FINANCIAL ANALYSIS Comparative Analysis Of Coca-Cola And Pepsi
Mr. Ashish Arora (Associate Professor) P rofessor) MBA Submitted To The Department Of Management Studies GNDU College (Jalandhar) In Partial Fulllment of the Requirement For the Award of the Degree of Masters in Business Administration
Submitted By : Neetika Sharma MBA (TYC) - 3rd Sem Roll No. - 405
ACKNOWLEDGEMENT The world of Professional industry was completely far away from me, but I got an opportunity to know about an organization’s various working aspects at WAVE BEVERAGES, COCA COLA Pvt. Ltd . I am indebted to my teachers and gurus who molded at this junction of my career from where I could take off better in the competitive scenario of today’s world. First of all, I would like to thank ALMIGHTY for his gracious blessing without whom I would not be able to complete my project work. I would like to thank Ms. VANIKA (Charted Accountant) WAVE BEVERAGES, COCA COLA Pvt. Ltd, Amritsar for giving me an opportunity to do my summer training in this esteemed organization. I have taken efforts in this project. However, it would not have been possible without the kind support and help of MR. ASHISH ARORA . I would like to extend my sincere thanks to them. I would like to express my gratitude towards my parents & member of our college for their kind co-operation and encouragement which helped me in completion of this project.
Neetika Sharma MBA (TYC) 3RD Sem.
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TABLE OF CONTENTS
S. NO.
PARTICULARS
PAGE NO.
1.
Beverage Industry - Overview
3
2.
SWOT Analysis of Coca Cola
4
3.
Company Profile 3.1 About Coca Cola Company 3.2 Vision of the Company
5-6
4.
Introduction to the Concept 4.1 Ratio Analysis 4.2 Importance of Ratio Analysis Classification of Ratios
7-8
5.
9-24
6.
Research Methodology 6.1 Objective of the study 6.2 Need for the study 6.3 Research Design 6.4 Sources of data collection collection 6.5 Limitations
25-27
7.
Data Analysis & Observation
28-38
8.
Suggestions & Conclusions
39
9.
Bibliography
40
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BEVERAGE INDUSTRY- OVERVIEW The beverage industry refers to the industry that produces drinks. Beverage production can vary greatly depending on which beverage is being made. The website ManufacturingDrinks.com explains that, "bottling facilities differ in the types of bottling lines they operate and the types of products they can run". Other bits of required information include the knowledge of if said beverage is canned or bottled, hot-fill or cold-fill, and natural or conventional. Innovations in the beverage industry, catalyzed by requests for non-alcoholic beverages, include beverage plants, beverage processing, and beverage packing.
The beverage industry is a major driver of economic growth. A National Council of Applied Economic Research (NCAER) study on the carbonated soft-drink industry indicates that this industry has an output multiplier effect of 2.1. This means that if one unit of output of beverage is increased, the direct and indirect effect on the economy will be twice of that. In terms of employment, the NCAER study notes that "an extra production of 1000 cases generates an extra employment of 410 man days."
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SWOT ANALYSIS OF COCA COLA Strengths
Weaknesses
1. The best global brand in the world in terms of value ($77,839 billion)
1. Significant focus on carbonated drinks
2. World’s largest market share in beverage
2. Undiversified product portfolio
3. Strong marketing and advertising
4. Most extensive beverage distribution channel
3. High debt level due to acquisitions
4. Negative publicity
5. Corporate social responsibility
Opportunities 1. Bottled water consumption growth
2. Increasing demand for healthy food and beverage 3. Growing beverages consumption in emerging markets (especially BRIC)
4. Growth through acquisitions
Threats 1. Changes in consumer preferences
2. Water scarcity
3. Strong dollar
4. Legal requirements to disclose negative information on product labels
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COMPANY PROFILE WAVE BEVERAGES --- COCA COLA In India, the Coca-Cola system comprises of a wholly owned subsidiary of The Coca-Cola Company namely Coca-Cola India Pvt Ltd which manufactures and sells concentrate and beverage bases and powdered beverage mixes, a Companyowned bottling entity, namely, Hindustan Coca-Cola Beverages Pvt Ltd; thirteen authorized bottling partners of The Coca-Cola Company, who are authorized to prepare, package, sell and distribute beverages under certain specified trademarks of the Coca-Cola Company; and an extensive distribution system comprising of our customers, distributors and retailers. These authorized bottlers independently develop local markets and distribute beverages to grocers, small retailers, supermarkets, restaurants and numerous other businesses. In turn, these customers make our beverages available to consumers across India. The Coca-Cola Company's brands in India include Coca-Cola, Fanta Orange, Limca, Sprite, Thumps Up, Burn, Kinley, Maaza, Minute Maid Pulpy Orange, Minute Maid Nimbu Fresh and the Georgia Gold range of teas and coffees and Vitingo (a beverage fortified with micro-nutrients).
VISION OF THE COMPANY The vision of the company serves as the framework for Road map and guides every aspect of the business by describing what we need to accomplish in order to continue achieving sustainable, quality growth. People: Be a great place to work where people are inspired to be the best they can be. Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people’s desires and needs. Partners: Nurture a winning network of customers and suppliers, together we create mutual, enduring value. Planet: Be a responsible citizen that makes a difference by helping build and support sustainable communities
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Profit: Maximize long-term return to share owners while being mindful of our overall responsibilities Productivity: Be a highly effective, lean and fast-moving organization.
