Finance Management: Company Financial Analysis

Introduction

Coca-Cola company is an international nonalcoholic beverage corporation with its headquarters in Atlanta Georgia. The company was started in 1886 by Doctor John Pemberton, a pharmacist based in Atlanta Georgia (Young-Witzel & Witzel, 2019). He made the first syrup which was tested in Jacobs local pharmacy and proven to be an excellent refreshment. The beverage was then combined with carbonated water to make it more delicious.

The name Coca-Cola was derived from the contents of the first syrup by Pemberton’s book keeper Frank Robinson and it became the brand name of the company (Young-Witzel & Witzel, 2019). The company plays a key role in food and beverage industry due to its consistent production and supply of drinks in more than two hundred countries in the world.

Coca-Cola company primary competitors include PepsiCo which also deals with nonalcoholic beverages, Altria Group Inc, Mondelez Internatiional Inc, Philip Morris International Inc, Nestle which deals with coffee, tea, and bottled water, Keurig Dr. Pepper, Uniliver, Redbull, Danone among others. Coca-Cola company has five hundred beverage brands that are in the market, with its products ranging from bottled water, juices, energy drinks, ready to drink teas and coffees and sparkling beverages. The products are distributed through bottling partners, wholesalers who then distribute them to retailers or sometimes the distribution is done direct to the retailer. There are other products that are offered by the company such as selling fountain syrups to fountain retailers who use them to make their own beverages for immediate consumption in restaurants. The company also manages bottling services in many countries in the world as well as offering marketing services to other companies that sell nonalcoholic beverages. This is done through partnerships, licensing and joint ventures.

A Financial Analysis of Coca-Cola Company Using Financial Statements

Coca-Cola company income statement
Fig 1: Coca-Cola company income statement (“Yahoo finance”, 2021)
Coca-Cola company balance sheet for assets
Fig: 2 Coca-Cola company balance sheet for assets (“Yahoo finance”, 2021)

Summary

The above statement illustrates the financial overview on assets status of the company to provide shareholders and investors with information concerning the assets.

Coca- Cola company balance sheet for stockholders’ equity and liabilities
Figure 3: Coca- Cola company balance sheet for stockholders’ equity and liabilities (“Yahoo finance”, 2021)

Summary

The statement above gives report on the status of stockholders’ equity and liabilities of the Coca-Cola company giving data to investors and shareholders about the spending and earning of the company.

Coca- Cola company statement of comprehensive income
Figure: 4 Coca- Cola company statement of comprehensive income (“Yahoo finance”, 2021)

Summary

The report illustrates the financial overview and status of Coca-Cola company comprehensive income providing information to the shareholders of the company

A Financial Analysis of Coca-Cola Company Using Finance Ratios

The financial analysis of the Coca-Cola company can be represented through liquidity ratios that show the ability of accompany to pay debts and its margin of safety.

Coca-Cola company Liquidity Ratios (Current & Quick)

Dec, 31st, 2020 Dec, 31st, 2019 Dec, 31st,2018 Dec, 31st,2017
Current ratio 1.32 0.76 1.05 1.34
Quick ratio 0.96 0.56 0.66 0.9

Table 1: Liquidity ratios

The current ratio is a liquidity ratio obtained by dividing the current assets with current liabilities. In this case Coca-Cola company current ratio dropped from 2018 to 2019 but improved from 2019 to 2020.Quick ratio obtained by adding cash, short-term marketable investments and receivables and then diving the sum with the current liabilities. There is a drop in quick ratio from 2018 t0 2019 which improves from2019 to 2020 in Coca-Cola company. Therefore, the liquidity ratio between the year 2018 and 2019 shows that the company had less ability to pay for short term liabilities and this could scare creditors. A liquidity ratio which is above one is always more preferred by investors and creditors.

Coca-Cola Company Turnover Ratios

Dec, 31st, 2020 Dec, 31st, 2019 Dec, 31st, 2018 Dec, 31st, 2017
Fixed asset turnover 3.06 3.44 3.87 4.32
Total asset turnover 0.38 0.43 0.38 0.40

Table 2: Turnover ratios

Fixed asset turnover ratio decreases from 2017 to 2020 which shows that the Coca-Cola company’s efficiency to generate sales from its fixed assets has been deteriorating. The total asset turnover ratio decreased from 2017 to 2018 then improved from 2018 to 2019. In between 2019 and 2020 the ratio also drops. This shows that there is inconsistency in in efficiency of producing the company sales from its fixed assets. The total asset turnover is also low, since total asset turnover of 0.38 as it is in the year 2020 means $ 0.38 of sales is generated from every dollar of the company’s assets.

