Financial Analysis of Coca-Cola - Research Paper Example

Introduction It is important for adults to learn how to invest money in order to generate wealth. Putting money in the bank is not a wise investmentsince the interest the bank pays is extremely low. In a way your acquisition power goes down when you leave money in the bank because inflation is higher than the interest the bank pays. The best way to invest your money is by investing in the stock market. The two largest markets are the New York Stock Exchange (NYSE) and NASDAQ. Prior to investing money in the stock market it is imperative for investors to analyze the financial performance of an enterprise. The four financial statements of a company are included in its annual report. The four financial statements are the income statement, balance sheet, statement of retained earnings, and the statement of cash flow. This paper will analyze the financial performance of Coca-Cola to determine if the company is a good investment option. Two financial tools that are going to be used to analyze the financial performance of Coca-Cola are horizontal analysis and ratio analysis. Company Background The Coca Cola Company is the largest soft drink company in the world. The company has a long history of success in the market since it was founded 127 years ago. The flagship product of the firm is the Coca Cola drink. Other brands that the company owns include Sprite, Fanta, Diet Coke, Coca Cola Zero, and Danasi. The company has a product portfolio of 3,500 products. The organization is a global company that operates in 200 countries worldwide. The mission of the company is to refresh the world, inspire moments of optimism and happiness, and to create value and make a difference (Coca-colacompany). The values of the company include leadership, collaboration, integrity, diversity, and quality. The company is a publicly traded firm whose stocks are sold in the New York Stock Exchange under the symbol KO. The price of Coca Cola common stocks as of April 19, 2014 was $40.72 (Yahoo). The market capitalization of the firm is $178.84 billion. Horizontal Analysis A horizontal analysis of the income statement and balance sheet of Coca Cola is illustrated below. Horizontal Analysis Income Statement Coca Cola Company (millions) 2013 2012 2011 2013 2013 2012 2012 Amount Percent Amount Percent Revenues 46854 48017 46542 -1163 -2.42% 1475 3.17% Cost of goods sold 18421 19053 18215 -632 -3.32% 838 4.60% Gross profit 28433 28964 28327 -531 -1.83% 637 2.25% Selling, general, and administrative expenses 17310 17738 17422 -428 -2.41% 316 1.81% Other operating charges 895 447 732 448 100.22% -285 -38.93% Operating income 10228 10779 10173 -551 -5.11% 606 5.96% Interest income 534 471 483 63 13.38% -12 -2.48% Interest expense 463 397 417 66 16.62% -20 -4.80% equity income (loss) net 602 819 690 -217 -26.50% 129 18.70% Other income (loss) net 576 137 529 439 320.44% -392 -74.10% Income before income taxes 11477 11809 11458 -332 -2.81% 351 3.06% Income taxes 2851 2723 2812 128 4.70% -89 -3.17% Consolidated net income 8626 9086 8646 -460 -5.06% 440 5.09% Less: income attributable controlling interest 42 67 62 -25 -37.31% 5 8.06% Net income 8584 9019 8584 -435 -4.82% 435 5.07% Horizontal Analysis Balance Sheet Coca Cola Company (millions) 2013 2012 2011 2013 2013 2012 2012 Amount Percent Amount Percent Assets Current assets Cash and cash equivalents 10414 8442 12803 1972 23.36% -4361 -34.06% Short term investments 6707 5017 1088 1690 33.69% 3929 361.12% Total cash and cash equivalents 17121 13459 13891 3662 27.21% -432 -3.11% Marketable securities 3147 3092 144 55 1.78% 2948 2047.22% Trade account receivables 4873 4759 4920 114 2.40% -161 -3.27% Inventories 3277 3264 3092 13 0.40% 172 5.56% Prepaid expenses 2886 2781 3450 105 3.78% -669 -19.39% Assets held for sale 0 2973 0 -2973 -100.00% 2973 n/a Total current assets 31304 30328 25497 976 3.22% 4831 18.95% equity methods investments 10393 9216 7233 1177 12.77% 1983 27.42% Other investments 1119 1232 1141 -113 -9.17% 91 7.98% Other assets 4661 3585 3495 1076 30.01% 90 2.58% Property, plant, and equipment 14967 14476 14939 491 3.39% -463 -3.10% Trademarks 6744 6527 6430 217 3.32% 97 1.51% Bottler franchise rights 7415 7405 7770 10 0.14% -365 -4.70% Goodwill 12312 12255 2219 57 0.47% 10036 452.28% Other