Introduction-Coca Cola
The company that is going to be suggested for investment is the Coca-Cola Company, which is one of the largest beverage companies in the world. The company owns over 500 nonalcoholic beverage licenses which are categorized into clusters of water, sports drinks, sparkling soft drinks, juices, enhanced waters, plant-based beverages, dairy-based beverages, and energy drinks. The company sells beverages in more than 200 countries under various brand names including Coca-Cola, Fanta, Diet Coke, and Sprite (Coca Cola Company, 2018).
As a financial manager researching the investment opportunity for any of the public traded company trading in the United States, I would Coca-Cola Company. It is one of the most profitable and high return brands in the US. This report examines the rationale behind choosing the said company and its financial performance. It will analyze the profiles of the investors who are going to be potentially interested in investing in Coca-Cola company stock. Furthermore, this report will analyze the financial performance of the company for its last five years by conducting ratio analysis. The level of risk reflected in the company will also be evaluated from an investor perspective (Hamzaçebi & Pekkaya, 2011). A few recommendations would be provided regarding the venture opportunity for investment in Coca-Cola.
The rationale for Choosing the Company-Coca Cola
As the financial manager, it would be my recommendation that the investors should consider Coca-Cola stocks. There are numerous reasons because of which this company is selected for recommendation. The main rationale is because of the world-renowned status of the company and its significance around the world. The sales revenue, as evident from the financial statement of the company, has been declining for the last five years. The income statement of the company shows a revenue decline for the last five years. In 2013, the company earned revenue of $46854 million, this declined to $45,998 million in 2014, $44294 million in 2015, to $41863 million in 2016 and $35410 million in 2017. However, Coca-Cola has explained and mentioned in the report that apart from concentrating sales volume, acquisitions and divestitures, currency fluctuations, price, product, and geographic mix also affect the sales revenue of the company. Looking from this perspective, it is revealed that the company has increased its revenue from its operating segments. The only exception is that of the Bottling investments segment, which is responsible for most of the decline in the revenue (Coca Cola Company, 2018, p. 49).
As per the analysts, the organic revenue of the company rose by 5% in the last quarter while the volumes rose by 2%. The global volume of the company rose by 3%, which is the highest in its last five years. The North American segment is the biggest revenue generating segment. Overall, the revenue fell because of the hurting divestiture of its bottling investments (Balu, 2018).
Looking at the stock performance of the company, it is evident that Coca-Cola stock has been gaining momentum. It is depicted in the rise of its stock for the last five years. The company also distributes a healthy dividend of more than $1 per share each year (Coca Cola Company, 2018).
Ratio Analysis-Coca Cola
Ratio Analysis is used for the comparative analysis of a company to evaluate the financial health of the company. It is also handy in getting an idea about the future condition of the company. This process needs the comparison of the current position of the company with its past position to access the trend and direction of the company for its future (Hsu, 2014). Ratio Analysis is used by the investors to evaluate the companies for finding the best investment choice.
The liquidity ratios of the company evaluate the ability of the firm to pay its current liabilities on time (Sarlija & Harc, 2012). As per the Current Ratio, Coca-Cola has improved its current ratio from 1.13 to 1.34 in five years. The current ratio of 1 show that it is certainly capable of paying its current liabilities.
The quick ratio has also improved in the last five years, showing a stronger liquidity position of the company. The small difference in the current and the quick ratio shows that not a major portion of the current assets is tied in the form of inventories or prepaid expenses.
The profitability ratio of the company shows how profitable the operations of the company have been in a given financial period (Snowden & Munoz, 2012). Coca-Cola Return on Equity is declining from 25% to 7.31%. It is because of the low income of the company.
The Return on Assets has followed the same pattern and experienced a decline in the last five years from 9.5% to 1.42%. It shows that the company has declined in its efficiency to utilize its assets. The decline is quite substantial as the decline is very huge. It is basically because of the decline in the net income and the increase in the value of the assets.
The Net Profit Margin of the company has declined from 18% to 3% in the last five years. Even though this is major because of the divestitures of the bottling investments, it still affects the financial position of the company. It can be deduced that the ratio analysis is not yielding the real picture of the financial position of the operations of the company. It is because of the reason that the company has improved its operational returns. However, the ratios and the figures being lower than past shows another story entirely. It is mainly because of the hurtful divestiture of the bottling investments. It is true that the divestiture of one of its operating segments represents declining operative efficiency as well. However, the company has divested it. The results for returns are expected to rise in the coming years as it is making good investments and getting rid of the loss-yielding segments.
