Capital Structure
The Coca-Cola Company (KO) is the world’s most outstanding and renowned beverage company. Coca-Cola has remained at the top of the beverage sector since its founding due to its international brand awareness and sophisticated financial management, particularly its capital structure. As described in this analysis, Coca-Cola’s cash position is used to assess the extent to which the corporation utilizes debt and equity to finance its businesses. This research examines the financial performance of Coca-Cola, together with its stock composition, debt capitalization, leverage potential, and enterprise value.
Equity Capitalization
Shareholders’ equity, also known as proprietors’ equity for privately owned corporations, represents the amount of funds distributed to a corporation’s investors if all of its assets were liquidated. The aggregate of retained profits and ordinary shares, excluding the proportion of equity securities, is subtracted from the amount of treasury shares to calculate the amount of ownership allocated to a firm. According to its 10-Q for the third quarter, Coca-Cola’s shareholders’ equity was $22.179 billion (Appendix 1). This comprises $1.76 billion in market value ordinary shares, $17.929 billion in capital excess, and $68.494 billion in incorporated, retained earnings, less $14.25 billion in other revaluation surplus and $51.754 billion in treasury stock (Appendix 1). As of October 1, 2021, Coca-Cola has 4.31 billion outstanding shares and 26 million diluted units, also referred to as dilutive stocks (Appendix 2). As of November 2021, Coca-Cola had a market valuation of around $244.5 billion (Appendix 1).
Debt Capitalization
The accumulated quantity of capital owing to lenders is determined by debt, the other component of capital structure. First, debt is categorized into two types: current liabilities, which are due within a year, and the remainder of the obligations that expire over a year. Coca-Cola’s 10-Q form from October 2021 indicates that the company has current liabilities totaling $15.99 billion (The Coca-Cola Company, 2022a). This includes $12.83 billion in trade payables and accrued expenses, $1.866 billion in borrowings and notes payable, $448 million in current expenses of long-term debt, and $846 million in accumulated income taxes (The Coca-Cola Company, 2022a). Long-term debt, suspended income taxes, and other long-term liabilities total $50.483 billion, bringing the combined liability amount to $66.473 billion (Appendix 1).
Leverage
Since the 2008 economic downturn, the Federal Reserve has maintained interest rates at historically low levels (Macrotrends.net, 2022a). This has made it attractive for numerous firms, including Coca-Cola, to increase their indebtedness by issuing bonds at comparatively low-interest rates, raising Coke’s outstanding balance to $45.19 billion (Macroaxis, 2022). Coca-Cola’s ability to pay off its responsibilities has improved despite this debt. Coca-Cola’s current ratio, a proportion of a business’s assets to its current liabilities, is 1.44, deemed healthy (Macrotrends.net, 2022a). It had risen marginally since 2016, when it was 1.24, suggesting the expansion of assets over short-term debt. Therefore, the firm can settle its obligations using its available resources.
This corporation has a quick ratio of 1.31, which gauges the ratio between its liquid assets and current liabilities (Macrotrends.net, 2022). The decline in Coca-Cola’s debt-to-equity ratio indicates its financial viability. This measure of leverage is employed to quantify a firm’s shareholding to the amount owed to lenders, and it is calculated by dividing total liabilities by stockholders’ equity. In the third quarter of 2021, Coca-Cola’s debt-to-equity ratio was 2.997% (Macroaxis, 2022). This represents a consistent decrease since 2017, when it was 4.04.
Enterprise Value
Enterprise value (EV) is a metric commonly used by investment bankers to assess the market value of a company or institution. EV is determined by adding a company’s market capitalization and net debt. A company’s net debt is calculated by deducting its total cash reserves and cash equivalents from the sum of its obligations and debt.
The current Coca-Cola EV is $259.112 billion, up from $226.204 billion in 2015 to $210.33 billion in 2012 (Macroaxis, 2022). Therefore, shareholders should not be alarmed by Coca-Cola’s rising EV. It is a modest gain, especially when contrasted with prominent firms such as Amazon.com Inc. (AMZN) and Apple Inc. (AAPL).
