Tag Archives: Financial Statement

Coca Cola Financial Statement Analysis

Coca Cola Financial Statement Analysis

Financial Statement Analysis

Financial ratios are tools to help with the interpretation of results. They are used to indicate the financial performance of a company in comparison to its previous years. Parties in an organization can also use ratio analysis as a basis for making decisions. For instance, managers can use them to identify key strengths and weaknesses upon which strategies can be formed. Funders can use them to make comparison between companies and make a judgment on the effectiveness of the management. The various ratios used in analysis include profitability ratios, activity ratios, liquidity ratios, the long-term solvency ratios and the short-term solvency ratio.

Liquidity ratios

They are used to determine if a company will be able to meet its current obligation when it becomes due (Rutkowska-Ziarko, 2015). Current ratio measures the firm’s ability to pay off the short-term liabilities using current assets. Current ratio is an important liquidity ratio since it indicates whether the firm can be able to pay off liabilities that fall due within a year. Current assets represent those assets that the firm can easily convert into cash. They include cash and cash equivalents, marketable securities, and other items. Current ratio is obtained by dividing current assets by the current liabilities.

An ideal current ratio is ‘2’. However, a ratio of 1.5 is also acceptable if the firm has adequate arrangements with its bankers to meet its short-term requirements of funds. It indicates the extent to which the current assets exceed the current liability. A high current ratio shows that funds are not being adequately employed whereas a low current ratio indicates danger to the management. The current ratio of coca cola company has increased meaning the funds are being well utilized. The company should continue utilizing the funds to ensure the ratio increases to a range of between 1.5 and 2.

Related: Coca-Cola Company Organizational Behavior

Profitability ratios

They are used to depict the efficiency in which operations are conducted in a company (Rutkowska-Ziarko, 2015). Gross profit margin, net profit margin and the return on equity are used. The gross profit margin is the ratio of the gross profit to the net sales. It indicates the limit in which a company should manage its operating expenses. The GPM of Coca Cola Company has maintained a percentage of 60-61% in the last three years meaning the sales have remained within the same range. The net operating margin has also remained within the same range whereas the return on equity has improved from last year. This shows there is effective utilization of assets in the company.

Leverage ratios

The ratios indicate the financial position of a company. A company is said to be financially sound if it’s able to meet its short term and long term financial obligation without difficulty. The ratio shows the soundness of the financial policies used by accompany. The debt to equity ratio and debt ratio are used to determine the financial position of a company. The debt to equity ratio is the ratio of total debt to the shareholders equity. It is said to be ideal when the shareholders fund equal to the long-term debt. However, it is also acceptable if the liabilities do not exceed twice the shareholders’ funds. Coca cola company debt to equity ratio has increased from the year 2015 to the year 2016. This means more funds in form of long-term debts have been acquired over the year. The management should not worry, as the debts do not double the amount of the shareholders equity. The debt ratio is the ratio of the sum of the current liabilities and the long-term debt to the total assets.

References

Rutkowska-Ziarko, A. (2015). The influence of profitability ratios and company size on   profitability and investment risk in the capital market. Folia Oeconomica      Stetinensia, 15(1), 151-161. doi:10.1515/foli-2015-0025

https://www.sec.gov/Archives/edgar/data/21344/000002134417000009/a201612310-k.htm

Related:

Case study of Amazon and Wal-Mart-Financial Statement & Data Analysis

 

TESCO PLC CASE STUDY-Financial Statement & Data Analysis

TESCO PLC. CASE STUDY-Financial Statement & Data Analysis

Table of Contents

  1. Introduction. 2
  2. Overview of Tesco PLC.. 2

III.        Literature Review.. 3

  1. a) Efficient Market Hypothesis. 4
  2. b) Types of Profit warnings. 5
  3. Results and Analysis. 6
  4. Conclusion and Recommendations. 10
  5. References. 11

Part B: Motivations behind Earnings management and creative accounting. 12

          I.            Introduction

Tesco Plc. announced two major profit warnings in the year 2014 on September 22nd and 9th December. These two announcements had an adverse effect on the stock volumes. It came out that the company had misstated its profit statements and this aspect made its stock price take a deep dive. Therefore, this report presents the abnormal returns analysis for the company for the period of the warning. The report has the following sections; introduction, overview of Tesco Plc., literature Review, results and analysis and conclusion and recommendations.

       II.            Overview of Tesco PLC

Tesco Plc. a supermarket chain made major announcements towards the last quarter of the year 2014. The company had made six profit warnings in a year. The announcement was made by the incoming CEO Dave Lewis who had only spend 100 days in the company. The CEO warned the share market the predicted profits that were expected on the year ending on February 2015 had a £500 million deficit compared to the expected markets forecasts as they didn’t exceed £1.4bn. These announcements saw the company share price halve to its lowest in 14 years’ time. The accounting scandal of overstating their profits was also a major blow to investors an aspect that saw them lose confidence with the company. In less than a year, the company had made major changes including hiring a new CEO.

These situations put the company into a major crisis that lead it to face tough economic times. The top ten shareholders sold some of their shares after that scandal and the profit warning an indicator they had sensed some danger. However, while majority were frustrated with the state of the company, others had the hope that the company was at its lowest but it could still make a turnaround and recover the market share. The shares saw a deep dive by 16% after the announcements and the company traded way below other competitors like FTSE 100.

   III.            Literature Review

Accounting information is vital in stock markets. The accounting data that is available to the public is used to explain the changes that affect the stock prices. Many authors have evaluated literature and gave varying views on the effects of financial announcements on the aspects of stock markets. Negakis (2005) noted that the earnings and book values have no effect on the stock prices. However, various authors like Hirschey et al., 2001; Liang and Yao, 2005), identified that there exist various relationships between accounting parameters and the stock prices.

Further, Fama (1970) argues that the stock prices must reflect on the financial information that is presented to the shareholders in an efficient market. He further adds that the financial information provided to the public for the publicly owned companies influence the stock prices on an efficient market and the investors would always react to such announcements. However, some research reveal that announcements made on financial markets may not be reflected by the variations of stocks (Helbok & Walker, 2003).

