Financial Analysis of Coca Cola - Case Study Example

Financial Analysis of Coca Cola Financial analysis on the performance of a company is inevitable for managers who intend to succinctly project the future prospects of the company. The analysis also helps investors decide on whether to inject their investments to the company. The understanding of the profitability and the risk by understanding annual or quarterly reported financial information of a company is important with in making some important decisions on the future growth. Given the interest in the beverage industry, the analysis in this paper will consider the performance of Coca Cola, one of the giant brands in the world. Given its complex operations and the fact that it’s listed in more than one stock exchange, the paper found the analysis of Coca Cola to be the best in understanding the performance in the beverage industry. The paper will also consider the financial results of Coca Cola for 2014 and comparing it with the 2013 and 2012 results. Background and History of Coca Cola The Coca Cola Company is a leading American multinational corporation that produces and markets syrups and a number of non-alcoholic beverages across the world. With the Headquarters in Atlanta, Georgia, the brand is known for various flagship products. The brand was invented by John Stith Pemberton who was a chemist in Columbus Georgia. The formula of the products which is still patented was introduced in 1886 by Candler Griggs. Coca Cola currently operates franchised distribution system to enable it reach its customers. The firm produces the concentrate syrup which is then sold to different bottlers across the globe. The company’s current executive director and Chairman is Muhtar Kent. Major operations The system of Coca Cola is not a single entity one, when looked from the managerial and legal point of view; it neither owns nor controls any bottling partner. The company operates through different multiple channels. It manufactures and sells syrups, beverage bases and concentrates to the bottling partners. The company also owns the brand and conducts various marketing strategies and activities. The bottling companies are expected to work with the local vendors to ensure the local strategies adopted by the mother company are executed. Distribution The portfolio of the company currently stands at 17 billion dollar including Fanta, Coca Cola Zero, Sprite, Powerade, Diet Coke, Del Vale, and Minute Maid among others. Consumers in more than 210 countries the company serves an average of 1.9 billion customers in day. United States – 43% Mexico, Brazil, Japan, India and China – 37% The rest of the world – 20% Statistics show that in 2010, the company was the first to be the brand top £1 billion in terms of grocery sales in UK. It is regarded as one of the best selling soft drinks globally. Despite serious competition in Middle East, the company still holds more than 25% of market share. The company has been trading in the stock exchange from 1919 with a share going for $40 dollar in 1919 with all the dividends being reinvested. It was amongst the 30 companies that made Dow Jones Industrial; Average, usually regarded as the stock market and has been a Dow stock up to 1935. Competition Beverage industry is one of the industries that have witnessed serious competition in the past. The segment of non-beverage of the commercial beverages is quite competitive with a number of firms such as Coca Cola, Pepsi, and Nestle among others. Some of the common competitive products include, water, soft flavored drinks, nectars, juices, fruit drinks, energy drinks among others. PepsiCo is Coca Cola’s main competitor. The competitive strength of Coca Cola includes; A leading brand with leading consumer acceptance across the globe A global network of bottlers and distributors Sophisticated marketing capabilities across the globe Some of its competitive challenge includes Competition in geographical regions A retail sector that is concentrated giving customers an option to pick from Competitive individual suppliers and retailers are able to store some of the private labeled beverages. Discussion Coca Cola shares shot up much higher by the end of 2014 compared to the analyst’s projections. With the exclusion of the currency, the Coca-Cola’s earnings went up by 5%, pushed mainly by the organic revenues and reduction of the operational costs. The organic revenue went high by 4%, which was mainly pushed by the increased process in North America, extra selling day and improved sales of the soda. Given its solid global bottling, expansive international presence and global outreach, the company enjoys long term fundamentals. Despite the aggressive cost cutting mechanism, and strategies of driving growth in 2015, the management warned that some of the initiatives will take to be translated to financial growth of the company. The long term target of the company includes a total global volume of 3.4% pre-tax income of 6-8% with the net revenue in the mid single digits with the earnings per share in the high single digits. (Barnett, 2011) Financial Analysis Working Capita This is delineated as the efficiency of the firm in the short term financial health. The working capital represents the operating liquidity that is available to the business. Working capital = current assets – current liabilities The 2014 results showed that its current liabilities reduced more than the company’s assets. Its working capital ratio therefore improved to 1.23 However the company’s working capital turnover reduced from 2012 to 2013 however improved from 2013 to 2014. Despite its improved performance, the Coco Cola’s working capital is still below the industry’s average. Current ratio This is defined as a liquidity ratio that is used to measure the ability of the company to pay its short term obligations. Current ratio=Current Assets/Current Liabilities In 2014 the company’s current ratio stood at 1.02 compared to 1.13 in 2013 and 1.09 in 2012. Generally the current ratio of the company has been stable, indicating the ability of the firm to meet its short term obligations. (Coca-Cola Company 2014) Quick ratio This ratio is an indicator of the short term liquidity of a company. It measures the ability of the company to meet its short term obligations with some of `its liquid assets. It analyzes the dollar amount of company’s liquid assets available for every dollar of the current liabilities. (Coca-Cola Embonor Company Capsule 2014) Quick ratio = (current assets  –   Inventories) / current liabilities Coca Cola’s quick ratio for 2014 was 0.94, 0.81 in 2013 and 0.90 in 2012. Despite the deterioration, the ratio is still healthy and competes well against the industry’s average. It means that in 2014 the company has $0.94 to meet each of $1 current liabilities. Accounts receivables