Analysis
Analyzing Coca-Cola’s optimal capital structure and comparing its ratio to that of the beverage sector is essential. From the above discussion on the capital structure of the Coca-Cola Company, it is evident that the company has a greater degree of equity, as indicated by its low gearing ratio ($244.5 billion) compared to its debt ($66.473 billion). The company’s D/(D+E) ratio is less than the optimal number on its 2021 Form 10-K, indicating that it has more credit available to issue loans. It has also been demonstrated that the institution’s growth rate has remained consistent with its strategic growth tactics.
The company’s development methodology is collaborating with local bottling companies in underdeveloped regions. The company can combine or acquire these small local enterprises to expand its local consumer base (The Coca-Cola Company, 2022c). Therefore, acquiring these firms in emerging economies is made possible with a higher degree of equity, thus becoming a recognized market leader in the beverage business.
The impact of the heightened level of equity on the firm’s operations is that it may not be able to finance its operations solely using retained earnings. Coca-Cola may eventually need to rely on alternative financing sources to sustain its operations. The company could not finance most activities without borrowing funds and covering internal expenses. The firm’s view on operational risks is that capital funded by debt is hazardous than money provided by the enterprise’s owners because creditors must be repaid irrespective of whether the business is profitable. Coca-Cola maintains that corporations with excessive debt may risk insolvency or default, mainly if the loans contain variable borrowing costs and a sudden rate increase (The Coca-Cola Company, 2022c).
On the other hand, the firm’s view on returns, such as dividends to shareholders, is that the payout is a measure of the corporation’s prosperity. The Coca-Cola Company pays its shareholders dividends to make them optimistic about their capital appreciation. The Coca-Cola Company’s dividend goal is to strike a balance between potential development and current distributions to enhance the institution’s stock price.
Coca-Cola’s Financial Performance
Economic performance is a subjective assessment of a company’s ability to earn income from its core organizational resources. The phrase is also an overall indicator of a company’s financial health over a specific period. Investors and financiers use financial results to compare similar companies within the same sector or to analyze entire industries or segments. Coca-Cola has multiple stakeholders, notably trade creditors, bondholders, financiers, personnel, and administration. Each component is interested in monitoring the entity’s financial success. A firm’s financial performance reveals how effectively it earns money and administers its assets, obligations, and the commercial interests of its clients and owners (Kadim et al., 2020). This report evaluates the company’s liquidity, profitability, and solvency metrics to assess Coca-Cola’s performance.
Liquidity Ratios
Table 1: Coca-Cola’s Liquidity Ratios (Macrotrends.net, 2022b; Macrotrends.net, 2022c; Macrotrends.net, 2022d; Appendix 2)
Financial indicators, such as liquidity ratios, evaluate a borrower’s ability to repay debt without incurring additional borrowing. By measuring indicators such as the quick, current, and operating cash flow (OCF) ratios, liquidity indicators determine Coca-Cola’s ability to pay its debts and maintain a sufficient security margin. According to Table 1, the liquidity ratios suggest that Coca-Cola can generate sufficient cash to meet its short-term obligations.
The quick ratio reflects a company’s ability to meet its short-term liabilities using its most liquid assets. The company’s quick ratio increased from 0.63 in 2019 to 1.09 in 2020. However, in the following years, 2021 and 2022, the firm experienced a steady decrease in its quick ratio, 0.96 and 0.95, respectively. As of 2022, Coca-Cola’s quick ratio of 0.95 suggests that the company may struggle to settle its outstanding creditors in the short term.
The current ratio explains to financial analysts how a corporation can optimize its current wealth to cover its existing debt commitments. Coca-Cola’s current ratio improved from 0.76 in 2019 to 1.32 in 2020. However, the proportion decreased slightly from 2020 to maintain a constant figure of 1.13 in 2021 and 2022. The 1.13 value indicates that the firm is well-positioned to meet its short-term obligations.