Over the decades, companies have made public announcements that target the investors like takeover announcements, change of company management, assets acquisitions, dividend announcements among other financial related information. It has been established in literature that these announcements have an impact on the movement of stock prices. While some investors might perceive some announcements as a warning signs, others would not do anything when such announcements are made. The reaction is quite different ranging from one company to the other as other factors like market share play a role. According to Vega (2006), there is a change of the relationships between stock prices in the markets and the several types of public announcements made. Moshirian et al., 2012 revealed that negative public announcements adversely affected the movement of the stock prices in his study of Vilnius Stock Exchange.

In their research, Eizentas et al. (2012) evaluated abnormal returns on stocks and how it was impacted by the financial information’s signals on stock market prices. Under their study that they found few categories of financial announcements that had an influence on the stock prices. Further in their study, Kiete and Uloza (2005) adopted Cumulative Abnormal Returns and identified a semi-strong form of EMH that existed in Vilnius SE where financial brokerages exploited the market inefficiencies. They further added that financial information was a crucial key on the company returns.

Alidoro and Grigalinjnienơ (2012) also evaluated the stock price reactions to the key financial information like profit warnings and found out that the reaction to positive financial information was a bit positive on the stock prices compared to the  negative financial information. He further adds that existence of some inefficiencies leads to the investors taking advantage of that to gain profits. Generally, positive public announcements lead to a positive stock price movement while a negative public announcement may generally lead to a decline is stock prices. While some events affect these movements, some might be short lied thus the investors may not react at all to the changes.

a)      Efficient Market Hypothesis

According to EMH, investors have a limited chance to buy stocks as they are always traded at their fair value on the SE (Polk, 2013). EMH has some issues of anomalies where regular patterns are noticeable for asset returns. The patterns are regular and reliable an indicator that they can be applied in forecasting of stock prices (Jackson & Madura, 2003).

There are three forms of EMH and are based on the underlying assumptions of price efficiency. They include; weak-form market efficiency, semi-strong market efficiency and strong version of market efficiency. Under weak market efficiency it’s stated that the available financial information reflects the prices for the publicly traded assets as well as the future trends cannot be predicted by the past prices while the semi-strong established that stock prices react instantaneously to the public financial announcements while the strong version argues that private insider information and public knowledge reflect the asset prices.

b)     Types of Profit warnings

Profit warnings according to analysts refer to an unexpected outcome in that the earnings for a given period or quarter may not reach the current expectations. The earnings shortfall maybe due to low sales, reduced net profits, escalating expenses, earnings per share among others. The warnings are normally made for the ending year even though quarterly announcements can be made (Kasznik & Lev, 1995). Profit warnings that there will be a shortfall of profits, sends a negative message to investors and that would lead negative reactions that could lead to a decline in stock price movement. When a company publishes its financial information, a decline in sales could be a profit warning and if the decline is persistent, then the stock prices may be influenced negatively overtime. Reduced profits that maintain a trend over several quarters consecutively or even in years could send a signal to investors and the stock prices and volume would be negatively affected (Skinner, 1994).

Profit warnings will influence the stock prices differently ranging from a company to the other. Large-sized companies would be less affected by profit warnings compared to medium or small sized companies. Also, a profit warning may lead to an overreaction by the investors in that when there is a sudden drop of profits with unclear circumstances, that could be a red signal to them especially when there are accounting scandals (Tserandash & Xiaojing, 2010). An underreaction indicates less reaction by the investors after a warning has been send and this could be when the profit drop is less significant. No reaction by the investors come in when there is an expected drop but the market is promising so the company will gain. Profit warnings are quite useful as they send a signal to the investors to act for the sake of the company. The shareholders may chip in and help the company recover from pressing debts that could be leading to declining profits. The investors can as well offer decisions to help the company recover.

    IV.            Results and Analysis

This section presents the findings of the abnormal returns for Tesco for 22-9-2014 & 09-12-2014 period after a profit warning was send. It’s expected that the stock volumes and prices declined tremendously after the announcements. Also, the findings present the company returns for the period, CAPM, AR and CAR for Tesco Plc.

A ten-day (-5 & +5 days) analysis for abnormal returns was done with an average trading volume of -260 and -10 days. The results are presented in the figure below.

Figure 1: -5 & +5 DAYS AR

From the results as shown in Figure 1 above, 5 days before the announcement of 22nd September, the returns were normal but at the 5th to 6th day, there was a sharp incline indicating the abnormal returns that were because of stock sales due to the warnings. After the period of two days, the curve took a deeper curve with negative returns before assuming the normal curve again. The results are in line with Eizentas et al. (2012) who noted that financial announcements had an adverse effect on the stock prices.

Also, the researcher calculated the daily cumulative abnormal return s for the company for -5 days and +20 days for each of the profit warning using CAPM. The results are as shown below.

22ND September Profit Warning

The figure below presents the September profit warning.

Figure 2: Sep. Profit warning

From the results as shown in Figure 2 above, the abnormal returns are experiencing a declining curve that majorly operates on the negative side.

Figure 3: December Profit Warning

Results as shown in Figure 3 reveal that the abnormal returns for December are moderately operating along the zero line but with a sharp plunge on the 21st day. The cumulative abnormal returns operate on the negative side. This is an indicator that the stock was not doing well. Comparing the two profit warnings, they almost assume a similar curve even though in December there was adverse effects compared to September.

From the results presented above, they are in line with the literature in that the profit warnings issued adversely affected the stock prices of the company. The findings collaborate with Skinner (1994, 1997) and (Kasznik and Lev, 1995) who identified profit warnings having unimpressive implications on the stock markets as the case presented by the findings.

