Calculation and Analysis of Solvency Ratios for Coca-Cola

This assignment provides a summary of how funds can be raised in the best possible manner. After analyzing the financial position of Coca-Cola, it is possible to understand and compare its market position against competitors' products. Financial management aids in understanding various techniques of management, which helps avoid shocks and surprises. The analysis also assists in utilizing available resources to achieve desired targets.

FINANCIAL MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................1
TASK ..............................................................................................................................................1
Critical analysis of the gearing ratio and dividend policy of Coca-Cola as against to their
corporate objectives................................................................................................................1
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5
APPENDIX......................................................................................................................................6

INTRODUCTION
Financial management places more emphasis upon the effective and optimum utilization
of money. Effective management of financial resources enables the organization to accomplish
their objectives in an efficient manner (Moyer, McGuigan and Rao, 2014). For this project
report, Coca-Cola is selected which is the multinational manufacturer, marketer and retailer of
non-alcoholic beverages. Company is known for its flagship product and recognized as the
famous brand. The present report will discuss the solvency aspect of Coca-Cola with the help of
gearing ratio. It also provides a deep insight about the dividend policy of company upon which
the investment decision of stakeholders is highly dependent.
TASK
Critical analysis of the gearing ratio and dividend policy of Coca-Cola as against to their
corporate objectives
Coca-Cola is the leading organization in the food and beverages sector which enjoys the
customer’s loyalty towards the brand. Customer base of Coca-Cola is very wide which provides
several benefits to the firm in terms of high productivity and profitability. Financial health and
performance of organization is sound in all the financial years. Nevertheless, in the present
scenario, Coca-Cola faces cut throat competition in the food and beverages sector. It is one of the
dominating companies in this sector but due to their rivals, profitability aspects of the firm
decreases as compared to the previous years (McKinney, 2015). One of the main competitors of
Coca-Cola is Pepsi and other international firms which directly impacts the market share and
brand image of the organization. It is one of the main causes due to which profit margin of
company is decreased in the financial year 2014 as compared to 2013.
Before analyzing the solvency aspects and dividend policy of Coca-Cola, it is required to
understand these terms. Gearing ratio of company provides more assistance not only to but also
to the shareholders about the financial leverage and solvency aspects of an organization. It
entails the ratio of fund which is borrowed by the firm from equity source as well as from the
other long term debt sources of fund (Gearing Ratio, 2015). Ideal debt equity ratio of company is
0.5:1 which entails that firm needs to meet their financial needs from equity sources as compared
to the debt sources of fund (Situm, 2014). In addition to this, dividend policy of company states

the amount of dividend paid by the organization to build and maintain faith of the investors. It is
one of the main aspects upon which the investment decisions of stakeholders highly depend.
Debt equity ratio of Coca-Cola is continuously increasing in each of the financial year
which is not fruitful for the organization. In the financial year 2010, debt equity ratio of Coca-
Cola is .45 which is very near to the ideal ratio. It states that company raises their fund from the
equity sources in against to the other long term debt sources. However, in the FY 2013, it is .58
which is highly increased from the previous years. In contrary to this, in 2014, debt equity ratio
of company is .63 which states that long term borrowing aspect of the firm is very high
(Financial statements of Coca cola, 2015). It places a negative impact upon the shareholders
because if borrowing of an organization is high then company is unable to pay high rate of
dividend to their shareholders (Murto and Terviö, 2014).
Gearing ratio of Coca-Cola reflects that company is suffering from lots of problems due
to which debt equity ratio of the firm is continuously increasing. In the financial year 2011,
gearing ratio of an organization is .43 which states that Coca-Cola issued number of shares to
meet their financial requirements as compared to the long term debt sources. However, it is to be
critically evaluated that in the next financial years, Coca-Cola has taken long term debt sources
to meet their financial needs. One of the main causes behind the increment in long term debt is
the changes in economical aspects such as policies and economic condition like inflation and
deflation.
Besides this, changes in the exchange rate and tax rate also affect the financial practices
and decisions of an organization. In addition to this, these changes reflect that company has
undertaken the expansion strategies and policies to build a strong presence. It may also be one of
the causes behind the high gearing ratio. In the business downturn, high gearing ratio creates
financial difficulties in front of company (Ali, Sharif and Jan, 2015). In this situation,
organization is not in the position to repay the debt amount which may turn into bankruptcy.
High gearing ratio also creates a negative image in the minds of different stakeholders towards
business practices, operations and functions of Coca-Cola. Thus, company needs to undertake
effectual measures to improve its financial leverage. Through this, organization is able to attract
large number of investors towards the business organization. Coca-Cola needs to frame
strategies and policies to improve its solvency aspects and thereby, makes contribution in the
organizational success.