Finally, OCF represents the amount of money a corporation produces for daily operations. Coca-Cola’s OCF decreased from $10,471 in 2019 to $9.844M in 2021 (Table 1). Nonetheless, the entity has witnessed an increase in its OCF, from $9.844 million in 2021 to $12.625 million in 2022 (Table 1). This indicates that Coca-Cola can generate positive cash flow to sustain and expand its operations.
Profitability Ratios
Table 2: Coca-Cola’s Profitability Ratios (Macrotrends.net, 2022e; Macrotrends.net, 2022f, Appendix 1)
Profitability ratios are a category of financial indicators used to evaluate a company’s ability to generate income over time, considering its earnings, operational expenses, balance sheet holdings, or stockholders’ equity, based on data from a single point in time. According to Table 2, Coca-Cola’s gross profit margin has been inconsistent, fluctuating between 2019 and 2022. The firm has witnessed a drop in this proportion, from 60.27% in 2021 to 58.49% in 2022. This means that Coca-Cola has been generating less income from selling its products.
The company’s operating margin in 2022 was 27.25%, increasing from 27.06% in 2019. The subsequent years have seen Coca-Cola experience a decline in its operating margin, from 26.67% in 2021 to 24.81%. This decrease may be primarily attributed to COVID-19, which disrupted the supply chains of most multinational companies (MNCs).
On the other hand, Coca-Cola’s ROA is a financial statistic that measures the company’s profitability relative to its total assets. From Table 2, Coca-Cola witnessed a sharp decrease in its ROA in 2020 (8.30%) from 10.13% in 2019. In 2021, despite recording a 10.70% rise in its ROA, the organization saw its ROA fall to 10.61% in 2022.
Concerning Coca-Cola’s ROE, which is its return on net assets, the institution had a reduction from 43.58% in 2019 to 38.44% in 2020 (Table 2). The following year, 2021, Coca-Cola saw a sharp rise in ROE of 40.89%. However, in 2022, just like other profitability ratios of the firm, Coca-Cola’s ROE fell to 39.33%. Coca-Cola’s ROI decreased significantly from 20.26% in 2019 to 15.71% in 2020. In 2021 and 2022, the business entity recorded increases in its ROI of 16.29% and 16.92%, respectively.
Solvency Ratios
Table 3: Coca-Cola’s Solvency Ratios (Macrotrends.net, 2022g; Dybek, 2022)
A solvency ratio is a crucial parameter used by potential business creditors to assess a company’s ability to fulfill its long-term loan commitments. Coca-Cola’s debt-to-equity (D/E) ratio has decreased steadily from 2019 (3.09) to 2022 (2.78). This scenario illustrates that the firm continuously funds its liabilities using its assets rather than debt.
The firm’s debt-to-asset percentage increased from 0.32 in 2019 to 0.46 in 2020. After that, the ratio dropped to 0.40 in 2021 and further to 0.38 in 2022. On the other hand, Coca-Cola’s interest coverage ratio has increased over the years, from 7.78 in 2020 to 8.78 in 2021 and 17.75 in 2022, as illustrated in Table 3.
Managing Stakeholder Expectations
Coca-Cola uses the ‘keep informed’ approach in the power versus interest grid to manage its stockholders’ expectations. These investors can track the entity’s performance by being informed about the company’s activities. Since stakeholders make a significant contribution and have a say within the firm, Coca-Cola shares its audited annual financial statements and other relevant information that may interest them. In addition, Coca-Cola recognizes the data requirements, creates a communication strategy, provides continuous progress updates, and conveys results to stakeholders.
Suggestions and Recommendations
The following recommendations can be made for the Coca-Cola Company from parts A and B. Firstly, the firm has more equity to settle its long- and short-term liabilities. The limitation is that Coca-Cola must share ownership of the business in exchange for equity funding and its significant gains. Moreover, if there are disparities in Coca-Cola’s vision, business strategy, and financial reporting, shared responsibility and collaboration with others could cause anxiety and even confrontation within the institution.