CORPORATE GOVERNANCE AT COCA COLA Coca-Cola India operations are fully integrated into the governance structure of The Coca-Cola Company, including two important codes: (a)
The Code of Business Conduct outlines expectations for employees to comply with the law and act ethically in all matters. The Code remains applicable to all employees of The Coca-Cola Company and its majorityowned subsidiaries.
Anti-Bribery Policy: The Coca-Cola Company and its subsidiaries are committed to doing business with integrity. This means avoiding corruption of all kinds, including bribery of government officials. We will abide by all applicable antibribery laws, including the U.S. Foreign Corrupt Practices Act, and local laws in every country in which it does business. The Company is a signatory to the United Nations Global Compact, by which it is committed to work against corruption and bribery around the world. The Company also has incorporated a prohibition against bribery into its Code of Business Conduct. This anti-bribery policy provides compliance requirements to prevent improper payments and to ensure accurate reporting of permissible payments under all applicable anti-bribery laws.
(b) The Code of Business Conduct for Suppliers seeks to extend and clarify similar ethical expectations to our suppliers. The Supplier Code became effective in February 2008. Both the Code of Business Conduct and the Supplier Code highlight the Ethics Line reporting service, through which individuals can confidentially ask questions or report concerns to an independent administering party.
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INTRODUCTION TO THE CONCEPT Meaning of Ratio: - A ratio is simple arithmetical expression of the relationship of one number to another. It may be defined as the indicated quotient of two mathematical expressions. According to Accountant’s Handbook by Wixon, Kell and Bedford, “a ratio is an expression of the quantitative relationship between two numbers”. Ratio Analysis: - Ratio analysis is the process of determining and presenting the relationship of items and group of items in the statements. According to Batty J. Management Accounting “Ratio can assist management in its basic functions of forecasting, planning coordination, control and communication”.
It is helpful to know about the liquidity, solvency, capital structure and profitability of an organization. It is helpful tool to aid in applying judgment, otherwise complex situations. Ratio analysis can represent following three methods. 1. Pure Ratio or Simple Ratio: - It is expressed by the simple division of one number by another. For example, if the current assets of a business are Rs. 200000 and its current liabilities are Rs. 100000, the ratio of ‘Current assets to current liabilities’ will be 2:1. 2. ‘Rate’ or ‘so Many Times’: - In this type, it is calculated how many times a figure is, in comparison to another figure. For example , if a firm’s credit sales during the year are Rs. 200000 and its debtors at the end of the year are Rs. 40000 , its Debtors Turnover Ratio is 200000/40000 = 5 times. It shows that the credit sales are 5 times in comparison to debtors. 3. Percentage: - In this type, the relation between two figures is expressed in hundredth. For example, if a firm’s capital is Rs.1000000 and its profit is Rs. 200000 the ratio of profit capital, in term of percentage, is 200000/1000000*100 = 20%.
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IMPORTANCE OF RATIO ANALYSIS Ratios are useful for the following reasons: 1) Helpful in Forecasting: - The ratio can be used by financial managers for future financial planning. Ratio calculated for a number of years work as a guide for the future. 2) Useful in Co-ordination:Co-ordination:- Ratios are useful in co-ordination, which is very much needed in business. The efficiency and weakness of an enterprise if communicated properly will establish a better co-ordination among areas of appreciation and control. 3) Helpful in Control: - the most important aspect of ration analysis is that it is very useful in controlling the areas of inefficiencies and weakness. It can be done by the management as a technique of correction. 4) Helpful in Efficiency Appraisal: - ratios are the scale of comparison; here the variations in financial statement, if they need appreciation, are brought to limelight. 5) Helpful in Evaluation of Financial Position: - The ratio analysis is useful for financial diagnosis of an enterprise. The under mentioned ratios will make the above clear: Current Ratio: - It speaks about the working capital the company is having and the funds to pay off its short term commitments. Solvency Ratio: - Profitability ratio, Capital gearing ratio are all such ratio that can evaluate the financial soundless or weakness of the company. 6) Helpful to investors, Financial Institutions and Employees: - the ratios are economic barometer useful to the investors, financial institutions and employees as they can know the good and bad position of the company by making a comparative study of financial statement.
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CLASSIFICATION OF RATIOS
Fig: 5.1
Ratio may be classified into the four categories as follows: A. Liquidity Ratio a. Current Ratio b. Quick Ratio or Acid Test Ratio B. Leverage or Capital Structure Ratio a. Debt Equity Ratio b. Debt to Total Fund Ratio c. Proprietary Ratio d. Fixed Assets to Proprietor’s Fund Ratio Page | 9
e. Capital Gearing Ratio f. Interest Coverage Ratio C. Activity Ratio or Turnover Ratio a. Stock Turnover Ratio b. Debtors or Receivables Turnover Ratio c. Average Collection Period d. Creditors or Payables Turnover Ratio e. Average Payment Period f. Fixed Assets Turnover Ratio g. Working Capital Turnover Ratio D. Profitability Ratio or Income Ratio I. Profitability Ratio based on Sales a. Gross Profit Ratio b. Net Profit Ratio c. Operating Ratio d. Expenses Ratio II. Profitability Ratio Based on Investment I. Return on Capital Employed
II.
