Financial Situation of Coca-Cola Company - Case Study Example

Accounting for managers University Student Id Course Date Abstract The report is exploring the financial situation of Coca-Cola Company. The most recent annual accounts published in the company have been used in the process of conducting the financial analysis report. The ratios used in the financial analysis of Coca-Cola Company have been categorized in asset efficiency, profitability, market performance, liquidity and capital structure. Only the ratios that are relevant to the Coca-Cola Company have been used in the process of analysing its financial performance in the industry. The report is mainly focused on the calculations and ratios in the financial operations of the company. The recent changes that have taken place in the coca cola company affecting the financial position in the coca cola company have been considered in the process of writing this report. The calculation of the relevant ratios has been used in the process of supporting the financial analysis of the company. Table of Contents Abstract 2 Introduction 4 Financial analysis 4 Capital structure 4 Profitability of Coca-Cola Company 6 Asset efficiency 7 Liquidity ratios of Coca Cola Company 8 Performance of Coca-Cola Company 9 Interpretations of the ratios 10 Valuation and analysis 12 Conclusion 13 References 15 Appendix 16 Introduction Coca-Cola Company has many brands that can include diet coke, coca cola, vitamin water, minute maid, Powerade, Sprite, and Fanta. The Coca-Cola Company has markets and licenses for more than 500 brands of beverages especially sparkling drinks, energy drinks, juice drinks, and teas that are ready for a drink. The company has managed to improve its financial position in the Industry due to its ability to meet the needs of the customers that has made it compete well in the market. The major competitor of the coca cola company is Pepsi that has not been able to compete better in the Industry as Coca-Cola Company has done (Armus, 2005). As a result, the Coca-Cola Company has realized an increase in its financial performance in the market. The financial success of Coca-Cola Company can be attributed to its distribution system that has been considered to be the largest globally. Besides, Coca-Cola Company has been operating in approximately 250 countries in the world. Financial analysis Capital structure The structure of capital is comprised of debt capital and equity capital. The coca cola company has been relying heavily on the equity capital than the debt capital. The management has been avoiding the implications of over-reliance of an organization in the debt capital. Some of the implications that are associated with the overreliance on the debt capital are the costs implication and lack of proper control of the financial decisions of the company. The management of Coca-Cola Company has been working towards ensuring that the debt capital is minimized. Debt capital is obtained from creditors who share high interests making the costs of debt capital higher than the equity capital. The equity capital in Coca-Cola Company is obtained from the sale of shares where the company sells the shares in the process of raising capital. The owners of the shares are known as shareholders who expect the management of the company to maximize their wealth. The current equity of the shareholders in Coca-Cola Company are said to be around $25.765 billion (Lehn & Poulsen, 2009). The shareholders do influence the decision taken in the organization as they hold gnarl meetings with the directors who they expect to manage the activities of the managers aiming at ensuring maximization of the wealth of the shareholders. Some decisions involving investment decision need to involve the shareholders who want to be convinced by the management concerning the viability of the investment decision taken. The coca cola company has been aligning the investment decision with its long-term goals in its operations. The convertible securities of Coca-Cola Company are around $54 billion and $4.32 billion outstanding shares. The total market capitalization of the coca cola company is around $187.8 billion currently. Debt capital does represent the capital that belongs to the creditors that are used as part of the capital structure of the Coca-Cola Company. The debt capital can be divided into two categories that can include current and long-term liabilities. The current liabilities of the coca cola company do include accounts payable that do amount to around $9.7 billion and $13.12 billion as the accrued expenses loans. The long-term liabilities of the coca cola company include accrued income taxes that are around $330 million and other long other liabilities worth around $1.133 billion (Kruger & Mucha, 2007). In the Coca-Cola Company, the deferred income taxes among other liabilities are around $37.4billion. The liabilities of the coca cola company