Accounting Characteristics For Asset Pricing Models

Description of operation and comparative advantages

In order to satisfy the needs of the investors and the management it is necessary to assess the financial position of the company. To take the financial decisions it is necessary to find a base to do so and therefore the below report determines the position of the firm through the medium of the ratios. For the purpose of the analysis the two chosen companies are Coca Cola and the Dominos. The report also delivers the preview of the share price movements and the utilisation of the capital asset pricing model. There are different dividend policies for every company and these policies are also scrutinised in case of both the companies. Moreover the purpose of this report is to provide the entire glance on the companies’ financials and relating them with each other as well as within itself for a period of three years (Penman, Reggiani, Richardson and Tuna, 2017).

The Coca Cola Company is an American Corporation which is engaged in the activities like manufacturing, retailing and the marketing of the non-alcoholic beverage concentrates and the syrups. The company is known for one of the most saleable and the likeable predict Coca Cola, which was invested in the year 1886 by the pharmacist names John Stith. Currently the company is operating under the loss of $35.410a and the recorded the net income of the company is US$1.248 billion in the financial year 2017. The Coca Cola Company offers more than 350 brands in the 200 countries. In terms of the marketing and the advertising the Coca Cola is most prolific (Coca Cola, 2018).

Dominos on the other hand is the Americas largest chain of pizza founded in the year 1960. The company is engaged in catering the needs of the customers by delivering them the high quality and wide variety of the pizzas. The unique features are its USP and the menu is relatively simple and likeable. Currently the company is performing outstanding and features the net income of US$214.68 billion and reported revenue of the US $2.47 billion in the financial year 2017 (Press Release, 2018).

Ratio analysis is the method which is adopted by the organisation i order to compare its performance either in relation to the past years or in comparison to the other companies operating in the similar industry. The main purpose of the ratio calculation of the ratios is to get an understanding of the liquidity position, the leverage taken by the company, the profitability and the way the capital structure is formed to determine the entire glance of the company (Krantz and Johnson, 2014).

Calculation of the performance ratios

Profitability ratios are utilized to assess the productivity of the organization. The speculators are normally intrigued by these sorts of ratios with the goal that they can have a comprehensive understanding of how much share they are going to receive consequently rather than the amount invested in the resources into the specific areas of organization. There is wide range of ratios under the umbrella of the profitability ratios such as determined below (Saleem and Rehman, 2011).

Net profit margin: The net profit can be determined as the number of sakes dollars which are remaining after the set off of all the operating expenses and accounts for actual profit (Parrino, Kidwell and Bates, 2011).

From the above table it can be analysed that the profitability position of the Coca Cola Company is low and non-profitable in case of the net profit. However in the case of the Dominos the company is performing outstandingly. The net profit margin of the Dominos is 8.70% in the year 2015n and the same increased to 9.97% in the year 2017 due to growth in the amount of the sales and the subsequent decrease in the cost of goods sold. Whereas in case of the Coca Cola the net profit margin of the company was better than the Dominos in the year 2015 at 16.60% however, due to the changes in the season the volume of sales decreased and the net profit margin ended at 3.24%. Hence, it can be interpreted that in this area Dominos performed better (Nikolai, Bazley and Jones, 2009).

Return on Assets: This proportion essentially portrays the limit of the organization based on the advantages and the assets that are utilized in the business and the high proportion is considered as ideal for the organization (Tracy, 2012).

The below graph also suggests that the company’s return on assets have decreased in case of the Coca Cola company from 9.32% to 7.67% due to the low income generation from the existing assets and in case of the Dominos the return on total assets increased from 56.62% to 57.26% which is surely a boost to the performance of the company. The Dominos increased its assets and accelerated the net profit margin of the company and henceforth, it can be interpreted that the Dominos is again head of the Coca Cola in this area as well (Arnols, 2017).

The return on equity showcases the capability of the company in offering the return on the funds invested by the shareholders on their invested capital. If the profit is high the company will generate the higher returns for the company. The return on equity will determine the portion of the equity held by the investors to enhance the future possibilities Vogel, H.L. (2014).

Profitability ratios

The capital structure ratios of the company are the composition of so many ratios. It basically determines the portion of the equity and the debt in different manner. This ratio provides the insight on how risky the company is and how well they can cope up with it (Warren and Jones, 2018).