Coca-Cola Company Return Ratios

Dec, 31st, 2020 Dec, 31st, 2019 Dec, 31st, 2018 Dec, 31st, 2017
Return on equity 40.14% 46.99% 37.89% 7.31%
Return on total assets 8.87% 10.33% 7.73% 1.42%

Table 3: Return ratios

Return on equity ratio for Coca-Cola company is high and has been increasing from 207 to 2019, from 2019 to 2020 there is a drop. This shows that the company is proficient in using its shareholder’s investments to generate profit, that is proper use of capital. Any return on equity ratio that is above 15% is considered proficient (Brigham & Ehrhardt, 2019). The company’s return on total assets indicates the amount of money returned to the shareholders in relation to the company’s total assets. A high return on total assets shows that the company is efficient in using the assets to generate profit for its shareholders. Coca-Cola company as indicated above in table 3 had an increasing return on total assets from 2017 to 2019. In the year 2020 there is a drop in the two ratios, this shows a decline in the efficiency of the company’s output as compared to input.

Price ratios in Coca-Cola company

Dec, 31st, 2020 Dec, 31st, 2019 Dec, 31st, 2018 Dec, 31st, 2017
Price to earnings ratio 27.91 28.21 30.47 150.54
Operating profit margin 27.25% 27.06% 27.31% 21.18%

Table 4: Price ratios

Price to earnings ratio shows the value of products of a company as it compares the value of the stock to the company’s earnings. The higher the price earning the ratio the higher the possibility of the stock appreciating. Coca-Cola company has had its price earnings ratio decreasing, this shows that the company’s stock is not expected to appreciate with time and the investors shouldn’t have high expectations on the earnings. The operating profit margin ratio shows the profit made by a company after paying for all costs of production. It shows the efficiency of a company in controlling the expenses of a business production. In this case production and distribution of Coca-Cola company products is efficient since the operating profit margin has been maintained at a high level. The company has the ability to pay for expenses of operating the business as well as making the expected profit.

Debt ratios for Coca-Cola company

Dec, 31st, 2020 Dec, 31st, 2019 Dec, 31st, 2018 Dec, 31st, 2017
Debt to equity 2.22 2.25 2.56 2.79
Debt to capital 0.69 0.69 0.72 0.74

Table 5: Debt ratios

Debt to equity ratio for Coca-Cola company has been decreasing since 2017. This is a positive result since a high ratio shows that the company has put the shareholders at high risk. High ratio means the companies debts are too high as compared to the shareholders’ equity. A ratio of less than 2.22 for the Coca-Cola company is slightly high and needs to be decreased.

Debt to capital ratio in Coca-Cola company dropped from 2017 to 2019, 2019 and 2020 the ratio is the same. The ratio shows the company’s liabilities that are used in operations as compared to the capital. A low ratio as it is in Coca-Cola company shows that the company debts are manageable and the company and be trusted by the investors willing to make profit. in all debt ratios a low figure shows the strength of the company in operating its activities without being overwhelmed by liabilities.

Coca-Cola Company Gross Profit Margin Ratio.

Dec, 31st, 2020 Dec, 31st, 2019 Dec, 31st, 2018 Dec, 31st, 2017
Gross profit margin 59.31% 60.77% 63.05% 62.56%

Table 6: Profit margin ratio

Coca –Cola company gross profit margin level has dropped from 2017 to 2020. This means company’s large percentage of the company’s revenue is being used to cater for direct cost of running the business, leaving less amount after selling the products. Decreasing gross profit margin may scare potential investors as is it shows the cost of operating the business is high as compared to profit being made in the company.