Dividend policy adopted by an organization plays a vital role in attracting large number
of investors towards the organization. Dividend policy of each and every organization is highly
affected by the revenue generated by the firm. Company is able to pay dividend only when they
earn sufficient amount of profit from their business organization. Thus, it directly highlights the
earning aspects of organization (Rahman, 2015). If company declares better dividend as
compared to their rival firm then it creates a strong image in the minds of customers. Besides
this, it indicates that financial health and performance is sound. Further, this situation also states
that company continuously makes good efforts for the growth and development of organizational
practices and activities.
In order to maintain faith of the investors in organizational activities and practices,
company needs to consistently pay dividend to their shareholders. When adopts this policy they
enjoys the customer loyalty towards their brand which proves to be more beneficial for an
organization. In the competitive business environment, one of the main corporate objectives of
Coca-Cola is to create value for the customers or investors and to make a difference for them.
Besides this, another objective of company is to have organizational growth and development by
taking into consideration the ethical standards and practices. Below mentioned figures states that
dividend per share which investors of Coca-Cola earns by investing their money is continuously
increasing as profitability aspects of the firm shows downward trend in their performance (Baker
and Weigand, 2015). Instead of this, Coca-Cola provides higher return to their shareholders to
build a strong presence as compared to their competitors.
In the financial year 2010, corporation gives .88 dividends to their shareholders where as
in 2012 and 2013, it was 1.02 and 1.12. It shows increasing trend in return which investors may
generate by investing in the next financial years. In 2014, dividend per share was 1.22 which is
high as compared to the previous years. On the basis of this aspect, it can be stated that company
has met their objective of maximization of wealth of the shareholders to a great extent (Financial
statements of Coca cola, 2015). Along with this, by increasing the earnings per share, Coca-Cola
has created the value of their shareholders. However, it is to be critically evaluated that Coca-
Cola gives lower rate of dividend to their shareholders as compared to their rival firms. This
aspect negatively impacts the decision making aspect of investors. Thus, company needs to make
efforts to maximize their sales and revenue aspects. Through this, firm is able to give high rate of

dividend to their shareholders (Nazir, 2014). Further, it also makes contribution in increasing
brand value and market share of an organization as against to the competitors.
There are various theories that are available in relation to the dividend policy, Walter
model, Gordon model and Modigliani and Miller's hypothesis. Various policies place emphasis
that dividend policy of an organization closely impacts the market value of the share (Rahman,
2015). However, it is to be critically evaluated that by Modigliani and Miller's model which
emphasizes on dividend policy of an organization does not affect the shareholders. It states that
earnings of the firm highly depend upon the investment made by an organization. All the theories
present their results on the basis of certain assumptions (Ali, Sharif and Jan, 2015). Thus,
company does not need to take into consideration these theories. To build and maintain faith of
the investors, organization needs to frame effective dividend policy after assessing the market
conditions and competitor’s strategies. It proves to be more beneficial for Coca-Cola in
achieving the success in competitive business arena.
CONCLUSION
From this project, it has been concluded that gearing ratio of company is continuously
increasing which is not fruitful for Coca-Cola. Thus, company needs to undertake effective
measures to improve their financial or solvency aspects. Further, it can be concluded that
dividend policy of company is improved year by year which proves to be beneficial for them in
building competitive advantage over others.
Reflective statement
I am glad to conduct the financial analysis of Coca-cola. I have learnt various techniques of
conducting financial analysis through interpretation of accounts and statements. I am glad to
learn techniques of studying corporate reports and statements. The study of this report aids me to
analyze the financial position of the coca-cola. This in turn assists me to decide whether I should
invest in the company or not. The financial management is a subject that has provided me
valuable insights in relation to analysis of business financial performance. Financial management
of all the activities aids me to achieve the desired target by forming various strategies. It also
helps me to manage my all the activities in advance related to availability of funds, resources and
other necessary things. Calculation of various solvency ratios aid me to fund out the source from
where funds can raised in a best possible manner. After analyzing the financial position of the

