Financial analysis of companies

Financial Analysis

Financial analysis is the process by which companines or businesses big or small have a look at their progress. There are three aspect of the business which are examined this include viability,stability and profitability.Financial analysis could also be called financial statement analysis.

Financial analysis report are prepared from ratios taken from the financial statement of the business which the management use to act on the business.

The aims of the financial analysis are:

· Profitability:this is a both short-term and long term aim to achieve profit and sustain it.It can be calculated from the income statement.

· Solvency:when the business as to pay it creditors and in the long term.Can be calculated from the balance sheet.

· Liquidity:It aim is to have stable cash flow at the same time meeting it short term obligation.Also can be calculated from balance sheet.

· Stability:process of staying in business in the long term and maintain profit.It can be calculated from both in income statement and balance sheet and other financial and non financial indicators.

Financial analyst usually use three ways to make financial analysis for the business which include

· Past performance:using past performance of some year say three to five years to compare the present performance.

· Future performace:this also involve using past ratios and applying using statistical method to predict the future using present and future valve.

· Comparative performance:this is comparing the datas from two similar firm .

I will be analyzing and comparing the financial ratios of coca cola and pepsi.

Among my comparisng among these two company includes the following

· (Porter,SWOT,STEEPLE)

· Ratio analysis (liquidity,profitability,asset management,debt management,market ratios.)

· Growth.

· Degree of Operating Leverage(DOL),Degree of Financial Leverage(DFL).Degree of Combined Leverage(DCL).

· Working capital policy.

· Debt struture and risk.

I will start with the ratio analysis.

Liquidity: It is the extend to which an asset can be bought or sold with out changing the asset’s price.Liquidity also measures the company’s ability to pay short-term obiligation.It can be measured by four ways.

Liquidity ratio for Coca Cola

Liqiudity ratio for Pepsi

What does this numbers means or what they try to tell the us about the company.

Net Working Capital: it shows us the company efficiency and it financial health in the short-run. With positive net working capital the company can meet it short-term responsibilty while with negative it can not and may lead to problem in the future. As I have calculated from the tables aboves of the net working capital of both Coca-Cola and Pepsi and see that Coca-Cola is more in the negative espcially in the year 2006,and 2008 compare to the Pepsi who has a very strong positive figures in the three years calculated. This means that Pepsi has more financial stability than Coca-Cola and can meet it’s short-term liabilities than Coca-cola if they can.

Current Ratio: it is also know as liqiudity ratio. This shows the company the degree to which they can meet their short term liabilites(debt and payable) with the company’s short term assets( cash,inventories and receivable). The higher the ratio the more likely the company can pay easily. At the same time if the ratio is much higher than 1 it can also tell the company if it keeps too much cash or inventories which can be re-invested in the company rather than keeping. And if it is less than 1 means the company can not pay off it liabilities if it was to come at this point,but does not necessary mean the business will go bankrupt even if it tells us the company is not in good financial health. From the tables in the previous page we can see that the current ratio of the two companies. As before Pepsi is in much better financial shape than Coca-Cola,with Pepsi having well above 1 can meet any liabilites immediates from the three years calculated but for Coca-Cola just the year 2007 was the only time from the three years calculated that it can meet it obligation and year 2008 was much worse.

Quick Ratio: this tells a company about it short-term liquidity. The quick ratio measures a company’s ability to meet it’s short-term obligation with its most liquid assets. According to financial analyst quick ration is a more conservative way to calculate company’s short-term run than current ration. This is because inventories are excluded from the company’s current assets because company’s can have problem turning their inventories to cash quickly. And if there is a short term liabilities to be paid then inventories can help. The higher the quick ratio the bbetter postion the company is. Again we can see from the calculated tables on the previous page Pepsi is in much better financial shape than Coca-Cola in all the three years we calculated.

Cash Ratio: The most conservative liquidity ratio for judging the financial stability of a company on a short-term basis. This is because inventories and account receivable are left from the equation. This two elements are important but since they have not been made in to cash or can be hard to make into cash,it may not be used to meet short-term liabilities. This is usually used by creditors to determine how much debt they will be willing to extend to the asking party.

The next ratio analysis I will be calculating and analyisis is the asset management.

II. Asset Management: this ratio is use to measure how the company has used it assets to generate revenue. It also give us a look how sucessful the credit policy and inventory management of the company’s are. Most investors are more interested in the this ratio analysis than other. The table below shows the calculations of the asset management for both Coca-Cola and Pepsi.

