Present financial position: Coca Cola’s revenues have been falling steadily since 2013 due to unexpectedly slow sales in developed markets – especially in the United States
Headquarters: Atlanta, Georgia
Products: Invented in 1886 by John Pemberton, Coca Cola is a soft carbonated drink that was initially sold as a highly beneficial beverage that could cure a variety of diseases, including morphine addiction, headaches, nerve disorders, indigestion and even impotence (Coca Cola, 2016). Today, Coca Cola manufactures and distributes a wide range of non-alcoholic beverages all over the world; its offering includes carbonated waters, flavored waters, still beverages and energy drinks. Coca Cola, Fanta, Sprite, Powerade, Aquarius, Diet Coke, Dasani, Del Valle, Minute MaidSchweppes, Georgia, Coca-Cola Light, Coca-Cola Zero and Ice Dew are only some of the brand names under which the U.S. company advertises and sells its various products.
Date company started: 1984
Publicly traded company
According to a recent study by Interbrand (2015), Coca Cola is the world’s most valuable brand, after Apple and Google.
Purpose of the study: In the following section, we will take a closer look at Coca Cola’s financial performance so as to gain a deeper understanding of its current financial position.
Revenues: As can be seen from table 1, Coca Cola’s revenues went from $46,8 billion in 2013 to $44,2 billion in 2015 (Coca Cola, 2015). While production costs only account for a small percentage of the company’s overall expenses, it is important to consider that as a large multinational company whose main products are manufactured using rather affordable raw materials, Coca Cola has to invest heavily in advertising and marketing in order to maintain a competitive advantage over its numerous domestic and international competitors. None of the items listed in the 2015 income statement is out of the ordinary: with a gross margin of 60.5%, Coca Cola clearly earns a lot from the sale of its beverages.
Profitability: from an analysis of Coca Cola’s latest financial statements it emerged that despite exhibiting a net margin of 16.60%, an asset turnover rate of 0.49% and a 26.31% return on equity, the company appears to have become rather reliant on external sources of financing (Morningstar, 2016).
Financial leverage: with a financial leverage ratio of 3.53%, Coca Cola’s capital structure is much less stable than it was in 2012, when its financial leverage ratio amounted to 2.53% (Morningstar, 2016). As reported by the company in its 2015 Annual Report (Coca Cola, 2015), its long-term debt rose from $19 billion in 2014 to $28,4 billion in 2015, thus demonstrating that quite a few things have changed over the past two years. With that being said, it is worth mentioning that low interest rates may have encouraged the company to borrow more funds in order to improve its overall liquidity and step up its game in emerging markets, where competition is becoming increasingly intense. Returning to the company’s return on equity, it is interesting how Coca Cola has been guaranteeing high dividends to its shareholders despite Coke being associated with a relatively low return on asset (which as of 2014 was estimated to amount to 7.71%). What gives the company such a positive return on equity is its 3.04 equity multiplier, which means that for every dollar invested by shareholders, Coca Cola managed to increase its assets threefold.
Financial health: With regards to the company’s overall financial health, as of 2015 its short-term investments amounted to $8.3 billion, whereas its inventory was worth $2.9 billion. Return on assets (ROA) is a very important indicator that can help assess how effectively a company is using its assets to generate profit. As can be seen from the diagram below, Coca Cola’s return on assets went from 11.21% in 2011 to 8.07% in 2015, which clearly suggests that over the past five years, the company’s assets have become increasingly unprofitable.
However, it is important to keep in mind that Coca Cola’s assets consist of cash, marketable securities, long-term tangible and intangible assets (such as property, equipment, brand equity and goodwill) and other long-term assets. Considering that neither cash nor marketable securities necessarily contribute to the company’s net income as they are not invested to generate profit, return on these assets could go down without Coca Cola’s financial position being negatively affected by such a decline. Being a significant percentage of the company’s cash and marketable securities held by foreign subsidiaries, Coca Cola’s return on assets would inevitably fall if its subsidiaries decided to invest that money.
Summary and Conclusions
From an analysis of various performance, profitability and financial health indicators, it is evident that Coca Cola’s current financial position is not as positive as it was last year. With western markets becoming increasingly saturated and the non-alcoholic retail industry in emerging markets evolving at a remarkably fast pace, it is no surprise that Coca Cola has failed to meet its ambitious sales target. Judging from the figures reported in its latest income statements, Coca Cola’s revenues have been falling steadily since 2013, whereas its reliance on debt has increased, which means that the U.S. company’s financial position has worsened quite significantly over the past few years. Nevertheless, we have successfully demonstrated that the company’s not-so-promising indicators can be easily justified by simply taking into consideration external phenomena and factors. For example, its growing financial leverage may have resulted from the company’s decision to take advantage of highly competitive interest rates.