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Coca-Cola Financial Statement Analysis Austin Jacobs
Spring 2015
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Table of Contents Section I: Governance and Communication Analysis 3 Analyst Call 5 Section II: Industry and Strategy Analysis Porter’s Five Forces 6 Industry Value Chain 9 Coca-Cola Value Chain 9 Company Strategy Analysis 10 Section III: Accounting and Financial Analysis Recasted Income Statement 11 Recasted Balance Sheet 12 Common Size Income Statement 13 DuPont Analysis 14 Profitability Analysis Ratios Profit Margin 15 Return on Assets (ROA) 16 Return on Equity (ROE) 18 Gross Profit Margin 19 EBIT Margin 21 Accounts Receivable Turnover and Days’ Receivable 22 Inventory Turnover and Days’ Inventory 24 Accounts Payable Turnover and Days’ Payable 26 Risk Analysis Non-Financial Risk Analysis 28 Financial Risk Ratios Current Ratio 29 Quick Ratio 30 Cash Ratio 31 Liabilities-to-Equity Ratio 32 Interest Coverage Ratio 33 Section IV: Forecasting Growth Rate Sustainable Growth Rate 34 Weighted Average Cost of Capital 35 Forecasted Income Statements 36
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Section 1: Governance and Communication The set up of a company is vital to its success. Each company seems to set their
company up a little differently, but every company is governed in some sort of way. What we focus on in financial statement analysis is the CEO, the audit committee, the pay of the top executives, and the equity structure of the firm. This gives us an overview of how the company operates so that we can get a feel for the company.
Governance 1. Who is the company’s current CEO? Is he or she also the Chair of the Board?
The current CEO of Coca-Cola is Muhtar Kent, who is also the Chairman of the Board. Muhtar Kent started working for Coca-Cola in 1978. He was the General Manager of Coca-Cola Turkey and Central Asia from 1985-89, in 1989 he became the President of the East Central Europe Division and Senior VP of Coca-Cola International. In 1995 he became Managing Director of Coca-Cola Amatil-Europe (bottling operations in 12 countries). In 1999 he was the President and CEO of Efes Beverage Group, which has Coca-Cola and beer operations in Southeast Europe, Turkey, and Central Asia. 2005 Mr. Kent become the President and COO of Coca-Cola’s North Asia, Eurasia, and Middle East Group. In 2006 he became the President of Coca-Cola International. Finally in 2008, Muhtar Kent became the CEO and in 2009 became the Chairman of the Board as well.
(Muhtar Kent)
2. Who serves on the board’s Audit Committee? How many members are Financial Experts? What experience qualifies them for that designation?
The Audit Committee chair is Evan G. Greenberg. Additional committee members are Ronald W. Allen, Marc Bolland, Peter V. Ueberroth, and David B. Weinberg. Greenberg is designated as “Audit Committee financial experts” by the Board. Evan Greenberg is qualified as a Financial Expert because of his 38 years in the insurance industry managing global businesses and complex transactions. He is also the CEO of ACE Limited.
(Evan G. Greenberg)
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3. What was the CEO paid last year? What portion of his or her total pay was in the form of bonus? In the form of stock-based awards? What performance measures were used to determine the CEO’s pay?
Muhtar Kent was paid a total of $25,224,422 in 2014. Of this $1.6 million was pure salary, $6,489,441 was from stock, $9,314, 144 was from options, $7,100,940 is based on changes in pension value, and the last $719,897 comes from other compensation. Mr. Kent declined an annual incentive for 2014, and the $7 million of change in pension is primarily due to a lower discount rate and revised mortality assumptions. The performance factors that affect Mr. Kent’s salary include unit cases volume growth, operating income growth, and EPS growth. In 2015 unit case volume will have less weight in the incentive determination (25%), with comparable currency neutral net revenue having a 25% weight and comparable currency neutral profit before tax will have a 50% weight. 4. Who or what entity holds the highest percentage of the company's stock? Are most of the beneficial owners reported individuals or institutions?
The highest percentage of company stock is held by Berkshire Hathaway, with 9.16%, followed by the Vanguard Group with 5.6%, and then BlackRock, Inc has 5.41% of Coca-Cola stock. All directors, director nominees and executive officers as a group hold 1.5%. The majority of “high percentage” owners are institutions.
5. How many common shares are outstanding? Is there more than one class of common stock outstanding? If so how many votes do each share of each class get?
There are 4,368,492,837 shares of Coca-Cola common stock outstanding as of
March 2nd, 2015. There is only one class of stock, and each share gets one vote.
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Communication Analyst Call The analyst call that I listened to was a discussion of Coca-Cola’s first quarter earnings for 2015. This call was recorded on April 22nd, 2015. It was led by Tim Leverage, who is a VP and the Investor Relations Officer, however, the portion that I listened to was solely the CEO (Muhtar Kent) speaking. This was the first analyst call that I have been exposed to, and I was impressed with how it was laid out and the presentation that it followed. This is what I should expect, as Coca-Cola is one of the top companies in the world and I expect them to act as so. The call focused on the how the company did in the first quarter, looking at volume sold, operating margin, the current initiatives of the company, and what the future will look like for Coca-Cola. Volume sold was up 1% this quarter and organic revenue is up 8%. This growth comes from a double-digit increase in marketing expenses, which lead to double-digit growth in operating income. Some of this increased advertising comes in regards to the Chinese New Year, which grew Coca-Cola Brand volume 9% in China. Operating margin also increased because of benign product costs and an improvement in the global mix. The company is currently in the process of being restructured, and in that restructuring is an effort to embed a culture of productivity to fund growth. An example of this is the zero-based budget that is getting implemented across all sectors of the company, which will create a half billion dollars worth of savings this year, and by 2019 it will generate three billion dollars in savings annually. The refranchising effort in North America is well on track, as well as the bottling transfers are ahead of schedule, which is good news. Looking towards the future, the initial progress of 2015 is encouraging, but this year will still be a year of transition for the company. Between the restructuring of the corporate environment, and the challenging macroeconomic environment, 2015 will be a challenging year. The outlook is cautious, and Coca-Cola will focus on what they can control. The questions that I have for Muhtar Kent are: What prompted the restructuring of the company? How long until the company is fully restructured and firing on all cylinders? What strategies does the company have to create growth in the emerging markets that are slowing down? What steps will be taken in South America with the Venezuelan law that heavily affected Coke’s financial statements in 2014? I feel that these questions would provide a clearer look at the underlying business strategies at Coca-Cola.