Comparison Coca-Cola Company of Ratios with Industry Averages

Coca-Cola company cash ratio comparison with competitors and industry
Figure5: Coca-Cola company cash ratio comparison with competitors and industry (“Yahoo finance”, 2021)
Coca- Cola company quick ratio comparison with competitors and the industry
Figure 6: Coca- Cola company quick ratio comparison with competitors and the industry (“Yahoo finance”, 2021)
Coca- Cola company fixed asset ratio comparison with competitors and the industry
Figure 7: Coca- Cola company fixed asset ratio comparison with competitors and the industry
Coca- Cola company total asset ratio comparison with competitors and the industry
Figure 8: Coca- Cola company total asset ratio comparison with competitors and the industry (“Yahoo finance”, 2021)
Coca- Cola company return on equity ratio comparison with competitors and the industry
Figure 9: Coca- Cola company return on equity ratio comparison with competitors and the industry (“Yahoo finance”, 2021)
Coca- Cola company return on assets ratio comparison with competitors and the industry
Figure 10: Coca- Cola company return on assets ratio comparison with competitors and the industry (“Yahoo finance”, 2021)
Coca- Cola company price /earnings ratio comparison with competitors and the industry
Figure 11: Coca- Cola company price /earnings ratio comparison with competitors and the industry (“Yahoo finance”, 2021)
Coca- Cola company operating profit margin ratio comparison with competitors and the industry
Figure12: Coca- Cola company operating profit margin ratio comparison with competitors and the industry (“Yahoo finance”, 2021)
Coca- Cola company debt to equity ratio comparison with competitors and the industry
Figure 13: Coca- Cola company debt to equity ratio comparison with competitors and the industry (“Yahoo finance”, 2021)
Coca- Cola company debt to capital ratio comparison with competitors and the industry
Figure 14: Coca- Cola company debt to capital ratio comparison with competitors and the industry (“Yahoo finance”, 2021)
Coca- Cola company gross profit margin ratio comparison with competitors and the industry
Figure 15: Coca- Cola company gross profit margin ratio comparison with competitors and the industry (“Yahoo finance”, 2021)

Statistical Discussion on Coca-Cola Company’s Financial Ratios Compared to Other Primary Competitive Companies

Liquidity Ratios

Both cash and quick ratios of the company are high as compared to other competitive companies and the industry. Pepsi company which is the closest competitor has a higher recent quick ratio than Coca-Cola company. this means Pepsi has a higher ability of paying off short term liabilities than Coca-Cola.

Fixed Asset Turnover and Total Asset Turnover

Coca-Cola’s average fixed asset turnover and total asset are below the sector ratios and below some of the competing companies. The company is less efficient in making profit from its assets as compared to the other companies. The expected industry ratios are also above those of Coca-Cola company.

Return in Equity Ratio and Return in Asset Ratio

These two ratios for Coca-Cola company are below those of the other competitors and the industry. The competing companies are more efficient in generating profit from the available assets and shareholder’s contribution than Coca-Cola company. These companies are likely to attract more people to buy shares from them than Coca-Cola if the trend remains the same.

Price Earnings Ratio

From figure 11, the price earnings ratio of Coca-Cola company is higher than the competing companies and that of the industry. The company has higher chances of its stock appreciating in future. Most investors consider the future of a company in terms of the chances of the stock appreciating before they invest in them. In this case Coca-Cola company is likely to be more trusted than the rest of the companies in the same industry.

Operating Profit Margin Ratio

Over the last five years Coca-Cola company has had high operating profiting margin ratio as compared to most of its competitors. It also has a higher contribution to the industry ratio. This consistency shows that the company is more profitable and can generate more profit even in future since the management of the business operations cost is efficient. This can also be improved to maintain the company’s commanding power in the industry.

Debt to Equity Ratio and Debt to Capital Ratio

Coca-Cola company statistics show that debt management in relation to shareholder’s equity and capital has been close to efficient. The company is able to maintain debts ensuring that they do not outdo the capital and the shareholder’s equity. Management of debt ensures that the company does not run bankrupt due to too much borrowing.

Gross Profit Margin

Coca-Cola company has the highest gross profit margin ratio as compared to its competitors.it is even higher than that of the whole industry. This is a reflection of proper management of direct costs incurred in running business to maximize on profit. when the company has the highest gross profit ratio, competing with other companies becomes easier. This profit can be used to expand the business, market and to attract more investors.

