Analysis of Coca-Cola Company

Midterm Paper

Finance 620

MSAF

Lizhe Dang

Summer 2017

I want to do analysis of the Coca-Cola company. In this paper, I will divide to three parts: financial analysis, company background and strategic issues.

I. financial analysis

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In the year 2016, Coca-Cola reported weak financial performance with a reported net income of $6,527,000.

The company recorded revenues of $41863 million during the financial year ended December 2016, a decrease of 5.49% compared to FY2015.  

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Coca-Cola will continue to use its available annual cash flows to reduce long-term debt. But Coca-Cola Company has a worse debt to equity ratio characterized by high levels of debt than the equity capital. In 2016, the debt to equity ratio was 1.98. It shows that the company was heavily financed by the debt, which is not good for the long-term solvency of the company.

The company’s 20.6% operating margin is higher than the competitor-Pepsi. In addition, Coca-Cola's gross profit margin has no significant change in the last 3 years. Gross profit margin serves as the source for paying additional expenses and future savings. Coca-Cola is heavily lagging behind in both these metrics.

In the last 10 years, the company has been averaging a compound annual growth rate of just under 5%. In addition to the higher revenues, profit margin is slightly improving.

The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the company's liquidity position. With a quick ratio of 1.181 increased by 0.923 in 2014 the company should be able to comfortably repay its short-term obligations with its most liquid assets.

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Since Ratio of liabilities to stockholder’s equity is the measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. This ratio is worsening which increase from 2.035, 2.522 to 2.784. It means that for every dollar that shareholders own, Coca-Cola owes more to creditors. It is not a good sign. Coca-Cola will continue to use its available annual cash flows to reduce long-term debt. But Coca-Cola Company has a worse debt to equity ratio characterized by high levels of debt than the equity capital. In 2016, the debt to equity ratio was 1.98. It shows that the company was heavily financed by the debt, which is not good for the long-term solvency of the company. The ratio is relatively high when compared with the non-acoholic beverages industry's norm. The company should reduce the amount of debt used in the financing of the company's investments.

Unsustainable debt levels would undermine the ability of the company to finance its expansion and normal operations. The management of the company should source for additional equity finances including the raising of right issue. The average cost of common equity was less than 10 percent, which is 8.713%. The cost of common equity is close to the weighted average cost of capital (WACC), which is 7.820%. Coca-Cola Company should reduce the amount of debt capital compared to the equity capital. The failure to reduce the debt capital would affect the solvency level of the company in the long term. Coca-Cola Company has the highest leverage ratio compared to its closest rival in the industry. Coca-Cola Company has higher liabilities that the equity level. It shows that the company does not have the ability to pay for its debts. The management should improve the leverage ratio through raising additional equity to finance the expansion and operations of the company.

Elements of high leverage ratios undermine the ability of the company to perform well. From 2015, the leverage ratio increased from 2.51 to 2.77 in 2016. It shows that the leverage ratio is weakening the solvency ratio of the company. Based on the financial results and trends of Coca-Cola Company, the investors should not buy the shares of the company.

Demand for carbonated soft drinks has been negatively affected from the concerns of the growing health, nutrition and obesity concerns of today’s population.

The consumption of carbonated soft drinks have dropped significantly in the total US beverage volume. Except the public policy challenges which will be mentioned in the next two part, Coca-Cola faces a risk from increasing price movements for commodities that are required in for its operations. Changes in the prices of raw materials will pass on the customers if the company wants to remain profitable. And then, customers may choose to switch to more inexpensive products provided by Coca-Cola's competitors.

Raw materials used in the production of finished products such as aluminum, corn and resin as well as crude oil which will change the transportation cost will have huge impact.

the pertinent financial ratios

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II. Company Background

The Coca-Cola Company is a manufacturer, distributor and marketer of non-alcoholic beverage concentrates, syrups, and finished sparkling and still beverages. It operates in more than 200 countries. The company is headquartered in Atlanta, Georgia and employed about 129,200 people as of December 31, 2014. The diversity and localized product which makes the company goes stronger and stronger throughout the past few years. However, with more concerning to the health and environment, the growth of the future growth of the company is not very pleasing.

With revenues of $45,998 million, Coca-Cola is one of the largest beverage manufacturers globally. It is the largest provider of sparkling beverages, juices and juice drinks and RTD coffees. Coca-Cola offers more than 3,600 products including diet and regular sparkling beverages, and still beverages such as 100% juices, juice drinks, waters, sports and energy drinks, and RTD teas and coffees. The company’s beverages alone account for 1.9 billion of the approximately 57 billion servings of all beverages consumed worldwide every day.

Over the years, the company has made large investments in establishing a strong brand portfolio. Consequently, Coca-Cola is one of the best recognized global brands. Furthermore, Coca-Cola owns four of the world's top five non-alcoholic sparkling beverage brands including Coca-Cola, Diet Coke, Sprite and Fanta.

The company's strong brand portfolio allows it to penetrate new markets and consolidate its presence in the existing ones. Various awards and presence in global listings for top brands further testify the company's strong brand presence. For instance, the Coca-Cola brand was ranked among the top 100 best global brands list 2014 by an industry source specializing in brand services and activities. Coca-Cola's market leadership and industry-leading brands provide an exceptional competitive advantage and, in turn, enhance its bargaining power.