Coca-Cola I am able to understand and compare its market position against its competitor’s
products. Financial management aids me to understand the various technique of management,
through which I am able to avoid the condition of shocks and surprise. Management of all the
activities will also assist me to utilize the available resources to the full extent in order to achieve
my desired target. Financial analysis of the Coca-Cola will assist me to know its financial
position. Through which I am able to find its growth rate by comparing it with its competitor’s
growth.
Financial analyzes of the Coca-Cola help me to increase my knowledge and skills. This
analyzes help me understand how funds can be utilized to the best extent in order to achieve the
desired goals and objectives. At the same time I am also able to learn about the various strategies
which company are using in order expand its business, achieve the set target and to overcome the
various work related problems within and outside the organization. Financial management also
assist me compare the financial position of the various companies through which I am able to
decide in which company I should invest to gain the profit. It will also me to decide whether I
should take back my shares from the company or should invest more. I am also glad to analyze
the financial position of the company which in turn will aid me to learn and understand the
various techniques which in turn will assist me analyze the different types financial statement in
order to gain various types of knowledge.
Financial management will also aid me maintain my expenses. This in turn will aid me
maintain the balance between all my expenses and revenue. Financial management will assist
me maintain the various budgets which in turn aid me to grow. Learning of various financial
techniques will also help to start up the new business easily. By using these techniques in will be
able to manage the inflow and outflow of the funds for my own business unit. These techniques
will also assist me to analyze the various competitors which can create problem for me while
starting my new business. By using this all techniques I will also be able to prepare various
strategies in order to achieve the various objectives.
Therefore, I am glad that after analyzing the financial position of Coco-Cola Company I am
able to enhance my skills and knowledge. This enhanced skills and knowledge will help me start
up my own business in the future. Knowledge of various techniques will aid me compare the
financial position of all the necessary business organization and at the same time will also aid me
find out the number of competitors present in the market against the business which I want to

start. I personally find out that analyzing the financial position of the Coco-Cola has developed
by skills and I have observed growth in myself. This enhanced knowledge will also help me
solve out various problems related to business. Enhance knowledge will also help me to join high
rate business unit at the good post. Moreover, study of various techniques will also aid me
maintain my own expenses. At last it can also said that knowledge of all these techniques will aid
me to know the various methods which will help me raise the capital in the future for my
business.

REFERENCES
Books and Journals
Ali, A., Sharif, I. and Jan, F. A., 2015. Effect of Dividend Policy on Stock Prices. Journal Of
Management Info. 6(1). pp. 55-85.
Baker, H. K. and Weigand, R., 2015. Corporate dividend policy revisited. Managerial Finance.
41(2). pp. 126-144.
McKinney, J. B., 2015. Effective financial management in public and nonprofit agencies. ABC-
CLIO.
Moyer, R. C., McGuigan, J. and Rao, R., 2014. Contemporary financial management. Cengage
Learning.
Murto, P. and Terviö, M., 2014. Exit options and dividend policy under liquidity constraints.
International Economic Review. 55(1). pp. 197-221.
Nazir, N., 2014. Impact of Dividend Policy on Stock Price Volatility: A Case Study of Pakistani
Capital Market. European Journal of Business and Management. 6(11). pp. 49-61.
Rahman, M. M., 2015. Managers’ Perception towards Dividends and Dividend Policy—
Evidence from Bangladesh. Journal of Financial Risk Management. 4(03). pp. 143.
Situm, M., 2014. Inability of Gearing-Ratio as Predictor for Early Warning Systems. Business
Systems Research. 5(2). pp. 23-45.
Online
Gearing Ratio. 2015. [Online]. Available through: <http://www.accountingtools.com/gearing-
ratio>. [Accessed on 18th November 2015].
Financial statements of Coca cola, 2015. [Online]. Available through:
<http://financials.morningstar.com/balance-sheet/bs.html?t=KO>. [Accessed on 18th
November 2015].
APPENDIX
Gearing ratio of Coca-Cola is as follows:
Particulars 2010 2011 2012 2013 2014

Debt equity ratio 0.45 0.43 0.45 0.58 0.63
Financial leverage 2.35 2.53 2.63 2.71 3.04
Dividend per share 0.88 0.94 1.02 1.12 1.22
Dividend per share which investors of Coca-Cola earn by investing in the operations of
company is as follows:
Particulars 2010 2011 2012 2013 2014
Dividend per share 0.88 0.94 1.02 1.12 1.22
Financial statements Of coca-cola (Financial statements of Coca cola, 2015)
Balance sheet

Income statement
Cash flow