       V.            Conclusion and Recommendations

The study concludes that profit warnings have negative effects on stock markets and would influence the stock price movements. The abnormal returns because of such announcements are short lived as for the case of Tesco, it was experienced for two days then was followed by a sharp decline. Profit warnings are treated as negative announcements and would trigger investors to sell part or all their shares if the company keeps issuing profit warnings every other time like for the case of Tesco. In the study, I would recommend that Tesco to have both an external and internal accounting team that will compare the accounting figures and accounting misstatements can be avoided prior publishing the financial reports.

    VI.            References

Collett, N. (2004). Reactions of the London stock exchange to company trading Statement announcements. Journal of Business Finance & Accounting, 31(1/2),

Eizentas, V., Krušinskas, R., Stankeviþienơ, J. (2012). Impact of public information signals on share prices: evidence from Lithuania. Economics and Management, 17, 879-888.

Fama, E. F. (1970). Efficient capital markets: review of theory and empirical work. The Journal of Finance, 25, 383-417.

Helbok, G., & Walker, M. (2003). On the Willingness of UK Companies to Issue Profit Warnings: Regulatory, Earnings Surprise Permanence, and Agency Cost Effects. Working Paper, University of Manchester.

Jackson, D., & Madura, J. (2003). Profit Warnings and Timing. The Financial Review, 38, 497-513.

Kasznik, R., & Lev, B. (1995). To Warn or Not to Warn: Management Disclosure in the Face of an Earnings Surprise. The Accounting Review, 70, 113-134

Kiete, K., Uloza, G. (2005). The information efficiency of the stock markets in Lithuania and Latvia. SSE Riga Working Papers, 2005:7 (75).

Laidroo, L. (2008). Public announcement induced market reaction on Baltic stock exchanges. Baltic Journal of Management, 3, 174-192.

Laidroo, L.; Grigaliuniene, Z. (2012). Testing for Asymmetries in Price Reactions to Quarterly Earnings Announcements on Tallinn, Riga and Vilnius Stock Exchanges during 2000-2009. Baltic Journal of Economics, 12, 61 – 86.

Moshirian, F., Nguyen, L. H. G., Pham, P. K. (2012). Overnight Public Information, Order Placement, and Price Discovery during the Preopening Period. Available at: http://ssrn.com/abstract=1785682

Polk D (2013) HK profit announcements: to warn or not to warn? IFLR

Skinner, D. J. (1994). Why firms Voluntary Disclose Bad News. Journal of Accounting Research, Spring, 38-60.

Tserandash T & Xiaojing W (2010) The relationship between the Profit warning and stock returns: Empirical Evidence in EU markets; Published Master Thesis, UMEA School of Business UK

Vega, C. (2006). Stock price reaction to public and private information. Journal of Financial Economics, 82, 103-133.

 Part B

Creative accounting describes a best practice in accounting and is undertaken to solve individual conflict of interest that arise in a workplace as they care more on self-interests while overlooking the ethical dimensions of accounting. Managers and accountants can manipulate their financial statements and reports as a misuse of their position in the company thus giving a false information to the shareholder. Motivations for creative accounting are known to be the stimulating behavior for creative accounting in the company. One of the key motivators for creative accounting is one reporting a decline in business income to lower the payable tax. Also, when a manager reduces the company losses to huge figures to make the company to appear having a better performance in future. Lastly, also providing a positive view on the expectations, securities valuation as well as reducing the existing risks in an anticipated capital markets to maintain the performance of the company.

Burger King Case Analysis -BBA 3210, Business Law

Coca Cola Company & PepsiCo  Financial Statement and Data Analysis

Question

-Can you please inform the writer to notify me what are the two companies he/she selected before he/she starts doing the assignment.

-Please use Profitability financial ratio if possible.

-Select two companies operating in the same industry and download their latest annual reports
(minimum year ending 2014). YOU MUST NOT select Thorntons plc.

Sample paper

Coca Cola Company & PepsiCo  Financial Statement and Data Analysis

Industry Overview

Coca Cola Company and PepsiCo are both in the beverage sector since they produce ready-to-drink beverages. The beverage industry is one of the fastest growing industries in the world and among the earliest industries. This sector includes companies that manufacture both alcoholic and non-alcoholic drinks. The alcoholic segment includes spirits, wine and beer. On the other hand, the non-alcoholic segment includes soft drinks, coffee, bottled pure water, fresh fruit juices and tea (Wells, 2000). Due to the competitiveness in this industry, most companies turn to producing variety of products, improving their distribution channels as well as their marketing strategies in order to expand their businesses.

Although many of the beverages such as tea, wine and beer have existed for centuries, the beverage industry has only evolved over the past few centuries. The beverage sector is one that is highly fragmented as is evident through the numerous manufacturers, different packaging methods, production processes and even the end products. From the 1990s, beverage companies have evolved from local production to corporate giants that serve international markets. The development in this industry was brought about by the adoption of mass production technique that allowed for expansion into international markets (Nolan, 2007). Other factors also brought about development in the industry such as advancements in product packaging and processes that helped increase the shelf-life of products. Other advancements such as refrigerators helped products such as beers to brewed in plenty without the fear of suffering losses.

Company Profile

Coca Cola

The Coca Cola Company was founded and in operation in 1886 in Atlanta, Georgia as a manufacturer, retailer and marketer of syrups and non-alcoholic beverages. One of the best known products of the company is its flagship product Coca-Cola commonly known as Coke. Since 1889, the company has operated as a franchised distribution system within the industry; it is invoked in the production of syrup concentrates and sells it to various bottlers with sole territorial areas all over the world. However, the Coca-Cola Company has its anchor bottler situated in North America.

Coca Cola Company is the owner and marketer of four of the world’s best seller’s top five non-alcoholic beverage brands which are: Fanta, Coca-Cola, Diet Coke and Sprite (Armus, 2005). According to the 2015 annual report, the company now sells beverage products with their trademark to over 200 countries. These beverages account for over 1.9 billion sales of the estimated 58 billion beverage servings consumed all over the world on a daily basis. The company operates on the belief that its success greatly depends on their ability to associate with its consumers by ensuring they provide products that meet their needs and lifestyles.