The leverage ratios show the relationship between equity and debt capital sources and how effectively the company is using these (Velampy & Niresh, 2012). The Debt to Asset Ratio of 63% has increased to 80% in the last five years because of the increase in debt sourcing of capital funding. It can be concerning for the investor as the creditors would have more claim on the company then equity holders.
The Debt-to-Equity Ratio of the company has also increased exponentially in five years because of the high dependency on debt funding.
The time’s interest earned ratio of 22 has declined to 11 times. However, it is still highly good enough. The 11 times interest earned ratio means the company has earned its interest 11 times and is capable of paying off its interest 11 times.
The working capital of the company has increased in the last five years, showing a less risky position for investors.
The Return on Capital Employed has improved in the last five years, declining from 16% to 13% and then rising to 15.5%. It shows less risk and growth potential of the company.
The company is paying out healthy dividends to its shareholders. It has constantly improved its payout ratio, and the dividend yield has improved from 2.7% of the earnings to 3.2% in five years. The remaining has been retained, which shows its potential for more investment and growth in the future.
Stock Price Analysis-Coca Cola
The year-end market values of the Coca-Cola stock show that the company has been performing well regarding its stock performance. The stock of the company has not faced any sudden dips. The following five-year stock performance shows that the stock is currently on the rising trend and overall, it is performing well this year. For long-term investment, such stocks offer great potential as they always grow (Kogan & Papanikolaou, 2013).
The one-day performance of the stock shows the stable position of the stock and closing at an increment of this day. With a beta of 0.56, the stock of Coca-Cola is average-risky stock showing potential for long-term investment growth (Yahoo Finance, 2018).
Recommendations for Coca Cola
Considering the last five-year financial performance of the stock, its ratio analysis, and its strong financial position, as a financial manager, my recommendation would be to invest in the Coca-Cola Company. It is suggested for long-term investment, as along with dividends, the investor would be able to earn a considerable rise in its investment due to the growth in Coca-Cola stock. As the company position has improved with time, the benefit would be reflected in its stock as well.
References
Balu, N. (2018, July 25). Coca-Cola results pop as consumers turn to Diet Coke, Zero Sugar. Retrieved from https://www.reuters.com/article/us-coca-cola-results/coca-cola-results-pop-as-consumers-turn-to-diet-coke-zero-sugar-idUSKBN1KF1GX
Coca Cola Company. (2018). Annual Report 10K 2018. Retrieved from http://d18rn0p25nwr6d.cloudfront.net/CIK-0000021344/f2a7de17-c60e-49c2-97ee-9abfad26eb85.pdf#A2017123110-K_HTM_SD3DBF0E55B155A1DBC5D8C5E33539949
Coca Cola Company. (2018, September 5). Investors Info: Year-End Market Values. Retrieved from https://www.coca-colacompany.com/investors/stock-history/investors-info-year-end-market-values
Hamzaçebi, C., & Pekkaya, M. (2011). Determining of stock investments with grey relational analysis. Expert Systems with Application, 38(8), 9186-9195.
Hsu, L. (2014). A hybrid multiple criteria decision-making model for investment decision making. Journal of Business Economics and Management, 15(3), 509-529.
Kogan, L., & Papanikolaou, D. (2013). Firm characteristics and stock returns: The role of investment-specific shocks. Review of financial Studies, 26(11), 2718-2759.
Morningstar.com. (2018, September 5). Coca Cola KO. Retrieved from http://financials.morningstar.com/cash-flow/cf.html?t=KO®ion=usa&culture=en-US
Sarlija, N., & Harc, M. (2012). The impact of liquidity on the capital structure: a case study of Croatian firms. Business Systems Research, 3(1), 30-36.
Snowden, N., & Munoz, J. (2012). Building a BRIC? Stock Market Opening and Investment Finance in India since Liberalization. World Development, 40(6), 1109-1121.
Velampy, T., & Niresh, J. (2012). The Relationship between Capital Structure & Profitability. Global Journal of Management and Business Research, 12(13), 67-74.