A suggestion for addressing the above issue is for Coca-Cola to consider adopting debt financing. A major benefit of debt financing is that Coca-Cola would not have to relinquish control of the company. When Coca-Cola obtains a credit line from a bank or substitute creditor, it must make timely payments for the loan duration. In contrast, if the company relinquishes ownership in the form of shares as compensation for financing, it may be dissatisfied with outside opinions regarding its future.
Secondly, as indicated in Table 1, Coca-Cola has experienced a decrease in its quick ratio, from 0.96 in 2021 to 0.95 in 2022. A ratio of less than 1 signifies that the firm does not have sufficient liquid assets to meet its current liabilities promptly; the lower the ratio, the higher the danger the organization faces. Coca-Cola could boost sales and reduce inventory volatility, as sales and stock turnover are among the most significant indicators of business health.
To expand its liquid assets, it is essential to raise sales. This, in turn, will boost inventory turnover. A corporation with a higher turnover will have more cash on hand, resulting in higher sales.
In addition, Coca-Cola should extend the billing accounts receivable, as long-term debts committed to customers are frequently one of the primary causes of an institution’s incapacity to cover its obligations. As a result, it is frequently difficult to manage cash, and even with increased revenues, resources, and long-term debtors, the financial condition may become dire. It also raises the risk exposure, as the likelihood of consumers defaulting on their payments escalates, and the enterprise incurs bad debts. Therefore, by providing coupons to long-term borrowers to encourage early repayment, the Coca-Cola Company can quickly convert long-term assets into cash, thereby enhancing its liquidity.
Lastly, despite being an industry leader in the beverage sector, the company’s EV is lower than that of most of the world’s renowned multinational corporations. Significant food and beverage industry trends can be observed as customers seek healthier alternatives to classic CPG companies. Taking advantage of the potential, Coca-Cola could utilize machine learning (ML) to enhance product distribution and positioning, as well as individualized user experiences.
For instance, ML can be utilized in product creation. Coca-Cola may utilize machine learning extensively in its product development. The debut of Cherry Spite is an example of the application of ML in product development. Coca-Cola could have introduced interactive soda fountain dispensers in 2019. This would have permitted eateries and retail customers to add a splash of their preferred beverage to Coca-Cola beverages.
References List
Dybek, M. (2022). Coca-Cola Co. (NYSE:KO) | Analysis of solvency ratios (Quarterly). Web.
Kadim, A., Sunardi, N. and Husain, T. (2020) ‘The modeling firm’s value based on financial ratios, intellectual capital and dividend policy’, Accounting, 6(5), pp.859-870. Web.
Macroaxis. (2022). Is Coca Cola stock a good investment in January 2023 | KO. Web.
Macrotrends.net. (2022a). CocaCola debt to equity ratio 2010-2022 | KO. Web.
Macrotrends.net. (2022b). CocaCola current ratio 2010-2022 | KO. Web.
Macrotrends.net. (2022c). CocaCola quick ratio 2010-2022 | KO. Web.
Macrotrends.net. (2022d). CocaCola cash flow from operating activities 2010-2022 | KO. Web.
Macrotrends.net. (2022e). CocaCola profit margin 2010-2022 | KO. Web.
Macrotrends.net. (2022f). CocaCola return on investment 2010-2022 | KO. Web.
Macrotrends.net. (2022g). CocaCola debt to equity ratio 2010-2022 | KO. Web.
The Coca-Cola Company. (2022a). Balance sheet. Web.
The Coca-Cola Company. (2022b). Income statement. Web.
The Coca-Cola Company. (2022c). Strategy. Web.
Appendix 1
Table 1 – Coca-Cola’s balance sheet as of December 30, 2022 (The Coca-Cola Company, 2022a)
Appendix 2
Table 2 – Coca-Cola’s income statement for the period ended December 30, 2022 (The Coca-Cola Company, 2022b)