Financial Management: Coca-Cola Company, Ratio Analysis (Term Paper Sample)

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Coca-Cola Company
Ratio Analysis
Liquidity Ratio Analysis (figures in millions)
Current Ratio = Current Assets/Current Liabilities
2012 = (30,328/27,821) = 1.09
2013 = (31,304/27,811) = 1.13
2014 = (32,986/32,374) = 1.02
Net Working Capital Ratio = Net Working Capital/Total Assets
Net Working Capital = Current Assets – Current Liabilities
2012 = (30,328 - 27,821)/86,174 = 0.029
2013 = (31,304 - 27,811)/90,055 = 0.039
2014 = (32,986 – 32,374)/92,023 = 0.0067
Profitability Analysis Ratios (figures in millions)
Return on Assets (ROA) = Net Income/Average Total Assets where the latter = (beginning total assets + ending total assets)/2
2012 = {(7,124/ [92,023 + 90,055]/2)} =0.078
2013 = {(8,626/ [90,055 + 86,174]/2)} = 0.098
2014 = {9,086 / [86,174 + 83,675]/2)} = 0.107
Return on Equity (ROE) = Net Income/Average Stockholder’s Equity where the latter is given by (beginning stockholder’s equity + ending stockholders equity)/2. In the coca cola company, 7,040 million shares were disbursed at 0.25 par value for the years 2014, 2013, and 2012. Therefore, the average would just be 1,760 for stockholder’s equity.
2012 = 9,086/1,760 = 5.16
2013 = 8,626/1,760 = 4.9
2014 = 7,124/1,760 = 4.05
Profit Margin = Net Income/Sales
2012 = 9.086/48.07 = 0.19
2013 = 8.626/46.7 = 0.18
2014 = 7.124/45.93 = 0.16
Earnings per Share (figures in billions) = Net Income/Number of Common Shares Outstanding
2012 = 9.086/4.5 = 2.02
2013 = 8.626/4.43 = 1.95
2014 = 7.124/4.39 = 1.62
Activity Analysis Ratios
Asset Turnover Ratio = Sales/Average Total Assets
2012 = 48,070/ (92,023 + 90,055]/2) = 0.528
2013 = 46,700/ (90,055 + 86,174]/2) = 0.52999
2014 = 45,930/ (86,174 + 83,675]/2) = 0.541
Capital Structure Ratio Analysis
Debt to Equity Ratio = Total Liabilities/ Total Stockholders’ Equity
2012 = 86,174/ 33,168 = 2.6
2013 = 90,055/ 33,440 = 2.69
2014 = 92,023/ 30,561 = 3.01
Note that the total assets = total liabilities in the net working capital and the debt equity ratio
Interest Coverage Ratio = Income Before Interest and Tax (EBIT)/ Interest Expense
2012 = 11,809/397 = 29.75
2013 = 11,477/463 = 24.79
2014 = 9,325/483 = 19.31
Capital Market Ratio Analysis
Price Earnings Ratio = Market Price of Common Stock per Share/ Earnings per Share
2012 = 40/2.02 = 19.8
2013 = 40/1.95 = 20.51
2014 = 40/1.62 = 24.69
Dividend Yield = Annual Dividends per Common Share/Market Price of Common Stock
Where the former must be dived by the number of common shares
2012 = (4,595/1,760)/40 = 0.06
2013 = (4,959/1,760)/40 = 0.07
2014 = (5,350/1,760)/40 = 0.076
Coca-Cola Company
Common Size AnalysisDec 31 2014Dec 31 2013Dec 31 2012Net Operating Revenues100.00100.00100.00Cost of goods sold-38.89-39.32-39.68Gross profit61.11%60.68%60.32%Selling, general, and -37.43-36.94-36.94administrative expensesOther operating expenses-2.57-1.91-0.93Operating Income21.11%21.83%22.45%Interest Income1.291.140.98Interest Expense-1.05-0.99-0.83Net Equity Income1.671.281.71Other Income -2.571.230.29Income before tax liability20.27%24.50%24.59%Income taxes-4.78-6.08-5.67Consolidated Net Income15.49%18.41%18.92%Net Income attributable to-0.06-0.09-0.14Non-controlling interestsNet Income attributable to15.43%18.32%18.78%shareowners of The Coca-ColaCompany
Coca-Cola Company
Trend Analysis (in millions)201420132012$$$Net Operating Revenues45,99846,85448,017Trend Percentage98.17%97.58%100.00%Cost of goods sold17,88918,42119,053Trend Percentage97.11%96.68%100.00%Gross profit28,10928,43328,964Trend Percentage98.86%98.17%100.00%Selling, general, and 17,21817,31017,738administrative expensesTrend Percentage99.47%97.59%100.00%Other operating expenses1,183895447Trend Percentage132.18%200.22%100%Operating Income9,70810,22810,779Trend Percentage94.92%94.89%100.00%Interest Income594534471Interest Expense483463397Net Equity Income769602819Other Income -1,263576137Income before tax liability9,32511,47711,809Trend Percentage81.25%97.19%100.00%Income taxes2,2012,8512,723Consolidated Net Income7,1248,6269,086Trend Percentage82.59%94.94%100.00%Net Income attributable to264267Non-controlling interestsNet Income attributable to7,0988,5849,019shareowners Trend Percentage82.69%95.18%100.00%
Calculation of the Company’s Beta
The beta of Coca-Cola Company has had significant changes over the last three years. The following formula was used to calculate it:
R k o = R f + Beta k o (R m – R f)
R k o is the required rate of return and is calculated as the (normalized free cash flow/ price) + growth rate. This gives: (1.662/42.22) + 0.005 = 4.44% in 2014. The figures for 2013 and 2012 were calculated (and also given in Coca-Cola Company’s Form 10-K) to give 13.2 and 17.92 respectively. The rate of return on the stock market from 1950 -2013 has always been 7% and the risk free rate for a ten year bond is 2.74%. Therefore,
