Financial statement interpretation essay

Financialstatement interpretation

FINANCIALSTATEMENT INTERPRETATION

Introduction

Itis critical that investors and users of financial statements caninterpret their financial statements to enable them to draw validconclusions. Furthermore, financial statements provide informationabout the financial position of the company, the performance and anychanges in the financial situation of a company and help in takingimportant business decisions. In particular, shareholders use thefinancial statements to assess the risk and actual return on theirinvestment in the company. Hence, the interpretation of thisfinancial statements is very crucial. Typically, interpretation ofthe financial statements involves ratio analysis which majorlyentails comparisons to prior years, forecasts and competitors.Therefore, ratios are the biggest tool that helps investors,shareholders, managers, suppliers and lenders to understand andcompare financial statements and results.

ANALYISISOF COMPANIES FROM VARIOUS INDUSTRIES

Inmy study, I have decided to select the Chevron Company, the AdcockIngram Corporation, and the Coca-cola Company

1. Chevron Corporation.

Thecompany has its headquarters in San Ramon, California. It is anAmerican energy firm that is active in more than 180 countries. Thecompany is involved in the oil, natural gas, and geothermalindustries. The company also refines markets and transports oil andoil products. In the New York Stock Market, it is traded as NYSE:CVX. Its subsidiaries include Citgo Petroleum Corporation (Lalc,2010).

CurrentRatio

Thatis a ratio that gauges a company’s ability or inability to honor itis short-term or long-term financial obligations. It is derived bycomparing a company’s total current assets to its total currentliabilities.

 Ratios Formulae Calculation Value Current ratio Current Assets / Current Liabilities 12,020,000/11,050,000 1.0877 Quick ratio (current assets – inventories) / current liabilities 15,030,000/11,050,000 1.3601 Net Profit margin Net profit/Revenue 1,030,468/127,472,000 0.8080% Asset Utilization Revenue / Average Total Assets 138477/ 100,000,000*100 0.1387% Financial leverage Total debt / Shareholders Equity 40850/4587 8.9050

Impliesthe extent to which a company is using debt and preferred equity. Itis the percentage change in earnings per share (EPS) divided by thepercentage change in Earnings before interest and taxes (EBIT).

TheCompany’s working Capital stands steadfast at 970,000. That isusually the difference between the company’s current assets and thecompany’s current liabilities.

Thus,the company employs the use of a hedging (maturity matching)strategy. As the financial leverage (8.9050) shows, each of theassets would be financed by a debt instrument with almost the samematurity date. Thus, long-term assets are purchased through long-termsources. Fixed assets and temporary working capital are funded byshort-term sources of funds. That ensures minimal strain on thetemporary working capital in case of a financial crisis (Lalc, 2010).

Ata current ratio of 1.0877 the Chevron Corporation can be seen to havea clean bill of health in matters financial. The company is deemed tobe able to meet all its financing needs. The company operates in arelatively capital intensive sector thus it is significant that thereexist no cash flow shortages. The Company also has a defined uniquemarket which is under contractual obligations to purchase the oil andoil products. That ensures little working capital goes towardsadvertising and marketing. Most finances go towards the actual corebusiness of production of geothermal energy and supply of oil and itsproducts (Lalc, 2010).

Unlikeother industries, this sector delivers the bulk of its goods firstthen payment comes after a while thus the temporary working capitalshould always be in finance from internal sources or short-termsources. In this sector, the firms tend to have a small net profitmargin thus it is imperative that the company purchases and sells itsproducts in bulk. At 0.8080%netprofit margin it is easy to see this unique aspect (Lalc, 2010).

Thissector employs a vast amount of resources before even procuring agiven product such as geothermal wells thus requiring a significantamount of equity or reserves.

2.The Coca-Cola Company

TheCoca-Cola Company is a manufacturer, marketer, and retailer ofbeverages and syrups. The company operates a franchised distributionsystem whereby the parent company only produces syrup after that soldto various bottlers who hold predefined territories in any part ofthe world. The company`s headquarters is in Atlanta, Georgia. In theNew York Stock Exchange where it is on the list, it is referred to asNYSE: KO. Its subsidiaries include Minute Maid and Energy Brands(Hays, 2005).

