Principle of Financial Management.

Principle of Financial Management
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Contents
Industry Description....................................................................................................................................4
a) Size of Industry & Level of Competition...............................................................................................4
b) Regulators of the Industry & Extent of their Power for Ensuring Compliance within the Industry.....4
c) Industry Groups regulating the Industry..............................................................................................4
Part 2: Company Description.......................................................................................................................4
a) Main Source of Business & the products and services being sold.......................................................4
b) Ownership & Management Structure of Company.............................................................................5
c) Company’s Role within the Financial System.......................................................................................5
Part 3: Financial Instrument Analysis...........................................................................................................5
a) Financial Instruments Used by Company.............................................................................................5
b) Presence of Off Balance Sheet Business (OBS) in Company................................................................6
Part 4: Analysis of financial structure..........................................................................................................6
(a) Key financial ratios important to the creditors...................................................................................6
 Current Ratio...............................................................................................................................6
 Debt to Equity Ratio.....................................................................................................................7
 Interest Coverage Ratio...............................................................................................................7
(b) Key financial ratios important to the investors..................................................................................7
 Price-Earnings Ratio.....................................................................................................................7
 Dividend Yield Ratio.....................................................................................................................7
 Return on Equity..........................................................................................................................7
(c) Calculation of financial ratios those are important for creditors and investors..................................8
Calculation of financial ratios those are important from viewpoint of creditors.................................8
Calculation of financial ratios those are important from viewpoint of investors.................................9
(d) Recommendation for the Company on the basis of Financial ratios Calculations............................10
Credit Management Analysis.............................................................................................................10
Investment Potential Analysis...........................................................................................................10
Part 5: Financial Market Analysis...............................................................................................................11
a) Interaction of different Financial Players within the Selected Industry.............................................11
b) Government Intervention within the Industry and the Actions Taken for Ensuring Ethical Behavior
within the Industry................................................................................................................................12
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c) Ethical Behavior of the Company.......................................................................................................13
Part 6: Findings, Conclusions and Recommendations...............................................................................13
References.................................................................................................................................................15
Appendix...................................................................................................................................................17
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Industry Description
a) Size of Industry & Level of Competition
The present assignment is conducted on the company Coca-Cola Amatil that is operating
within the beverage industry of Australia. The market size of Australia beverage sector is
expected to be reach to USD 5.813 million by the end of the year 2025 and is expected to depict
a growth of CAGR of 3.4% over the forecasted period. The revenue realized in the non-alcoholic
drink beverage segment of Australia amounts to US $ 15,000 m in the year 2019. The rising
health concerns among the consumers of Australia are leading to supporting the growth within
the soft drink segment of Australia (Statista, 2019). The companies are placing emphasis on
manufacturing advanced sugar free soft drinks for meeting the changing needs and requirements
of the consumers. There is increasing level of competition within the segment due to high growth
realized by the sector at present. The major players operating within the industry are Coca-Cola
Amatil, PepsiCo, Nestle, Bickfords Australia Pty Ltd among many others (IBIS World, 2018).
b) Regulators of the Industry & Extent of their Power for Ensuring Compliance
within the Industry
The industry is governed by the standards that have been outlined by the Food Standards
Australia New Zealand (FSANZ) and ensure that the soft drink companies comply with the
entire standard outlined by the FSANZ (Australian Beverages, 2019).
c) Industry Groups regulating the Industry
Australian Beverages Council is the industry group regulating the industry. Its members
consists of all the small, medium-size and large companies involved within the sector. The
council holds the responsibility for over-viewing and monitoring the overall activities of the
member companies to ensure they comply with the industry norms (Australian Beverages, 2019).