PepsiCo

PepsiCo Inc is one of the American multinational beverages Company that also manufactures snacks and has its headquarters in Purchase, New York. The company was commenced in 1965 after the merger of two major companies; Pepsi-Cola Company and Frito-Lay. Since then, expansion has occurred within the company from Pepsi to a company providing products that range from beverages to grain-based snacks. Its expansion included the acquisition of two companies Tropicana and Quaker Oats Company in 1998 and 2001 respectively; it saw Pepsi add the Gatorade brand to its portfolio. By 2012, retail sales of PepsiCo brands generated revenue over $ 1 billion for every piece with the products being distributed to over 200 countries. The bottling and distribution is done by PepsiCo together with other licensed bottlers in other parts of the world. The company has developed and grown to be the second largest catering and Beverage Company in the world.

Competition

Over the years, Coca Cola and Pepsi have been great competitors in the beverage industry. Historically, Coca Cola has been considered Pepsi’s major competitor until the year 2005 in December when PepsiCo beat Coca Cola for the first time ever in 112 years in terms of market value. However, in 2009, tables turned with Coca Cola holding a higher market share within the US than Pepsi in sales of carbonated soft drinks. Through mergers, partnerships and acquisitions done by PepsiCo in the year 1990 and 2000, the company’s business has expanded with the inclusion of a wider product base inclusive of snacks, foodstuffs and beverages (McKelvey, 2006). These products have seen the company make a lot to an extent that the mainstream of the revenue has shifted from the sale and production of carbonated drinks.

Corporate Social Responsibility

In an effort to support the wellbeing of its consumers, Coca Cola ensures that it offers reduced, low or completely calorie-free options in over 191 markets in which it operates. In 2014 alone, the company was able to support more than 300 programs for healthy living in over 112 markets. In that same year, Coca Cola foundation together with the company itself gave back to the community $126 million which is approximately 1.3% of its operating income. Through this efforts, the company has managed to support women, children and communities in general lead better, healthier lives.

For the case of PepsiCo, through its vision to deliver top notch financial performance, it has managed to reduce its operational water use by 23% per unit of production which shows great effort in conservation of water. In addition, the company has also recorded 1 billion liter reduction in absolute water use. Due to its high values portrayed in its business operations, Pepsi has been ranked among the World’s Most Ethical Companies by Ethisphere for ten consecutive years (2007-2016) which is a proof of just how much Pepsi value the community which it serves by maintaining high business standards at all times.

Financial Aspects

Revenue Outlook

        The Coca-Cola Company recognizes revenue when the transfer of product to the bottling partners, through a resale or to its direct consumers. The relationship between the parties exists as an agreement where the delivery has been made and price is either fixed or determinable and finally collectability is rationally guaranteed.  The financial year 2015 saw the sales capacity and unit sales case size both grow with a margin of 2 % in comparison with the previous year. Although having had a 2% growth on sales of case the Coca- Cola net profit revenue decreased by a 4% margin which was a $ 1,704 million loss (Cola, 2015).It attributed the loss to the unfavorable impacts on the foreign exchange fluctuations. The United States dollar was at a stronger position than most currencies with the company operations. The gross profit with the company also decreased to 60.5 percent in 2015 a 0.6 decrease from the previous year 2014. It was also I attribute to the foreign exchange loss, although offset by the lower prices on commodity as well as a positive price mix in its areas of operations.

        PepsiCo net revenue as at 2015 stood at 63,056 million a 5 % decrease from the previous year. The total operating profit decreased by 13 % while the operating margin decreased 1.2 percent (PepsiCo, 2015). Unlike the competitor, PepsiCo had a certain operating cost increase. It also acknowledged that unfavorable foreign exchange was a risk factor to the decrease in operating margin. Unlike the Coca-Cola Company its marketing mix did not work for its revenue growth, PepsiCo has an increased cost on advertisement and marketing.

 

Marketing and risk factor

        PepsiCo acknowledges offering of incentives and discounts on various products as a means of marketing. Most of its incentives arrangement is not more than a year, with only incentives such as fountain pouring rights, extending a year. The company advertising and other related marketing expenses increased with $ 0.1 billion and stood at $2.4 billion. PepsiCo also have part marketing as deferred expenses, which are expensed with the ear once utilized. They include media contribution and personal services, promotional materials and production costs of future media advertising. Deferred advertising incurred by PepsiCo is $40 million. The distribution cost which included cost of shipping and handling activities was $ 9.4 billion (PepsiCo, 2015)

         Coca-Cola Company had an increase in its marketing and advertising cost attributed to the investment in strengthening the companies brand and partially offsetting the foreign exchange impact. Selling and distribution expenses with Coca-Cola also reduced in 2015, attributing the reduction on acquisitions and divestitures impacts within the business operations.  The Coca-Cola Company also focused more on marketing spending on consumers facing promotional overheads as well as saving on output and initiatives towards reinvestments. The high risk factor facing both companies if the foreign exchange fluctuations against the constant U.S Dollar, causing losses on both companies on international operations. 

Profitability ratio

The ratio measures the company ability to utilize its resources in the generation of profitable sale within its operations. The ratios include Gross profit Margin, Net Profit Margin, Operating Profit Margin, Return on Equity (ROE) and Return on Assets (ROA). The gross profit margin is an indicator of the percentage of income available to cover both operative and other outflows. The gross profit margin for Coca-Cola stood at 60.53 %, which was a deterioration from the previous year (Cola, 2015). PepsiCo stood at 54.99%, lower than Coca- Cola although an improvement from the previous year.

         The operating profit margin is a representation as operating income divided by revenue. It measures the proportion of companies’ revenue left after expensing on its valuable costs of production. PepsiCo operating profit stood at 13.25 %, while Coca- Cola stood at 19.70% both companies highlighting a decrease from the previous year. Coca-Cola has a higher proportion on income left as compared to PepsiCo.