Asset management ratio for coca-cola.

Asset management ratio for Pepsi

What does this numbers means or what they try to tell the us about the company.

Total Asset Turnover: This measure how efficient a company is converting it’s asset to revenue.If it not good then it also tells the company to find other assets that can generate sales. The higher the more efficent the company is turning it’s asset to revenue. It can also tell us about the price strategy in the sense that the higher this ratio means the lower lower profit and those with lower number have a higher profit. We can see from the table above that that Pepsi has a higher total asset turnover than Coca-Cola,which means it is more efficient than the Coca-Cola company,but on the hand coca-Cola makes more profit than Pepsi does.

Account Receivable Turnover: this also show how effectiveness a company is in converting its asset to sales and extending it to it’s credittors and collecting of it’s debts. A higher number means that the company either is operating in cash basis or its extension of credit and collection of accounts receivable is efficient. In this department we conclude that Coca-Cola is more effective in the are of giving credit and collecting it accounts receivable much better than Pepsi does.

Account Receivable Period: the account receivables indicates how long, on average, it takes for the firm to collect on its sales to customers on credit. This ratio is also known as the Days’ Sales Outstanding (DSO) or Average Collection Period (ACP). On average Coca-cola does collect their money from creditors much faster than pepsi the difference between them is about 10days from the calculation above.

Inventory Turnover: This shows us how the companys inventories are sold and replace in a given period of time. A low turnover shows that there is a lot of inventories in the company and very poor sales. This is bad for a company because it investment in the invetories is making back nothing and if prices should fall then the company might be in trouble. Well a higher turnover means good sales or in-effective buying by the company as well. Both companies that is Coca-Cola and pepsi seems to be almost equal,so neither of them is doing better than the other. Maybe pepsi does better but it really so close.

Inventory Period: this shows us on average how long inventories sits in the company stores unsold. The higher the day the poor the companys sales. Also both companies have identical numbers.There is no one doing better than the other too in this area.

The next financial ration I will be discussing about is the debt management ratio.

III Debt Management: it gives an insight to the extend the company can borrow money for its operation.Usually owner and creditors are interested in this ratio because it give the risk postion of the company.

The tables below shows the various debt management ratios for both Coca-cola and Pepsi.

Debt management ratio for Pepsi

Debt management for Coca-Cola

What does this number show the company involved.

Debt Ratio: this measure the companys debts to its assets. It is calculated by dividing the total debt by total asset. If the debt ratio is greater than 1 it means the company has more debt than it asset can cover. And opposite is the case if the debt ratio is less than 1 then the company has more asset than debt and also show the company financial health. Most investors looks at this ratio to have an idea of the company risk. When we look at the number in the table above we can see that that the debt ratio for Coca-Cola is almost 1 and that of pepsi is much smaller which suggest that pepsi has more asset compare to its debt than Coca-Cola. Pepsi is in a better financial health than Coca-Cola.

Debt/Equity Ratio: it is calculated by the total liability by the shareholders equity. Sometime long time liability can be used instead of total liability this is when we are considering only interest. It measures a companys financial leverage. A high numbers tells us that a company is financing it growth with debt very aggresively. It accumulate debt for growing. It can pay off with high earning. We can see from the calculated table above that Coca-Cola has a very high debt/equity ratio to Pepsi which suggest that Coca-Cola is aggressively making debt to finance it growth than Pepsi. It also show Pepsi is accumulating less debt than Coca-Cola.

Financial leverage Multillier: A higher ratio indicates possible difficulty in paying interest. Coca-Cola will have more difficulty in paying it debt than Pepsi because it has a very large number.

Time Interest Earned: It calculated by by dividing the companys earning beofre interest and tax by interest. It is also use to measure the company ability to pay back it debt. A large number means that the company maybe paying it debt with its earnign which can be used for other project. Pepsi has a very large number compare with Coca-Cola. Pepsi is using most of it earning to pay off it debt which can be used to make other project and borrow at a low cost.

IV. Profitability

It is used to assess a companys ability to generate earning as compared to it’s expenses.

The tables below show different ways in which profitability ration can be calculated and I will be doing for both companies that is Pepsi and Coca-Cola.

Profitability ratio for pepsi

Profitability ratio for Coca-Cola