Debt to Equity ratio is the composition of the debt and the equity and its consequences and future options (Nikolai, Bazley and Jones, 2009). From the above analysis it can be concluded that the debt to equity ratio of the Coca Cola Company is 1.83 in the year 2017 and it increased from 1.29 in the year 2016. The dominos on the other hand booked the ratio of 3.77 in the year 2017. Therefore it can be interpreted that the dominos company is more towards the financing through the debt and vice versa in case of the Coca Cola Company. The debt component gives the benefit of the tax; however the equity gives the pleasure of the risk. Henceforth, the company needs to take care of the fact that in order to save too much of the tax the company is getting more liable towards the payment of the fixed amount. Moreover to much of the debt component is not a good sign hence, the Dominos shall focus on improving the debt to equity ratio (Lee, Lee and Lee, 2009).

The interest coverage ratio also known as the Times Earned ratio is a combination of the debt and the profitability ratio which determines the fact, how easily the company can pay its interest on the outstanding debt (Warren, Reeve and Duchac, 2011).  

As per the above analysis the interest coverage ratio of the Coca Cola Company is 8.02 and it fell down from 11.10 in the year 2016. In case of the Dominos the interest coverage ratio is 3.13 in the year 2016 and it rose to 3.27 in the year 2017. The ability of the Dominos Company is sounder to pay the interest amount in its outstanding debt and in case of the Coca Cola company the company needs to improve its position and therefore it can be concluded that the Dominos got an up hand in this year (Arnols, 2017).

The liquidity ratio determines the liquid position of the company and the ability of the company and to convert the assets into the liquid to utilise it. The ratio basically measures the time period in which the company can easily convert the assets into cash. The liquidity ratio is of the interest of the investor so that they can analyse the position of the company and invest the shares in the company accordingly (Lee, Lee and Lee, 2009).

Capital structure (leverage) ratios

The current ratio of the company will determine the shareholders and the investors about the current situation of the company in terms of the capacity of how well the current assets are able to equate with the current liabilities and can be repaid without any hassle (Jenter and Lewellen, 2015).

The current ratio of the Coca Cola Company is fairly sound in comparison to the past three years. The current ratio of the company is 1.24 in the year 2015 and it increased to 1.34 in the year 2017. This reflects that the company is able to pay off the liabilities easily in terms of the dollars. However, if the position of the company is looked from the perspective of the Dominos than the current ratio is low and below the standard as well. The current ratio of the Dominos is 1.11 in the year 2017.

The quick ratio which is also known as the acid test ratio determines how well the company can generate the liquid cash out of the assets and convert it soon so that it can be utilised for the other purposes as well (Gitman, Juchau and Flanagan, 2015).

The quick ratio of the Coca Cola Company is 0.98 in the year 2016 and it changed to 0.90 in the year 2017. In case of the dominos the ratio is even worse and ended up at 0.28. Therefore it can be interpreted that in this case both the companies need to improve their performances and focus on improving the cash (Press Release, 2018).

The graph of the Coca Cola reflects the price moving average in contrast to the average returns of the S&P 200 All Ords Index. The trend lines set on the graph clearly showcases that the average return of the Coca Cola Company never crossed the average return of the S&P 200. Initially the company was performing better than the average returns of the S&P, however, in the month of March 2016 the company saw a negative index in the share price and thereafter the biggest surge was in the March 2018. The company can revamp its position it adopts the static price strategy to survive in the competitive market. Hence on the positive outlook it can be concluded that the company needs to work on the price movements and the prices are directly proportional in this case.

In the graph above it can be observed that the S&P 200 is low in case of the average return of the Dominos. Therefore it can be interpreted that the company performed outstandingly and in the consistent manner. Whenever the company’s share saw a surge or the fall it comes up with the rapturous effort and sets the new targets. For example in January 2016 the company saw a drastic fall of 5% and it recovered and reached till 20% in the month of May in the same year (Bowman, 2016).

Debt to Equity Ratio

Henceforth, it can be stated that the price movements of the Dominos is likely not dependent or associated with the market performance. Rather it is facing fluctuations due to its own factors.

The factors that are responsible for influencing the price of the shares in case of the Coca Cola Company are outlined below.

The plan to create a brand and promote the sales growth are the early promises made by the company under which there was  a recent campaign named “ Share a Coke”  which not only supported the brand value of the Coca Cola sales but also managed to accelerate the sales by 3% worldwide in the second quarter.

Beverages are on the rise and therefore the Coca Cola’s non sparkling beverage volume increased by 6% in the first two quarters of the 2016 financial year (Arnols, 2017).

The Dominos has recently been opening the nine outlets a month and has 777 shops extravagantly. The total sales went up due to the 16% rise in the volume of the sales. The product has been revamped with different flavours and the company reformulated the recipe of the pizza and there is all together a different concept now.

The company has created the Dominos tracker with the assistance of which the customers can track the order right from the oven till their doorstep. This concept of the enhanced technology not only helped to boost the sales in the Dominos but also levelled it by more than  50% through the online platforms itself (Bowman, 2016).