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Section II: Industry and Strategy Analysis Industry Analyses
Porters Five Forces 1) Rivalry among existing firms Rivalry is high among existing firms. Coca-Cola is in the soda industry, where the only other major competitor is Pepsi. The competition is very intense. This was exhibited during the “Cola Wars” of the 1980s, where both Coca-Cola and Pepsi went on an advertising tear to try to win over the most customers. There is not much differentiation in the product, as subsidiaries of both companies taste similar to their competitors. The differentiation comes from the positioning that the company takes from an advertising standpoint. There are no switching costs, as there is no different software, learning curve, accessories, or anything else in that nature that you need to drink one company’s soda versus the other. While there are some smaller soda companies like Jones Soda, Coca-Cola and Pepsi have such large-scale economies that it is nearly impossible for Jones Soda to be compared to Coca-Cola and Pepsi. Exit barriers are moderately high as the equipment used to make the soda is fairly specialized, but there are many small soda companies that could use the equipment.
2) New Entrants Threat of new entrants is low. This is due to economies of scale, first mover advantage, and access to channels of distribution and relationship. In 2014, Coca-Cola sold 28.6 billion unit cases of product. This shows that Coca-Cola has incredibly large economies of scale. A new soda company would have to invest a very large sum of money to be able to compete with Coca-Cola. Coca-Cola and Pepsi definitely have first mover advantages, as they have been around for 125 and 50 years respectively. They have set industry standards as well as already negotiated exclusive contracts with vendors, such as venues for events, colleges, and sponsorship of large-scale events (like the NCAA March Madness Tournament or the Super Bowl). Both Coca-Cola and Pepsi have a vast network of distribution channels, as well as relationships that have cultivated
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over the years with the players in each channel. It would be nearly impossible for a new firm to develop the channels and relationships of the two major players.
3) Substitute Products Substitute products in the soda industry is high. Other products that perform the same function include water, tea, coffee, hot chocolate, sports drinks, and energy drinks. The vast majority of these substitutes are priced close to soda.
4) Bargaining Power of Buyers The bargaining power of buyers is medium. There is high concentration and actual product differentiation is low (making price sensitivity high), which makes the bargaining power high. On the other hand, the volume that B2B consumers buy is large, making the bargaining power low. There are some switching costs involved with restaurants or venues, as they have to change the labeling on menus and on machines.
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5) Bargaining Power of Suppliers The bargaining power of suppliers to the soda industry are low. This is due to the fact that the suppliers are selling commodities, where substitutes are readily available, as well as heavy competition amongst firms.
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Value Chain Analysis Industry Value Chain
The soda industry value chain looks like:
The research and development for new flavors does not happen very often, and many times is a small expense for the firm. The research and development can also constitute of finding new ways to market the product or find other products to partner with the current product. The syrup production is where the “heart and soul” of the product is actually produced. The bottler is where the soda is put into the form where it is consumable. The distributor gets the product from the bottler to the merchant. Without the distributor, no soda sales would occur. The customer then finishes the value chain by purchasing the soda. Coca-Cola Value Chain
Coca-Cola’s value chain looks similar to the general soda industry’s value chain, with some added steps:
Research and Development Produce Syrup Bottler Distributor Merchant Consumer
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The value chain starts with research and development for new flavors, similar to the value chain for the soda industry (not pictured above). Then, Coca-Cola creates the syrup using sustainable agriculture, water stewardship, and responsibly sourced ingredients. Once the syrup is made, it is then distributed to bottlers to package the soda in the bottles, cans, or any other method. After bottling, the product is then distributed to retailers where the product is purchased by consumers. What makes Coca-Cola different than other soda companies is that in their value chain they include recycling and recovery, which matches their core values. I find this very respectable in a company, and more and more companies are adding this into their value chain. This is seen in the fact that the majority of S&P 500 companies have a corporate social responsibility report to show the world how they are taking care of the world.
Company Strategy Analysis
Coca-Cola uses a Product/Service Differentiation strategy. Their products are priced similar to everyone else in the market, if not slightly higher. Coca-Cola has built their brand behind what they stand for as a company: happiness. They are all about creating happiness in others lives and they have defined their product as what starts happy times. Coca-Cola wants to help the world through sustainable efforts, providing people with the resources they need (their 5 by 20 campaign – empower 5 million women entrepreneurs by 2020), and help promote the well being of people as a whole by sponsoring fitness events to get people to be active. As a Product/Service Differentiation company, we should see this impact their financial statements in the SG&A line, specifically for advertising. Coca-Cola has had over 17 billion dollars in SG&A expenses over the past 3 years, with around $3.5 billion of that being spent on advertising alone. This number makes sense as it seems like Coca-Cola is always advertising, but it works as Coke is one of the top five most recognized brands in the world. Have to advertise to differentiate itself because lots of soda companies that want to be low cost leaders
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Section III – Accounting and Financial Analysis Recasted Income Statement (in millions of dollars)
2014 2013 2012
Sales $45,998 $46,854 $48,017 Cost of Sales $17,889 $18,421 $19,053 SG&A $17,218 $17,310 $17,738 Other Operating Expense $1,183 $895 $447 Investment Income $769 $602 $819 Other Income (loss) -‐$1,263 $576 $137 Other Expense $0 $0 $0 Interest Income $594 $534 $471 Interest Expense $483 $463 $397 Minority Interest (loss) $(26) $42 -‐$67 Tax Expense $2,201 $2,851 $2,723 Unusual Gains, Net of Unusual Losses $714 -‐$80 $178 Preferred Dividends 0 0 0 Common Shares Outstanding 4,387 4,434 4,504
Net Income $7,098 $8,584 $9,019
This is not the same exact income statement that is found in the Coca-Cola 10-K. Coca-Cola’s income statement has more line items that are specific to the company. Each company’s income statement looks slightly different because each company discloses their financial information that makes the most sense for their company. Analysts look at a recasted income statement like the one above to standardize the income statement so that they can compare firms and industries.