Year 2014: 4.44 = 2.74 + Beta k o (7 - 2.74) = 0.4
Year 2013: 13.2 = 2.74 + Beta k o (7-2.74) = 2.46
Year 2012: 17.92 = 2.74 + Beta k o (7 – 2.74) = 3.56
It is to note that the rate of return is linearly related to its Beta. The market portfolio is the reference for measuring the volatility of individual risky assets. That is why the difference between the market rate of return and the risk free rate of return stays the same for all base years.
Industrial Analysis
The industry that Coca-Cola operates in is the ‘soft drink industry.’ For years, the industry has had two main competitors, Coke and Pepsi. Both companies have been relying on their non-carbonated drinks and new flavors to increase market share and dominance strength in the industry. The company boasts of having the largest market share in the entire industry (52.68 percent) whereas a decade ago the level was 46.8 percent. However, the company’s market share is likely to decelerate due to the stagnation in prices.
Cadbury Schweppes is another competitor in the industry but has a very significant margin between it and Pepsi. Coca-Cola Company has a market share of approximately 50 percent, followed by Pepsi at an estimated 21 percent and Cadbury Schweppes at around 6 percent. None of the companies depends on US being their largest market. Therefore, competition is strategized on a global perspective (Hein 112).
From the Porter’s Five Forces Model, freedom of entry and exit is very difficult for new and established firms respectively. Entry is made difficult due to the high capital investments, the already established brand names, and the distribution worldwide channels. Furthermore, exit is also deemed unthinkable due to the large sums of fixed costs, machinery, fixed assets, and advertising costs, exit is just unthinkable. Besides, the industry is already well established.
Since Pepsi has a very great market share in the US, Coca-Cola struggles with adverts and new flavors to maintain its place in that particular region. Pepsi records around $32 billion in average sales per year compared to the $5.6 billion Coca Cola makes (Hein 113). Diet Pepsi ranks 14th on the Brand Name Loyalty Leader’s Survey while Diet Coke is the highest in the Coca-Cola brand in the 36th position. Rivalry is the greatest source of competition in the industry.
All in all, the leading firms have been trying to diversify to increase revenue growth. This way, they can also increase market share, indirectly. One popular method of doing this is through merging. For example, when Pepsi Company merged with Quaker Oats, its market share increased with a significant 1.6% margin within the first year. Internet and the globalization phenomenon has played a very crucial role in the expansion of markets in this industry. However, firms still have no choice but to differentiate their products to increase sales in a stagnant soft drink market.
Over the last decade, obesity has been said to a major disease among the youth and the young adults. This poses a very big threat to carbonated drinks, including the biggest market dominators. This has led to a very big change in the business environment of soft drinks. Therefore, the constant product innovation all companies are doing is probably the most important tool of their steady revenue streams (Hein 118).
Financial Strengths, Weaknesses, Opportunities, and Threats
Coca-Cola has been retaining profits over the last ten years despite the fact that the company faced a reduction in revenue streams the previous year (2014). Regardless, it is in a strong position to always invest in the ploughed back profits. This way, their long term growth rate might gradually increase again. Despite the company’s decrease in profits in the period 2012-2014, the company has invested substantially in the media segment and has expanded savings through global supply chain optimization, data and information technology systems standardization, and cost reallocation. The company also uses derivative financial instruments to reduce exposure on exchange rate, commodity prices, and interest rate fluctuations among many market risks. As can be seen from the income statements, despite their huge expenses the interest rate is still fairly the same throughout with a close margin (Coca-Cola Company 61).
One on the major financial weaknesses the company is going through is ‘a weak balance sheet.’ In 2012, the company started a four year productivity and reinvestment program designed to strengthen the brand and re...