1. Task 1: Selection of Companies
As a consultant, you have been asked to report upon the financial performance of any company from the following business sectors: Consumer goods, Engineering, Health, Leisure, Technology and Telecoms. From their respective annual report or other suitable financial databases (such as Financial Analysis Made Easy-FAME; Morning Star; Osiris; etc.) obtain relevant financial information for your chosen companies for the last 5 years.
2. Task 2 : Extraction of ratios
From above financial platforms, extract the following financial ratios (or the necessary information or variables to calculate the ratios) for the company over a period of 5 years as follows:
• Profitibility
• Liquidity
• Working capital management
• Capital structure
• Stock market performance
Task 3: Discussion of ratios
Evaluate and analyse the performance of the company using the ratios extracted over the period under consideration (use graphs of the ratios extracted to support your analysis). Recommend whether the company would be a good investment (with the necessary justification)
Task 4: Weaknesses of Ratios
What are the main weaknesses associated with ratio analysis?
Financial Accounting is also known as Management Accounting. As the Business grew the complexity also grows due to which it become necessary to maintain proper accounting of the Company. For which Financial Accounting becomes necessary. It includes preparation of Ledgers, trial Balance, Profit and Loss Account and Balance Sheet by recording, classifying the entries, summarizing the entries through trial balance and then interpreting it in Profit and Loss Account and Balance Sheet of the Company.
It covers all the services and works of the accounts departments and manages all the functions of the Financial Accounts departments.
It helps in the decision making activity as it consider what is good and what is unfavorable towards the growth of the Company.
It helps the management in analysis the financial of the Company and to take the Quick and intelligent decisions by this proper accounting prepared by the help of the Financial Management.
Management Accounting helps the Management in the Planning, Controlling and decision making activities of the Company. [Anglo American Council of Productivity, 1950]
Scope of Financial Accounting:
Includes the preparation of Ledger Accounts:-
Ledger accounts help the Company to maintain the proper accounting of the Company with whom the transactions have been done. It includes Journal entries of the parties.
By maintain the ledgers all the entries are known and there is no chance to forget to do the entries. It will help to maintain the equal debit and credit side of the Accounts.
Trial Balance:-
Trial balance is prepared to check whether the entries have been passed correctly in the ledger account. When the trial balance of company matches it is assumed that the accounts have been prepared correctly.
Profit & Loss Account:-
Profit and Loss Account is prepared to calculate he profit earned by the Company during the year by deducting the Expenses from the revenue and also helps in calculation of the tax to be paid by the Company during the year. It presents the fair and true picture of the financial position of the Company. By ascertain g the Profit and loss Account Company comes to know how it is doing and on its basis it starts doing the projected work. In this Account the Expenses and the revenue earned by the Company is shown, depreciation charged on the assets and tax paid all the financials are shown and given on the Profit and Loss account.
Balance Sheet:-
Balance sheets indicate the Assets and Liabilities of the Company. It indicates the total Share capital, Reserves & surplus, debtors, Creditors, investments, Inventories, Cash and Bank Balance of the Company
Inventory Control/ Budgetary Control:-
It is the branch of the cost accounting as it helps to control the cost by proper decision making activity and helps to make the projected budgets for the future of the Company which will have to grow the company in order to achieve the targets of the Company.
Forecasting of the projects for the Company:-
By forecasting the projects through the help of graphs, statistics the Company can easily achieve the gap between the projected results and current results. Forecasting helps to decide what the company can do for the growth of the Company. It helps the Company to compare the Company financial position of the Company with the past financial analysis of the Company. Forecasting helps in growth of the Company
Control the Cost of the products by effective implementation of the Cost techniques:-
By financial Accounting implementation the Cost techniques are developed by the help of which per unit cost is ascertained and the cost can be reduced on the basis of the cost sheet and company should develop which products can be come to known to the Company.
Helps in determination and comparisons of the Company with the last year by help of ratios:
Profitability Ratio;
Liquidity Ration;
Price Earnings Ratio;
Solvency Ratio
Leverage Ratio
Investment Analysis Ratio
Efficiency Ratio
Includes internal Audit to be conducted internally in the offices of the Company by which any loopholes of the Company can easily be detected by the Company can be solved within the time and helps to maintain the proper accounts. By conducting the internal Audit the Financial position of the Company can be ascertain in true and fair sense.
Qualities of Management Accounting:-
In financial statement the relevant information is shown that is necessary for the ascertainment of the financial position of the Company. It saves the time as the least important data are separated from the important data.
It becomes easy to understand the Financial Data of the Company as all the figures are shown in the tabular form which is attractive and can easily be understandable to all the persons easily.