        The Net profit margin which is an indicator of company profitability margin is a representation of net income against the revenue. It highlights the percentage of revenue within the company after all the expenses have been deducted from the sales. Standing at 16.60% Coca-Cola Company highlighted a slight improvement from the previous year. PepsiCo net profit was at 8.65%, with Coca-Cola almost doubling it figure which was a decrease from the previous year.

        Both companies had an increase in the Return of Equity, PepsiCo stood at 45.73% while Coca-Cola stood at 28.77%. The return on Equity is computed as net revenue against shareholders equity. It is a highlight of the amount of net income returned as a percentage of the shareholders equity. It effectively measures the profit within the corporation though a highlight on how much profits is in generation with the money invested by the shareholders.

 The Return on Assets which is the net income against total company assets for Coca- Cola stood at 8.16 % while that of PepsiCo was at 7.83%, which was a decrease from the previous year. The Return on Asset for Coca- Cola was a slight increase from the previous year. The Return on Assets provides a vivid idea on how most of the managers are effective in utilization of assets in generation of earning. It is clear that both companies Return on Asset falls on the same level although PepsiCo is lower with a slight margin.   

References

Armus, S. (2005). Coca-Cola Company. France and the Americas: Culture, Politics, and History: a Multidisciplinary Encyclopedia, 273.

Cola, C. (2015). Annual financial Report 2015. Form 10-k.

McKelvey, S. M. (2006). Coca-Cola vs. PepsiCo-A” Super” Battleground for the Cola Wars? Sport Marketing Quarterly, 114.

Nolan, P. Z. (2007). The Beverage Industry. In The Global Business Revolution and the Cascade Effect. Palgrave Macmillan UK.

PepsiCo. (2015). Annual Financial Report 2015. Form 10-k.

Wells, B. H. (2000). Carbonated-Beverage Industry. Journal (American Water Works Association), 860-864.

 

Appendices

 

Gross profit margin

Coca-Cola

Gross profit margin = Gross profit ÷ Net operating revenues * 100
= 100 × 26,812 ÷ 44,294 = 60.53%

PepsiCo.

Gross profit margin = Gross profit ÷ Net revenue * 100
= 100 × 34,672 ÷ 63,056 = 54.99%

 

Operating Profit Margin

Coca-Cola

Operating profit margin = Operating income ÷ Net operating revenues * 100
= 100 × 8,728 ÷ 44,294 = 19.70%

PepsiCo.

Operating profit margin = Operating profit ÷ Net revenue * 100
= 100 × 8,353 ÷ 63,056 = 13.25%

 

 

Net Profit Margin

Coca-Cola

Net profit margin = Net income attributable to shareowners of The Coca-Cola Company ÷ Net operating revenues * 100
= 100 × 7,351 ÷ 44,294 = 16.60%

 

PepsiCo

Net profit margin = Net income attributable to PepsiCo ÷ Net revenue * 100
= 100 × 5,452 ÷ 63,056 = 8.65%

 

Return on Equity

Coca-Cola

ROE = Net income attributable to shareowners of The Coca-Cola Company ÷ Equity attributable to shareowners of The Coca-Cola Company * 100
= 100 × 7,351 ÷ 25,554 = 28.77%

 

PepsiCo

ROE = Net income attributable to PepsiCo ÷ Total PepsiCo shareholders’ equity * 100
= 100 × 5,452 ÷ 11,923 = 45.73%

 

Return on Assets

Coca-Cola

ROA = Net income attributable to shareowners of The Coca-Cola Company ÷ Total assets * 100
= 100 × 7,351 ÷ 90,093 = 8.16%

PepsiCo

ROA = Net income attributable to PepsiCo ÷ Total assets * 100
= 100 × 5,452 ÷ 69,667 = 7.83%

 

COCA-COLA

Balance Sheet

USD $ in millions

Dec 31, 2015 Dec 31, 2014 Dec 31, 2013 Dec 31, 2012 Dec 31, 2011
Cash and cash equivalents 7,309  8,958  10,414  8,442  12,803 
Short-term investments 8,322  9,052  6,707  5,017  1,088 
Cash, cash equivalents and short-term investments 15,631  18,010  17,121  13,459  13,891 
Marketable securities 4,269  3,665  3,147  3,092  144 
Trade accounts receivable, less allowances 3,941  4,466  4,873  4,759  4,920 
Inventories 2,902  3,100  3,277  3,264  3,092 
Prepaid expenses and other assets 2,752  3,066  2,886  2,781  3,450 
Assets held for sale 3,900  679  2,973 
Current assets 33,395  32,986  31,304  30,328  25,497 
Equity method investments 12,318  9,947  10,393  9,216  7,233 
Other investments 3,470  3,678  1,119  1,232  1,141 
Other assets 4,207  4,407  4,661  3,585  3,495 
Property, plant and equipment, net 12,571  14,633  14,967  14,476  14,939 
Trademarks with indefinite lives 5,989  6,533  6,744  6,527  6,430 
Bottlers’ franchise rights with indefinite lives 6,000  6,689  7,415  7,405  7,770 
Goodwill 11,289  12,100  12,312  12,255  12,219 
Other intangible assets 854  1,050  1,140  1,150  1,250 
Noncurrent assets 56,698  59,037  58,751  55,846  54,477 
Total assets 90,093  92,023  90,055  86,174 79,974

 

Current Liabilities               26,930  32,374  27,811  27,821  24,283 
Long-term debt,excluding current maturities 28,407  19,063  19,154  14,736  13,656 
Other liabilities 4,301  4,389  3,498  5,468  5,420 
Deferred income taxes 4,691  5,636  6,152  4,981  4,694 
Noncurrent liabilities 37,399  29,088  28,804  25,185  23,770 
Total liabilities 64,329  61,462  56,615  53,006  48,053 
Common stock, $0.25 par value 1,760  1,760  1,760  1,760  880 
Capital surplus 14,016  13,154  12,276  11,379  11,212 
Reinvested earnings 65,018  63,408  61,660  58,045  53,550 
Accumulated other comprehensive loss (10,174) (5,777) (3,432) (3,385) (2,703)
Treasury stock, at cost (45,066) (42,225) (39,091) (35,009) (31,304)
Equity attributable to shareowners of The Coca-Cola Company 25,554  30,320  33,173  32,790  31,635 
Equity attributable to noncontrolling interests 210  241  267  378  286 
Total equity 25,764  30,561  33,440  33,168  31,921 
Total liabilities and equity 90,093  92,023  90,055  86,174 79,974