There is nothing out of the ordinary for Coca-Cola. Their SG&A is almost as much as their cost of sales, which makes sense because of all of the advertising that Coke does. The other lines items are fairly similar across the three years. There are some big swings in certain line items (like in the other income line), but this is somewhat to be expected because unusual gains or losses that do not have a line specifically for them will fall into these categories.
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Recasted Balance Sheet (in millions of dollars)
2014 2013 2012
ASSETS Cash and Marketable Securities $21,675 $20,268 $16,551
Accounts Receivable $4,466 $4,873 $4,759 Inventory $3,100 $3,277 $3,264 Other Current Assets $3,745 $2,886 $5,754 Long-‐Term Tangible Assets $14,633 $14,967 $14,476 Long-‐Term Intangible Assets $26,372 $27,611 $27,337 Other Long Term Assets $18,032 $16,173 $14,033 TOTAL ASSETS $92,023 $90,055 $86,174
LIABILITIES AND EQUITY Short-‐Term Debt $22,682 $17,925 $17,874
Accounts Payable $9,234 $9,577 $8,680 Other Current Liabilities $458 $309 $1,267 Long-‐Term Debt $19,063 $19,154 $14,736 Deferred Taxes $5,636 $6,152 $4,981 Other Long-‐Term Liabilities $4,389 $3,498 $5,468 Minority Interest $241 $267 $378 TOTAL LIABILITIES $61,703 $56,882 $53,384
Preferred Stock $0 $0 $0 Common Stock $30,320 $33,173 $32,790 TOTAL EQUITY $30,320 $33,173 $32,790
TOTAL LIABILITIES AND EQUITY $92,023 $90,055 $86,174
This is not the same exact balance sheet that is found in the Coca-Cola 10-K. Coca-Cola’s balance sheet has more line items that are specific to the company. Each company’s balance sheet looks slightly different because each company discloses their financial information that makes the most sense for their company. Analysts look at a recasted balance sheet like the one above to standardize the income statement so that they can compare firms and industries. For Coca-Cola, no line item is out of the ordinary. The majority of the line items are fairly similar over the past years with a few exceptions. Other current assets rose substantially over the past year, as this is a catchall category that is likely to have some volatility, similar to how other long-term liabilities has had a good amount of change over the past three years. Short-term debt also increased substantially over the last year. The company does not disclose why the increase in short term debt, but it could be due to the historically low interest rates that businesses have been experiencing in the U.S, so Coke could have taken advantage of this and borrowed more money.
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Common Size Income Statement
2014 2013 2012
Sales
100.00% 100.00% 100.00% Cost of Sales
38.89% 39.32% 39.68%
SG&A
37.43% 36.94% 36.94% Other Operating Expense 2.57% 1.91% 0.93% Investment Income 1.67% 1.28% 1.71% Other Income (loss) -‐2.75% 1.23% 0.29% Other Expense 0.00% 0.00% 0.00% Interest Income 1.29% 1.14% 0.98% Interest Expense 1.05% 0.99% 0.83% Minority Interest -‐0.06% 0.09% -‐0.14% Tax Expense
4.78% 6.08% 5.67%
Unusual Gains, Net of Unusual Losses 1.55% -‐0.17% 0.37% Preferred Dividends 0.00% 0.00% 0.00% Common Shares Outstanding 9.54% 9.36% 9.14%
Net Income
15.43% 18.32% 18.78%
The common size income statement is used to compare line items across companies and industries. Each line item is divided by the sales for that specific year, which gives us the percentage. With a percentage, we can then compare the numbers of different sized companies and in different industries. The net income number in the common size income statement is the same as the profit margin.
Similarly to the recasted income statement, nothing seems out of place for Coca-Cola’s common size income statement. The trends are the same in the common size as they are in the income statement. This common size shows a healthy business that has room for improvement, but continues to thrive in their current environment.
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DuPont Analysis (2014)
The DuPont analysis breaks down how the return on equity is achieved. Return on equity shows how well shareholders’ money fared in the company. This analysis is to really highlight the driving forces behind the return on equity to see where a company is doing well and where they could improve
Coca-Cola has a high return on equity with 23.41%. Breaking it down, Coke’s return on assets is not that great with only 7.71%. A profit margin of 15.43% is good for the industry, but the total asset turnover number of 0.5 could be higher. What gives Coke such a high return on equity is their equity multiplier of 3.04. This number means that looking at the money that shareholders have invested into the company, Coca-Cola was able to gain more than 3 times the amount of assets with that money. The equity multiplier is what carries the return on equity number for Coca-Cola.
Return on Equity 23.41%
Return on Assets 7.71%
ProJit Margin 15.43%
Net Income $7,098
Sales $45,998
Total Asset Turnover
0.5
Sales $45,998
Total Assets $92,023
Equity Multiplier 3.04
Total Assets $92,023
Shareholder's Equity $30,320
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Profitability Ratios
Profit Margin
The profit margin shows how much money is generated in profit for every dollar in sales. This is sometimes called return on sales because it shows how profitable the sales truly are. It shows if the revenues can be effectively spread out over all of the expenses and there is still enough money left over to have profit. Profit margin also shows if the company has the ability to lower their prices in a tough economy. If they had a high profit margin, then they will be able to take in less revenue and still cover all expenses.