Return on Shareholder’s Funds a. Return on Total Shareholder’s Funds b. Return on Equity Shareholder’s Funds c. Earning Per Share d. Dividend per Share e. Dividend Payout Ratio f. Earnings and Dividend Yield g. Price Earning Ratio
(A) Liquidity Ratio:- It refers to the ability of the firm to meet its current liabilities. The liquidity ratio, therefore, are also called ‘Short-term Solvency Ratio’. These ratio are used to assess the short-term financial position of the concern. They indicate the firm’s ability to meet its current obligation out of current resources.
Liquidity ratio include two ratio: a. Current Ratio b. Quick Ratio or Acid Test Ratio Page | 10
a. Current Ratio: - This ratio explains the relationship between current assets and current liabilities of a business. Current Assets: - ‘Current assets’ includes those assets which can be converted into cash with in a year’s time. Current Assets = Cash in Hand + Cash at Bank + B/R + Short Term Investment + Debtors (Debtors – Provision) + Stock (Stock of Finished Goods + Stock of Raw Material + Work in Progress) + Prepaid Expenses
a re Current Liabilities: - ‘Current liabilities’ include those liabilities which are repayable in a year’s time. Current Liabilities = Bank Overdraft + B/P + Creditors + Provision for Taxation + Proposed Dividend + Unclaimed Dividends + Outstanding Expenses + Loans Payable within a Year Significance: - According to accounting principles, a current ratio of 2:1 is supposed to be an ideal ratio. It means that current assets of a business should, at least, be twice of its current liabilities. The higher ratio indicates the better liquidity position, the firm will be able to pay its current liabilities more easily. If the ratio is less than 2:1, it indicate lack of liquidity and shortage of working capital.
The biggest drawback of the current ratio is that it is susceptible to “window dressing”. This ratio can be improved by an equal decrease in both current assets and current liabilities. b. Quick Ratio: - Quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately.
‘Liquid Assets’ means those assets, which will yield cash very shortly. Liquid Assets = Current Assets – Stock – Prepaid Expenses
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Significance: - An ideal quick ratio is said to be 1:1. If it is more, it is considered to be better. This ratio is a better test of short-term financial position of the company. (B) Leverage or Capital Structure Ratio: - This ratio disclose the firm’s ability to meet the interest costs regularly and Long term indebtedness at maturity. These ratio include the following ratios: a. Debt Equity Ratio: - This ratio can be expressed in two ways: First Approach: According to this approach, this ratio expresses the relationship between long term debts and shareholder’s fund.
Debt Equity Ratio = Long term Loans / Shareholder’s Funds or Net Worth Long Term Loans:- These refer to long term liabilities which mature after one year. These include Debentures, Mortgage Loan, Bank Loan, and Loan from Financial institutions and Public Deposits etc. Shareholder’s Funds: - These include Equity Share Capital, Preference Share Capital, Share Premium, General Reserve, Capital Reserve, Other Reserve and Credit Balance of Profit & Loss Account. Second Approach: - According to this approach the ratio is calculated as follows:-
Debt Equity Ratio=External Equities/internal Equities Significance: - This Ratio is calculated to assess the ability of the firm to meet its long term liabilities. Generally, debt equity ratio of is considered safe.
If the debt equity ratio is more than that, it shows a rather risky financial position from the long-term point of view, as it indicates that more and more funds invested in the business are provided by long-term lenders.
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The lower this ratio, the better it is for long-term lenders because they are more secure in that case. Lower than 2:1 debt equity ratio provides sufficient protection to long-term lenders. b. Debt to Total Funds Ratio: - This Ratio is a variation of the debt equity ratio and gives the same indication as the debt equity ratio. In the ratio, debt is expressed in relation to total funds, i.e. both equity and debt.
Debt to Total Funds Ratio = Long-term Loans / Shareholder’s funds + Long term Loans Significance: - Generally, debt to total funds ratio of 0.67:1 (or 67%) is considered satisfactory. In other words, the proportion of long term loans should not be more than 67% of total funds.
A higher ratio indicates a burden of payment of large amount of interest charges periodically and the repayment of large amount of loans at maturity. Payment of interest may become difficult if profit is reduced. Hence, good concerns keep the debt to total funds ratio below 67%. The lower ratio is better from the long term solvency point of view. c. Proprietary Ratio: - This ratio indicates the proportion of total funds provide by owners or shareholders. Proprietary Ratio = Shareholder’s Funds/Shareholder’s Funds + Long term loans Significance: - This ratio should be 33% or more than that. In other words, the proportion of shareholders’ funds to total funds should be 33% or more.
A higher proprietary ratio is generally treated an indicator of sound financial position from long-term point of view, because it means that the firm is less dependent on external sources of finance. If the ratio is low it indicates that longterm loans are less secured and they face the risk of losing their money.
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d. Fixed Assets to Proprietor’s Fund Ratio: - This ratio is also known as fixed assets to net worth ratio.
