FBL5030: Fundamentals of Value Creation in Business & Accounting - Assessment Answers

1 Executive Summary

The assignment summarizes the analysis of three significant items from the financials of Coca Cola Amatil Ltd. A ratio analysis of solvency, leverage, profitability and operational efficiency aspects follows this section. Finally, non-financial factors have also been analysed for their impact on performance. A discussion on the strategic reasons for the recognized trends is preceded by a conclusion on the overall rating of the company based on the analysis.

The financial position and performance of CCA is below expectations with poor leverage, operational efficiency and falling profitability. The solvency position of the company is satisfactory. The income statement analysis also substantiates this fact with a deteriorating profit and operating cost trend and improving finance cost trend, The Balance sheet analysis indicates improves trends for intangibles, PPE and long term debt implying strong solvency once again. The cash flow analysis indicates improved operating cash inflows injected into the capital expenditure and for repayment of debt. This implies that even though the other measures of performance like leverage, efficiency and profitability are negative, the company is solvent from a consideration and analysis of all impacts. The Client is recommended to consider these factors before investing in the long run.

2 Introduction

The purpose of the assignment is the analysis of three significant items from the financials of Coca Cola Amatil Ltd., a bottler of non-alcoholic beverages in the Asia pacific including Australia and New Zealand and one of the major Coca Cola bottler. A ratio analysis of solvency, leverage, profitability and operational efficiency aspects follows this section. Finally, non-financial factors have also been analysed for their impact on performance. A discussion on the strategic reasons for the recognized trends is preceded by a conclusion on the overall rating of the company based on the analysis. The conclusion forms the basis of a recommendation to the client to invest in the company or otherwise. A Horizontal analysis of the financials as well as a ratio analysis forms the basis of the recommendation. The figures for the above have been extracted from the annual reports of the company.

3 Discussion

3.1 Analysis of three significant items in the income statement

3.1.1Operating Expenses

The Operating expenses of CCA have mostly increased except for 2013 when they decreased in relation to the low revenue of the year. A deteriorating trend is noted here. Reasons for the selection of this item is the potential of item being controlled and its impact on performance. The increase in operating expenses could be attributed to restructuring activities in 2014, the introduction of 250 ml cans and due to the fall in alcoholic beverages and drinks demand. In addition, increase in input cost, increase in per unit cost by 3.3 % and in Indonesia by 15% are also attributable reasons. Figure 1 shows the expenses increased by 11.82% in 2015.

3.1.2 Net profit

The Net profit of the company also showed a significantly deteriorating trend overall especially for 2013 -14 where it declined by 25.3 % as shown by Figure 1. This is a huge impact attributed to reasons like increased competition, impact of inflation, increase in wages and fuel costs. Indonesian Rupiah deflation increased cost by $35 million and the impact of a material reduction in inventory levels, slow down of economy and impact of decrease in SPC Ramona earnings.

3.1.3 Interest expenses

The interest expenses have shown an improving trend with an overall decrease from 2010 to 2015. The Coca cola company injected $ 500 million in equity of the company which resulted in finance cost reduction of $ 35.7 million in 2014-15. The company was also able to pay off $ 110.4 m in debt during 2012. The interest expense declined by 29.3 % in 2015.

3.2 Analysis of three significant items in the balance sheet

3.2.1 Long term Debt

The long term debt position has shown an improving trend overall. The reasons being that the Coca cola company injected $ 500 million in equity in 2015 of the company which resulted in debt reduction. The company was also able to pay off $ 110.4 m in debt during 2012 and reduced debt by 2.95 % in the current year.

3.2.2 PPE

The PPE assets of the company have shown an improving trend overall. In 2013, SPCA assets were written down by $ 404 million for PPE, intangibles and inventory due to competition and inflation. In 2012, due to Project Zero Capital Investment Project in Indonesia and PNG, PPE increased by $ 221.7 m and $ 176.8 m in 2011 and $ 138.8 m in 2010 reaching about 12.51 % in 2012.

3.2.3 Intangibles

The intangibles have also shown an improving trend overall with significant improvement in 2015. Reasons attributed are increase of $26.7 million due to the Oasis platform rollout. The intangibles increased by 15.63 % in 2012.

The choice of these items was made due to the peculiar improving trend so as to analyse their link with the otherwise falling net profit of the company.