intangible assets 1140 1150 1250 -10 -0.87% -100 -8.00% Total assets 90055 86174 79974 3881 4.50% 6200 7.75% Liabilities and equity Current liabilities Account payable 9577 8680 9009 897 10.33% -329 -3.65% Loans and notes payable 16901 16297 12871 604 3.71% 3426 26.62% Current maturities of long term debt 1024 1577 2041 -553 -35.07% -464 -22.73% Accrued income taxes 309 471 362 -162 -34.39% 109 30.11% Liabilities held for sale 0 796 0 -796 -100.00% 796 n/a Total current liabilities 27811 27821 24283 -10 -0.04% 3538 14.57% Long term debt 19154 14736 13656 4418 29.98% 1080 7.91% Other liabilities 3498 5468 5420 -1970 -36.03% 48 0.89% Deferred income taxes 6152 4981 4694 1171 23.51% 287 6.11% Shareholders equity Common stock 1760 1760 1760 0 0.00% 0 0.00% Capital surplus 12276 11379 10332 897 7.88% 1047 10.13% Reinvested earnings 61660 58045 53621 3615 6.23% 4424 8.25% Accumulated other comprehensive income -3432 -3385 -2774 -47 1.39% -611 22.03% Treasury stock -39091 -35009 -31304 -4082 11.66% -3705 11.84% Shareholders equity 33173 32790 31635 383 1.17% 1155 3.65% equity attributable to noncontrolling interest 267 378 286 -111 -29.37% 92 32.17% Total equity 33440 33168 31921 272 0.82% 1247 3.91% Total liabilities and equity 90055 86174 79974 3881 4.50% 6200 7.75% Horizontal analysis measures the year to year difference in all the accounts of the income statement and balance sheet. The revenues of Coca Cola decrease by 2.42% in 2013, while its net income went down by 4.82%. The cash of the firm went up by 23.36% in 2013. Coca Cola’s total assets increase by 4.5%. In 2013 the enterprise had a 0.82% increased in total equity. The total liabilities of the firm increase by 6.81%. Ratio Analysis The gross margin is a measure of the broad profitability of a company. Coca Cola Company had a gross margin in 2013 of 60.68%. Net margin measures the absolute profitability of a firm. Coca Cola in 2013 had a net margin of 18.32%. Its net margin is 15.62% better than the industry average of 2.70% (Dun & Bradstreet). The return of assets of Coca Cola was 9.53%. Coca Cola’s return on assets is much better than the industry average of 5.4%. Return on assets measures how effective a company has been at generating profits from its assets. The company’s return on equity in 2013 was 15.16%. The current ratio measures the company’s ability to pay off short term debt (Besley & Brigham). The firm’s current ratio in 2013 was 1.13. Coca Cola’s current ratio is lower than the industry average of 1.40. The debt ratio measures the level of debt of the company. The organization had a debt ratio in 2013 of 0.63. Based on this ratio we can infer that the company is not too highly leveraged. The debt to equity ratio of the company was 1.69. This implies that the company has financed its growth over the years more through debt than equity. Recommendation The profitability of Coca Cola is extremely good based on its tremendous gross and net profit. Its net margin was 6.78 times better than the industry average. Also the company’s ROA and ROE were better than the industry standard which implies the firm has done good use of its assets and equity. The total assets, total equity, and cash accounts all rose in 2013. The company’s net income and total sales decreased slightly. The current ratio of the company is below the industry average by 0.30, but it is above the 1.0 threshold. The organization is not too highly leverage evidence by its relatively low debt ratio. The short term liquidity of the company should be improved, but it is not an inherent problem. The company was efficient at generating profits from its assets. The financial performance of Coca Cola was good. The firm had great profitability, sound liquidity, and good efficiency. Its total profits decreased a little bit, but it is not too worrisome of a factor. Growth in assets was a positive factor the company had in 2013. After considering the entire realm of financial factors my recommendation is by buy Coca Cola stocks. Works Cited Besley, Scott, Eugene Brigham. Essential of Managerial Finance (12th ed.). Fort Worth: The Dryden Press. 2000. Print. Coca-colacompany.com. 2014. “Our Company.” 19 April 2014. Dun & Bradstreet. 2014. “Key Business Ratios – SIC 2080.” 3 April 2014. Yahoo.com (2014). “The Coca Cola Company (KO).” 19 April 2014. Read More