Fixed Asset to Proprietor’s Fund Ratio = Fixed Assets Proprietor’s Fund
Significance: - The ratio indicates the extent to which proprietor’s (Shareholder’s) funds are sunk into fixed assets. Normally, the purchase of fixed assets should be financed by proprietor’s funds. If this ratio is less than 100%, it would mean that proprietor’s fund are more than fixed assets and a part of working capital is provided by the proprietors. This will indicate the long-term financial soundness of business. e. Capital Gearing Ratio: - This ratio establishes a relationship between equity capital (including all reserves and undistributed profits) and fixed cost bearing capital.
Capital Gearing Ratio = Equity Share Capital+ Reserves + P&L Balance / Fixed cost Bearing Capital
Whereas, Fixed Cost Bearing Capital = Preference Share Capital + Debentures + Long Term Loan Significance:- If the amount of fixed cost bearing capital is more than the equity share capital (including reserves an undistributed profits), it will be called high capital gearing and if it is less, it will be called low capital gearing
The high gearing will be beneficial to equity shareholders when the rate of interest/dividend payable on fixed cost bearing capital is lower than the rate of return on investment in business. Thus, the main objective of using fixed cost bearing capital is to maximize the profits available to equity shareholders.
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f. Interest Coverage Ratio:- This ratio is also termed as ‘Debt Service Ratio’. This ratio is calculated as follows:
Interest Coverage Ratio = Net Profit before charging interest and tax / Fixed Interest Charges Significance: - This ratio indicates how many times the interest charges are covered by the profits available to pay interest charges. This ratio measures the margin of safety for long-term lenders.
This higher the ratio, more secure the lenders is in respect of payment of interest regularly. If profit just equals interest, it is an unsafe position for the lender as well as for the company also, as nothing will be left for shareholders. An interest coverage ratio of 6 or 7 times is considered appropriate. (C) Activity Ratio or Turnover Ratio: - These ratio are calculated on the bases of ‘cost of sales’ or sales, therefore, these ratio are also called as ‘Turnover Ratio’. Turnover indicates the speed or number of times the capital employed has been rotated in the process of doing business.
Higher turnover ratio indicates the better use of capital or resources and in turn lead to higher profitability. a. Stock Turnover Ratio: - This ratio indicates the relationship between the cost of goods during the year and average stock kept during that year.
Stock Turnover Ratio = Cost of Goods Sold / Average Stock Here, Cost of goods sold = Net Sales – Gross Profit Average Stock = Opening Stock + Closing Stock/2 Significance: - This ratio indicates whether stock has been used or not. It shows the speed with which the stock is rotated into sales or the number of times the stock is turned into sales during the year. Page | 15
The higher the ratio, the better it is, since it indicates that stock is selling quickly. In a business where stock turnover ratio is high, goods can be sold at a low margin of profit and even than the profitability may be quit high. b. Debtors Turnover Ratio: - This ratio indicates the relationship between credit sales and average debtors during the year.
Debtor Turnover Ratio = Net Credit Sales / Average Debtors + Average B/R While calculating this ratio, provision for bad and doubtful debts is not deducted from the debtors, so that it may not give a false impression that debtors are collected quickly. Significance: - This ratio indicates the speed with which the amount is collected from debtors. The higher the ratio, the better it is, since it indicates that amount from debtors is being collected more quickly. The more quickly the debtors pay, the less the risk from bad- debts, and so the lower the expenses of collection and increase in the liquidity of the firm.
By comparing the debtor’s turnover ratio of the current year with the previous year, it may be assessed whether the sales policy of the management is efficient or not. c. Average Collection Period: - This ratio indicates the time with in which the amount is collected from debtors and bills receivables.
Average Collection Period = Debtors + Bills Receivable / Credit Sales per day
Here, Credit Sales per day = Net Credit Sales of the year / 365 Second Formula:Average Collection Period = Average Debtors *365 / Net Credit Sales
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Average collection period can also be calculated on the bases of ‘Debtors Turnover Ratio’. Average Collection Period = 12 months or 365 days / Debtors Turnover Ratio Significance: - This ratio shows the time in which the customers are paying for credit sales. A higher debt collection period is thus, an indicator of the inefficiency and negligence on the part of management. On the other hand, if there is decrease in debt collection period, it indicates prompt payment by debtors which reduces the chance of bad debts. d. Creditors Turnover Ratio: - This ratio indicates the relationship between credit purchases and average creditors during the year.
Creditors Turnover Ratio = Net credit Purchases / Average Creditors + Average B/P Significance: - This ratio indicates the speed with which the amount is being paid to creditors. The higher the ratio, the better it is, since it will indicate that the creditors are being paid more quickly which increases the credit worthiness of the firm. e. Average Payment Period: - This ratio indicates the period which is normally taken by the firm to make payment to its creditors.
Average Payment Period = Creditors + B/P/ Credit Purchase per day Average Payment Period = 12 months or 365 days / Creditors Turnover Ratio Significance: - The lower the ratio, the better it is, because a shorter payment period implies that the creditors are being paid rapidly. f. Fixed Assets Turnover Ratio: - This ratio reveals how efficiently the fixed assets are being utilized.