3.3 Analysis of three major changes in cash flow

3.3.1 Net Operating cash flow

The net Operating cash flow shows an improving trend with an increase of 15.6% (Figure 3) in 2012 due to improvement in profit, working capital and low interest and tax payments.

3.3.2 Purchase of Investments

Capital expenditure showed an increase of $103.6 million due to investment in high-returning Project Zero investments and PPE; investment purchases grew substantially in the current year. In addition, Operating cash flow was used to fund $65.8 capital expenditure in 2010.

3.3.3Repayment of borrowings

The repayment of borrowing in 2010 is attributed to improved cash management and low funding costs for refinancing of debt, it improved by 193.33 (Figure 3) % in 2013.

3.4 Three-year ratio analysis for the company

This part covers an analysis of the profitability, solvency, leverage and operational efficiency of CCA on the basis of last 6-year ratio analysis.

3.4.1 Leverage

Debt to assets Increased ratio of debts to equity and debt to assets implies increased cost, risk and less ownership control on the company. The selected ratios will indicate clearly whether the company is properly leveraged form the point of view of investors. The debt to asset ratio for CCA has slightly lowered after increasing in the last six years and was highest in 2013 at 74% (Figure 4) implying less reliance on debt for financing assets currently.

Debt to equity The debt to equity ratio has also demonstrated a similar trend over the period of analysis. Since it is greater than 1 for all the years; this indicates that debt exceeds the owner’s capital making the investment a risky proposition. The ratio is below expectation. (Analysis, 2015)

3.4.2 Solvency

Cash flow Cash flow ratio has been specifically selected to indicate the financial strength of the company as well as the quality of its earnings. Ideally, cash flow ought to increase with increase in profits. The cash flow ratio exceeds 1 and is overall increasing with an exceptionally high ratio in 2013 at 9.10 implying more cash per dollar of earning.

Interest coverage ratio The interest coverage is also exceeding and shows an increasing trend with the highest at 6.6 (Figure 4) in the current year. However, where this is not the case; it normally implies inconsistent earnings which may not be enough to even meet the financing costs of the business. Overall, the ratios are satisfactory.

3.4.3 Profitability

Returns on equity indicate deteriorating profitability over the period of analysis even though the ROE increased slightly in 2011 at 29%. However, it fell drastically over the years implying less returns for the equity holders of the company.

Operating profit ratio indicates the profit earned for every one dollar of revenue. Here again, the ratio has declined from 15 % to 11 % (Figure 4) over the period of analysis implying less profitability. The reasons could be attributed to the increase in the operating expenses of the company which ought to be controlled so as to improve the profitability levels of the company.

3.4.4 The operational efficiency

The operating costs ratio has increased from 78% to 82 % (Figure 4) of revenue implying increased cost per unit of revenue. This is a sign of falling operational efficiency and the management ought to identify the reasons at the earliest before the margin widens nay further.

The tax burden ratio was computed to find whether tax could be one of the reasons for the declining profitability and operational efficiency of the business. It is almost stable for the period with minor fluctuations in between and is also indicative of the fact that the company is paying its taxes fairly and correctly.

3.5 Two items not included in the financial statements that are important from the perspective of judging the performance and making an investment in the company are the experience and accolades of the management and the employee opinion of the company. The capability, track record and experience of the management team of the company as indicated in the annual reports 2010-2016 indicate that investment in the company is a sound decision. Secondly, the employee opinion about the company indicates the social and ethical grounding of the company and is a good indicator of the soundness of investment in the company. The online surveys of employees indicate an easy going culture with ethical treatment overall making it another positive for investment in the company. (Glassdoor.co.in, 2016)

4 Conclusion

The financial position and performance of CCA is below expectations with poor leverage, operational efficiency and falling profitability. The solvency position of the company is satisfactory. The income statement analysis also substantiates this fact with a deteriorating profit and operating cost trend and improving finance cost trend, The Balance sheet analysis indicates improved trends for intangibles, PPE and long term debt implying strong solvency once again. The cash flow analysis indicates improved operating cash inflows injected into the capital expenditure and for repayment of debt. This implies that even though the other measures of performance like leverage, efficiency and profitability are negative, the company is solvent from a consideration and analysis of all impacts. However, if the other aspects are not improved; the long term solvency of the company is at risk. A prospective investor is advised accordingly.