CASH FLOW ANALYSIS AND SECURITY VALUATION OF COCA-COLA AMATIL LTD
Introduction
The company is Australasia Based with various with 18 countries in the Central, Eastern, and the South-East Asia. The company was established in 1904 with its headquarters in Australia North Sydney. The company performance is associated with the broad coverage in the market which is determined by looking at the financial statements and cash flows. The purpose of this report is to cover the company description, analysis of the financial statements and cash flows in determination of the CCA market performance.
Give a brief description of Coca Cola.
The company engages in the distribution of both alcoholic and non-alcoholic beverages across the market. Its operations cover various market segments such as Alcohol and coffee beverages, Corporate, and Food and services. Relevant products distributed by the company include coffee, beer, cider, spring water, carbonated soft drinks, fruit juices, spirits, vegetable snacks, flavored milk, and ready to eat fruits. The company has two sub-divisions which include the corporate, food and services segment and the alcohol and beverages segment with each specializing in its own products.
Coca-Cola Amatil has a wide market distribution of over 450 million people and a leader in each market that runs its operations. The markets are promising as they present more opportunities for sales expansion for example the New Zealand and Australia. Despite these, there are other viable markets that are presenting a top-notch priority in the market coverage and are likely to pick up very fast. They include countries such as Indonesia, Poland, and Philippines. Amatil has plans of expanding to the rising new opportunities to meet the demand for the market. Basically, the company has much of its concentration focus on the market in the South-East Asia and the Eastern Europe. The company is putting up strategies to cover for the increasing demand. For example, in Ukraine, Coca Cola Company has set up a large Greenfield production plant in the capital of Kiev.
Explain the purpose of financial statement analysis.
Financial statement analysis can be described as the process of examining a firm’s financial statements in order to make a decision and to grasp the overall financial health of a company. Most importantly, financial statement analysis provides a concept to the investors or shareholders concerning their decision to invest in a certain corporation[1]. Above all, a firm is able to assess its performance over a given period.
Financial statement analysis is employed to identify the relationships and trends between financial statements aspects. Both external users such as investors, creditors, and analysts and internal management of the financial statements require analyzing a company’s solvency, liquidity, and profitability. Considerably, the financial analysis refers to the process of evaluating budgets, projects, businesses, and finance- related organizations to determine their suitability and performance. On other hand, financial analysis is used to examine whether a company is liquid, solvent, stable, or profitable enough to guarantee a financial investment. The main goals of financial statements are to offer data concerning the results of cash flows, financial position, and operations of a corporation[2]. Ultimately, this information is used by users of the financial statements to make choices concerning resource allocation.
Analyze the firm’s current operation using its financial statements
Market Conditions
In a statement release by the company, it indicated that it had earlier noticed that there would be challenges due to the existence of the soft market conditions in Indonesia. It had recognized that the Indonesian Rupiah had fallen below the dollar value in the past 20 years and this could adversely affect the business. Though the company illustrated that the impairment does not necessarily mean the company will demand it. This is true because the carrying value of the investments is different due to timing.
The valuation of the carrying value of the Coca-Cola Company exceeds the value of the Coca-Cola Amatil in the value of the capital employed. As part of the year end accounting processes, the company can review the carrying value at the year end. Furthermore, shareholders can solely depend on the quarterly results pending the year end results to buy shares due to the expectations[3]. The market condition remained as a shock to the market competitors and analysts due to the exceed of the market expectations attributable to the focus on healthy drinks that increased the demand for the products.
Investors consider the dividend option as a viable alternative for the benefit out of the company. At the macro-level, the market for the company is expanding and this is likely to expand it to a highly profitable business in the Australian economy. The company is likely to boom in the next years to come which and likely the shares will increase in value making the early birds better[4]. With the standing market condition, the company is most likely to have a long-term growth that will attract more investors.
Figure 1: Coca – Cola Share price daily
Analyze the firm’s current operation using its financial statements
Coca Cola Company, it is clear that this company has effective operations. For instance, the cash flow from the operations in the financial year 2015 was valued at $ 10,528,000, and in 2016 the cash from operations was estimated at $ 8,792,000. Consequently, there was a significant increase in the cash flow from financial 2017 to 2018 being estimated at $ 6,930,000 and $ 7,320,000 respectively. This increase is attributed to higher sales which were driven by an increase in demand for the beverages in the market. On the other hand, the assets for the Coca Cola Company have remained steady for the last four months is a good indicator that the firm’s operations are effective and hence no assets were sold to meet the company’s financial obligations. This also indicates that the management is efficient in using the assets to generate revenue which is used to meet the daily obligations of the corporation. For instance, the company’s assets were estimated at $ 89,996,000, $ 87,270,000, $ 87,896,000, and $ 83,216,000 respectively.
Ratio Analysis
Profitability
- Gross Margin
37.77
- Return on Assets
6.57
- Return on Equity
25.96
Liquidity
Current Ratio
1.71
- Quick Ratio
1.33
- Cash Ratio
0.65
Capital Structure
- Total Debt to Total Equity
159.89
- Long-Term Debt to Equity
145.51
Efficiency
- Receivables Turnover
4.77
- Total Asset Turnover
0.78
Valuation
- Price to Book Ratio
3.84
- Enterprise Value to EBITDA
9.01
Coca-Cola Amatil Limited dividend valuation
Dividend discount model
Value of stock = expected dividend per share/cost of capital equity – a dividend growth rate
Value of stock = D / r – g
Expected dividend per share = $8.51
Cost of equity = 5.51%
Dividend growth rate = 4.11%
=8.51 / 0.551- 0.411
=8.51/0.14
= $ 60.76
Coca-Cola Amatil Limited graphs for adjusted share price and return
Figure 2: Adjusted Share price and return
The graph indicates that the share prices increase proportionately with an increase in return.