One can rely on the financial data presented as it helps in ascertaining the true and fair position of the Company. It helps in checking whether any wrong entry is not done in the financial books of the Company.
It becomes easier to compare the financial data of the current year with the previous year and if any deviation finds in the work it can easily be known can easily be solved on time, in order to get the expected financial position of the Company.
By the financial statements prepared as per the financial accounting the completeness is shown in the work as it can easily be read by any one and all the details come under the Profit and Loss Account and in the balance sheet of the Company.
It help to make the work easy and fast within time as the data are inserted in the table and can be done easily by using the formulas.
Limitations of the Management Accounting:
It is wide process and includes many stages to be covered to get the accurate financial position of the Company.
If any of the financial detail is given wrong then whole of the Accounting will be done wrong and will be misleading.
It includes proper knowledge of the Financial Accounting; lack of the knowledge will create hurdles in this Accounting process.
Coca Cola was incorporated by Dr. John Styth Pemberton. Mr. John Styth Pemberton came in 1869 from the Atlanta from Columbus, Georgia. Pemberton developed a laboratory in 1885 for the preparation of Hair dyes and drink beverages. Mr. Pat Watters, partner of Mr. Pemberton cited a Coca-Cola label for Coca Cola drinks “makes not only a delicious … and invigorating beverage … but a valuable Brain Tonic and a cure for all nervous affections.” from the year 1887. Coca Cola was not so well known and was failure during the beginning of the year. Due to illness and failure business Mr. Pemberton died, during the year 1891 Mr. Asa G. Candler owned the enterprise by paying a cost of $2,300. Mr. Candler and his two lawyers started doing advertising and publicity of this brand. They started the business in eight other places for the Growth and expansion of the Company and to build the brand of the Coca Cola. During his tenure the Coca Cola become popular in the public.
The marketing of the Coca Cola was not properly done by Mr. Pemberton, so the first marketing effort was done by distributing coupons for free samples of the beverage. This is also followed by the advertising in the newspaper and also promotional items well also distributed during the promotion of the Beverages.
Today Coca Cola is world first soft drink maker and selling around 1.3 billion beverage every day. It headquarter is situated in Atlanta. Coca-Cola is engaged in making four types of the Soft drinks:
Coca Cola
Diet Coke
Fanta
Sprite
Coco Cola is known by the short name Coke. Today it is famous by this word.
Company is also engaged in making Carbonated beverages like: Fresca, Barq’s, Cherry, vanilla Coke, Soft drinks, Juices, Coffees, bottle waters etc.
Tag lines used with the Coca Cola are:
Coke is it, during the year 1980
Can’t Beat the feeling, In 1993
The Pause that Refreshes, during 1929
Open happiness during the year 2009
Coca Cola is the best beverage and well known all over the world.
Graph showing Coca Cola net income and EBITA over the past years
Company had earned the income which can be understand by the help of the chart as given below for the year 2010, 2011,2012,2013 and 2014
|
Year |
Net Income |
|
2010-12 |
11809 |
|
2011-12 |
8572 |
|
2012-12 |
9019 |
|
2013-12 |
7098 |
|
2014-12 |
6884 |
As it is shown in the graph the Company is moving upwards and earning profits in its financial year. It shows that the Company is engaged in earning the profits and can earn profits easily by increase the production and marketing of the Product.
|
Year |
EBITA |
|
2010-12 |
16419 |
|
2011-12 |
13180 |
|
2012-12 |
14188 |
|
2013-12 |
13917 |
|
2014-12 |
11784 |
The financial position of the Company is strong and Company is doing its business day by day. The main points that the Company has focused on are as follows:-
Customer oriented :-
Company focused on the Customers desires and demands to increases its demand and maintains its goodwill in the market all over the world. By focusing on the customers the Company will be able to earn the profit and to increases it goodwill of the Company. It will help the Company to concentrate the desires and to produce the product as per the demand of the customer.
Product packaging:-
Company highly concentrates on the packaging of the Product to attract as many consumers as it can. As the attractive packaging will help to increase the consumer of the product. Proper packaging helps the Company to sell the product with safety and good attractive packaging helps the Company to avoid the wastage of the drinks of the Company.
Customer satisfaction:-
Coca Cola also focuses on the Customers queries in order to satisfy them by providing them appropriate answers to the queries raised by the Customers. As the Customer is satisfied they tend to purchase the drinks again. Happy Customer always comes back again to buy the product. They even add new consumers to the Company and bring the brand and fame of the Company.