Part 2: Company Description
a) Main Source of Business & the products and services being sold
Coca-Cola Amatil Limited (CCA) is an ASX listed company that is known to be one of
the largest bottlers of non-alcoholic ready to drink beverages within Asia-Pacific region. It has
achieved a distinctive position within the world’s five major coca-cola bottlers. The major
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products that are provided by the company include soft drinks, sports and energy drink, diet
coke, deep spring, fanta, spring water, sprite, powerade, iced tea, flavored milk and its major
services include manufacturing and distribution of alcoholic and non-alcoholic beverages (IBIS
World, 2018).
b) Ownership & Management Structure of Company
The company has separate ownership and management structure with Board holding the
responsibility for managing the business of the company and attaining maximum value for the
shareholders, that are, the owners of the company. The management function is performed by the
company’s Board that consists of one executive director and two non-executive directors. The
board members hold the responsibility for carrying out the company business in a sustainable
manner and delivering higher value for the shareholders (Coca-Cola Amatil: Annual Report,
2018).
c) Company’s Role within the Financial System
The company is involved in creation of profits for its owners that are its different
shareholders and thus holds the role of providing funds within the financial system. It helps in
economic development by creating funds that is used in the financial markets and assists in
financial growth and development (Gullifer and Payne, 2011).
Part 3: Financial Instrument Analysis
a) Financial Instruments Used by Company
Coca-Cola Amatil adopts the use of derivative financial instruments in order to manage
the exposures related to the financial risk of the company. The company holds collateral as per
the agreement to gain protection against the credit risk exposure from its counterparties. The
cash collateral that is received or paid by the company is recognized at fair value on the date of
settlement within the cash flow statements. On the date of trading, the derivates are valued as
assets on increase in the fair value and the decrease in the fair value categorize them as liabilities.
The derivative financial instruments classified as hedges are recognized primarily at equity. The
gain or loss incurred is subsequently transferred to the statement of income if their occur
termination or revoking of the hedge relationship. It also adopted the use of cross currency swaps
for managing the exposure related to foreign currency risks. The changes that occurs within the
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fair values of the hedged debt that occurs due to significant changes in the exchange rate and
interest rates are offset as per the changes occurred with the cross currency swaps value (Coca-
Cola Amatil: Annual Report, 2018).
b) Presence of Off Balance Sheet Business (OBS) in Company
The off-balance sheet items are regarded as the assets or liabilities possessed by a
company that are depicted on its balance sheet. Coca-Cola Amatil is also engaged within the off-
balance sheet business. The derivative assets and liabilities of the company are not depicted on
the balance sheet. The company represents its derivate net assets and liabilities position as off-
balance sheet items as depicted:
(Source: Coca-Cola Amatil: Annual Report, 2018)
Part 4: Analysis of financial structure
(a) Key financial ratios important to the creditors
Creditors are regarded as an important user of financial statements as they are dependent
upon the financial performance of the company to make decision on investment in the respective
company. Creditors are interested in company income profile, current debt obligations, profit
position, expenses and cash flow generated during the year. The main motive of the creditors is
to analysis the company’s financial statements to determine whether business posses sound credit
risk and ability to pay for the debt (Gullifer and Payne, 2011). The three most important financial
ratios that need to be considered by Creditors are as follows:
 Current Ratio: It is a liquidity ratio that helps in assessing the ability of a company to
meet its short-term financial obligations in an effective manner. The formula for its
calculation is as follows:
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Current Ratio=Current Assets/Current Liabilities
 Debt to Equity Ratio: The ratio provides an assessment of the ability of a company in
meeting its overall liabilities through its shareholder equity. The formula for its
calculation is as follows:
Debt to Equity Ratio: Debt/Equity
 Interest Coverage Ratio: It determines the ability of a company to meet its interest
obligations on the outstanding debt in an effective manner (Bragg, 2010). The formula is
as follows:
Interest Coverage=EBIT/Total Interest Expense
(b) Key financial ratios important to the investors
Investors are regarded as the owner’s of the company as they invest their money in
ordinary equity shares and they look forward to earn maximum return on their investment. They
look actual return on their investment and it can be divided into current earnings in form of
dividend and holding period return on value of shares (Moles and Kidwekk, 2011). Three
important ratios that are important to the investors are:
 Price-Earnings Ratio: The ratio provide an assessment of the value of a company by
indicating the amount an investor is expected to invest for achieving significant earnings.
The formula is as follows:
Price-Earnings Ratio=Share Price/Earnings per share
 Dividend Yield Ratio: The ratio is used for assessing the amount of cash dividends that a
company is able to pay to its shareholders in comparison to the market value per share.