Use an appropriate dividend valuation model to value Coca Cola’s shares
| Dividend discount model | ||||||||
| Value of stock = expected dividend per share/cost of capital equity – a dividend growth rate | ||||||||
| Value of stock = D / r – g | ||||||||
| Expected dividend per share = $8.51 | ||||||||
| Cost of equity = 5.51% | ||||||||
| Dividend growth rate = 4.11% | ||||||||
| =8.51 / 0.551- 0.411 | ||||||||
Suggest relevant investment and financing strategies to improve the firm’s cash flow position
Investment and Financing Strategies to improve Coca-Cola Amatil Limited cash flow position.
Robust cash flow is vital for an organization to remain competitive. Enhancing the firm’s cash flow makes it simple for the planning and budgeting for future expansion and also offers the company with enough cash to meet daily expenditures[5]. Therefore, to improve the cash flow of Coca-Cola Amatil Limited the following strategies should be adopted;
Develop a cash flow prediction
Predicting the company’s cash flow aids in offsetting uncertainty by forecasting troughs and peaks in cash available. For instance, a forecast unfolds the changes in the firms and predicts the cash flow on a daily, monthly, or annual basis. To achieve this, there is a need for listing all the payments anticipated to be made in the coming periods, and this may comprise of taxes, loan repayments, rent, wages, equipment, and stock[6]. Additionally, all income generated by the company should, and this includes returns from savings and investments, tax returns, and clients payments.
Establish the payment rule
Launching a payment rule speeds up the income cash in the company and this requires the management of the company to maintain short terms payments by ensuring faster repayments and listing of all payables on invoices. The company should also provide various payment methods to the clients to make their debt easier[7]. Coca-Cola Amatil Limited should also offer small discounts on first payments to encourage the customers to pay early. On the other hand, the company can charge discount on clients that makes late repayments and remind them of the firm rules to avoid making late payment a habit.
Minimize the overheads
Adverse cash flow is mostly found in the long term or fixed assets with consecutive monthly payments such as business equipment and vehicles. Coca-Cola Amatil Limited can consider leasing some of its fixed assets instead acquiring them permanently since they are costly since they will also be required to pay taxes, and even they depreciate with time. Additionally, the firm should assess whether it is getting the best negotiations on technology, phone, and insurance services and other daily expenses. Consequently, Coca-Cola Amatil Limited should lower the staff overtime and develop a friendly working environment in the workplace to reduce the regular costs such as water and power bills. Notably, the above adjustments increase the business cash flow hence leaving the company with surplus money to invest.
State and justify your recommendations in terms of shareholders’ wealth maximization
The idea of shareholder’s wealth maximization has much to do with the increasing the value of the public company’s ordinary stock. Notably, the maximizing the shareholders wealth is mostly the basic aim of a firm; therefore, the bottom line is that revenues have to be increased so as to increase the dividends payout in every ordinary stock which involves shareholders wealth. For this reason, a competent leader will focus on the fundamental ways of increasing the firm’s profits. For instance, Coca-Cola Amatil Limited makes higher sales revenues by keeping robust brand recognition and producing high quality products. Ultimately, to maximize shareholders wealth Coca-Cola Amatil Limited should maintain its current status of strong name in the market.
Bibliography
Penman, S.H. Financial Statement and Security Valuation. Fourth Edition, McGraw-Hill, 2010.
Peirson, G., Brown, R., Easton, S., Howard, P., and S. Pinder. Business Finance, 10th edition. Mc-GrawHill, Australia, 2009.
Pike, R. And B. Neale. Corporate Finance and Investment: Decisions and Strategies, 6th edition, Financial Times Prentice Hall, Limited, 2009.
Viney, C. McGrath’s Financial Institutions, Instruments and Markets, 6th edition, McGraw-Hill, Australia, 2009.
[1] Penman, S.H. Statement and Security Valuation. Fourth Edition, McGraw-Hill, 2010.
[2] Pike, R. And B. Neale. Corporate Finance and Investment: Decisions and Strategies, 6th edition, Financial Times Prentice Hall, Limited, 2009.
[3] Peirson, G., Brown, R., Easton, S., Howard, P., and S. Pinder. Business Finance, 10th edition. Mc-GrawHill, Australia, 2009.
[4] Viney, C., .McGrath’s Financial Institutions, Instruments and Markets, 6th edition, McGraw-Hill, Australia, 2009.
[5] Penman, S.H. Financial Statement and Security Valuation. Fourth Edition, McGraw-Hill, 2010.
[6] Peirson, G., Brown, R., Easton, S., Howard, P., and S. Pinder. Business Finance, 10th edition. Mc-GrawHill, Australia, 2009.
[7] Pike, R. And B. Neale. Corporate Finance and Investment: Decisions and Strategies, 6th edition, Financial Times Prentice Hall, Limited, 2009.