Yahoo Finance. (2018, September 5). Coca Cola Company KO. Retrieved from https://finance.yahoo.com/quote/KO/
Appendix A: Ratios Analysis-Coca Cola
| Liquidity Ratios | |||||
| Current Ratio | 2013 | 2014 | 2015 | 2016 | 2017 |
| Current Assets | $ 31,304 | $ 32,986 | $ 33,395 | $ 34,010 | $ 36,545 |
| Current Liabilities | $ 27,811 | $ 32,374 | $ 26,930 | $ 26,532 | $ 27,194 |
| Current Ratio | 1.13 | 1.02 | 1.24 | 1.28 | 1.34 |
| Quick Ratio | 2013 | 2014 | 2015 | 2016 | 2017 |
| Current Assets | $ 31,304 | $ 32,986 | $ 33,395 | $ 34,010 | $ 36,545 |
| Inventory+Prepaid Expenses | $ 6,163 | $ 6,166 | $ 5,654 | $ 5,156 | $ 4,655 |
| Current Liabilities | $ 27,811 | $ 32,374 | $ 26,930 | $ 26,532 | $ 27,194 |
| Quick Ratio | 0.90 | 0.83 | 1.03 | 1.09 | 1.17 |
| Profitability Ratios | |||||
| Return on Equity | 2013 | 2014 | 2015 | 2016 | 2017 |
| Net Income | $ 8,584 | $ 7,098 | $ 7,351 | $ 6,527 | $ 1,248 |
| Total Equity | $ 33,173 | $ 30,320 | $ 25,554 | $ 23,062 | $ 17,072 |
| Return on Equity | 25.88% | 23.41% | 28.77% | 28.30% | 7.31% |
| Return on Assets | 2013 | 2014 | 2015 | 2016 | 2017 |
| Net Income | $ 8,584 | $ 7,098 | $ 7,351 | $ 6,527 | $ 1,248 |
| Total Assets | $ 90,055 | $ 92,023 | $ 90,093 | $ 87,270 | $ 87,896 |
| Return on Assets | 9.53% | 7.71% | 8.16% | 7.48% | 1.42% |
| Net Profit Margin | 2013 | 2014 | 2015 | 2016 | 2017 |
| Net Income | $ 8,584 | $ 7,098 | $ 7,351 | $ 6,527 | $ 1,248 |
| Net Sales | $ 46,854 | $ 45,998 | $ 44,294 | $ 41,863 | $ 35,410 |
| Net Profit Margin | 18.32% | 15.43% | 16.60% | 15.59% | 3.52% |
| Leverage Ratios | |||||
| Debt to Assets Ratio | 2013 | 2014 | 2015 | 2016 | 2017 |
| Total Debt | $ 56,882 | $ 61,703 | $ 64,539 | $ 64,208 | $ 70,824 |
| Total Assets | $ 90,055 | $ 92,023 | $ 90,093 | $ 87,270 | $ 87,896 |
| Debt to Assets Ratio | 63.16% | 67.05% | 71.64% | 73.57% | 80.58% |
| Debt to Equity Ratio | 2013 | 2014 | 2015 | 2016 | 2017 |
| Total Debt | $ 56,882 | $ 61,703 | $ 64,539 | $ 64,208 | $ 70,824 |
| Total Equity | $ 33,173 | $ 30,320 | $ 25,554 | $ 23,062 | $ 17,072 |
| Debt to Equity Ratio | 171.47% | 203.51% | 252.56% | 278.41% | 414.85% |
| Times Interest Earned Ratio | 2013 | 2014 | 2015 | 2016 | 2017 |
| EBIT | $ 10,228 | $ 9,708 | $ 8,728 | $ 8,626 | $ 9,427 |
| Interest Expense | $ 463 | $ 483 | $ 856 | $ 733 | $ 841 |
| Times Interest Earned Ratio | 22.09 | 20.10 | 10.20 | 11.77 | 11.21 |
| Working Capital Ratio | 2013 | 2014 | 2015 | 2016 | 2017 |
| Current Assets | $ 31,304 | $ 32,986 | $ 33,395 | $ 34,010 | $ 36,545 |
| Current Liabilities | $ 27,811 | $ 32,374 | $ 26,930 | $ 26,532 | $ 27,194 |
| Working Capital Ratio | $ 3,493 | $ 612 | $ 6,465 | $ 7,478 | $ 9,351 |
| Return on Capital Employed Ratio | 2013 | 2014 | 2015 | 2016 | 2017 |
| EBIT | $ 10,228 | $ 9,708 | $ 8,728 | $ 8,626 | $ 9,427 |
| Capital Employed (TA-CL) | $ 62,244 | $ 59,649 | $ 63,163 | $ 60,738 | $ 60,702 |
| Return on Capital Employed Ratio | 16.43% | 16.28% | 13.82% | 14.20% | 15.53% |
| Dividend Yield Ratio | 2013 | 2014 | 2015 | 2016 | 2017 |
| Dividend Per Share | $ 1.12 | $ 1.22 | $ 1.32 | $ 1.40 | $ 1.48 |
| Market Value Per Share | $ 41.31 | $ 42.22 | $ 42.96 | $ 41.46 | $ 45.88 |
| Dividend Yield Ratio | 2.71% | 2.89% | 3.07% | 3.38% | 3.22% |
(Morningstar.com, 2018)
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