Overall, Coca-Cola has a reasonable profit margin for the industry that they are in. 15-18% gives them enough money to either reinvest in their company or distribute to shareholders (we will see later in the analysis the distribution to shareholders). Coca-Cola’s profit margin has declined each year the past three years. This can be due to the fact that Coca-Cola does a fair amount of business abroad, and with the dollar getting stronger and stronger these revenues are not as significant when they are brought back over the US border. This past year, Coca-Cola also had a fair amount of unusual expenses dealing with the Venezuelan operations as the Venezuelan government enacted a new law called the “Fair Price Law” in January of 2014 that imposes limits on profit margins earned in the country. This caused many write-downs and foreign exchange loses that contributed to the lower profit margin of Coca-Cola this past year.
10% 12% 14% 16% 18% 20%
2012 2013 2014
Pro$it Margin
Year
Pro$it Margin for Past 3 Years
2012 18.78%
2013 18.32%
2014 15.43%
Profit Margin =Net Income
Sales
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Return on Assets (ROA)
Return on Assets (ROA) measures how much profit is generated per dollar of assets that a company has. It shows how efficiently the assets are being used to generate profit. The higher the number, the more efficient that company is using their assets. This is important for investors because they want to see if the money that they are putting up (that will most likely go towards assets) will be generating money to the company’s bottom line.
The assets that Coca-Cola has are mainly made up of cash and marketable securities, long-term tangible assets (like property, plant and equipment), long-term intangible assets (like goodwill), and other long-term assets (how money is invested in the long term). The cash and marketable securities don’t necessarily help contribute to the net income because they are not being invested in anything. This number could come down and the company would most likely be better off. These short-term assets are primarily held by foreign subsidiaries, so if these subsidies invested the money this number would be lower. The long-term tangible assets are a necessity because Coca-Cola needs equipment to produce their product, as well as property for the plants to operate on as well as corporate offices. This number makes sense and does contribute to the company’s ROA. The long-term intangible assets do cannot be physically traced to the company’s bottom line, but there is something to be said about being a top 3 most recognizable brands in the world. This goodwill rolls over to when you are in the South, people ask if you want a Coke, not a soda. Coke is synonymous with soda in the South. The trademarks that Coca-Cola owns, such as the contour bottle, do not contribute directly to net profit, but the contour bottle is recognizable and people think of Coke when they see it. Other long term assets is also important because it shows how that Coke has invested money into long term investments to make money in the long run. Overall, Coke has a good ROA, however it has been declining the past 3 years. This can be attributed to the fact that net income has been declining while the amount of assets has been rising. (The graph is on the following page.)
Return on Assets (ROA) =Net IncomeTotal Assets
2012 10.46%
2013 9.53%
2014 7.71%%
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0%
5%
10%
15%
2012 2013 2014
Return on Assets
Year
Return on Assets for Past 3 Years
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Return on Equity (ROE)
Return on Equity (ROE) measures how well stockholders fared during the year. It shows how effectively the equity that was put up by stockholders was turned into profit. ROE can also be calculated by breaking it down into ROA x Financial Leverage (assets/shareholders’ equity). The financial leverage shows how many dollars of assets that the firm is able to put into the company from the dollars invested by shareholders. This ratio is important to show future investors how efficiently their money will be used in the company.
Since Coke’s ROA is fairly low, their financial leverage is very high. This shows that Coke does a very good job of using the money that shareholders have invested into the company. As an investor, this is a positive sign, as you know that your money will be making a difference in the company. Over the past three years, Coca-Cola’s ROE has declined slightly, as this is a result of the declining net income. I do not feel that this is a major concern or red flag because this number is already above the threshold of many companies, and the decline rate is very minimal.
15% 17% 19% 21% 23% 25% 27% 29%
2012 2013 2014
Return on Equity
Year
Return on Equity for Past 3 Years
Return on Equity (ROE) =Net IncomeTotal Equity
2013 25.88%
2014 23.41%
2012 27.51%
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Gross Profit Margin
Gross profit margin measures the profitability of sales less the direct cost of those sales. It is an indicator of the price premium that a firm’s product commands. The higher the percentage, the more of a premium that the producer can ask for the product. Gross profit margin shows how well management prices the product, as well as the volume of sales. This can be taken a step further, as this margin looks at the efficiency of a firm’s procurement and/or production process.
In the case of Coca-Cola, the gross profit margin is very high. Management has realized that their product commands a premium and can charge it. The number that they charge is not astronomically high, as one might see in the technology sector, because they produce the syrup that is then sold to bottlers to put into the single serving packaging. The product that they are creating is not extremely technologically advanced as in the technology sector. In this sense, Coca-Cola is the first cog in the value chain (looking at individual drinkers of Coca-Cola as the consumer). The volume of their sales is very high, as they sold 28.6 billion unit cases of product, which is what Coca-Cola constitutes as volume (a unit case is 192 ounces of product, or 24 eight ounce servings). Because of this high number, the economies of scale for producing the product is large, so the cost to produce each unit is low. The majority of costs of goods sold comes from sweeteners, metals (for packaging), and juices. To make sure that they do not overpay for a commodity, Coke hedges the commodity in case they have to take a loss on it. This is an example of good cash management and risk reduction skills. Coca-Cola has also been in business for over 125 years, so they have had time to tinker with their production process to make it as optimal as possible. The low production price coupled with premium that management can charge is how Coca-Cola has such a high gross profit margin. Over the past three years the gross profit margin has risen, however not by very much. The small increase from 2013 to 2014 is due to the deconsolidation of their Brazilian bottling operations and lower commodity costs (especially in the North American finished goods part of the business). (The graph is on the following page.)
Gross Profit Margin =Sales− Cost of Sales
Sales
2012 60.32%
2013 60.68%
2014 61.11%
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55%
57%
59%
61%
63%
2012 2013 2014
Gross Pro$it Margin
Year
Gross Pro$it Margin for Past 3 Years
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EBIT Margin
The EBIT margin eliminates interest and taxes from the expenses of the company. EBIT stands for Earnings Before Interest and Tax. This number is valuable because it shows true operating performance of the company because it includes sources of revenue, all of the operating costs of the company, but does not include interest and tax expense. The fact that it does not include interest and tax expense is important because interest and tax expenses are not operating expenses, but rather financing expenses. EBIT looks solely at how company’s revenue covers their operating expenses. EBIT is divided by sales to show the value of EBIT as a percentage of the revenue that the company generates.
