Financial Ratios Coca Cola Company Ratios Calculation

Financial Ratios Coca Cola Company Ratios Calculation Ratio Operating Leverage ROI 6,172-4,521/4,521 EVA 10,154-(10,154x.12) Profit Margin-Sales 8,634/46,542 The Coca Cola Company had an operating leverage of 68.6% (2011 Annual Report, 2011). Return on Investment was 36.5%. The economic value added ratio was 8,935.52. The profit margin on sales was 18.6%. The return on investment ratio is used to evaluate the efficiency of a single investment or a group of investments (Return on Investment - ROI).

There is not considered a right and wrong calculation for return on investment because the definitions of the return and costs items vary from one person to another. A financial analyst may figure the ratio using certain return and cost items, where a manager may figure the return on investment using entirely different return and cost items. The operating leverage ratio reflects the extent a change in sales affects earnings (Operating Leverage Ratio). For a high operating leverage ratio, with high elastic product demand, will cause sharp fluctuations.

This would depend on the product demand and how the sales and earnings are played out. Economic value added is an estimate of the amount that earnings exceed or fall short of the required minimum rate of return for shareholders (Economic Value Added (EVA)). Economic value added can be calculated at a divisional level or a corporate level. It is a flow and can be used for performance over time. It is economic based on the fact that a business must recover both operating and capital costs.

It can be used for setting organizational goals, performance measurement, determining bonuses, communication with shareholders and investors, motivation of managers, capital budgeting, corporate valuation, and analyzing equity securities. The profit margin on sales is a profitability ratio that measures the degree of success or failure of a given company division for a given period of time (Kieso, 2008). Profit margin is net income to net sales. Financial ratios are the starting points that are used to figure the financial analysis.

Ratios are usually based on historical information, which can cause distortions in the performance measurement. When estimated items, such as depreciation and amortization, are significant, credibility is lost in income ratios. It is difficult to achieve comparability among firms in the same industry. To achieve comparability the basic differences in accounting principles, procedures, and adjusting the balances of the accounts need to be considered. A substantial amount of important information is not included in the financial statements.

Industry changes, management changes, competitor's actions, technological developments, government actions, and union activities all play a vital role in the success of an operation. There is argument that the efficient-market hypothesis, that financial statements contain no surprises to those engaged.