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.
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.
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.
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.
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