 

 

Income statement

USD $ in millions

12 months ended Dec 31, 2015 Dec 31, 2014 Dec 31, 2013 Dec 31, 2012 Dec 31, 2011
Net operating revenues 44,294  45,998  46,854  48,017  46,542 
Cost of goods sold (17,482) (17,889) (18,421) (19,053) (18,216)
Gross profit 26,812  28,109  28,433  28,964  28,326 
Selling, general and administrative expenses (16,427) (17,218) (17,310) (17,738) (17,440)
Other operating charges (1,657) (1,183) (895) (447) (732)
Operating income 8,728  9,708  10,228  10,779  10,154 
Interest income 613  594  534  471  483 
Interest expense (856) (483) (463) (397) (417)
Equity income, net 489  769  602  819  690 
Other income (loss), net 631  (1,263) 576  137  529 
Income before income taxes 9,605  9,325  11,477  11,809  11,439 
Income taxes (2,239) (2,201) (2,851) (2,723) (2,805)
Consolidated net income 7,366  7,124  8,626  9,086  8,634 
Net income attributable to non-controlling interests (15) (26) (42) (67) (62)
Net income attributable to shareowners of The Coca-Cola Company 7,351  7,098  8,584  9,019  8,572

 

PEPSICO

Income Statement        (Figures in thousands)

Revenue 12/26/2015 12/27/2014 12/28/2013
Total Revenue 63,056,000 66,683,000 66,415,000
Cost of Revenue 28,384,000 30,884,000 31,243,000
Gross Profit 34,672,000 35,799,000 35,172,000
Operating Expenses
Research Development
Selling General and Administrative 24,885,000 26,126,000 25,357,000
Non Recurring 1,359,000 1,359,000 1,359,000
Others 75,000 92,000 110,000
Total Operating Expenses
Operating Income or Loss 8,353,000 9,581,000 9,705,000
Income from Continuing Operations
Total Other Income/Expenses Net 59,000 85,000 97,000
Earnings Before Interest and Taxes 8,412,000 9,666,000 9,802,000
Interest Expense 970,000 909,000 911,000
Income Before Tax 7,442,000 8,757,000 8,891,000
Income Tax Expense 1,941,000 2,199,000 2,104,000
Minority Interest 107,000 110,000 110,000
Net Income From Continuing Ops 5,452,000 6,513,000 6,740,000
Non-recurring Events
Discontinued Operations
Extraordinary Items
Effect Of Accounting Changes
Other Items
Net Income
Net Income 5,452,000 6,513,000 6,740,000
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares 5,452,000 6,513,000 6,740,000

 

 

 

Balance Sheet     (Figures in thousands)

Period Ending 12/26/2015 12/27/2014 12/28/2013
Current Assets
Cash And Cash Equivalents 9,096,000 6,134,000 9,375,000
Short Term Investments 2,913,000 2,592,000 303,000
Net Receivables 6,437,000 6,651,000 6,954,000
Inventory 2,720,000 3,143,000 3,409,000
Other Current Assets 1,865,000 2,143,000 2,162,000
Total Current Assets 23,031,000 20,663,000 22,203,000
Long Term Investments 2,311,000 2,689,000 2,623,000
Property Plant and Equipment 16,317,000 17,244,000 18,575,000
Goodwill 14,177,000 14,965,000 16,613,000
Intangible Assets 13,081,000 14,088,000 16,039,000
Accumulated Amortization
Other Assets 750,000 860,000 1,425,000
Deferred Long Term Asset Charges
Total Assets 69,667,000 70,509,000 77,478,000
Current Liabilities
Accounts Payable 13,507,000 13,016,000 12,533,000
Short/Current Long Term Debt 4,071,000 5,076,000 5,306,000
Other Current Liabilities
Total Current Liabilities 17,578,000 18,092,000 17,839,000
Long Term Debt 29,213,000 23,821,000 24,333,000
Other Liabilities 5,887,000 5,744,000 4,931,000
Deferred Long Term Liability Charges 4,959,000 5,304,000 5,986,000
Minority Interest 107,000 110,000 110,000
Negative Goodwill
Total Liabilities 57,744,000 53,071,000 53,199,000
Stockholders’ Equity
Misc. Stocks Options Warrants -145,000 -140,000 -130,000
Redeemable Preferred Stock
Preferred Stock
Common Stock 24,000 25,000 25,000
Retained Earnings 50,472,000 49,092,000 46,420,000
Treasury Stock -29,185,000 -24,985,000 -21,004,000
Capital Surplus 4,076,000 4,115,000 4,095,000
Other Stockholder Equity -13,319,000 -10,669,000 -5,127,000
Total Stockholder Equity 12,068,000 17,578,000 24,409,000
Net Tangible Assets -15,190,000 -11,475,000 -8,243,000

Case study of Amazon and Wal-Mart-Financial Statement & Data Analysis

 

Case study of Amazon and Wal-Mart-Financial Statement & Data Analysis

Question

Select two companies operating in the same sector and download their latest annual reports (minimum year ending 2014). You must not select Thorntons plc.Financial statements must be prepared using International Financial Reporting Standard IFRS.References should follow the APA 6th Edition referencing system.

Sample paper

A comparative case study of Amazon and Wal-Mart-Financial Statement & Data Analysis

Introduction

Walmart and Amazon have been two competitive retail business company over the years. An analysis of the two companies over a ten-year horizon highlights Walmart on a better provision of value on its stocks than Amazon. It is in attribute to the uniform dividend payout and growth on its share price.

