Financial Analysis of Coca-Cola Company - Case Study Example

Financial Analysis of Coca Cola Company Student’s name: Institution’s Name: Instructor’s Name: Course Code: Submission Date Introduction Coca cola is a company that produce and sell beverages in the global market. It has many employees both domestic and foreign but it is managed by a group of investors from Europe. In this report there is an examination of the financial and non financial information about Coca Cola Company where there is determination of it returns and market returns so that its financial performance can be ascertained (Atrill and McLaney, 2002). It also involves the assessment of its capital structure to ensure that the most commonly used source of finance it uses to finance most the investment can be determined. This helps in the computation of debt to equity ratio which is used to know the gearing level of the company. 1 General background of the Firm Coca Cola Company was started in 1919 as a company that produce and sell beverages such as sodas and juices. It produces not less than 500 soft drinks where each of them has its own brand. It was formed for the purpose of producing both sparkling and still beverages such as mineral waters and ready to drink juices. The sparkling drinks which its sells in the global market include coca cola, fanta and sprite (Atrill and McLaney, 2002). It has its branches in Africa, Asia, Europe, North America and Australia. In 2011, it established great plain in the US and it retrieved the balance of interest in Great plain and Honest Tea. Non controllable interest was also acquired in Dec 2011 for Central Japan branch and then in 2012 it acquired 50% of equity in Aujan industries. It is also role of Coca cola to manufacture and market beverage concentrates and syrups which compose of fountain syrups and end sparkling products. There is also production of concentrates for fountain beverages in other countries apart from US to its bottling partners (Atrill and McLaney, 2002). The main competitor of Coca Cola Company is Pepsi cola which also produce substitute commodities like it and for this reason it has to employ good competitive strategies which cannot be copied by any other beverage company. 2 Capital Structure of the Firm This is the method in which the company finances both its long and short term investment assets by the use of either equity or debt capital (Pettinger, 2000). It is therefore important to note that capital structure is the composition of all its liabilities which it used to finance its investment. It can be said that the capital structure of Coca cola is 80% equity and 20 debts and this lead to debt to equity ratio of 1:4. (i)The largest funds used over the last 5 years Coca cola has a mix of capital structure which composed of debt and equity. The company uses more equity than debt and therefore not able to benefit largely from interest tax shield which is a tax deductible. The largest source of finance which the company used to finance its expansion and other operations is equity capital which is in the form or retained earnings and others from the sale of shares to the general public (Drury, 2009). The company uses this source of finance because it is a permanent source of finance which cannot be returned to the owners even if the company becomes bankrupt. It is also able to produce sufficient funds to finance the expansion projects such as production of other beverage brands. (ii)The purpose of the fund The equity capital that the company raised was to meet its expansion objectives and to increase the wealth and profit maximization goal of the investors (Atrill and McLaney, 2002). Through the acquisition of equity funds the company managed to introduce other fruit beverages to the market such as minute maid and dasani mineral water. It also opens new branches or subsidiary companies in other countries with the aim of increasing profitability and liquidity. The equity funds which the company acquired were to increase its competitive advantage and to increase its marketability of all its brands to reach the customers (Drury, 2009). This made it to attain high investment returns over the last five years. Equity finance was also raised by the company to improve its corporate governance and business conduct. This will ensure that the company considers the interest of all its stakeholders such as employees and creditors. (iii)The Initial Announcement Date of this Issue The initial announcement date of this issue is on 1 April every year. On this date the company issues its annual financial report to the shareholders so that they can know and understand the financial performance of this company (Atkinson and Banker, 2001). During this time the financial statements which are produced to the shareholders include income statement, cash flow statement and balance sheet. The information in this financial statement is able to provide the profitability, liquidity and leverage information. This information is used to make investment decision or expansion decisions which are very essential for the company. There is also other additional information such as corporate governance which the company has incorporated in their management (Baines and Langfield, 2003). This information form part of non financial information which the shareholders also require to know. (iv) Return earned by Coca Cola Company from two days before the announcement date to two days after the announcement date of this issue. Trading Revenues Million ($) Non alcoholic beverages 4318.9 Alcoholic beverages 833.3 Total Revenues 5036.4 EBIT 833.3 Non Finance Cost (124.8) Taxation expenses (205.0) Outside equity interest (0.7) NBIT 502.8 Tax (422.9) Reported Profit 79.9 Earning Per share before other items 65.9 Earnings after other items Per share 10.5 Total dividends per share 56.0 Special dividend per share 2.5 Total dividend per share 58.5 Return on invested capital 16.5% (v) Calculate the market return for the corresponding period This is the expected return that the investor may get after investing in stock annually. This return is based on some assumptions such as investing in a long term asset more than ten years and the stock market is very volatile (Atrill and McLaney, 2002). Market return is therefore a return generated from the entire theoretical investment portfolio in the market and these portfolios weighted for value. It is computed using the following formula CAGR = End value/ start value/1/ number of years (65.9/60.5)1/5-1 = 2.2 Earning per share from 2009 t0 2013 has been 2.2% and that of dividend per share is 7.7%. The annual growth rate has been increasing annually where interim results for dividend per share are 18.5%, 20.5%,22%,24% ND 26.5% and actual results 25%,28,%30%,35.5% and 32%. (vi) Compare (iv) and (v) and comment on how the market perceived this issue The difference is that market returns is lower than the company returns (Drury, 2009). This makes the market to perceive the company to be more profitable and hence they are able to invest in it. This indicates that it has high investment returns than most of the companies in the same industry (Pettinger, 2000). This therefore increase its goodwill hence makes it to increase its share price. This issue is therefore found to be convenient for the public investors since they are able to gain their investment funds within a short period. It is also less risky to invest in the company because the shareholders can be paid their dividends annually since there a positive investment returns annually. (vii) Identify if the recent financial crisis affect the capital structure of your company. The recent financial crisis affected the financial structure of this company (Drury, 2009). This is because the company bought more shares from the public to finance some of its investments. This caused a change in debt to equity ratio where the company increased its equity capital than debt capital (Baines and Langfield, 2003). The strategies which the company used are to issue more ordinary share to the public to increase its financial base so that it can maintain its optimal capital base. It also increases the remuneration of its employees so that the effect of the financial crisis could not affect its employees (White and Fried, 2003). This increases the morale of the employees’ hence high performance. 3 Valuations This is the process of finding the present value of a bond or a financial institution due to the available information (Drury, 2009). The availability of the required information is because of the disclosure requirement of the enacted policies. There are different methods which can be used to attain the value of a bond (Atkinson and Banker, 2001). They include dividend yield, earning method, super normal profit method, capital asset pricing method, and net asset basis and capitalization method. (i) Calculate the value of the share for the last 3 Financial Year end available for the company. The appropriate valuation method for this company is super normal profit method. Coco Cola Company has a dividend per share or earning per share which is likely to grow super normally throughout the three year period (Pettinger, 2000). It has a growth rate of 6.8% hence the value of its shares is equivalent to Po = Do (1-g)/k-g where k cost of capital Po = intrinsic value of shares and g is the growth rate. 2009 - 2011 Po = 58.5(1- 0.068)/ (12%- 6.8%) Po = 54.522/0.052 = $1048.5 2010 – 2012 Growth rate 6.7% 58.5(1-0.067)/ (12-6.7) % 54.5805/0.053 = $1029.821 2011-2013 Growth rate = 0.5% 58.5(1-0.005)/ (12%-0.5%) 58.2075/0.115 = $506.152 Assumptions The dividend payable must be known by the investor and must be constant overtime The investor can determine the required rate of return in certainty. All the investors have the same rate of return and there are no transaction costs. Draw backs of the above method used It assumes that the cost of equity and the growth rate is the same in perpetuity but this is not true since they can change in future (Baines and Langfield, 2003). It also assumes that there is constant term dividend in future in perpetuity. It can only work when the cost of equity is greater than growth rate but if it is not so then the model cannot work. (ii) Comparison of the valuation results with actual currently given by market price The value of these shares is of good value compared to the actual values computed from market price. There is overpricing of the shares of this company because the company is able to produce high investment returns hence more potential investors are willing to buy its shares at a high price (Atkinson and Banker, 2001). The variation in share prices is also a result of the reputation of the company. This company has been making high profit margins and makes the investors to enjoy their goal of both profit and wealth maximization. This forced the company directors to sell its shares at a very high price than the market price (Drury, 2009). Conclusion Coca cola is an international company that produce and sell both alcoholic and non alcoholic beverages. It has branches in all the continents where it produces similar drinks. The company uses share capital to finance its investment projects such as production of new beverage brands like Minute maid. It also uses these funds to open new investment portfolios in different countries to ensure that its shareholders maximize their profit and wealth. The company also use a capital structure which compose of debt and equity which was affected by current financial crisis which led to the increase in the share prices. In the valuation of its bonds, the company has constant growth rate which made it to have a positive share value. Bibliography Atkinson, A. and Banker, R. 2001. Management Accounting, 3rd edition, Uppler Saddle River, New Jersey. Atrill, P and McLaney, E. 2002. Management Accounting for Non-specialists, 3rd Edition Financial Times/Prentice Hall. Baines, A and Langfield, K. 2003. Antecedents to Management Accounting Change: A Structural Equation Approach, in: Accounting,Organizations and Society, Volume 28, pp. 675-698 Drury, C. 2009. Management Accounting for Business, 4th Edition New York .NY: Cengage Learning EMEA. Pettinger, R. 2000. Investment Appraisal: A Managerial Approach .New York. Palgrave Macmillan. White, G.,Sondhi, A., and Fried, D. 2003. The Analysis and Use of Financial Statements, 3rd Edition, John Wiley and Sons. Read More