TASK II
Ratios of the Company:
Ratio Analysis of the Company in year 2010-12, 2011-12, 2012-12, 2013-12 and 2014-12 are as follows:
|
Profitability |
2010-12 |
2011-12 |
2012-12 |
2013-12 |
2014-12 |
|
Gross Margin % |
63.9 |
60.9 |
60.3 |
60.7 |
61.1 |
|
Operating Margin % |
24.1 |
21.8 |
22.4 |
21.8 |
21.1 |
|
Net Margin% |
33.63 |
18.42 |
18.78 |
18.32 |
15.43 |
|
Return on Equity % |
42.32 |
27.37 |
28 |
26.03 |
22.36 |
|
Return on Assets% |
19.42 |
11.21 |
10.86 |
9.74 |
7.8 |
|
Liquidity/Financial Health |
|||||
|
Current Ratio |
1.17 |
1.05 |
1.09 |
1.13 |
1.02 |
|
Quick Ratio |
0.85 |
0.78 |
0.77 |
0.9 |
0.81 |
|
Debt/Equity |
0.45 |
0.43 |
0.45 |
0.58 |
0.68 |
|
Financial Leverage |
2.35 |
2.53 |
2.63 |
2.71 |
3.04 |
|
Working Capital Management |
|||||
|
Days Sales Outstanding |
42.55 |
36.66 |
36.76 |
37.52 |
37.05 |
|
Days Inventory |
71.95 |
57.33 |
60.88 |
64.8 |
65.06 |
|
Payables Period |
47.40 |
40.67 |
39.66 |
38.66 |
41.03 |
|
Cash Conversion Cycle |
67.09 |
53.52 |
58.00 |
63.66 |
61.08 |
|
Receivables Turnover |
8.58 |
9.96 |
9.92 |
9.73 |
9.85 |
|
Inventory Turnover |
5.07 |
6.34 |
6.00 |
5.63 |
5.61 |
|
Fixed Assets Turnover |
2.89 |
3.14 |
3.26 |
3.18 |
3.11 |
|
Asset Turnover |
0.58 |
0.61 |
0.58 |
0.53 |
0.51 |
|
PE ratio |
28.1 |
|
Year |
KO |
Beverages-Soft drink |
S&P 500 |
|
2011 |
9.24 |
9040 |
2110 |
|
2012 |
6.53 |
10.84 |
16.00 |
|
2013 |
17.05 |
17.39 |
32.39 |
|
2014 |
5.16 |
8.52 |
13.69 |
|
2015 |
4.88 |
9.93 |
1.38 |
Graph showing Coca Cola Stock Market Performance
In the above table it shows the stock performance of the Coca Cola Beverages soft drinks has been increases during the year from $8.52 while the KO decreases to $4.88K from $5.16K.
As on the basis of the Ratios the performance of the Company can be easily ascertained that the Company is doing well in the business Gross Margin increases to 61.1% from 60.7% the Gross Operating Margin grows from 24.1 to 20.10 it means that the Company is making higher profits, if the Operating ratio goes high than it is said that the Company is not doing well while in Coca Cola the Operating Ratio decreases from the last year.
A net profit margin indicates that if the margin is high then previous year then there are adequate returns for the owners of the Company while in case of low margin the returns inadequate. In this Company the return falls from 18.32% to 15.43%.
As the return on equity declines from 26.03 to 22.36% it means this year the return to the stakeholder will be less as Compared last years.
Current Ratio indicates that the ability of the Company to meets its short term requirements that arise during the course of the business. The ideal current ratio is 2:1. It is believe that there should be double of Current Assets towards the Current Liabilities of the Company, so that it can easily arrange its Working Capital requirement on time. As per the Coca Cola the Current Ratio is 1.02 which is not so good indicator as the implies the shortage of working capital in its business while this current ratio may differ from Company to Company.
Quick Ratio implies that the instant debt paying capacity of the Company. The ideal ratio is 1:1in the case of Coca Cola Company ratio is 1:0.81 which is not so less as the Company can cover easily it by arranging the funds but the Company have under stocking of the funds.
Debt Equity Ratio indicates the capacity of the Company to pay its debts. Its ratio is1:1 in this Company it indicates that the creditors are safe as the debt equity ratio of Coca Cola is 1: 0.63.
Outstanding sales have been decreases from 37.52 to 37.05 days. It is the good indicator as now the money can be recovering earlier and can be invested in the business again.
Payables days have been increases to 41.03 now the company can pay later as the capital can be used in some other work.