Coca-Cola has a high EBIT margin, which is good. The EBIT margin is about 6% higher than profit margin, meaning that financing expenses expressed on the income statement account for about 6% of what could be Coca-Cola’s profit. Coke’s high EBIT margin shows that the revenues that the company generates sufficiently cover all operating expenses with room to spare. This is a good sign for an investor because will a large percentage of money filtering through to the bottom line, there is a good chance that they company will pay dividends or give some of the money back to their shareholders. Coca-Cola has seen a decline in their EBIT margin over the past three years due to more expenses in each year. This is still a minimal decline in the EBIT margin, and should not hurt the company in any way moving forward.
15%
17%
19%
21%
23%
25%
27%
2012 2013 2014
EBIT Margin
Year
EBIT Margin for Past 3 Years
EBIT Margin =EBITSales
2012 24.81%
2013 24.17%
2014 21.58%
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Accounts Receivable Turnover and Days’ Receivable
Accounts Receivable Turnover
Days’ Receivable
The working capital ratios looks at how the company manages the capital that they have to work with. Accounts receivable turnover and days’ receivable are both ratios that look at managing capital. The accounts receivable turnover is a number that shows how many times in a year that the firm collects all of the accounts receivable that are outstanding. The days’ receivable is the accounts receivable turnover number translated into the number of days that it takes the company to collect a payable (on average). The days’ receivable is the number that analysts focus on because it is easy to quantify in one’s head. The days’ receivable number is important because it shows how quickly the firm’s clients pay their outstanding payables. The higher the number (the more days), the longer it takes the firm to get paid (in cash). This has a major effect on cash flow because if the company hasn’t collected the money that they sold their product for, they cannot use the money to cover expenses or invest the money. The smaller the number (the less days), the better. Coca-Cola’s days’ receivable is very impressive. It takes a little over a month for Coke to collect a payable, which is good from a cash management standpoint. What is impressive about Coke’s number is that a majority of Coke’s business is done overseas. In some of these countries, it is not uncommon to have a payable take 90 days to collect. The fact that Coca-Cola can collect their receivables in a little over a month speaks to the quality of clients that they have, as well as the quality of their treasury/controller department. From an investor’s standpoint, I feel comfortable that Coke will continue to
Accounts Receivable Turnover =Sales
Accounts Receivable
2014 10.30
2013 9.62
2012 10.09
Days! Receivable =Accounts ReceivableAverage Sales Per Day
2012
36.18 Days 2013
37.96 Days 2014
35.43 Days
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perform as a company because they are able to get cash into their pocket quickly. Coca-Cola’s days’ receivable has been stable over the past three years with little turmoil.
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30
32
34
36
38
40
2012 2013 2014
Days
Year
Days' Receivable for Past 3 Years
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Inventory Turnover and Days’ Inventory Inventory Turnover
Days’ Inventory
Inventory turnover indicates the length of time needed to produce, hold, and sell inventories. This is another working capital ratio as mentioned before. The days’ inventory number puts inventory turnover in terms of days (like days’ payable), so it is an easier number to work with. These numbers show how long something sits on the shelf. For a fresh food company, like Panera Bread, that has built their brand on having freshly made products almost the day of, they want to have a low days’ inventory. This means that the products that they are selling go from production to customers’ hands as quickly as possible.
A beverage company like Coca-Cola is able to have a little more leeway with how long the product sits on the shelf, because the shelf life of soda and other beverages that Coca-Cola produces is fairly long. Even though the shelf life of the products is fairly long, Coca-Cola still does a tremendous job of getting them out of the warehouse and into the world. The days’ inventory is a little over two months, which provides the turnover that is needed to achieve a high sales revenue number that Coca-Cola has on selling a product that does not sell at a high price. The days’ inventory for Coke over the past three years has been stable, and there is no underlying trend. (The graph is on the following page.)
Inventory Turnover =Cost of Goods Sold
Inventory
2012 62.53 Days
2013 64.93 Days
2014 63.25 Days
2012 5.84
2013 5.62
2014 5.77
Days! Inventory =Inventory
Average Cost of Gods Sold Per Day
25
54
56
58
60
62
64
66
2012 2013 2014
Days
Year
Days' Inventory for Past 3 Years
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Accounts Payable Turnover - Days’ Payable
Accounts Payable Turnover
Days’ Payable
This is the final working capital ratio that we will look at during this analysis. Accounts payable is how long it takes the company to turn accounts payable into accounts paid (in cash). The days’ payable number takes the accounts payable turnover and turns it into a number of days, so that it easier to work with. This number is important to companies that do business with this firm because it will show how long it will most likely take them to collect payment for the goods/services provided. For investors, this number is important because it is a measure of cash management. The higher the number, the better cash management that company has. This is because they can use the money that could be going towards paying off the payable for something more pertinent (if it is an established company).
Coca-Cola has an extremely high days’ payable. It takes almost half of a year for a company to collect money for a product or service that they sold to Coca-Cola. What makes this number interesting is that Coke’s days’ receivable is a little more than 30 days. This is a double standard because Coke wants companies to pay them, but they do not want to pay other companies. That being said, the high days’ payable is a testament to Coke’s cash management. Since Coke can “get away” with waiting 180 days to pay off a payable because of their brand reputation, they do, so they have more money to pay other payables or invest the money. From 2012 to 2013 there was a 23-day jump for days’ payable, which could be because of a structural change of how payables are handled.
