Presented below are summary financial data from the Coca-Cola Enterprises, Inc.
ID: 2476403 • Letter: P
Question
Presented below are summary financial data from the Coca-Cola Enterprises, Inc. annual report:
Amounts in thousands
Year 2
Year 3
Balance sheet
Total assets
$1,364,467
$1,291,799
Shareholders’ equity
93,953
120,504
Income statement
Net sales
1,431,005
1,435,999
Net income
23,243
19,856
A. Use the ROE model framework to assess Coca-Cola’s profitability for both years.
B. Comment on the trends revealed by your analysis in Part A.
C. What is the purpose of unlevering such ratios as the ROA and ROS?
Amounts in thousands
Year 2
Year 3
Balance sheet
Total assets
$1,364,467
$1,291,799
Shareholders’ equity
93,953
120,504
Income statement
Net sales
1,431,005
1,435,999
Net income
23,243
19,856
Explanation / Answer
A. Return on Equity is calculated using the formula
Net Income/ Total Equity.
Return on Equity in Year 2 is $23,243/$93,953 = 24.74% (Rounded off to 2 decimals)
Return on Equity in Year 3 is $19,856/120,504 = 16.48% (Rounded off to 2 decimals)
B. The profitability of Coca-Cola based upon the ROE model can be said to be decreased in Year 3 compared to Year 2. ROE in Year 2 is 24.74%, however ROE in year 3 is decreased to 16.48%. The company has to take measures in increasing the profitability.
C. Unlevering will remove the effects of the use of leverage on capital structure of a company. Removing the debt components allows the investor to compare the base level of risk.
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