turnover This is the ratio of the total net credit sales of the business to the accounts that are received in the year. It is an activity ratio that estimates the number of times the business is able to collect the average accounts receivables balance during the financial period. Accounts receivable turnover = Net Credit Sales / Average Accounts Receivable The Coca Cola accounts receivables stood at 10.30 compared to 9.62 and 10.09 of 2013 and 2012 respectively. The receivables of Coca Cola deteriorated from 2012 to 2013 but then recorded as slight increase from 2013 to 201. The company has been over performing the industry’s average. Average collection period (number of days’ sales in receivables) This is defined as the average amount of time that it takes the firm for it to receive the payment that is owed, in terms of the receivables from its clients and customers. (Coca-Cola Company 2014) Average Collection Period = (Days x AR) / Credit Sales Days = Total amount of days in period AR = Average amount of accounts receivables Credit Sales = Total amount of net credit sales during period For the last three years, the average collection for the company has been on the rise. When compared to the industry, it is clear that it is underperforming. This can however be explained by the fact that its operations run much different compared to the competitors in the industry as result of the emphasis it puts on the distribution of the syrup. Inventory Turnover This is defined as the ration that is showing the number of times the inventory of company is sold and also replaced over a period of time. The days in the period can then be separated by the inventory formula so as to calculate the number of days that it takes to sell the inventory. (Senker and Foy, 2012) Inventory Turnover = Sales / Inventory OR Inventory Turnover = COGS / Average Inventory The Coca Cola’s inventory has been deteriorating; despite the increase from 2012 to 2013, the bad performance was recorded again in 2014. Ratio of liabilities to stockholders equity This is the measure of the company’s financial leverage. It shows the proportion of the debt and equity that the firm is using to finance the assets. Debt/Equity Ratio = total liabilities / stockholder’s equity In 2014, the ratio was about 1.127, in 2013, 0.986 while in 2012, it was at 0.879. The ratio indicates how worsening the ratio has been for the past years. Ratio of fixed assets to long term liabilities This ratio is used to analyze and measure the solvency of the company. The long term debts of the company are usually secured with the fixed assets. This is the reason as to why creditors pay keen interest into the ratio. Ratio = Fixed assets / long-term liabilities Coca Cola, compared to its competitors has recorded the best performance and the ratio has been improving. Net Profit Margin This refers to the proportion of the revenue that is left after all the expenses have been deducted. Net profit = (Total Revenue  –   Total Expenses)/Total Revenue Net profit margin = Net profit / Total revenue Despite good performance compared to its peers in the industry, its net margin has not recorded much difference with the figures standing at 15.25 in 2014, 15.43 in 2013 and 18.32 in 2012. Gross profit margin It is used in analyzing the financial health of the company by explaining the proportion of the amount that is left from the collected revenues after removing cost of goods sold. Gross Profit Margin = (Revenues-COGS)/Revenue The gross profit margin for Coca Cola has been improving from 2012 recording impressive figures of 60.7, 61.1 and 61.2 for 2014 Times interest earned It is used to measure the ability of the company to meet its debt obligation. It is also referred to as interest coverage ratio. Earnings before interest and taxes (EBIT) / Total interest payable contractual debt The ratio has been deteriorating from 2012 to2014 with the figures of 25.79, 20.31 and 12.29 respectively. (Coca-Cola Company 2014) Total asset turnover (ratio of nets sales to assets) This ratio measures the ability of the company to properly use the assets to generate sales. Total asset turnover = Net Sales/Total Assets = # Times The turnover has been deteriorating in Coca Cola with the figures of 0.53, 0.51 and 0.51 in 2012, 2013, and 2014 respectively. Rate earned on total stockholder’s equity (return on equity This refers to the amount of net income which is returned as the percentage of the shareholders equity. It measures the profitability of the corporation through revealing the profit the company generates with the money that is generated from shareholders investments Return on Equity = Net Income/Shareholders Equity Coca-Cola has been on the decline for the last three years because of the company’s under performance. Rate earned on common stockholder’s equity This is the ratio that indicates the earnings of the investment of the common stockholders. Net income - preferred dividends) / average common stockholders equity For the last three years, the metric has remained the same; the performance has however not changed much. Earnings per share on common stock This is defined as the profit of the company that is allocated to each of the outstanding shares of the common stock. The earnings per share usually serve as the indicator of the profitability of the company. Net income  –   Dividends on preferred stock) / Average outstanding shares The earnings per share of Coca Cola has been increasing with a record over performing compared to other firms in the industry. (Liu, 2009) Conclusion The company’s financial in-depth analysis is important in projecting future growth and possible investment areas in the future. It helps in the analysis of the liquidity condition, financial strength and the operating efficiency of the company. It provides the required valuable information for the ratio that helps the company increase its efficiency. Ratios are postmortem analysis of what happens in balance sheet, income statement and the cash flows. Generally the performance of Coca Cola is good compared to the industry. References Barnett, C., 2011, Report on Teacher Industry Placement Scheme at Coco-Cola Bottlers, Perth. 1991 Coca-Cola Embonor S.A. - Company Capsule2014, , Progressive Digital Media, Basingstoke. Coca-Cola Company 2014 financial report, , Progressive Digital Media, Atlanta Coca-Cola HBC Publishes 2013 Integrated Report 2014, , Springfield. Coca-Cola Embonor S.A. - Company results 2014, , Progressive Digital Media, Basingstoke. Liu, C., 2009 Multinationals, Globalisation and Indigenous Firms in China. London: Routledge, Senker, Cath, and Debbie Foy, 2012.,. Coca Cola: The Story behind the Iconic Business. London: Wayland, The Coca-Cola Company. (2014). Company Records. Retrieved from http://www.coca-colacompany.com/our-company/company-reports 2014. Read More