Coca- Cola company historical stock prices for the past five years
Graph 1.1 Coca- Cola company historical stock prices for the past five years. (Young-Witzel & Witzel, 2019)

Pertinent Issues Concerning Coca –Cola Company

The last mile project in Coca-Cola company can bring many positive changes in the company in future. The project aims at making partnerships with African countries to improve health care systems. The project will achieve its goals through partnerships with African governments and global donors. The project also transfers knowledge and skills from the company’s system to the ministry of health in different countries to strengthen essential services and improve the availability of important medicines. Due to these partnerships the company will extend to different countries in Africa and in the rest of the world through donors. While offering the medical help the company will have a good relationship with the countries’ government which will pave a way of conducting business in that particular country. More exports of products and establishment of bottling centers in the country will lead to increase in volume of sales in the country. Service to the members of the society through provision of essential medicine also will ensure that the company’s products are trusted and preferred compared to its competitors.

COVID 19 Pandemic As A Current Event Affecting Coca-Cola Company

Corona virus affected most of the parts of the world since January 2020. Most of entertainment areas such as stadiums, restaurants, hotels and movie theaters were closed. Social gatherings such as weddings, political meetings were also burnt or they were to be attended by few people. It is in these occasions and areas where refreshments and drinks are highly consumed. The virus also led to restrictions in movements and therefore most of the people could not travel for holidays and family gatherings where moist of Coca-Cola company products are sold. Therefore, Coca-Cola company revenue reduced adversely due to lack the corona virus restrictions (Brondoni, 2020). The company has recorded a drop in sales volume and net profit.

COVID 19 vaccine has been distributed and used in most of the countries in the world leading to opening of some of the entertainment areas and increase in minimal number of the people who are allowed to attend social gatherings. This has increased the volume of sales in the company due to the available customers in these areas. The company is therefore able to make profit even though not as high as it was before the effect of the pandemic. The Coca-Cola company was able to minimize on coast of production by allowing some the employees to go for leave to minimize cost of operations. The production of the drinks and bottling was also reduced since the demand was low. This also helped in maintaining the business during the challenging periods.

Conclusion and Recommendation

Capital Asset Pricing Model (CAPM) indicates what should be expected on company’s return to assets like stock. Form table 3 on return on total assets ratio, the Coca- Cola company has had a drop in the expected return (Brigham & Ehrhardt, 2019). According to Yahoo finance 2020 the Coca-Cola company stock is relatively overpriced. Current price for Coca-Cola share is $56.23 billion while the market cap is $42.4 billion per share therefore overpriced (Yahoo finance 2020). The company is therefore likely to have a higher growth as compare to the stock return. Looking at the debt capital ratio in figure the company has 0.96 ratio which is higher than that of the industry and some of its competitors in nonalcoholic beverages. This indicates that the strength of the company financially is poor which can scare away investors.

Coca-Cola company has fair profitability but with a poor financial condition with its growth being better than 67% of the other companies in the same industry. Coca-Cola company is the leading soft drink company in the world with an accepted and well-known image in the world. The distribution of the products and bottling partnerships in different countries makes the company to enjoy economies of scale.

From the research purpose, analysis and processing of the data found, it can be concluded that, Coca-Cola company is the leading soft drink company in the world with an accepted and well-known image. The company manages its debts, makes more profit and has a wider market as compared to its competitors. The drop in profit and sales in the year 2020 can be attributed to the corona virus effects.

Recommendations

Coca-Cola products pricing needs to be monitored to ensure that the products are affordable to most of the people. Overpricing the products directs customers to other available similar products. The company’s stock is also overvalued and this needs to be corrected to increase the number of interested shareholders. The company’s involvement in society activities like empowering the marginalized communities using programs like last mile project, should also be increased to improve the company’s face in the society.

References

Brigham, E., & Ehrhardt, M. (2019). Financial management (15th ed.) Sage Publications.

Brondoni, S. (2020). Shareowners, stakeholders & the global oversize economy. The Coca-Cola company case. Symphonya. Emerging Issues in Management, (1), 16.

Yahoo Finance. Finance.yahoo.com. (2021).

Young-Witzel, G., & Witzel, M. (2019). The sparkling story of Coca-Cola (4th ed., pp. 34-37). Voyageur Press.

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