The formula for the same is as follows:
Dividend Yield=Annual Dividend/Share Price
 Return on Equity: It provides a measure of the profitability realized by a company by the
use of its equity base (Bragg, 2010). The formula is as follows:
Return on Equity=Net Income/Shareholders’ equity
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(c) Calculation of financial ratios those are important for creditors and
investors
Calculation of financial ratios those are important from viewpoint of creditors
Current Ratio
Calculation of Current Ratio
Financial Data 2017 2018
In $ Million
Current Assets $ 2,799.60 $ 2,815.20
Current Liabilities $ 1,838.80 $ 1,643.50
Ratio 2017 2018
Current Ratio 1.52 1.71
Debt Equity Ratio:
Calculation of Debt Equity Ratio
Financial Data 2017 2018
In $ Million
Total Liabilities $ 4,176.60 $ 4,272.30
Shareholder's Equity $ 1,880.30 $ 1,900.00
Ratio 2017 2018
Debt Equity ratio 2.22 2.25
Interest Coverage Ratio:
Calculation of Interest coverage Ratio
Financial Data 2017 2018
In $ Million
EBIT $ 678.00 $ 617.00
Interest Expenses $ 104.40 $ 89.10
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Ratio 2017 2018
Interest Coverage Ratio in Times 6.49 6.92
(Coca-Cola Amatil: Annual Report, 2018).
Calculation of financial ratios those are important from viewpoint of investors
Price Earnings Ratio
Calculation of Price Earnings Ratio
Financial Data 2017 2018
In $ Million
Market Price (Yahoo Finance) $ 7.68 $ 7.78
EPS $ 0.60 $ 0.56
Ratio 2017 2018
P/E Ratio 12.86 14.02
Dividend Yield Ratio
Calculation of Dividend Yield Ratio
Financial Data 2017 2018
In $ Million
Market Price (Yahoo Finance) $ 7.68 $ 7.78
Dividend per share $ 0.47 $ 0.47
Ratio 2017 2018
Dividend Yield Ratio 6.12% 6.04%
Return on Equity
Calculation of Return on equity
Financial Data 2017 2018
In $ Million
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Shareholder's Equity $ 1,880.30 $ 1,900.00
Net Profit for shareholder's $ 445.20 $ 279.00
Ratio 2017 2018
Return on Equity 23.68% 14.68%
(Coca-Cola Amatil: Annual Report, 2018)
(d) Recommendation for the Company on the basis of Financial ratios
Calculations
Credit Management Analysis
The three ratios that are calculated for evaluation of the company ability to manage
adequately its cash payments and avoid the occurrence of any credit risk are current ratio, debt to
equity ratio and interest coverage ratio for the financial years 2017-2018. The current ratio for
the company has increased from 1.52 to 1.71 over the past two years and is also greater than 1
for the respective period. This implies that there is less credit risk within the company for not
able to meet its financial obligations in a timely manner as it has maintained a high proportion of
current assets in comparison to the current liabilities (Davies and Crawford, 2011). The debt to
equity ratio has also depicted an increase from 2.22 to 2.25 over the past two financial years and
this implies a higher credit risk for the company in future context due to adopting the use of high
proportion of debt as compared to equity within its capital structure. Lastly, the interest coverage
ratio for the company over the past two financial years have depicted an increase from 6.49 to
6.92 which means that it is able to effectively meet its interest expenses on its debt obligations
and thus there lies less credit risk within the company. This is because it is able to effectively
manage its debt obligations by meeting the interest expenses on time (Bragg, 2010).
Investment Potential Analysis
The ratios of price-earning, dividend yield and return on equity are used for assessing the
potential of Coca-Cola Amatil to yield returns for the shareholders. The price earnings ratio have
depicted an increase from 12.86 to 14.02 over the past two financial years which depicts its
increasing ability to create higher earnings for the shareholders for each amount of dollar
invested by them. The dividend yield has gradually declined from 6.12 to 6.04 over the past two
financial years which implies that it is currently paying less divided to the shareholders. Also, the
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return on equity has depicted a decrease from 23.68 to 14. 68 over the past two financial years
which implies a declining earning potential for the company over its equity base that can
negatively impact its future development and growth (Brigham and Houston, 2012).
