The Coca-Cola Company - Research Paper Example

The Coca Cola Company 1 INTRODUCTION The Coca-Cola Company has been operating internationally for over a century and has seen rapid growth in its business since it started. The company has introduced many innovative carbonated and non-fizzy drinks to add to their numerous products, which have been well received by consumers all over the world, including the Vanilla Coke and Coke Zero. The company has over 300 bottling partners globally that are responsible for its products and distributions and takes pride in playing an environmentally responsible role. With the current global economic downturn, we will be looking at how the company has performed based on its results for the First Quarter of 2009. We will be looking at several types of financial ratios available in assessing the financial position of The Coca-Cola Company: Liquidity Ratios, Asset Management Ratios, Profitability Ratios and Gearing Ratios. 2 FINDINGS The quantitative findings in this segment can be found in the Appendix section of this report. The results show that The Coca-Cola Company has a good Liquidity Ratio. The company’s Current Ratio is 1.12 (0.95 in Q1 2008) and its Quick Ratio is 0.94 (0.80 in Q1 2008). This means that The Coca-Cola Company is still able to generate enough cash to settle its short-term liabilities. There has been a slight improvement in its Liquidity Ratio compared with the previous quarter. As a guide, a current ratio of 2 is ideal. However, in the company’s case, 46% of its Current Assets (42% in Q1 2008) are made up of cash and cash equivalents. At a glance, the company’s assets are being managed efficiently. Its Inventory Turnover is 1.13 (1.07 in Q1 2008), which shows that company is trading better. Its inventories declined by 6% in the first quarter of 2009 whereas its sales increased by 3% in the same quarter of 2008. Nevertheless, the company should take note that over increasing its inventories may adversely affect its business performance. This is because costs associated with holding inventories for too long can be very expensive. As such, managing its inventories well is recommended. There is a slight improvement in the Average Collection Days of 39 (43 Days in Q1 2008). Although the company is able to meet its short-term liabilities; it should still make an effort to improve the collection of its debts. The credit term given to its customers is not stated; however, as a guideline, 30 days is recommended. In this case, the company’s customers are enjoying slightly more than the normal credit terms and this should be monitored. The profitability of The Coca-Cola Company is sound. Its Gross Profit Margin of 69% (64% in Q1 2008) is quite high. This is a 4% drop compared to the first quarter of 2008, due to the lower sales in the first quarter of 2009. Although, its sales performance shows a slight improvement from the previous quarter, the comparative results from the first quarter of last year did not fair as well. The company should analyze further the cause of this decline – whether the efficiency of its production dropped resulting in lower finished goods or simply experiencing slower sales due to consumer choice. The Return on Assets and Return on Equity ratios show similar results. At 3.2% and 6.4% respectively (3.2% and 6.5% respectively in Q1 2008), these can still be improved on. The Gearing Ratio is quite low at 24% (14% in Q1 2008). Although it has nearly doubled, the results should not cause an alarm. The estimated cost of capital of the company is 12.75%. This measures the opportunity cost of the investors that their investment is creating value. It measures what it costs to raise capital. It is advisable to have a balance between debt and equity sources. This balance should be the mix that gives the lowest possible cost of capital consistent to the attributes of the company. 