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Fixed Assets Turnover Ratio = Cost of Goods Sold/ Net Fixed Assets Here, Net Fixed Assets = Fixed Assets – Depreciation Significance: - This ratio is particular importance in manufacturing concerns where the investment in fixed asset is quit high. Compared with the previous year, if there is increase in this ratio, it will indicate that there is better utilization of fixed assets. If there is a fall in this ratio, it will show that fixed assets have not been used as efficiently, as they had been used in the previous year. g. Working Capital Turnover Ratio: - This ratio reveals how efficiently working capital has been utilized in making sales.
Working Capital Turnover Ratio = Cost of Goods Sold / Working Capital Here, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages + Other Direct Expenses - Closing Stock Working Capital = Current Assets – Current Liabilities Significance: - This ratio is of particular importance in non- manufacturing concerns where current assets play a major role in generating sales. It shows the number of times working capital has been rotated in producing sales. A high working capital turnover ratio shows efficient use of working capital and quick turnover of current assets like stock and debtors. A low working capital turnover ratio indicates underutilization of working capital. (D) Profitability Ratio or Income Ratio: - The main object of every business concern is to earn profits. A business must be able to earn adequate profits in relation to the risk and capital invested in it. The efficiency and the success of a business can be measured with the help of profitability ratio. Profitability ratio can be determined on the basis of either sales or investment into business. 1) Profitability Ratio Based on Sales Page | 18
a. Gross Profit Ratio: - This ratio shows the relationship between gross profit and sales.
Gross Profit Ratio =
Gross Profit
*100
Net Sales Here, Net Sales = Sales – Sales Return Significance:- This ratio measures the margin of profit available on sales. The higher the gross profit ratio, the better it is. No ideal standard is fixed for this ratio, but the gross profit ratio should be adequate enough not only to cover the operating expenses but also to provide for depreciation, interest on loans, dividends and creation of reserves. b. Net Profit Ratio:- This ratio shows the relationship between net profit and sales. It may be calculated by two methods:
Net Profit Ratio = Net Profit / Net sales *100
Operating Net Profit = Operating Net Profit / Net Sales *100
Here, Operating Net Profit = Gross Profit – Operating Expenses Operating Expenses such as Office and Administrative Expenses, Selling and Distribution Expenses, Discount, Bad Debts, Interest on short term debts etc. Significance: - This ratio measures the rate of net profit earned on sales. It helps in determining the overall efficiency of the business operations. An increase in the ratio over the previous year shows improvement in the overall efficiency and profitability of the business.
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c. Operating Ratio:- This ratio measures the proportion of an enterprise cost of sales and operating expenses in comparison to its sales.
Operating Ratio = Cost of Goods Sold + Operating Expenses *100 Net Sales
Where, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages + Other Direct Expenses - Closing Stock Operating Expenses = Office and Administration Exp. + Selling and Distribution Exp. + Discount + Bad Debts + Interest on Short- term loans.
‘Operating Ratio’ and ‘Operating Net Profit Ratio’ are interrelated. Total of both these ratios will be 100. Significance:- Operating Ratio is a measurement of the efficiency and profitability of the business enterprise. The ratio indicates the extent of sales that is absorbed by the cost of goods sold and operating expenses. Lower the operating ratio is better, because it will leave higher margin of profit on sales. d. Expenses Ratio:- These ratio indicate the relationship between expenses and sales. Although the operating ratio reveals the ratio of total operating expenses in relation to sales but some of the expenses include in operating ratio may be increasing while some may be decreasing. Hence, specific expenses ratio are computed by dividing each type of expense with the net sales to analyze the causes of variation in each type of expense.
The ratio may be calculated as : (a) Material Consumed Ratio = Material Consumed/Net Sales*100 (b) Direct Labour cost Ratio = Direct labour cost / Net sales*100 (c) Factory Expenses Ratio = Factory Expenses / Net Sales *100 (a), (b) and (c) mentioned above will be jointly called cost of goods sold ratio. Cost of Goods Sold Ratio = Cost of Goods Sold / Net Sales*100
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(d) Office and Administrative Expenses Ratio = Office and Administrative Exp./ Sales*100 (e) Selling Expenses Ratio = Selling Expenses / Net Sales *100 (f) Non- Operating Expenses Ratio = Non-Operating Exp./Net sales*100 Significance:- Various expenses ratio when compared with the same ratios of the previous year give a very important indication whether these expenses in relation to sales are increasing, decreasing or remain stationary. If the expenses ratio is lower, the profitability will be greater and if the expenses ratio is higher, the profitability will be lower. 2) Profitability Ratio Based on Investment in the Business These ratio reflect the true capacity of the resources employed in the enterprise. Sometimes the profitability ratio based on sales are high whereas profitability ratio based on investment are low. Since the capital is employed to earn profit, these ratios are the real measure of the success of the business and managerial efficiency.
These ratio may be calculated into two categories: I. Return on Capital Employed II. Return on Shareholder’s funds I. Return on Capital Employed: - This ratio reflects the overall profitability of the business. It is calculated by comparing the profit earned and the capital employed to earn it. This ratio is usually in percentage and is also known as ‘Rate of Return’ or ‘Yield on Capital’.