It is recommended for the company based on the overall analysis that it should issue
AUD 10 Million new shares. This is because it is possessing higher debt and thus borrowing
money will lead to increase in the cost of debt and thus enhancing the credit risk if it is not able
to meet its debt obligations. The issue of new shares will bring the new investment and
consequent changes in the business structure and would enable in supporting the growth of the
company by providing new capital. This could lead in increasing its earnings potential and thus
strengthening its dividend yield and return on equity position (Vernimmen, 2014).
Part 5: Financial Market Analysis
a) Interaction of different Financial Players within the Selected Industry
The interaction of different financial players within the beverage industry that are,
borrowers, investors, financial intermediaries and regulators interact with each other for ensuring
efficient allocation of resources. The customers or suppliers of the company can be regarded as
its borrowers who have purchased a good or service and therefore have to give the supplier
payment in return. The investors are the shareholders who have invested within the company to
derive profit in return. Financial intermediary can be a commercial bank that acts as a middle
agent among different financial parties and facilitating the financial transactions. For example,
banks provide funds to the company for conducting its operational functions and the money in
turn is provided to the shareholders in the form of profit obtained from the various operations
(Vernimmen, 2014). The regulators are the government players who hold the responsibility of
implementing relevant laws and regulations on the industry to ensure that it ensures to the
adoption of best standard practices for promoting the welfare of its different stakeholders. The
overall interaction between these different players within a beverage industry can be illustrated
as follows:
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(Source: https://voxeu.org/article/key-functions-asset-management)
As depicted from the above diagram, the banks act as financial intermediary within the
beverage industry. The borrowers such as business firms operating within the industry seek funds
from the commercial banks to meet its various operational requirements. Also, the individual
borrowers such as customers and suppliers also borrow money from the business firms and in
turn have to meet their debt obligations for the good or service used by them (Moles and
Kidwekk, 2011). The business firms also act as investors when they seek to invest funds within
the financial markets. Also, the shareholders are the investors who provide capital to the business
firms operating within the industry in return of the profit achieved by them. The overall financial
regulation process within the industry is governed by the regulatory power of the government
who regulates the flow of money within the industry among the different financial players
(Brigham and Houston, 2012).
b) Government Intervention within the Industry and the Actions Taken for
Ensuring Ethical Behavior within the Industry
Coca-Cola Amatil conducts its business within the beverage industry which is facing
government intervention from the past few years due to increasing problem of obesity occurring
within the country. As a result, the Australian administration is placing high emphasis on
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imposing a sugar tax on the non-alcoholic beverages sector for ensuring that they decrease the
amount of sugar within their soft drinks. The Australian Bureau of Statistics data has illustrated
that there is a consistent trend within Australia consumers for reducing the sugar intake over the
past few years (Arthur, 2017). There have been occurred significant changes within the
consumer purchasing patterns within the country as they are placing large importance on
improving their health. As such, the Australian government imposes several regulations on the
beverage sector for ensuring that it products its various beverage products in an ethical manner
that consist of low sugar content (Scattergood, 2018). The beverage companies such as Coca-
Cola Amatil are placing importance on manufacturing low calorie drinks that are able to meet the
health requirements of the Australian consumers. Thus, the issue related with obesity among the
Australian people is causing the need for the government to regulate the sugar content within
various non-alcoholic beverages manufactured by the companies operating within the sector such
as Coca-Cola Amatil (Roddan, 2016).
c) Ethical Behavior of the Company
Coca-Cola is placing high importance o complying sugar tax imposed by the Australian
government on the beverage industry. As such, it has launched a new product known as Coca-
Cola No Sugar and it is recognized as one of the first product within the market that has no
sugar. The drink claims to having no sugar calories and thus effectively meeting the health needs
and expectation of the consumers within Australia. The production frameworks within Australia
of BMP (Bonsucro and Smartcane Best Management Practice) have stated the benchmarks that
the beverage companies need to address while producing sugar. As per the framework, Coca-
Cola Amatil has met the criteria of BMP in its sugar production process and ensures that it does
not use any of herbicides, pesticides and also strives to crease the use of water in its sugar
production process. Also, it strives to reduce the amount of fossil fuels in its sugar production
process for protecting the environment (Neo, 2019).
