and then increased slightly in 2012. However, the net profit margin of PepsiCo has been constantly decreasing over the three years. The ROA for both companies decreased considerably but the ROA of Coca was better than that of Pepsi indicating a better performance for Coca Cola Company. Overall, Coca Cola’s performance in terms of ROI was better than Pepsi’s. The return on equity for Coca Cola decreased drastically while that of PepsiCo also decreased altogether over the three years.
The decrease in availability of consumer credit resulting from the financial crisis, as well as general unfavourable economic conditions, may also cause consumers to reduce their discretionary spending, which would reduce the demand for beverages and negatively affect net revenues and the Coca Cola system's profitability. (Wikinvest, 2014).
SALES REVENUE ($ MILLION)
SALES VOLUME (IN MILLION OF CASES)
Table 2: Sales volume and sales revenue (Source: Appendix 8)
Graph 5: Sales Analysis of Coca Cola Company 2010-2012
As shown in the graph above, the sales revenue has increased from $35119 million in 2010 to $46542 million in 2011 and further rose to $48017 million in 2012. The sales volume also increased steadily from 25500 million cases in 2010 to 26700 million cases in 2011 to 27700 million cases in 2012. Sales revenue is one of the most important item of the financial statements as most of the ratios are calculated using this number.
North America is Coca Cola’s largest market and the growth in volume surpassed the volume growth in North America, Coca Cola’s, exceeded predictions from analysts such as Mark Swartzberg at Stifle Nicolaus. Moreover, Co. Coca Cola also benefited from marketing from the World Cup in 2010. In addition to that, Coca Cola also got advantages from increasing sales of PowerAde, one of its sports beverages. (Bloomberg, 2010)
There was an increase in global sales by drink volume by 5 % at Coca Cola, whereby the units at Eurasia and Africa unit displayed the fastest growth at 10%. South Africa hosted the World Cup soccer tournament which covered 160 countries, and Coca Cola used that event to market its products through advertising, hence, attracting more customers. (Wall Street Journal, Year 2010)
The lion’s share of Coca Cola’s sales is from outside the United States. Therefore, changes in currency can affect the figures like revenue extensively. (MARTINNE GELLER, Reuters 2010)
The debt crisis during those years has had an effect on European customers whereby they bought bottled soft drinks to take home instead of buying drinks sold at the restaurants. This proved to be less profitable for the company. (Business recorder, Year 2011)
Due to new products Sales in Japan, Soda volume 5% and hence, did not meet the Wall Street expectations. Moreover, owing to frequent typhoons in Philippines, sales went down in 2012. (Martinne Geller, Reuters)
Other factors which can affect the sales volume and sales revenue are: seasonal changes, inventory management of bottlers’, changes in points of supply, pricing policies, introduction of new products, changes in product mix. (Coca Cola Annual report, 2011)
Other factors that can affect the growth in the sales volume of the business are political forces and consumer trends. However, the company has a sufficiently geographic spread to cater for such decline in sales. Also, to meet the ever changing demand of consumers, the company can opt for acquisitions or go for innovation. (M. Alden, Dividend monk, 2012)
Liquidity measures the extent to which an organization has cash available to meet its short term obligations. (Business dictionary, 2014) Whether a business is worth investing in or not is shown by the liquidity ratios.
Table 3: Liquidity ratios (Source: Appendix 8)
Graph 6: Liquidity Analysis of Coca Cola Company 2010-2012
Graph 7: Liquidity Analysis of Coca Cola Company 2010-2012
The capital used in the daily operations of a business is called working capital finance.. (Market Invoice, 2014)
The working capital for the Coca Cola Company decreased drastically from $ 3071 million in 2010 to $ 1214% in 2011 by $1857 million. The working capital then increased in the next year to $2507 million rising by $1293 million in 2012. The fall in working capital in 2011 is explained by an increase in current liabilities from $ 18508 million in 2010 to $24283 million in 2011 resulting in an increase of $ 5775 million or 31%.
The increase in current liabilities is attributable to an increase in Accounts payable and accrued expenses and loans and notes payable. The increase in working capital, on the other hand is due to a large increase in current assets especially in the following items: marketable securities from and assets held for sale. Marketable securities increased from $144 million in 2011 to $ 3092 million while there were no assets held for sale in the years 2010 and 2011.Its only in 2012 that assets held for sale is recorded at $ 2973 million.
The acid test ratio also known as the quick ratio or the liquidity ratio is calculated by subtracting inventory from current assets and then subtracting the whole by current liabilities.
The normal levels for the quick ratio range from 1:1 to 0.7:1. (Kaplan Publishing, ACCA F7 paper)
The quick ratio for Coca Cola was 1.02 in 2010. In 2011, the quick ratio decreased to 0.92 by 0.10 and in 2012, it increased to 0.97 by 0.05. The fall in the quick ratio from 2010 to 2011 was because of an increase in current liabilities from $18508 million in 2010 to $24283 million in 2011, which is an increase of $5775 million. Consequently, the increase in the quick ratio was due to an increase in short term investments from $1088 million in 2011 to $ 5017 million in 2012.
The current ratio for the Coca Cola Company in 2010 was at 1.17 and it 2011, it fell to 1.05 and in the year 2012, it increased slightly to 1.09.
The fall in the current ratio is due to an increase in current liabilities for the year 2010 to the year 2011. The current liabilities increased from $18508 million in 2010 to $24283 million in 2011. Receipts from customers and the proceeds of commercial paper are the reasons for the rise in total current assets while the increase in the current liabilities are the several alternatives adapted to debt settling and issuance of commercial paper. (Annual Report of Coca Cola Company, 2011)
The increase in current ratio from the year 2011 to 2012 is because of an increase in current assets from $25497 million in 2011 to $30328 million in 2012. Cash and cash equivalents, short-term investments and marketable securities are the factors affecting the total current assets. The fall in cash and cash equivalents was due to a change in Coca Cola’s overall cash management program in which the cash balances were transferred to the short-term investments and marketable securities. (Annual report of Coca Cola Company, 2012).
The factors affecting the total current liabilities are mainly the loans and notes payable which were adversely affected by an increase in the commercial paper balance and other short-term credit facilities respectively. (Annual Report of Coca Cola Company, 2012).
Short term liquidity is indicated by the cash ratio. It measures the company can pay its current financial obligations by using its cash and cash equivalents
The cash ratio for Coca Cola was 0.61 for the year 2010. In 2011, the cash ratio fell to 0.57 representing a decrease of 0.04. In 2012, the cash ratio fell further to 0.48 with a further decrease of 0.09. In other words, the cash ratio has been on the decline for the past three years. This is explained by a huge increase in cash and cash equivalents which was $ 8517 million in 2010 while in 2011; it increased to $12803 million representing an increase of $ 4286 million.
The Coca Cola Company reported declined liquidity in the fiscal year ended 2011, which could impact its growth and expansion plans. (Users Business Education, 2014)
Table 4: Liquidity ratios (Source: Appendix 10)
Graph 8: Liquidity Analysis of Coca Cola Company and PepsiCo.Inc for the year 2012 only
The working capital for Coca Cola was $2507 million while that of Pepsi was $1631 million representing a difference of $876 million. This shows that the Coca Cola Company had a better working capital than PepsiCo for the year 2012. The quick ratio for both Coca Cola and decreased slightly and then rose in the following year. However, Coca Cola had a better and positive quick ratio for the three consecutive years. The cash ratio for Coca Cola is better for all the three years when compared to that of Pepsi.