Accounts Payable Turnover =Cost of Goods SoldAccounts Payable
2012 2.20
2012 1.92
2012 1.94
Days! Payable =Accounts Payable
Average Cost of Gods Sold Per Day
2012 166.28 Days
2013 189.76 Days
2014 188.41 Days
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From 2013 to 2014 there is very little difference, showing that there should be continued stability for future years.
150
160
170
180
190
200
2012 2013 2014
Days
Year
Days' Payable for Past 3 Years
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Risk Analysis Non-Financial Risk Analysis
In the financial statements, Coca-Cola describes 29 different non-financial risks that could affect their business. Some of these are extremely obvious, like “increased competition and capabilities in the marketplace could hurt our business” or “product safety and quality concerns could negatively affect our business” which affects just about every single business in existence. Other non-financial risks that are discussed are actual risks that could drastically affect only Coca-Cola’s business (and other soda/beverage companies). I think that the biggest one that they discuss is “obesity concerns may reduce demand for some of our products.” With the growing public concern over health and obesity, the demand for Coca-Cola’s sparkling beverages may go down because soda is not considered to be a healthy beverage. Coca-Cola has been trying to hedge this risk by promoting a healthy lifestyle and getting kids to live a healthy lifestyle, as well as producing other beverages that are healthier options, such as juice.
A second non-financial risk that is of major importance to the company is “water scarcity and poor quality could negatively impact the Coca-Cola system’s costs and capacity.” With water being the main ingredient in almost all of their products, it is crucial to have clean water, and a lot of it. The world is running out of water, and water has become a scarcity. The price of water will continue to rise in the coming years. With Coca-Cola being a global company, not all of their water comes from the same spring. Due to this, Coca-Cola has to take extra steps to make sure that all of the water provided to them is pure and will not taint any of their products.
A final major non-financial risk that the company faces is “fluctuations in foreign currency exchange rates could have a material adverse effect on our financial results.” Coca-Cola is the textbook definition of a global company. Case volume outside of the US accounts for 81% of worldwide case volume revenue. Since so much business is done outside of the US, foreign currency definitely plays a factor in Coca-Cola’s financial well-being. With the US dollar getting stronger, the money that Coca-Cola brings back to the US is less valuable than it is where it is made.
Overall, these risks might affect Coca-Cola marginally, but it will not stop the company from staying in business. Unless there was a global catastrophic event that destroyed all sources of water or if all of the sudden everyone hated Coke, Coca-Cola will not go out of business. After being around for over 125 years, it will be tough to take down the giant that is Coca-Cola.
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Financial Risk Ratios
Current Ratio
The current ratio is an overall measure of how liquid the company is. Liquidity measures how quickly a company can turn assets into cash. If the company had to pay off all of its current liabilities, does it have enough current assets to cover the liabilities? To be considered “good”, a company should shoot for a current ratio of 1. This means that the company has exactly enough assets to cover their liabilities, so they can cover any emergencies.
Coca-Cola has a current ratio of over 1, so they have enough assets to cover themselves if they have to. As an investor, and a company that does business with Coca-Cola, this is a good sign just in case anything comes up, the company can pay what they owe. There was a slight decline in the current ratio from 2013 to 2014, which was caused due to a larger increase in liabilities ($4,821) than in assets ($1,968). The increase in liabilities is mainly due to an increase of $4,757 in short term debt. This short-term debt has maturities greater than 90 days. The company does not disclose what the issuance of this debt is for, but it looks like the company could be looking to invest in something.
0.6
0.7
0.8
0.9
1.0
1.1
1.2
2012 2013 2014 Year
Current Ratio for Past 3 Years
Current Ratio =Current Assets
Current Liabilities
2012 1.09
2013 1.13
2014 1.01
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Quick Ratio
The quick ratio is similar to the current ratio, but looks at more short-term current assets. This ratio looks at liquidity, like the current ratio. The quick ratio eliminates some of the current assets that take longer to turn into cash. An example of this is inventory. This ratio would be useful if the company had only a couple of weeks to pay off all of their liabilities, so they need to have cash quickly. Ideally, a company wants to have a quick ratio of above 1, which means that they can cover all of their liabilities quickly. Most companies do not have a quick ratio above one because rarely will a company have to pay off liabilities quickly.
For a more established company, like Coca-Cola, they will probably have a quick ratio a little bit under 1 because there should be no, or very few, major emergencies where they have to liquidate all of their assets. Having a lower quick ratio means that they can utilize better cash management by putting cash into more long-term assets or investments to help the growth of the company. Coca-Cola’s quick ratio being at .80 is a healthy number for the size of their company. There has not been that much difference over the past three years in Coke’s quick ratio.
0
0.2
0.4
0.6
0.8
1
2012 2013 2014 Year
Quick Ratio for Past 3 Years
Quick Ratio =(Cash+ Short Term Investments+ Accounts Receivable)
Current Liabilities
2012 0.77
2013 0.90
2014 0.80
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Cash Ratio
Like the current ratio and quick ratio, the cash ratio is a measure of the company’s liquidity. The cash ratio is only looking at assets that are extremely liquidable, which are cash and marketable securities. This ratio is looking to see if the company could pay off all of their liabilities by tomorrow. Typically, companies will have this number be lower than 1 because it would be a “waste” of money to keep a lot of money in cash. Companies that are growing should try to keep as little money in cash as possible so that they can invest money into the growth of the company. Companies that are start-ups that could face problems early on should keep their cash ratio fairly high just in case they have to pay off all liabilities in a very short period of time.
Coca-Cola, being a well-established company, has a fairly high cash ratio. There are very few scenarios where Coca-Cola would have to pay off all liabilities quickly. Coca-Cola should have a lower cash ratio so that they can invest more into growing the company more. The past three years have shown that Coca-Cola has kept the same disposition on how much cash and marketable securities that they want to keep on hand because the cash ratio has had little change.