Part 6: Findings, Conclusions and Recommendations
It can be stated from the overall industry and financial analysis conducted in the context
of Coca-Cola Amatil that it is operating within the beverage industry that is predicted to achieve
higher growth in the future context with the rising demands from the consumers regarding
consumption of healthy soft drinks. There is increasing needs from the consumers regarding
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healthy consumption of drink and thus non-alcoholic beverages company are emphasizing on
reducing the sugar content of their drinks. For example, Coca-Cola Amatil has also launched
several non-alcoholic beverage drinks that have low sugar content for meeting the health
requirements of the customers. There is huge growth prospect for the industry as the companies
operating within the industry are emphasizing on developing healthy drinks that have low
calories. The government is also strongly intervening within the industry and has imposed a
sugar tax for the firms operating within the industry. This initiative is taken by the company for
promoting and sustaining the health and development within the industry by ensuring that he
firms are effectively meeting the customer needs. Also, it has been analyzed from the financial
evaluation of the company that it has effective credit management as it is able to meet the
financial obligations in an effective manner. But the company has increased its debt obligations
as compared to equity over the past two financial years. This implies that it need to reduce its
debt obligations for decreasing the credit risk that can increase due to not able to meet the
financial obligations in a timely manner. However, its investment potential is not as good due to
declining dividend and return on equity over the past two financial years. Thus, it can be said
that the company need to re-structure its business and issue new shares for gaining access to new
capital and promoting its growth and development.
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References
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conditions-in-Australia [Accessed on: 22 September 2019].
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https://www.australianbeverages.org/ [Accessed on: 22 September 2019].
Bragg, S. 2010. Business Ratios and Formulas: A Comprehensive Guide. US: John Wiley &
Sons.
Brigham, E. and Houston. J.F. 2012. Fundamentals of Financial Management. US: Cengage
Learning.
Coca-Cola Amatil. 2018. Annual Report. [Online]. Available at:
https://www.ccamatil.com/-/media/Cca/Corporate/Files/Annual-Reports/2019/2018-Annual-
Report.ashx [Accessed on: 22 September 2019].
Davies, T. and Crawford, I., 2011. Business accounting and finance. USA: Pearson.
Gullifer, L. and Payne, J. 2011. Corporate Finance Law: Principles and Policy. Bloomsbury
Publishing.
IBIS World. 2018. Coca-Cola Amatil Limited. [Online]. Available at:
https://www.ibisworld.com.au/australian-company-research-reports/manufacturing/coca-cola-
amatil-limited-company.html [Accessed on: 22 September 2019].
Moles, P. and Kidwekk, D. 2011. Corporate finance. USA: John Wiley &sons
Neo, P. 2019. Sustainably sweet: Coca-Cola Amatil to use 100% sustainable sugar in Aussie
operations. [Online]. Available at:
https://www.foodnavigator-asia.com/Article/2019/03/11/Sustainably-sweet-Coca-Cola-Amatil-
to-use-100-sustainable-sugar-in-Aussie-operations [Accessed on: 22 September 2019].
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Roddan, M. 2016. Coca-Cola Amatil sees further challenges. [Online]. Available at:
https://www.theaustralian.com.au/business/business-spectator/news-story/cocacola-amatil-sees-
further-challenges/4be25a159f3fe33e57115db595b0cd4f [Accessed on: 22 September 2019].
Scattergood, G. 2018. Special Report — How to tackle Australia's obesity epidemic: Coca-Cola
Amatil, Fonterra and Nestlé have their say. [Online]. Available at: https://www.foodnavigator-
asia.com/Article/2018/08/21/Special-Report-How-to-tackle-Australia-s-obesity-epidemic-Coca-
Cola-Amatil-Fonterra-and-Nestle-have-their-say [Accessed on: 22 September 2019].
Statista. 2019. Non-Alcoholic Drinks. [Online]. Available at:
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Vernimmen, P. 2014. Corporate Finance: Theory and Practice. US: John Wiley & Sons.
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Appendix
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