Introduction
Financial statement analysis is crucial to determining the financial soundness of an organization. It can be used to evaluate the performance or financial liquidity of an organization. The financial analysis will entail evaluating the liquidity ratios of Coca-Cola to assess its liquidity. Liquidity ratios are used to assess the ability of a firm to repay its current liabilities and the long-term liabilities as they become due.
Liquidity Ratio Analysis
The quick ratio is a metric that can be used to assess the financial strength of Coca-Cola. The ratio can be critical to determine the extent to which Coca-Cola can use its assets to pay the short-term obligations of the firm without selling its inventory (Brigham & Houston, 2012). From the analysis, Coca-Cola has a quick ratio of 1.13 and 1.18 in the year ended 2015 and 2016 respectively ("The Coca-Cola Company", 2017). Therefore, this high ratio shows that Coca-Cola is in a sound financial position that can meet its current obligations without causing adverse impacts on its operations.
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The current ratio can also be used to assess the Coca-Cola’s ability to repay its current liabilities using its current assets (Brigham & Houston, 2012). Also, the ratio can be used to determine the extent to which the firm can use its assets to pay its short-term obligations (Babalola & Abiola, 2013). It is achieved by dividing the current assets by the value of the current liabilities for a particular period. The current ratio for CocaCola is 1.24 and 1.28 in the year 2015 and 2016 respectively. Thus, the firm is in a good liquidity position. Also, the trend has increased which is a good indicator of a reliable financial strength for Coca-Cola.
The working capital ratio is also crucial to determining the liquidity of the firm. It refers to the difference between the firm’s current assets and its current liabilities (Brigham & Houston, 2012). The working capital of Coca-Cola is 6466 and 7478 in the year 2015 and 2016 respectively. The ratio shows whether a firm can pay its short-term debts or whether it is illiquid (Babalola & Abiola, 2013). The analysis shows that Coca-Cola has a positive working capital. Also, the increasing trend of the working capital ratio depicts that the firm is in a good financial position (Brigham & Houston, 2012). Therefore, it indicates that it is liquid and capable or repaying its short-term obligations.
The cash ratio can also be used to assess the liquidity of a firm. It refers to the ratio of an organization’s cash and cash equivalents to its total current liabilities (Brigham & Houston, 2012). The ratio aims at assessing whether Coca-Cola can use the available funds to offset its current liabilities. Also, the ratio is used to determine the extent to which firms can service debts that are due or to repay other short-term liabilities (Babalola & Abiola, 2013). From the analysis, Coca-Cola has a cash ratio of 0.27 and 0.32 in the year 2015 and 2015 respectively. In this case, the management of Coca-Cola should adjust their cash reserves to set off the current obligations effectively.
Conclusion
The liquidity analysis shows that Coca-Cola is in a good financial position. It can repay its debts without experiencing adverse implications on its business operations. Based on the liquidity analysis, Coca-Cola is profitable and efficient to cover its short-term obligations with the current assets. Also, the organization has a positive working capital. It has a low cash ratio, and this can adversely affect its short-term obligations. However, the organization is stable and in a good liquidity position.
References
Babalola, Y. A., & Abiola, F. R. (2013). Financial ratio analysis of firms: A tool for decision making. International journal of management sciences , 1 (4), 132-137.
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management . Cengage Learning.
The Coca-Cola Company . (2017). Finance.yahoo.com . Retrieved 14 April 2017, from https://finance.yahoo.com/quote/KO/financials?p=KO