Over the forty years, Walmart has been in operation; its dividend payout has been increasing. Currently, its dividend yield is at 3.03 %. Its price earnings ratio which ranges between 13.3 -18.2 over past decades highlight share worth investing in the long term. Over the next two years, Walmart plans to put $2.5 B investment in employment and $ 2 B in the electronic commerce industry. The investment will have an adverse impact on it earning, although it will yield significant returns after the two years of operation. Walmart is highly resourceful not only on infrastructure but also capital. The customer outreach gets support from the buyer`s power and a management team that’s fully focused to grow the firm into a model combining brick-and-mortar store with the electronic commerce.

Amazon.inc has had incomparable triumph over the years, over the past decade the company has its share of ups and downs. From an investment perspective, the current investment strategies on international market investment and expansions programs such as Prime Now and Logistics have placed it in an attractive position on the market. The launch of Prime will cushion Amazon on its less yielding products such as Fire Phone and Amazon Destination. By the year 2020, Amazon is estimated to grow up to $46 B from its current position of $ 7B.

  1. BUSINESS MODEL

2.1 Walmart

 Walmart is placed in the market as a discounting retailing company operating chains of stores, supermarkets, warehouse and the famous Sam’s Club it also runs websites such as samsclub.com and Walmart.com. Its operations within the 27 countries are under different names, in the U.S it operates as Walmart and Asda in the UK, forming the major markets. On the minority market it operates in Seiyu located in Japan and India has Best Price. Operating over 11000 retail units and e-commerce platform it operates big within the retailer industry and employees a large group, a recognition earned over a long period in operation.

Its core strategy is to be a price leader, invest in differentiating on access, be competitive on assortment and deliver a great experience. Under the leadership of Doug McMillon as the current president Walmart upholds on its mission statement as a move for improving people live through enabling saving of money. It strategies on bringing its stores together, passing its everyday low cost to its customers as a control on its expenses

2.2 Amazon Inc.

Amazon has grown within the retail industry to become the world largest online retailer. The growth is attributed to its extension in the global presence and not only focusing its operation in North America. Within the marketplace, it operates websites such as amazon.com, in the UK as Amazon co.uk, Amazon.inc, amazon co.jp and Amazon de (Research, 2016). Amazon Company started as a book retailer operating online, diversifying into sale of other products and sales categories over the years and developing its business model along with its growth. Its inventory is maintained and sold through two platforms commission based platform on third party retailers and its online platform. Subscription within Amazon is through prime services as well as a small electronic product line. Prime offers a variety of content such as music, web series, and videos. It has also expanded its Logistics; it is in an aim to shrink its dependency on some operations

First trading shares in 1996 after establishment in the year 1994 by Jeff Bezos who is the current board chair and CEO of the company, later reincorporated in 1996. It holds a mission to become Earth`s most client-centric company. It is guided by its four core principles and aims at becoming a consumer-centric company. To achieve this, it improves its principles: a customer obsession, a passion for invention, an excellence commitment to its operations and thinking on the long term goal.

  1. Operating characteristics

    3.1     Revenue Outlook

Just marked its 20th anniversary Amazon has strategically gained a market share within the United States and in the UK and India as minority share contributors. Most of its investments go towards growth through raising of debt and utilization of retained earnings. The company since inspection has never released any dividends as it fails to focus its growth strategy on profits. In the fiscal year 2015 it generated $107.0 billion in sales. Of total revenue generated the North America share was $ 63.7 billion representing 59% of the total. The International market generated $35.4 billion at 33% of the total. The rest $7.9 billion a 7% share of the total was contributed by the Amazon Web Service (AWS) division. 2015 thus became the first year for Amazon to split its revenue segment share (Amazon., 2015).

Walmart-the world`s largest retailer during the fiscal year of 2015 with a revenue of $485.7 billion, comprising mainly of $482.23 billion net sales. The sales distributed among its major three segments: Walmart United States, Sam`s Club and the Walmart International, The U.S segment had net sales of $288.0 billion, Walmart International segment operating in 26 countries outside U.S has net sales worth $136.2 billion. The Sam`s club operating as a membership-only warehouse club and as samsclub.com contributed $58.0 billion of the net sales. The major segment contributing to its revenue includes Grocery at 56%, Health and Wellness segment at 11%, the Entertainment stood at 10%, Hardline and Apparel were at 16% and Home was at 7%. (Walmart, 2015) The company trades as “WMT.” at the (NYSE) New York Stock Exchange.

    3.2 Competitive factor

The two companies have grown within the years to a competitive market but still manage to be the two leading giants. Its brick and motor stores allows Walmart to stand out among competition and will continuously be the most preferential retail store for most homes.  There store to provide an attribute that beats Amazon in its retail market as customers get a physical experience permitting them to have a feel and touch of the products, immersed in brand experiences and sales contacts engagement. Moreover to the physical distribution through stores, Walmart is aggressively investing in e-commerce platforms and better customer experience through sales improvement, operations, and customer services. Through programs such as EDLP focusing commitment to price leadership and price philosophy which lowers prices to customers on a daily basis.  EDLC controls expenses thus saving on costs and passed to customers. Walmart distribution facilities consist of 102 operational self-owned, two under by third party operator’s ownership, six leased properties, and 24 under third party lease.

Amazon acknowledges competition from single entrance company to alliances. Walmart as a competitor falls on the online, offline and multichannel retailer. As on Amazon competitive edge are publishes on its online store, the web search engine along with social networks. In an aim to beat the competition, it’s in adoption of new and improved technologies which include search, web attributes and computing services infrastructure. Thus Amazon can lock in customers with potential and with restrictive terms, devote its technological resource on, structure, fulfillment, and adverse marketing.

