The P/E Ratio is shorthand for the ratio of a company’s share price to its per-share earnings. Coca-Cola’s Current P/E Ratio of 27.
0 shows that the company has $1 of annual, per-share earnings for every $27 in share price. Stated differently, at this price, investors are willing to pay $27 for every $1 of last year’s earnings. Like other indicators, P/E is best viewed over time, looking for a trend.
A company with a steadily increasing P/E is being viewed by the investment community as becoming more and more speculative.And of course a company’s P/E ratio changes every day as the stock price fluctuates. The range from the P/E 5-year High (76. 0) to the 5-year Low (20.
9) indicates that the earnings for the company had fluctuated significantly during those years. The trouble with the P/E ratio is that earnings is a complicated “bottom line” number, sometimes reflecting non-recurring events; so many people look at sales revenue as a more reliable indicator of a company’s size and growth. The Price/Sales ratio, also called the “PSR”, is a company’s stock price divided by its annual sales per share.Coca-Cola’s PSR of 5. 74 is much higher than both of its major competitors, as well as the industry. This reflects that the stock is possibly overvalued. The Price/Book Value ratio, also known as the price/equity ratio, is a favorite of strict value investors. The price/book ratio gives some idea of whether the investor is paying a little or a lot for what would be left of the company if it went out of business immediately.
In other words, the price/book ratio measures what the market is paying for those net assets (also known as shareholder equity).The lower the number, the better. Coca-Cola, unfortunately, has a high price/book value (8. 46) when compared to the industry (5. 77). One last alternative to using the P/E ratio is the Price/Cash Flow ratio. This ratio takes depreciation and other non-cash charges out of the equation.
Some analysts consider cash flow as perhaps a company’s most important financial indicator, and the ratio of stock price to operating cash flow is favored by many over the price-earnings ratio as a measure of a company’s value.Price-to-cash-flow ratios vary widely from industry to industry. The Standard ; Poor’s 500 companies’ ratio is about 13. In other words, for every $1 that flows through those companies, their stock price is $13. The Coca-Cola Company’s ratio is 22. 60 and the industry shows a ratio of 16. 00.
Companies with low price-to-cash flow ratios sometimes become acquisition targets. In evaluating the competition, Coca-Cola is in no threat of takeover, but Cadbury Schweppes needs to keep one eye open at 10. 00.Figure 1: The Coca-Cola Company Price History Profit Margins To measure the profitability of a company’s operations profitability ratios are calculated. These ratios realize overall profitability, or the bottom line. Net profit margin (NPM) indicates the percentage of each dollar of sales that the firm is able to flow to the bottom line as profit. NPM is a function of the price of the product and efficiency of operations. A firm selling a unique product to a captive market may be able to charge a premium price and thus generate a greater NPM.
Conversely, a firm selling a generic product in a highly competitive market, as is the Beverage Industry, will have a low NPM. It must be a very efficient company, or it will not survive. Coca-Cola’s NPM of 21. 45 percent is much higher than both PepsiCo and Cadbury Schweppes, and is due primarily to its proprietary product and monopolies in certain foreign markets. Coca Cola’s NPM is also substantially above the industry calculation of 10.
81 percent.Financial Strength looks at business risk. The stronger a company is from a financial standpoint, the less risky it is. The Quick Ratio compares cash and short-term investments (investments that could be converted to cash very quickly) to the financial liabilities they expect to incur within a year’s time. Coca-Cola’s quick ratio (0. 70) is in line with the industry. The standard measure of liquidity is the current ratio. The Current Ratio compares year-ahead liabilities to cash on hand now plus other inflows (e.
g. Accounts Receivable) the company is likely to realize over that same twelve-month period.The ratio for Coca-Cola is close to 1. 00 (1. 07), not atypical for a high quality company with easy access to capital markets to finance unexpected cash requirements. The Long Term Debt/Equity Ratio looks at the company’s capital base. A ratio of 1. 00 means the company’s long-term debt and equity are equal.
The Total Debt/Equity Ratio includes long-term debt and short-term debt. Coca-Cola’s Total Debt/Equity ratio is 0. 44, showing that the company is fully capable of covering their debt. Investment Returns Many would argue that the most important ratio to calculate for a company is its return on equity (ROE).
ROE represents the rate of return the company earned on the book value of its equity investment. The higher the number, the greater the return the company is earning for its shareholders. Coca-Cola has the greatest ROE, 31. 6 percent, an exceptionally high number. Coca-Cola’s excellent ROE results from its high profit margin, effective asset utilization, and use of leverage.
Because of its high NPM, Coca-Cola could choose to use less debt in difficult economic times, and still earn a very respectable ROE. A company’s ability to operate profitably can be measured directly by measuring its return on assets.ROA (Return On Assets) is the ratio of a company’s net profit to its total assets, expressed as a percentage. ROA measures how well a company’s management uses its assets to generate profits. The higher the ROA, the more profitable the company. Consistent with the NPM, Coca-Cola has the highest ROA of 15.
9 percent, but PepsiCo’s 14. 1 percent is now second, reflecting its ability to generate significant sales volume from its asset base. It is a better measure of operating efficiency than ROE, which only measures how much profit is generated on the shareholders equity but ignores debt funding.