0
0.1
0.2
0.3
0.4
0.5
0.6
2012 2013 2014 Year
Cash Ratio for Past 3 Years
Cash Ratio =(Cash +Marketable Securities)
Current Liabilities
2012 0.41
2013 0.49
2014 0.39
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Liabilities-to-equity ratio
The liabilities-to-equity ratio looks at how much risk that the company is taking, meaning looking at how much of the company is financed through debt. The higher the number, the more the company is financed based on debt. If a company is highly financed on debt, they are considered to be highly leveraged. Companies that take on more debt have more opportunities to grow their companies by financing long-term assets over a longer period of time rather than paying for it in cash. The down side to this is that companies will have more interest expense than companies who are more financed through equity. There is also more risk involved in being financed through debt because there is a chance to default on a loan, and if that happens the debtor will seize assets. This ratio is a solvency ratio, which measures the ability of a firm to meet long-term obligations.
Coca-Cola has a high liabilities-to-equity ratio, meaning that they are heavily financed through debt. This continues the trend of Coke having good cash management skills, as they can pay for assets over the course of the assets’ life, instead of having to pay for it up front. The cash that could’ve been used to pay for the asset up front is then utilized elsewhere in the company, making the company more efficient. Coke has increased their liabilities-to-equity ratio for the past three years, showing their continued reliance on using debt finance because it lowers their overall cost of capital and increases the return on shareowners’ equity. They borrow funds domestically at reasonable rates
0
0.5
1
1.5
2
2.5
2012 2013 2014
Liabilities-‐to-‐Equity Ratio for Past 3 Years
Liabilities to Equity Ratio =Total Liabilities
Shareholders! Equity
2012 1.63
2013 1.71
2014 2.04
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Interest Coverage Ratio
This ratio is also a solvency ratio, like the liabilities-to-equity ratio. This ratio measures the ease with which the firm can meet its interest payments. This is an indication of the degree of risk that the debtor takes when they lend money to a company. It shows whether or not the company is able to generate enough money to pay the debt holders, which will in turn pay off the debt.
Coca-Cola definitely has enough money to meet current interest obligations. Even at the lowest point over the past three years, Coke can pay their interest expense 20 times over. Lenders should have no questions about whether or not Coca-Cola will pay them back. Over the past three years, Coke’s interest coverage ratio has gone down fairly substantially. This does not mean a whole lot, however, as this number is already well above the threshold that Coke needs to be cover their interest expense. This decline can be due to the fact that net income has decreased each year and last year there was less tax expense. The interest expense also continues to rise each year, making the denominator of the ratio higher and higher.
0
5
10
15
20
25
30
35
2012 2013 2014 Year
Interest Coverage Ratio
Interest Coverage Ratio =(Net Income + Interest Expense+ Tax Expense)
Interest Expense
2012 30.58
2013 25.70
2014 20.25
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Section IV – Forecasting Growth Rate
Sustainable Growth Rate
Sustainable growth rate measures the ability of a firm to maintain its profitability and financial policies. It looks at if the company reinvests a large portion of their money, or if they pay dividends. This is important to look at to see if a company is looking to grow more, or if they are comfortable where they are and want to reward their shareholders.
Coke has a decent sustainable growth rate. They are already a global company and involved in almost everything in the non-alcoholic beverage industry, Coke does not necessarily have to grow. Of course, companies always want to grow and get better, but Coke is at a good place right now. This is due to the fact that net income has been decreasing while cash dividends paid has been increasing. For the 53rd consecutive year, Coca-Cola has increased their annual dividend. From 2012 to 2013 it rose 10% and from 2013 to 2014 it rose 9%. This means that the company is not looking to grow a large amount in the near future because they are using the majority of their net income to reward shareholders.
0% 2% 4% 6% 8% 10% 12% 14% 16%
2012 2013 2014
Rate
Year
Sustainable Growth Rate
Sustainable Growth Rate = ROE ∗ (1−Cash Dividends Paid
Net Income )
2012 13.50%
2013 10.90%
2014 5.77%
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Weighted Average Cost of Capital
Overall Formula
The WACC shows the cost of capital to the company. This is what it costs the company to raise money. If the company needed to go out and raise money to finance a new project or expand, the WACC shows how much the raising of this capital will cost the company. Weighted average cost of capital is utilized because the weight of each method of capital shows which part of the market (equity or debt) that the company primarily utilizes to raise money. If a company’s WACC is 7% and they need $100 million dollars to finance a new project, they really need raise $107 million dollars because 7% of what they raise needs to go to pay the cost of raising the money. Coca-Cola has a WACC of 7.18%. Coke’s total market value of debt and equity is primarily made up of equity (90.4%). Even though the company has a low cost of debt (1.68% after looking at the tax benefit), the majority of Coca-Cola’s capital comes from equity, so the WACC is much higher than just the cost of debt. The cost of debt was found in the notes in the financial statement, and the cost of capital was found using the CAPM model. (Re = Rf +Be[E(Rm) – Rf]). Coke’s WACC is fairly low, meaning that it does not cost the company that much money to raise the money that they need. This is beneficial for the company when it decides that it needs to finance a project.
WACC = (Weight of Equity ∗ Cost of Equity) + (Weight of Debit ∗ Cost of Debt)
Coca-Cola’s WACC = 7.18%
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Forecasted Income Statements (in millions of dollars)
2015 2016 2017 2018 2019
Sales $46,554 $47,061 $47,842 $48,560 $49,127 Cost of Sales $17,923 $17,930 $18,036 $18,113 $18,177 SG&A $17,597 $17,977 $18,419 $18,793 $18,963 Other Operating Expense $1,229 $988 $765 $680 $540 Investment Income $752 $768 $740 $792 $802 Other Income (loss) -‐$520 -‐$200 $350 $476 $512 Other Expense $0 $0 $0 $0 $-‐0 Interest Income $666 $739 $789 $835 $884 Interest Expense $512 $546 $574 $597 $624 Minority Interest -‐$10 $23 $5 -‐$2 $12 Tax Expense $2,405 $2,579 $2,815 $2,945 $3,073 Unusual Gains, Net of Unusual Losses $302 $453 $100 -‐$75 $180 Preferred Dividends $0 $0 $0 $0 $0 Common Shares Outstanding 4,340 4,302 4,302 4,016.0 3,996.0
Net Income $8,087 $8,800 $9,211 $9,461 $10,128
The income statement above is forecasted for the next 5 years. Forecasting is tough to do as you cannot see the exact challenges that a business will face or how they will react to the challenge, that’s why we have to live life day by day. We forecast to create an estimate of both revenues and expenses so that we can try to make the best financial decisions when it comes to unseen challenges.