3.3. Risk factor

The number one and most common factor faced by the two companies is on exchange loss. With both companies trading on the international market, the loss is inevitable. The retail industry is not limited to the local economic and political risk. Other risks within the industry include government regulation, business licensing and limited fulfillment and technology infrastructure. Walmart further in its 2015 report acknowledges that data and privacy risk, as well as supply chain and third party risk, may also affect the retail business operations.

4 Employees

Due to the seasonal factor Amazon employee’s dropped to 230,800 on full time during the 2015 financial year. To curb the falling employee number Amazon opted for independently contracted contractors and temporary personnel to supplement its workforce (Amazon., 2015). Employee relation with the company is maintained at a suitable level. Walmart has approximately 2.2 million employees worldwide. It also maintains a large number of associates in each operational year. The company maintains its relationship with its associates is good (Walmart, 2015).

  1. Investment strategies

Over the 2015 financial year, Walmart investors faced a dilemma due to the short-term investment strategy and adoption to environmental changes within the retail industry. On the same year, the company issued a negative guidance, highlighting unpredictable business performance merits, revenue was low as operational cost rose. The expenses increase was forecasted to be by $1.2 B and $1.5B in the fiscal year 2016 and 2017 respectively. Further disappointment on the Walmart investor was due to its additional capital expenditures of $ 23.4B on store improvement and a $2 B electronic commerce investment over the coming years since 2015. The investors got skeptic about the company’s future low-cost over the 2015 financial year selling the stocks they held causing a 40% stock loss of its value over the past years. Its strong basics and statement of financial position along with an enduring strategy well laid out by the management has enabled the company to become a compelling factor on a ten-year investment horizon. Currently, the company offers existing permission allowing value investors to purchase a premium dividend thus paying stock at a very lucrative price (Walmart, 2016).

Investments within Amazon are directed towards technological advancement.  The company believes that technological progress improves their customer interaction on the internet as speeds have improved as well as cutting down on processing costs.  To gain a larger market share the Amazon digital platform has provided a membership service with the inclusion of more than video streaming. The platform is a multi-product incorporating free shipping and two free delivery.

  1. Ratio Analysis

Profitability ratios

Measures the ability of the business to generate considerable profits from its shareholders, communicating the financial performance of the business. The gross profit margin ratio highlights the revenue as a percentage available to cover not only operations but also other expenditures, Amazon Gross profit stood at 33.04 % an improvement from 2014, while Walmart was at 24.58% which was a deterioration from 2014 financial year. Operating profit margin is calculated as operating income divided by revenue; Walmart had a higher operating profit at 5 .04% a drop from 2014 compared to 2 % for Amazon which was a growth from 2014 that was less than 1%. The Net profit margin is calculated as the net income as a factor of revenue, Amazon stood 0.56 % while Walmart was at 3.07% highlighting an almost stable margin on the net profit margin. The Return of Equity after tax stood at 18.24% for Walmart and 4.45% for Amazon, highlighting a wide margin between the two companies. Although Walmart had dropped 2% from the previous year, Amazon grew with the 2% from 2% on the previous year. The return on asset for Amazon stood at 0.91% while that of Walmart stood at 7.36%.

Conclusion

Walmart has potential to develop distribution centers and small integrated store hybrids reducing its costs on operations over coming years. Enabling Walmart competes against Amazon supply channel and vast networks on delivery providing closeness to clients. Amazon earning continue to shrink against Walmart’s revenue as it spends more on capital expenditure. Walmart further utilizes scale and price competitiveness to ease its transition into the multi-channel distribution. Defiantly Amazon needs to replicate Walmart model, transforming itself into a multi-channel retail distributor. As the two companies invest within the market will see a change in its profitability ratio as they grow their sales and revenues.

References

Amazon. (2015). Annual Report . . SEC Form 10-K, 1-78.

https://www.sec.gov/Archives/edgar/data/1018724/000101872416000172/amzn-20151231x10k.htm

Research, Z. I. (2016, Octomber 28). AMZN: AMAZON.COM INC Stock Quote & Analysis – Zacks.com. Retrieved from Zacks: http://www.zacks.com/stock/quote/AMZN

Walmart. (2015). Annual Report . S. E. C. form 10K, 14-16.

https://www.sec.gov/Archives/edgar/data/104169/000010416915000011/wmtform10-kx13115.htm

Walmart, I. (2016, Octomber 28). Walmart strategy drives growth and sustainable returns, Plans $20 billion share. Retrieved from Walmart, Inc., : http://news.walmart.com/news-archive/2015/10/14/walmart-strategy-drives-growth-andsustainable-returns-plans-20-billion-share-repurchase-program-over-two-years.

 

Appendices

Amazon Ratio calculation

Gross profit margin = 100 × Gross profit ÷ Net sales
= 100 × 35,355 ÷ 107,006 = 33.04%

Operating profit margin = 100 × Income from operations ÷ Net sales
= 100 × 2,233 ÷ 107,006 = 2.09%

Net profit margin = 100 × Net income (loss) ÷ Net sales
= 100 × 596 ÷ 107,006 = 0.56%

ROE = 100 × Net income (loss) ÷ Total stockholders’ equity
= 100 × 596 ÷ 13,384 = 4.45%

ROA = 100 × Net income (loss) ÷ Total assets
= 100 × 596 ÷ 65,444 = 0.91%

Walmart ratio calculations

Gross profit margin = 100 × Gross profit ÷ Net sales
= 100 × 117,630 ÷ 478,614 = 24.58%

Operating profit margin = 100 × Operating income ÷ Net sales
= 100 × 24,105 ÷ 478,614 = 5.04%

Net profit margin = 100 × Consolidated net income attributable to Walmart ÷ Net sales
= 100 × 14,694 ÷ 478,614 = 3.07%

ROE = 100 × Consolidated net income attributable to Walmart ÷ Total Walmart shareholders’ equity
= 100 × 14,694 ÷ 80,546 = 18.24%

ROA = 100 × Consolidated net income attributable to Walmart ÷ Total assets
= 100 × 14,694 ÷ 199,581 = 7.36%

Google Inc Financial Analysis