3 COMMENTARIES Considering the sluggish economic situation across the world, The Coca-Cola Company has reported steady performance in the first quarter of 2009. Notwithstanding the fact that the first quarter of 2009 report included 5 additional selling days, its results still faired better compared to the previous quarter. It reported worldwide unit case volume growth of 2% and an international unit case volume growth of 3% in the quarter just ended. The company is confident that the slow economy will not greatly impact its financial performance in the coming months as “our business was built for times like these”, according to the president and chief executive officer of The Coca-Cola Company, Muhtar Kent. Despite the growth in unit case volume in the quarter, the company’s net income showed a 10% decline, attributed by asset write-downs and restructuring charges. The company’s pricing and mix strategy resulted in a 2% favorable outcome. Additionally, its selling, general and administrative expenses dropped 6% due to better management of its expenses without compromising on its marketing strategies. Recently, the Board of Directors of The Coca-Cola Company declared an almost 8% increase in its quarterly dividend, at 41 cents per common share. The company shows a higher equity funding, based on the findings in the earlier section. Although, it has long-term debts, the equity funding is almost 100%, resulting in a 0% debt factor. The company has published in its latest annual 10-K filed with the SEC that it has available debt funding that it can utilise, if necessary. The net cash used in the company’s operating activities for the quarter amounted to $873M, down by 20%. The recent capital market financing activities of the company include the issuance of debt amounting to $5,758M and payment of debt of $3,001M, resulting in a 26% increase in its cash inflow of $1,817M ($1,441M in Q1 2008). Still, the volatility of the global economy could adversely impact the financial performance of the company with considerations made on the financial conditions of its bottling partners, changes in the regulations, negative climate circumstances and changes in consumer preferences. 4 LIMITATIONS The financial statements of The Coca-Cola Company provided do not contain sufficient information to perform the analysis well. The notes accompanying the financial results of the company have not been published, thereby limiting the confirmation of this report. As such, certain assumptions have been made in order to complete the findings, including the components used in the calculation of the cost of capital. The interest rates and risk free interest rates used in the calculation were based on the latest annual Form 10-K filed with the SEC, whereas the marginal tax rate used was based on the first quarter of 2009 results. However, the beta and the premium expected for risk was based on estimates. The use of financial ratios in itself is limiting as it relies on profit values. Since profits are historical, The Coca-Cola Company cannot solely rely on the findings. The company’s accounting policies, such as depreciation method, can also affect its profit. In addition, it would be more reliable if the results can be compared with a similar business within the same industry that has been benchmarked for its financial and operating performance. 5 CONCLUSION Although there are limitations in the analysis of financial ratios, this tool is still highly used by investors and management in assessing the overall performance of its business. As such, The Coca-Cola Company should perform such analysis on a regular basis, taking into account external factors such as the current economic situation. Relying solely on this historical analysis would not benefit the business in its future growth. With the correct marketing strategy and contingency plans in place, the company will definitely be able to tide through this economic downturn. *** End *** APPENDICES Financial Ratios Q1 2009 ($’000,000) Q1 2008 ($’000,000) Working Result Working Result Current Ratio 14,714 / 13,169 1.12 14,888 / 15,588 0.95 Quick Ratio 14,714 – 2,298 / 13,169 0.94 14,888 – 2,447 / 15,588 0.80 Inventory Turnover 2,590 / 2,298 1.13 2,624 / 2,447 1.07 Receivables Turnover 7,169 / 3,139 2.28 7,379 / 3,500 2.11 Average Collection Period 90 / 2.28 39 Days 90 / 2.11 43 Days Fixed Asset Turnover 7,169 / 8,425 0.85 7,379 / 8,675 0.85 Gross Profit Margin 4,579 / 7,169 69% 4,755 / 7,379 64% Return on Assets 1,359 / 43,103 3.2% 1,500 / 47,004 3.2% Return on Equity 1,359 / 21,108 6.4% 1,500 / 23,032 6.5% Debt to Equity 5,017 / 21,108 24% 3,259 / 23,032 14% Cost of Capital = 12.7% Cost of Debt = Interest Rate ( 1 – Corporate Tax Rate) = 3.5%* (100% - 23.5%) = 2.68% * Long-Term Debt = (5,478 / 12,178) (5.7%) = 2.565 Loans & Notes Payable = (6,701 / 12,178) (1.7%) = 0.935 3.500 Cost of Equity = Risk-Free Rate + (Beta x Market Risk Premium) = 3.18% + (1.3 x 7.36%) = 12.75 REFERENCE 1. The Coca-Cola Company. 2009. http://www.thecoca-colacompany.com Read More