We will be looking at several types of financial ratios available in assessing the financial position of The Coca-Cola Company: Liquidity Ratios, Asset Management Ratios, Profitability Ratios and Gearing Ratios.
The quantitative findings in this segment can be found in the Appendix section of this report. The results show that The Coca-Cola Company has a good Liquidity Ratio. The company's Current Ratio is 1.12 (0.95 in Q1 2008) and its Quick Ratio is 0.94 (0.80 in Q1 2008). This means that The Coca-Cola Company is still able to generate enough cash to settle its short-term liabilities. There has been a slight improvement in its Liquidity Ratio compared with the previous quarter. As a guide, a current ratio of 2 is ideal. However, in the company's case, 46% of its Current Assets (42% in Q1 2008) are made up of cash and cash equivalents.
At a glance, the company's assets are being managed efficiently. Its Inventory Turnover is 1.13 (1.07 in Q1 2008), which shows that company is trading better. Its inventories declined by 6% in the first quarter of 2009 whereas its sales increased by 3% in the same quarter of 2008. Nevertheless, the company should take note that over increasing its inventories may adversely affect its business performance. This is because costs associated with holding inventories for too long can be very expensive. As such, managing its inventories well is recommended.
There is a slight improvement in the Average Collection Days of 39 (43 Days in Q1 2008). Although the company is able to meet its short-term liabilities; it should still make an effort to improve the collection of its debts. The credit term given to its customers is not stated; however, as a guideline, 30 days is recommended. In this case, the company's customers are enjoying slightly more than the normal credit terms and this should be monitored.
The profitability of The Coca-Cola Company is sound. Its Gross Profit Margin of 69% (64% in Q1 2008) is quite high. This is a 4% drop compared to the first quarter of 2008, due to the lower sales in the first quarter of 2009. Although, its sales performance shows a slight improvement from the previous quarter, the comparative results from the first quarter of last year did not fair as well. The company should analyze further the cause of this decline - whether the efficiency of its production dropped resulting in lower finished goods or simply experiencing slower sales due to consumer choice.
The Return on Assets and Return on Equity ratios show similar results. At 3.2% and 6.4% respectively (3.2% and 6.5% respectively in Q1 2008), these can still be improved on. The Gearing Ratio is quite low at 24% (14% in Q1 2008). Although it has nearly doubled, the results should not cause an alarm.
The estimated cost of capital of the company is 12.75%. This measures the opportunity cost of the investors that their investment is creating value. It measures what it costs to raise capital. It is advisable to have a balance between debt and equity sources. This balance should be the mix that gives the lowest possible cost of capital consistent to the attributes of the company.
Considering the sluggish economic situation across the world, The Coca-Cola Com