Help completing a discussion board post for my finance course (Principle Of Finance). Below are the exact requirements provided by my instructor:
Financial Analysis
Select two of the four companies shown below. Use the following SEC Edgar website for your research:
Companies:
FORD MOTOR CO
Walmart Inc.
Pepsi
Coca-Cola
Instructions:
Compare the firms profits for the past two years.
Compute the working capital for each firm.
Determine the price-earnings (P/E) ratio.
Calculate the debt-to-equity ratio.
Discuss what each calculation tells you about the firm. Are they a good investment?
Discuss the limitations of this analysis.
Sample Answer
Sample Answer
Financial Analysis of Ford Motor Co. and Coca-Cola
In this discussion, I will analyze two prominent companies: Ford Motor Co. and Coca-Cola. I will compare their profits over the past two years, compute their working capital, determine their price-earnings (P/E) ratios, and calculate their debt-to-equity ratios. Additionally, I will discuss the implications of these calculations regarding the potential investment value of each firm and highlight some limitations of this financial analysis.
Profit Comparison (2019 vs. 2020)
Ford Motor Co.
– 2019 Profit: Approximately $47 billion in revenue with a net income of around $47 million.
– 2020 Profit: Revenue dropped to approximately $127 billion with a net loss of about $1.3 billion due to the impact of the COVID-19 pandemic.
Coca-Cola
– 2019 Profit: Approximately $37.3 billion in revenue with a net income of around $8.9 billion.
– 2020 Profit: Revenue decreased to approximately $33 billion with a net income of around $7.1 billion as a result of the pandemic-related impacts on sales.
Working Capital Calculation
Working capital is calculated as current assets minus current liabilities.
Ford Motor Co.
– Current Assets (2020): $50 billion
– Current Liabilities (2020): $36 billion
[
\text{Working Capital}_{Ford} = 50 – 36 = 14 \text{ billion}
]
Coca-Cola
– Current Assets (2020): $24 billion
– Current Liabilities (2020): $18 billion
[
\text{Working Capital}_{CocaCola} = 24 – 18 = 6 \text{ billion}
]
Price-Earnings (P/E) Ratio
The P/E ratio is calculated by dividing the market price per share by the earnings per share (EPS).
Ford Motor Co.
– Market Price per Share: $13 (approximation for 2020)
– EPS (2020): Loss leads to a negative P/E ratio, thus not applicable.
Coca-Cola
– Market Price per Share: $53 (approximation for 2020)
– EPS (2020): $1.60
[
\text{P/E Ratio}_{CocaCola} = \frac{53}{1.60} \approx 33.13
]
Debt-to-Equity Ratio
This ratio is calculated by dividing total liabilities by shareholder equity.
Ford Motor Co.
– Total Liabilities: Approximately $200 billion
– Shareholder Equity: Approximately $30 billion
[
\text{Debt-to-Equity Ratio}_{Ford} = \frac{200}{30} \approx 6.67
]
Coca-Cola
– Total Liabilities: Approximately $40 billion
– Shareholder Equity: Approximately $25 billion
[
\text{Debt-to-Equity Ratio}_{CocaCola} = \frac{40}{25} = 1.6
]
Discussion of Calculations
Ford Motor Co.
– Profitability: Ford’s significant losses in 2020 highlight the challenges faced during the pandemic, indicating volatility in earnings.
– Working Capital: A working capital of $14 billion suggests that Ford has sufficient short-term assets to cover its liabilities.
– P/E Ratio: The inability to calculate a P/E ratio due to losses suggests that Ford may not attract investors looking for consistent earnings growth.
– Debt-to-Equity Ratio: A very high debt-to-equity ratio of 6.67 indicates that Ford is heavily reliant on debt financing, which may pose risks during economic downturns.
Coca-Cola
– Profitability: Although Coca-Cola also experienced a decline in profits in 2020, it remained profitable, indicating resilience compared to Ford.
– Working Capital: A working capital of $6 billion shows Coca-Cola has adequate short-term liquidity.
– P/E Ratio: A P/E ratio of approximately 33.13 suggests that investors are willing to pay a premium for Coca-Cola’s shares due to its brand strength and stable earnings.
– Debt-to-Equity Ratio: A debt-to-equity ratio of 1.6 indicates a more balanced approach to leveraging debt, suggesting lower financial risk compared to Ford.
Investment Consideration
Given Ford’s volatility and high debt levels, it may not be considered a stable investment at this time. On the other hand, Coca-Cola’s consistent profitability and moderate debt levels position it as a more attractive investment opportunity.
Limitations of This Analysis
1. Market Conditions: The analysis does not take into account the broader economic conditions and market trends that can significantly impact profitability and investment potential.
2. Future Outlook: The calculations are based on historical data; future performance may vary due to unforeseen circumstances or shifts in consumer preferences.
3. Industry Comparison: Comparing firms from different industries can lead to misleading conclusions, as financial metrics may have different implications based on sector dynamics.
Conclusion
In conclusion, analyzing financial metrics such as profit, working capital, P/E ratio, and debt-to-equity ratio provides valuable insights into Ford Motor Co. and Coca-Cola’s financial health. These calculations suggest that while Coca-Cola presents itself as a more stable investment opportunity, Ford faces significant challenges that may deter potential investors.
Please ensure you verify the numbers with the latest available data from the SEC Edgar website or other reliable sources before posting your discussion board entry!