The beta values of the Coca Cola and the Dominos is 0.48 and the -0.10 respectively.

The dividend policies of the Coca Cola Company states that the Coca Cola Company has paid the quarterly dividends since 1920 and the increase in the dividends have been seen in each of the last 55 years. For the financial year 2018 the company paid the dividend of $0.39 per share in the regular cash form. The position of the Coca Cola has been rather bearish for the past couple of the years and the company has taken advantage of the very low rates and apart from this the company also has the policy of the dividend reinvestment plan (Sharma, 2014).

By having an outlook of the divided policy of the dominos the it can be observed that the company paid 4.05 per share to its shareholders and the it went extra 1 one month ago. There were two dividends distributed to the shareholders the final dividend and the interim dividend per year and the dividend cover is approximately 1.7.  The dividend policy of the company allows the shareholders to actively participate in the meaningful return of the capital transactions without the need of surrendering any shares of the DOMINOS (Press Release, 2018).

Dear Client,

This is to inform you that as per the comparative analysis undertaken of both the firm such as the Coca Cola and the Dominos it can be reflected that the liquidity position of the Coca Cola Company is better in comparison to the Dominos. Not only this company is able to take enough leverage and the gross margin is more than what is expected in case of the Coca Cola Company. Henceforth, it is recommended to invest in the Coca Cola Company.

Yours Sincerely

Investment Analyst

Conclusion

It tends to be inferred that the fundamental concepts and the financial analysis of the company are carried out in the accordance with each other to get an understanding of how the company is performing from each angle. Therefore the analysis of the ratios and the price movements has been taken to form a grip. This will not only assist the investors and the shareholders in making the decision whether to invest hold or sell the shares but they will also be aware of any progressive steps taken by the company which will help them to have benefits in the near future.

References

Arnols, J. (2017) Implications Of Coca-Cola’s Reckless Dividend Policy [Online] Available from https://seekingalpha.com/article/4082816-implications-coca-colas-reckless-dividend-policy [Accessed on 26^th September 2018]

Bowman, J. (2016) The Secret to Domino’s Pizza Inc.’s Success [Online] Available from https://www.fool.com/investing/general/2016/04/21/the-secret-to-dominos-pizza-incs-success.aspx [Accessed on 26^th September 2018]

Coca Cola, (2018) Price rise [Online] Available from https://www.fool.com/investing/general/2014/08/29/3-reasons-the-coca-cola-companys-stock-may-rise.aspx [Accessed on 26^th September 2018]

Gitman, L.J., Juchau, R. and Flanagan, J. (2015). Principles of managerial finance. Australia: Pearson Higher Education AU.

Jenter, D. and Lewellen, K. (2015).CEO preferences and acquisitions.The Journal of Finance, 70(6), 2813-2852.

Krantz, M., and Johnson, R. R. (2014). Investment Banking for Dummies. New Jersy: John Wiley and Sons.

Lee, A. C., Lee, J. C., & Lee, C. F. (2009). Financial analysis, planning and forecasting: Theory and application. Singapore: World Scientific Publishing Co Inc.

Nikolai, L. A., Bazley, J. D., & Jones, J. P. (2009).Intermediate Accounting. USA: Cengage Learning.

Parrino, R., Kidwell, D. S. and Bates, T. (2011).Fundamentals of corporate finance. USA: John Wiley & Sons.

Penman, S.H., Reggiani, F., Richardson, S.A. and Tuna, A. (2017). A Framework for Identifying Accounting Characteristics for Asset Pricing Models, with an Evaluation of Book-To-Price. New York: Springer

Press Release, (2018) Domino’s Pizza Completes its Recapitalization Plan and Declares $13.50 per Share Special Dividend [Online] Available from https://phx.corporate-ir.net/phoenix.zhtml?c=135383&p=irol-newsArticle&ID=986204 [Accessed on 26^th September 2018]

Saleem, Q. and Rehman, R.U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.

Sharma, A. (2014) 3 Reasons The Coca-Cola Company’s Stock May Rise [Online] Available from https://www.fool.com/investing/general/2014/08/29/3-reasons-the-coca-cola-companys-stock-may-rise.aspx [Accessed on 26^th September 2018]

Tracy, A. (2012). Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. Ratio Analysis. New York: Springer.

Vogel, H.L. (2014). Entertainment industry economics: A guide for financial analysis. New York: Cambridge: Cambridge University Press.

Warren, C. S., and Jones, J. (2018). Corporate financial accounting. USA: Cengage Learning.

Warren, C. S., Reeve, J. M., and Duchac, J. (2011). Accounting. USA: Nelson Education.

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