 Ratios Formulae Calculation Value Current ratio Current Assets / Current Liabilities 40,000,000/33,950,000 1.1782 Quick ratio (current assets – inventories) / current liabilities 40,000,000/33,950,000 1.1782 Net Profit margin Net profit/Revenue 7,450,000/44,294,000*100 16.81% Asset Utilization Revenue / Average Total Assets 44,294,000/84,560,000 0.5238 Financial leverage Total debt / Shareholders Equity 18084/7351 2.4600

Ata financial leverage level of 2.4600, it implies that the companyemploys the use of an aggressive strategy which is direct. The focusis primarily profitability. The long-term funds are utilized tofinance fixed assets and a small part of the permanent workingcapital. Short-term funds are in usage for temporary working capital.This aspect ensures the firm saves on interest costs at the expenseof high risk.

Ata current ratio of 1.1782, this implies that the company can quicklymeet its financial obligations in time. Thus, the firm has a cleanslate and is not at risk of the situation deteriorating at the centeris Paribas. The firm also has a remarkable net profit margin at16.81%. The aspect implies that the company’s management is doingwell regarding maintaining a lean expense account. Thus, it is safeto say that this sector does not require a lot of operating expenses(Hays, 2005).

Theasset utilization level is also relatively high implying that thecompany is running a very efficient system. The aspect indicates thatthe corporation has a brilliant future set for growth if the currentsituation is in maintenance in the long term. Owing to the firm’shigh leverage it is easy to comprehend why the company’s net profitmargins are astronomical (Hays, 2005). That shows the advantages ofemploying leverage when doing business.

Thecompany is a pharmaceutical company that manufactures, markets andsupplies various kinds of healthcare products. The company is in thelist on the Johannesburg Stock Exchange as JSE: AIP. The firm’sheadquarters are in Johannesburg, South Africa. Its subsidiariesinclude Adcock Ingram Critical care and the Adcock IngramPharmaceuticals. The company serves the greater southern Africa,Ghana, India and other emerging markets (Elmore, 2016).

Forthe year ended 1/09/2015

 Ratios Formulae Calculation Value Current ratio Current Assets / Current Liabilities 2,841,000/1,722,000 1.6498 Quick ratio (current assets – inventories) / current liabilities 1,900,000/1,722,000 1.1033 Net Profit margin Net profit/Revenue 198,809/5,294,511*100 3.7550% Asset Utilization Revenue / Average Total Assets 5528000/5,457,952*100 10.1283% Financial leverage Total debt / Shareholders Equity 1737/198 8.7727

Thus,the company employs the use of a hedging (maturity matching)strategy. As the financial leverage (8.7727) shows, each of theassets would be financed by a debt instrument with almost the samematurity date. Thus, long-term assets are purchased through long-termsources. Fixed assets and temporary working capital are financed byshort-term sources of funds. That ensures minimal strain on thetemporary working capital in case of a financial crisis (McGregor,2012).

Thecurrent ratio which stands at 1.6498 implies that the firm is verystable and can honor its financing needs without any problemwhatsoever. The company has a relatively small appetite forshort-term (current liabilities) funds. The company has an averagenet profit margin thus implying an average amount of capital requiredto achieve sufficient earnings. The firm also has an excellent assetutilization rate at 10.1283% thus indicating that it employs theavailable resources to come up with stellar revenues and profits.Thus, the firm is deemed to be operating at a very efficient level toensure maximum results are attained. That aspect is in support of thefact that the products sold by the firm (healthcare products) commanda higher markup thus ensuring a greater amount of profit for theenterprise (Mcgregor, 2012).

Dueto the 1.81 financial leverage and high asset utilization at 10.1283%the firm is qualified for a stellar future if the situation remainsconstant (Elmore, 2016).