has increased by around 21% for the last here years. However, the increase in the liabilities has not affected the organizational performance as the debt equity as also been increasing. The debt to equity ratio has changed involving leverage between the ownership of Coca-Cola and the funds that are due for the creditors. Equity=retained earnings + common stock-treasury shares =1.76+14.016+65.018-10.174-45.066=$25.764 Debt to equity ratio =debt/ equity =$10.23/$25.764=0.397 Profitability of Coca-Cola Company Viewing at the profitability of Coca-Cola Company is a paramount step in understanding the financial position of the enterprise. Profitability is the reason behind why an organization exists or maintains its competitive edge in the market and the main component in the process of determining whether to invest funds in such organization depending on its competitiveness in the industry. Therefore, there are various ways of doing calculations to obtain the profitability of the Coca-Cola Company which includes earning growth, profit margins, profitability ratios, and also the cash flow. The Coca-Cola Company stands tall among the many beverage industries which are its rivals in the field of production of beverages. Recently, the Coca-Cola Company announced its vision of 2020, where it has created a program under which its plan is to raise its production of beverage volume by 4% and therefore increasing the growth in its earnings (Madden, Fehle & Fournier, 2006). However, emerging markets such as U.S consumers who have shifted their tastes to more health drinks have played a crucial part in the process of driving the growth of the company. When examining the profitability of Coca-Cola, it is more important to carry out an investigation in the company`s price-to-earnings ratio, operating margin, return on invested capital and also dividend yield. The price-to-earnings ratio is used to perform a comparison between several companies across sectors, basing on their ability to grow their earnings per share. During the comparison, a higher P/E ratio usually indicates that a particular company expects to have better earnings per share growth prospects and higher net margins too. Importantly, the expected earnings growth usually plays the major role in the determination of a company`s P/E ratio. On the other hand, the coca-colas P/E ratio in February 2016 stood at 27.4. To put this number in a perspective which is Historical, the Coca-Cola company P/E ratio was ranging between a 12.9 low in 2011 to a peak of 27.5 in 2015 with an average of about 20. Asset efficiency Coca-Cola Company is managing its receivables better in the industry efficiently than the Pepsi which is the main competitor. This is a usually clear indication from the Coca-Cola receivable turnover of 8.4 whereas that of PepsiCo`s is 7.9. The Coca-Cola Company delivers sales worth $353,900 per employee which is higher as compared to PepsiCo which offers deals worth $241,000. Asset turnover entails measuring how an organization has the ability of turning its inventory into sales. Asset turnover can be obtained by taking the company revenues and dividing with the total assets. The consecutive three months that ended in June 2016, the income of Coca-Cola Company was $11,539Million and its average total Assets was $92,679 Million and therefore the company asset turnover for that period was 0.13. The Coca-Cola Company ROE was 53.51%, and ROA was 14.88% for the quarter that ended in June 2016 (Penman, 2007). Currently, the Coca-Cola Company has the largest heavy-duty commercial fleet in North America which has more than 650 delivery trucks. These vehicles usually reduce emissions by 30% and the trucks utilize less fuel as compared to other standard delivery trucks. Additionally, the Company has introduced more electric and none mission trucks in North America. Also, the Coca-Cola Company is training more than 11,000 drivers in eco-driving techniques which include, early gear changes and minimal braking. The company has also reduced the fuel gallons and idling by adjusting asset computer settings (Edstrom, 2004). Liquidity ratios of Coca Cola Company These are the ratios that are used in the process of analysing the short term position of the coca cola company. Some of these ratios can include current ratio that can be obtained by taking the current assets and dividing them by the current liabilities. The current assets of Coca-Cola Company can include inventories, debtors, and accounts receivables among other. The current liabilities can include creditors, accounts payable unclaimed dividends, and outstanding expenses among others. Current Ratio of Coca Cola Company =Current assets divide by current liabilities = $30,327 divide by $27,820 = 1.1 Working capital =the current assets less the current liabilities $25,479 - $24,274 = $1,205 Performance of Coca-Cola Company The performance of Coca-Cola Company has shown