Conclusion
It is advisable to invest the money in the Coca Cola as the Company is doing the good business and today it is well known and Number one Company who provides the Beverages- Soft drinks to the Consumers. The Company is making profits and ratios are also close to the ideal situation of the Company. It is safe for the investor to invest in the Company. This year Company is not able to earn more profits as compare to last year but still the Company is making higher Profits as Compared to other Competitors. So the investor can invest in the Company.
Limitation/ Weakness associated with the Ratio Analysis
Ratio Analysis is a comparative tool for understanding the Comparative study of the Company. It helps in understanding where the Company stands as per its financial position which can be ascertain by the help of Financial Analysis and Ratio analysis. Still there are some limitations associated with the Ratio Analysis which are as described under:-
Comparative knowledge and study needed:-
To know the ratio of the Company one should have the knowledge of the ratios. If the Ratios are not known then one cannot ascertain the correct ratios and can be in Dias for the financial position of the Company. So it becomes hard for every person to have the proper knowledge of the Ratios. If the Complete financial data is not given then it will be unable to calculate all the ratios of the Company. Sometimes meaningful information is given which is not enough to calculate the financial position of the Company as the financial data are not available.
Concentrate on the Quantities factors only:-
It is the basic limitation of the Ratio that they are calculated on the basis of the Quantities terms; the qualities terms are highly ignored in the ratios. Sometimes the Company is doing well. They provides the satisfaction to the Customer and have the brand but if the sales and profit are not enough then its means that the Company is not so well.
Hence the ratios ignored the qualitative figures of the Company which makes it stand towards the Competitors.
Difference in calculating methods:-
There are many formulas provided to calculate the ratio, due to which it becomes difficult to ascertain which is to be consider. There are different methods to calculate the ratios.
Difference in Accounting methods:-
There are different methods of accounting treatment which are used by the Companies. Due to lack of standard methods the financial position cannot be ascertain quite well and similar.
Base on Past information:-
Ratios are based on the past data which is not so needful the investors see the present and the future working of the Company to invest money in the Company. It doesn’t matter sometimes that the past records are not good enough.
Sometimes based on assumptions:-
Sometimes the calculation of the Financial of the Company are taken on the assumption basis due to which it becomes impossible to get the fair and true financial position of the Company. Due to which the Correct and fair position cannot be known to the investors and the General public to make investments in the Company.
Possibility to manipulate the Accounts:-
To show the better picture of the financial position of the Company the financial data of the Company was manipulated due to which the investors does not come to know where the company stands in the market and by the manipulation prices the investors start investing in the Company which is done only to mislead the investors and to gain the name and fame in the market.
Not sure indicator of the Company Financial position:-
Ratios are not the true and sure indicators of the financial position of the Company as there are different methods to ascertain the ratios and they are calculate on the Accounting principles which too suffers some limitations .so to decide the Company financial position on the basis of the ratio is not the good outlook. As it also ignored the qualitative factors of the Company which are even important for the Company for its growth and development.
Ignores Business Conditions:-
During the calculation of the Ratios analysis the business condition are ignored sometime due to environment factors, political factors, external factors sales and profit can be increase or decrease. So these factors are necessary for the determination of the financial position of the Company which is ignored while calculating the ratios of any particular company.
Incomplete Information:-
Sometimes incomplete information is provided due to which the ratios are unable to calculate. It becomes difficult to calculate the ratios of the Company as the entire information is not given by the company.
References:
Francis K.A., Demand Media_ The Differences Between Financial Accounting & Management Accounting, viewed on 21st Feb 2016,https://smallbusiness.chron.com/differences-between-financial-accounting-management-accounting-3985.html
Mitchell H, Demand Media_ Management Accounting vs. Financial Accounting, viewed on 21st Feb 2016, https://smallbusiness.chron.com/management-accounting-vs-financial-accounting-3987.html
Jeffrey G_ Financial Accounting vs. Management Accounting, viewed on 21st Feb 2016 https://www.investorguide.com/article/15759/financial-accounting-vs-management-accounting-d1412/
Brief Background of Coco-Cola Company, Viewed on Feb. 21st, 2016, https://deutch4macys.blogspot.in/2011/02/brief-history.html
Business history of Coca-cola Company, Company History Index, Viewed on Feb. 21, 2016_ https://www.referenceforbusiness.com/history2/32/The-Coca-Cola-Company.html#ixzz40mVS12OE
Financial ratio of Coca-Cola Company, Viewed on Feb. 21, 2016, https://financials.morningstar.com/ratios/r.html?t=KO
Jan O, Advantages and Limitations of Ratio Analysis, Viewed on Feb. 21, 2016, https://accountingexplained.com/financial/ratios/advantages-limitations
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