Inconclusion, the use of ratios puts all the companies on an equalscale in the eyes of the users of financial statements rather thantheir sales volume, size, and market share. That helps to rid theuser of biased decisions in the course of doing business. Asdiscussed above, we can easily see that Coca-Cola stands a betterchance of future growth mainly due to its high net profit margin andasset utilization. The aggressive strategy employed by Coca-Cola onits working capital is high risk but has a higher reward (highprofits) if used. Therefore, financial interpretation is a hugestepping stone towards the greater understanding and comparison ofthe state of a company’s financial state. Therefore to give abusiness a clean bill of health the critical analysis of a company’sfinancial statement is a prerequisite.

References

Elmore,B. J. (2016). CitizenCoke: The Making of Coca-Cola Capitalism.W. W. Norton, Incorporated.

Hays,C. L. (2005). TheReal Thing: Truth and Power at the Coca-Cola Company.Random House.

Lalc,b. (2010). ChevronCorporation: Gulf Oil, Texaco, Baku-tbilisi-ceyhan Pipeline, ChevronCorporation, Sam Nunn, Cobasys, Unocal Corporation.General Books Llc.

McGregor,R. (2012). WhoOwns Whom:The Southern African Edition. Springer Science &amp Business Media.

Appendix.

CHEVRONCORP (CVX)

CASHFLOW INCOME STATEMENT

FISCALYEAR ENDS IN DECEMBER

 USD in millions except per share data 2011-12 2012-12 2013-12 2014-12 2015-12 TTM Revenue 253706 241909 228848 211970 138477 127472 Cost of revenue 179657 163336 159323 144956 92785 86826 Gross profit 74049 78573 69525 67014 45692 40646 Costs and expenses Sales General and administrative 4745 4724 4510 4494 4443 4497 Depreciation and amortization 12911 13413 14186 16793 21037 21029 Other operating expenses 8759 14104 14924 14525 15370 14894 Total costs and expenses 26415 32241 33620 35812 40850 40420 Income before income taxes 47634 46332 35905 31202 4842 226 Provision for income taxes 20626 19996 14308 11892 132 -1177 Net income from continuing operations 27008 26336 21597 19310 4710 1403 Other -113 -157 -174 -69 -123 -108 Net income 26895 26179 21423 19241 4587 1295 Net income available to common shareholders 26895 26179 21423 19241 4587 1295 Earnings per share Basic 13.54 13.42 11.18 10.21 2.46 0.69 Diluted 13.44 13.32 11.09 10.14 2.45 0.69 Weighted average shares outstanding Basic 1986 1950 1917 1884 1868 1869 Diluted 2001 1965 1932 1898 1875 1873 EBITDA 60545 59745 50091 47995 25879 21255

THECOCA-COLA COMPANY

CASHFLOW INCOME STATEMENT

FISCALYEAR ENDS IN DECEMBER

 USD in millions except per share data. 2011-12 2012-12 2013-12 2014-12 2015-12 TTM Revenue 46542 48017 46854 45998 44294 43865 Cost of revenue 18216 19053 18421 17889 17482 17448 Gross profit 28326 28964 28433 28109 26812 26417 Operating expenses Sales General and administrative 17440 17738 17310 17218 10237 10114 Other operating expenses 732 447 895 1183 7847 7730 Total operating expenses 18172 18185 18205 18401 18084 17844 Operating income 10154 10779 10228 9708 8728 8573 Interest Expense 417 397 463 483 856 550 Other income (expense) 1702 1427 1712 100 1733 1495 Income before taxes 11439 11809 11477 9325 9605 9518 Provision for income taxes 2805 2723 2851 2201 2239 2225 Net income from continuing business operations 8634 9086 8626 7124 7366 7293 Other -62 -67 -42 -26 -15 -16 Net income 8572 9019 8584 7098 7351 7277 Net income available to common shareholders 8572 9019 8584 7098 7351 7277 Earnings per share Basic 1.88 2 1.94 1.62 1.69 1.68 Diluted 1.84 1.97 1.9 1.6 1.67 1.66 Weighted average shares Basic 4568 4504 4434 4387 4352 4343 Diluted 4646 4584 4509 4450 4405 4395 EBITDA 13810 14188 13917 11784 12431 12023