Even though net income has decreased during the past three years, I feel that Coca-Cola is ready to turn it around and will continue to increase their net income each of the next five years. I got to these numbers by looking at trends in the common size income statement as well as looking through segment information disclosed in the financial statements along with other key information in the financial statements. Some of the line items are educated guesses, which will be explained below.
In the 10-K, Coca-Cola breaks down revenue performance by geographic location. They focus on volume as well as revenue because volume measures the demand at the consumer level. In the analysis of each geographic region, Coke also breaks down the product type into sparkling drinks (sodas) and still drinks (juices and water). Unit cases in Eurasia and Africa grew by 4% last year, with an 8% increase in still drinks, while overall net operating revenue rose 3%. This region is still growing at a rapid rate and revenue should continue to grow. Europe had a decrease of 2%, in both volume and operating revenue, however the still drinks side of the business continues to grow. In North America, unit case volume was even because there was a 1% decline in sparkling drinks and a 1% growth in still drinks. This is reflective of the growing health concerns
37
that soda faces. Asia Pacific grew 5% in both unit volume and operating revenue. This is the largest opportunity that Coca-Cola has with India and China both falling into this category. Overall, I believe that revenues for Coca-Cola will continue to increase year after year because of the growth this past year in emerging markets, and the emphasis that Coke is putting on China and India in their global marketing campaigns. This is highlighted in the analysts call where Muhtar Kent discussed how they have already seen larger returns in the first quarter of 2015 in both China and India.
While Cost of Sales seems to increase each year, it is actually decreasing each year when it is looked at as a percentage of sales. The past three years it has gone down by about 0.3%, and I continued this trend for each of the next five years. Cost of Sales is decreasing because ingredients to make products continue to become cheaper, relations with the sources of the ingredients as well as with independent bottlers improve year after year which can help drive down some of the costs, and the system of producing the product gets better and better each year as more and more costs can get cut.
Over the next five years I predict SG&A to continue to rise. From a common size standpoint, SG&A rose .5% last year. This trend is expected to continue because Coca-Cola needs to continue to advertise to stay at the forefront of consumers’ minds, and they need to show that Coca-Cola stands for more than just soda with all of the health concerns going on in today’s society. In the analyst call that I listened to, CEO Muhtar Kent discussed that over the first quarter of 2015 Coca-Cola increased advertising expenses by double digits, thus showing that they view advertising as a key to inducing sales and that SG&A should continue to rise.
Other Operating Expense should be slightly more in 2015 than in 2014, and then after 2015 it should gradually decrease. Currently, these other operating expenses come from the refranchising of North American units and structural changes to the company to help it become more efficient. These changes should cease by 2017. I think that after 2015 the expenses associated with this initiative should start to decrease.
There was no underlying trend in the common size income statement in regards to investment income. There is also little disclosure in the financial statements as to where this income stems from. I forecasted this line item to hover around $760, as that is where it has been for the past three years. This is one of the line items where an educated guess was used.
There was no underlying trend for other income as well. However, in 2014 there was a loss of $1,263 due to refranchising and losses due to foreign exchange rates. As stated previously, refranchising is slated to finish by 2017 and expenses tied to this effort should start decreasing. The macroeconomic environment should begin to sort itself out, and Coca-Cola should not have to take as much loss due to foreign exchange rates. Due to this reasoning, I have forecasted Coca-Cola’s other income to increase each year for the next five years.
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Interest income has increased by about .12% of sales each of the past three years. I continued this trend in my forecasted income statements. The 10-K from Coca-Cola produced very little information about where this income stems from, but I am assuming that this is from a reputable source and will continue to increase as time goes on.
Interest expense has gone up by about .07% of sales each of the past three years. I expect this trend to continue and this trend is applied to the next five years. This number has a chance to grow even more than predicted if interest rates stop staying at low rates and jump to something much higher. If this is the case, I expect Coca-Cola not to borrow at the same rate as they have, which is why the forecasted income statement do not represent this possibility.
Minority interest has been very sporadic over the past three years, some years being a gain and some years being a loss. Due to the volatility of this number, I forecasted this line item to hover around either side of zero for the next five years. The minority interest stems primarily from bottling operations. While it is tough to tell what will happen, I feel that this line item will not have a major impact on the bottom line.
The tax expense for each forecasted year is based on the other line items for each specific year. For each year I calculated the taxable income that is left after all expenses. Currently Coca-Cola has an effective tax rate of 23.6%. I used this tax rate to calculate the tax expense. Each year there is more tax expense because each year there is more taxable income.
For unusual gains (or losses), there was no underlying trend as these are items of income or expense that do not fit anywhere else. The numbers that I chose are fairly arbitrary, however I have a gut instinct that these numbers are fairly right.
Each year there will continue to be no preferred dividends. Coca-Cola has stuck with only one class of stock, and I do not see them changing that structure within the next five years.
Common shares outstanding have decreased every year. This is due to buy backs from the company. I believe that this trend will continue as Coca-Cola has not issued new stock in a while. Each year (except for 2016 and 2017) I believe there will be some sort of buy back to reduce the number of shares outstanding.
Finally, net income reflects how much money is left over from revenue after all expenses are taken out. Each year I expect net income to rise. This is due to increased sales as well as better control of costs. Even though during the past three years Coca-Cola has seen their net income shrink, I believe that better days are just beyond the horizon. I plan to be working for Coca-Cola during this process to help Coca-Cola be even more dominant than they are now.
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