Return on Capital Employed = Profit before interest, tax and dividends / Capital Employed *100 Where, Capital Employed = Equity Share Capital + Preference Share Capital + All Reserves + P&L Balance +Long-Term Loans- Fictitious Assets – Non-Operating Assets like Investment made outside the business. Capital Employed = Fixed Assets + Working Capital
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II. Return on Shareholder’s Funds:- Return on Capital Employed Shows the overall profitability of the funds supplied by long term lenders and shareholders taken together. Whereas, Return on shareholders’ funds measures only the profitability of the funds invested by shareholders. These are several measures to calculate the return on shareholder’s funds: a. Return on total Shareholder’s Funds:- For calculating this ratio ‘Net Profit after Interest and Tax’ is divided by total shareholder’s funds.
Return on Total Shareholder’s Funds = Net Profit after Interest and Tax / Total Shareholder’s Funds Where, Total Shareholder’s Funds = Equity Share Capital + Preference Share Capital + All Reserves + P&L A/c Balance – Fictitious Assets Significance: - This ratio reveals how profitably the proprietor’s funds have been utilized by the firm. A comparison of this ratio with that of similar firms will throw light on the relative profitability and strength of the firm. b. Return on Equity Shareholder’s Funds: - Equity Shareholders of a company are more interested in knowing the earning capacity of their funds in the business. As such, this ratio measures the profitability of the funds belonging to the equity shareholder’s.
Return on Equity Shareholder’s Funds = Net Profit (after int., tax & preference dividend) / Equity Shareholder’s Funds *100
Shareholder’s funds are being used in the business. It is a true measure of the efficiency of the management since it shows what the earning capacity of the equity shareholder’s funds. If the ratio is high, it is better, because in such a case equity shareholders may be given a higher dividend. c. Earnings per Share (E.P.S):- This ratio measure the profit available to the equity shareholders on a per share basis. All profit left after payment of tax and preference dividend are available to equity shareholders. Page | 22
Earnings per Share = Net Profit – Dividend on Preference Shares No. of Equity Shares
Significance: - This ratio helpful in the determining of the market price of the equity share of the company. The ratio is also helpful in estimating the capacity of the company to declare dividends on equity shares. d. Dividend per share (D.P.S.):- Profits remaining after payment of tax and preference dividend are available to equity shareholders. But of these are not distributed among them as dividend .Out of these profits is retained in the business and the remaining is distributed among equity shareholders as dividend. D.P.S. is the dividend distributed to equity shareholders divided by the number of equity shares.
D.P.S. = Dividend paid to Equity Shareholder’s *100 No. of Equity Shares
e. Dividend Payout Ratio (D.P):- It measures the relationship between the earning available to equity shareholders and the dividend distributed among them.
D.P. = D.P.S. / E.P.S. *100
f. Earnings and Dividend Yield: - This ratio is closely related to E.P.S. and D.P.S. While the E.P.S. and D.P.S. are calculated on the basis of the book value of shares, this ratio is calculated on the basis of the market value of share.
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g. Price Earning (P.E.) Ratio: - Price earnings ratio is the ratio between market price per equity share & earnings per share. The ratio is calculated to make an estimate of appreciation in the value of a share of a company & is widely used by investors to decide whether or not to buy shares in a particular company. Significance: - This ratio shows how much is to be invested in the market in this company’s shares to get each rupee of earning on its shares. This ratio is used to measure whether the market price of a share is high or low.
Fig: 5.2
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RESEARCH METHODOLOGY Research Methodology is a way to systematically solve the problems. It may be understood to study how research is done scientifically. In this, we study various steps that are generally adopted by the researcher in studying research problems along with the logic behind them, to understand why we are using particular method or technique so that the research results are capable of being evaluated. During my project, I have used a lot of data to understand concept of Ratio analysis. The data collected was interpreted and then used as information in project.
OBJECTIVES OF THE STUDY
To identify the comparative financial strengths of Pepsi and Coca Cola India Ltd. Through the Net Profit Ratio and other profitability ratio, understand the financial position of the company. To know the liquidity position of the company, with the help of Current ratio. To find out the utility of financial ratio in credit analysis and determining the financial capability of the firm.
NEED FOR THE STUDY In the present scenario the competition between the soft drinks increased very high. The companies are struggling a lot to keep up their market share in the industry and to improve the sales of their products i.e. the turnover of the company. For this the company has to know their position in the market and the opinion and the loyalty of the customers and the retailers when compared to their competitor. Because of this reason the comparative analysis is very important and useful to the Company. By the use of comparative analysis the companies can understand the position of the company and the strength of the company in the market. Through the comparative analysis we can understand that what strategies the competitors are using for the increase their sales volume. From the study we can gather the information regarding the opinion of the retailers on the companies Page | 25
comparatively and this will help to plans for the future to increase the performance of the company and to gain the loyalty of the retailers when compared to the competitors.
RESEARCH DESIGN Research design is used to describe the state of affairs, as it exists at present. The research design adopted for this study is exploratory research design. Descriptive research includes fact finding enquiries of different kinds.
SAMPLING METHOD This refers to the technique or procedure the research would adopt in selecting the sample. Convenience sampling method will be chosen to conduct the survey.