improvements for the previous two years as it has managed to gain large market share in the market. The performance of Coca-Cola can be associated with the improved brand image of the company in the market. The company has been offering products of high quality that have managed to compete better in the market. As a result, Coca Cola Company has managed to access a large market share making as the customers in the market are satisfied by the company products (Agrawal & Kamakura, 2005). Differentiation strategy is among the stages that company has been using to make its products unique in the industry. This strategy has made its products different from those of the competitors such as Pepsi making the company enjoy a large market share in the industry. Coca-Cola Company has realized an increase in sales in the emerging markets that can include China, Russia, Brazil, and India. There has been an increase in the market where the beverage volume has increased by around 9%. Inventory turnover ratio The inventory turnover ratio has been increasing for the last two years. The increase in the inventory turnover ratio can be attributed to the increased ability of the company of selling the inventory due to the increased market share and the competitiveness of its products in the market. The company has been changing its operations to meet the changes taking place in the taste of the consumers (Slater, 2001). As a result, it has been able to improve sits sales volume due to the increasing demand for the company products. Average collection period has decreased averaging to around 36 days due to the ability of the company to collect the receivables within a shorter duration. This has been important in reducing the bad debts experienced in the company. Interpretations of the ratios The liquidity ratios of Coca-Cola Company are showing that the company can meet its obligations in the short term using the available assets that are convertible to cash easily. The company has enough liquid assets that can be used in meeting its short-term debts. Coca-Cola has enough current assets that can meet the daily operations of the company. Besides, the balance between the current and long-term asset in the company is healthy as the available current assets are able of meet the current liabilities. The liquidity ratios are trying to communicate the ability of the company to generate enough cash that can meet the finance needs of the company. For instance, the current ratio is important in showing the relationship existing between the current liabilities as the current assets of the company (Pendergrast, 2013). The current ratio of Coca-Cola Company has shown that the company can be ain a position to meet the short term liabilities of the company. Besides, the quick ratio has shown that Coca-Cola Company can meet the immediate obligations using its liquid assets. The quick ratio of Coca-Cola Company when at 1.5 means that the company has liquid assets of $1.50 covering current liabilities of $1 each and the quick ratio is supposed to be 1:1. The high quick ratio may make the company have more cash in hand which can cause a problem in the collection of its receivable accounts. A quick ratio that exceeds 1:1 indicates the capability of business in meeting its obligations of current financial using available cash in hand. A quick ratio that is less than 1:1 indicates the high reliability of the company on inventory or other assets in order to pay for its short-term liabilities. It is hard for a company that has a quick ratio that is less than one to be able to pay back fully its current liabilities. The increase in the efficiency of the coca cola company is an indication that the company has ensured that there is proper utilization of the available resources. For instance, the company has ensured that employees are efficient by automating most of its operations to lower the labour costs (Mantegna, 2009). Also, the asset turnover of the company has improved showing that there is an increase in the sales of the company. Debt capital is taken to present the amount of capital that belongs to the creditors where an increase in the debt capital shows poor performances of an organization. The coca cola company has been financed with small amounts of debt capital making the company performance improved. The Coca-Cola debt to equity ratio of 0.397 is an indication that the capital structure is comprised of more equity capital than the debt capital. The profitability ratios are said to communicate the profitability of the company. For instance, the dividend yield is used to indicate the returns of the invested funds that the investors are likely to realize to realize. The dividend yield of the coca cola company has been higher than that of Pepsi which is the major competitor. This is an indication that Coca-Cola Company has higher ability to maximize the wealth of the shareholders than Pepsi Company Valuation and analysis The rations are showing how Coca-Cola Company has been performing in the Industry. According to the profitability ratios analysed, it is a clear indication that Coca-Cola Company has been performing well in the industry. For Instance, the liquidity ratio of Coca-Cola Company can be used in the process of measuring the ability to meet the immediate obligations. Besides, the profitability ratios used are indicating the Information concerning the income realized from each dollar realized in the sales. These ratios are essential tools for communicating the financial position and competitiveness of coca cola Company in the industry (Simon & Sullivan, 2013). The ratios can be used in the process of making an investment decision and assist in formulating financial strategies that can be crucial in the process of improving the financial position of Coca-Cola Company. Besides, the financial ratios are important communicators of the credit worthiness of the company where the borrowers do rely on the financial ratios to assess the company performance. The improved performance ratios is an indication that Coca-Cola Company has been aligning its operations with the vision and its future objectives. For instance, Coca-Cola Company has experienced an increase in the inventory turnover ratio an indication that the ability of the company of selling its inventory has increased. The capital structure of the coca cola company shows that the company has been using more of equity capital than the borrowed. This has played a crucial role in achieving its success as a decrease in borrowed capital reduced the costs of capital hence improving the organizational performance. Conclusion PepsiCo and Coca-Cola are mature companies and with positive outlooks although the PepsiCo’s profile have been growing stronger than that of Coca-Cola. Over one year that ended in June 2015, the Coca-Cola’s total revenue declined with1.8%.And also its net profit declined by 17%. Whereas, there was the growth of 4% in the revenue of PepsiCo over the same one year and a net income growth of 8.6%. Analysts have been expecting coca cola Company to experience growth in earnings of around 5.8% by the year 2017. The company financial performance is also expected to grow leading to increasing in the earning per share by around 8.6% as the management of Coca-Cola Company has been working towards adopting the best strategies that can ensure that the wealth of shareholders is maximized. The coca cola company has been working towards improving its performance in the industry by engaging the various stakeholders of the company. For instance, the management of Coca-Cola Company has been involving the shareholders in the formulation and implementing of the different strategies. References Agrawal, J., & Kamakura, W. A. (2005). The economic worth of celebrity endorsers: An event study analysis. The Journal of Marketing, 56-62. Armus, S. (2005). Coca-Cola Company. France and the Americas: Culture, Politics, and History: a Multidisciplinary Encyclopedia, 1, 273. Edstrom, R. C. (2004). U.S. Patent No. D345,693. Washington, DC: U.S. Patent and Trademark Office. Kruger, M., & Mucha, L. S. (2007). U.S. Patent No. 4,709,835. Washington, DC: U.S. Patent and Trademark Office. Lehn, K., & Poulsen, A. (2009). Free cash flow and stockholder gains in going private transactions. The Journal of Finance, 44(3), 771-787. Madden, T. J., Fehle, F., & Fournier, S. (2006). Brands matter: An empirical demonstration of the creation of shareholder value through branding. Journal of the Academy of Marketing Science, 34(2), 224-235. Mantegna, R. N. (2009). Hierarchical structure in financial markets. The European Physical Journal B-Condensed Matter and Complex Systems,11(1), 193-197. Pendergrast, M. (2013). For God, country, and Coca-Cola: The definitive history of the great American soft drink and the company that makes it. Basic Books. Penman, S. H. (2007). Financial reporting quality: is fair value a plus or a minus?. Accounting and business research, 37(sup1), 33-44. Simon, C. J., & Sullivan, M. W. (2013). The measurement and determinants of brand equity: A financial approach. Marketing science, 12(1), 28-52. Slater, J. S. (2001). Collecting brand loyalty: A comparative analysis of how Coca-Cola and Hallmark use collecting behavior to enhance brand loyalty.NA-Advances in Consumer Research Volume 28. Appendix Efficiency ratios Asset turn over=sales/assets $11,539/$92,679=0.3 Employee efficiency Revenue/employees number $11,539/354 Capital structure ratios Equity=retained earnings + common stock-treasury shares =1.76+14.016+65.018-10.174-45.066=$25.764 Debt to equity ratio =debt/ equity =$10.23/$25.764=0.397 Liquidity Current Ratio of Coca Cola Company =Current assets divide by current liabilities = $30,327 divide by $27,820 = 1.1 Working capital =the current assets less the current liabilities $25,479 - $24,274 = $1,205 Read More