SOURCES OF DATA COLLECTION Data for this project is collected through Secondary sources. Secondary data is collected with the help of following— 1. Annual report Majority of information gathered from data exhibited in the annual reports of the company. These include annual reports of the year 2009 to 2012. 2. Reference Books Theory relating to the subject matter and various concepts taken from various financial reference books.
The study contains secondary data i.e. data from books, authenticated websites and journals for the latest updates just to gain an insight for the views of various experts.
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LIMITATIONS Though the every researcher tries his / her best to fulfill the objectives of his / her study but still there are some limitations.
The authority and genuinely of the data received cannot be tested as every company does not disclose all of its records on interest.
False result Accounting ratio is based on data drawn from accounting accounting records. In this case if if data is correct, then only the ratio will be correct. The data therefore must be absolutely correct.
Effect of price level changes Price level changes often make the comparison of figures difficult over a period of time. Changes in price effect the cost of production, sales and also the value of the assets.
The comparison is rendered difficult because of differences in situations of one company as compared to another. Ratios are tool of quantitative analysis only. Normally qualitative factors are needed to draw conclusions. Ratio analysis is only the beginning as it gives only a little information for the purpose of decision making.
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DATA ANALYSIS & OBSERVATION COMPARATIVE ANALYSIS OF COCA-COLA AND PEPSI PVT. LTD.
LIQUIDITY RATIOS 1) CURRENT RATIO
Current Ratio= Current Assets Current Liabilities
Coca Cola, Co. Years
2012
2011
2010
2009
Current Assets
$6,620,000,000
$6,480,000,000
$6,280,000,000
$6,000,000,000
Current Liabilities
$9,321,000,000
$9,623,000,000
$9,221,000,000
$9,121,000,000
0.71
0.67
0.68
0.65
Current Ratio
Pepsi, Co. Years
2012
2011
2010
2009
Current Assets
$6,220,000,000
$6,000,000,000
$6,180,000,000
$6,220,000,000
Current Liabilities
$9,000,000,000
$9,323,000,000
$9,211,000,000
$9,112,000,000
0.69
0.64
0.67
0.68
Current Ratio
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CO CA CA C OL OLA
PEPS I
0.72
0.7
0.68
0.66
0.64
0.62
0.6 20 12
20 11
20 10
2 009
INTERPRETATION The above chart shows that in Pepsi, Current ratio is decreasing in year 2010 as compared to year 2009. In year 2011 also the Current ratio is decreasing as compared to year 2010. In 2012 only the Current ratio is increased. This is due to increase in current assets in year 2012 as compared to year 2011. In coca cola India Ltd, current ratio is higher than Pepsi in 2012 due to the more current assets than Pepsi.
2) QUICK RATIO
Quick Ratio= Current Assets- Investment Current Liabilities
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Coca Cola, Co. Years
2012
2011
2010
2009
Current Assets
$6,620,000,000
$6,000,000,000
$6,180,000,000
$6,220,000,000
Investments
$1,066,000,000
$1,076,000,000
$1,043,000,000
$1,055,000,000
Current Liabilities
$9,000,000,000
$9,323,000,000
$9,211,000,000
$9,112,000,000
Quick Ratio
0.617
0.528
0.557
0.566
Pepsi, Co. Years
2012
2011
2010
2009
Current Assets
$6,220,000,000
$6,480,000,000
$6,280,000,000
$6,000,000,000
Investments
$1,000,000,000
$1,056,000,000
$1,043,000,000
$1,045,000,000
Current Liabilities
$9,321,000,000
$9,623,000,000
$9,221,000,000
$9,121,000,000
Quick Ratio
0.56
0.56
0.57
0.54
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CO CA CA C OL OLA
PEPS I
0.62
0.6
0.58
0.56
0.54
0.52
0.5
0.48
0.46 20 12
20 11
20 10
2 009
INTERPRETATION The above chart shows that in Pepsi, Quick ratio is increasing in the year 2010 because of more current assets and investments but in year 2011 it again decreases. In year 2012 it remains the same as that of 2011. In coca cola India Ltd, quick ratio is higher than Pepsi in 2012 & 2009 due to the lesser liabilities than Pepsi. In year 2010 & 2011 Pepsi has higher quick ratio than coca cola due to the more current assets.
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ACTIVITY RATIOS 1) Account Receivable Turnover Account Receivable Turnover =
Net Sales
Accounts Receivable
Coca Cola, Co. Years
2012
2011
2010
2009
Net Sales
$30,990
$31,944
$28,857
$24,088
Account Receivable
$3,758
$3,090
$3,317
$2,587
10.34
8.70
9.31
Account Receivable Turnover Ratio
8.25
Pepsi, Co. Years
2012
2011
2010
2009
Net Sales
$43,232
$43,251
$39,474
$35,137
Account Receivable
$4,624
$4,683
$4,389
$3,725
9.24
8.99
9.43
Account Receivable Turnover Ratio
9.35
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CO CA CA C OL OLA
PEPS I
12
10
8
6
4
2
0 2 0 12
2 0 11
20 10
2 009
INTERPRETATION The above chart shows that in Pepsi, account receivable turnover ratio is steadily increasing from the year 2009 till 2012. In case of coca cola India Ltd, account receivable turnover ratio is higher than Pepsi in 2010 & 2011 only. In year 2009 & 2012 Pepsi has higher ratio than coca cola due to the more net sales.
2) Inventory Turnover Ratio Inventory Turnover Ratio =
Cost of Goods Sold Inventory
Coca Cola, Co. Years
2012
2011
2010
2009
Cost of Goods Sold Inventory
$2,545,715,000
$2,347,530,000
$2,447,890,000
$2,343,815,000
$1,066,000,000
$1,076,000,000
$1,505,000,000
$1,080,000,000
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Inventory Turnover Ratio
2.38
2.18
1.62
2.17
Pepsi, Co. Years
2012
2011
2010
2009
Cost of Goods Sold Inventory
$2,445,615,000
$2,237,430,000
$2,427,890,000
$2,243,810,000
$1,066,000,000
$1,056,000,000
$1,405,000,000
$1,080,000,000
Inventory Turnover Ratio
2.29
2.12
CO CA CA C OL OLA
1.72
2.08
PEPS I
2.5
2
1.5
1
0.5
0 2 012
20 11
2 010
20 09
INTERPRETATION The above chart shows that in Pepsi, inventory turnover ratio is increasing in all the succeeding years except the year 2010. In case of coca cola India Ltd, overall Page | 34
inventory turnover ratio of coca cola is higher than Pepsi. In year 2010 only Pepsi has higher inventory turnover ratio than coca cola.
PROFITABILITY RATIOS 1) GROSS PROFIT RATIO
Coca Cola, Co. Years
2012
2011
2010
2009
Gross Profit
$152,710,500
$113,901,200
$92,447,890
$96,343,815
Net Sales
$2,545,715,000
$2,347,530,000
$2,505,000,000
$2,080,000,000
5.99
4.85
3.69
4.63
Gross Profit Ratio
Pepsi, Co. Years
2012
2011
2010
2009
Gross Profit
$111,545,715
$95,347,530
$93,447,890
$95,333,416 $95 ,333,416
Net Sales
$2,000,005,000
$2,076,097,000
$2,544,000,000
$2,444,000,000
5.57
4.59
Gross Profit Ratio
3.67
3.90
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CO CA COLA
PEPS I
7 6 5 4 3 2 1 0 2012
2011
2010
2009
Norm: Higher the ratio shows higher efficiency and vice versa
INTERPRETATION The above chart shows that in Pepsi Gross profit ratio is decreasing in year 2010 as compared to year 2009 but in year 2011 & 2012 gross profit ratio is gradually increasing this is due to increase in cost of sales and in coca cola India Pvt. Ltd, gross profit is increasing gradually in year 2012 as compared to previous years.
2) NET PROFIT RATIO
Net Profit Ratio = NPAT * 100 SALES
Coca Cola, Co. Years
2012
2011
2010
2009
Net Profit after Taxes
$151,997,100
$113,176,100
$91,857,490
$95,772,615
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$2,545,715,000
Net Sales Net Profit Ratio
5.97
$2,347,530,000 4.82
$2,505,000,000
$2,080,000,000
3.66
4.60
Pepsi, Co. Years
2012
2011
2010
2009
Net Profit after Taxes Net Sales
$110,935,315
$94,636,030
$92,937,490
$94,892,116
$2,000,005,000
$2,076,097,000
$2,544,000,000
$2,444,000,000
5.54
4.55
Net Profit Ratio
CO CA COLA
3.65
3.88
PEPSI
7
6
5
4
3
2
1
0 2012
2011
2010
2009
Norm: Higher the ratio shows higher efficiency and vice versa
INTERPRETATION The above chart shows that in Pepsi, Net profit is increasing year by year from 2010 to 2012 like in 2010, it was 3.65 and it moves up to 5.54 in 2012 whereas in Page | 37
coca cola India Pvt. Ltd, net profit ratio is increasing from 2010 to 2012 but the increase in value is more than the Pepsi.
Return on Assets and Equity ---- comparison of coca cola and Pepsi with industry average
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SUGGESTIONS AND CONCLUSIONS
The in-depth analysis of key financial ratios in this project helps in measuring the financial strength, liquidity conditions and operating efficiency of the company. It also provides valuable interpretation separately for each ratio that helps organization implementing the findings that would help the organization to increase its efficiency. Ratios are only post mortem analysis of what has happened between two balance sheet dates. For one thing the position of the company in the interim period not related by analysis, moreover they gain no clue about the future. Ratio analysis in view of its several limitations should be considered only as a toll for analysis rather than as an end itself. From the analysis it is evident that the gross profit ratio is good, whereas operating ratio is around optimum level to the industry standards. As a whole the liquidity position of the company is good. Thus finally the company must try to improve its profit margins as they are below industry levels. This improvement may also bring up its return on investment and overall efficiency to the company. The business environment of both the company is reasonably good. The company’s track record is always oriented towards profitable growth and with strong fundamentals.
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BIBLIOGRAPHY Following books are referred for carrying out the project:1. Financial management by N.M. Venchalekar 2. Annual reports of Pepsi and Coca Cola
Following websites are referred:1. www.money.rediff.com 2. www.wikipedia.com 3. www.cocacolaindia.com
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