Financial managers have a job to provide clients with stock investments and portfolios that are diverse and successful. To provide this service financial managers must know and understand the trends, background of the company, financial statements, and competitors to companies. When a client hires a financial manager they are looking towards the professional to get sound advice on how stable to company is; and that the investment is safe, sound, and as secure as it can be. In order to provide and understand all this information it requires research and analysis. Working as a financial manager there are millions of options for investments and opportunities for clients to invest their money.
For this paper, I will examine Coca-Cola (KO) a publicly traded company on the New York Stock Exchange and will present more than just financial statement analysis, but will also examine; the important financial ratios that effect investment decisions, overall health of the company, the analysis of the price of KO stock, and rational for choosing KO over it’s competitors. KO has more than 500 brands including world known brands like Diet Coke, Vitaminwater, Powerade, Sprite and Coca-Cola Zero. These brands total over 17 billion dollars, not including the independently owned bottling distributors that are part of KO’s supply chain. Thanks to our global market today, Coca-Cola products are found in nearly every country of the world, serving over 1.9 million servings of consumable products each day (7 Reasons Coca-Cola Is A Buy. (n.d.)).
Coca Cola has been a strong company for many decades, and has been able to innovate and change with their consumers needs and wants. Ko’s business volume has grown 6% in the first half of 2014, as the company has been moving away from it’s reliance solely on carbonated soft drinks and more towards loIr calorie “natural” beverages (7 Reasons Coca-Cola Is A Buy. (n.d.)).
To start the analysis of KO, we will start by looking at three years of financial statements to look for trends, ratios, and important information that can be found on the financial statements. Information on how healthy the company is financially and how stable the assets are can be found by analyzing more than one year of financial statements. One can also see where the company stands with debts, and day to day operational expenses that come with running a business. Starting with the top of the financial statements; income statement and balance sheet, I will work my way down each statement and analyze the numbers.
Starting with the income statement the first important number is Sales and Revenue. This is a good indication of where and how much money is coming into the company. For KO they have been increasing their sales and revenue not only over the last three years, but the last five as well. Noting some astounding percentage increases like 13.09% in 2010 and 33.10% in 2011 this is good to see that their sales and revenue is not stagnant but can continue to grow. This last year, 2013, KO has seen a small decline in income, but this can be from many different sources, and is expected to recover in 2014. Next on the income statement is the cost of goods sold. KO has managed to increase their revenues but keep their cost of goods sold steady over the last three years, this shows good management and use of resources within the company.
Another good indicator is their Sales and General Administrative expenses have been decreasing over the last three years, meaning they are not increasing their cost to create and bottle their soft drinks, or increasing their costs of running the business. Net income overall for KO has been on the rise, they had a rough decrease in 2011 of 27.41%, but if income was the only number considered for an investment that could cause some disappointment and financial loss. It is important to see the company as a whole and the potential it has, not just the numbers on paper. A decrease in net income could mean a merger or acquisition, which over the course of time could boost profits even more (Coca-Cola Co., 2014).
When examining the balance sheet, overall it continuing the upward growth and increase in trends that was seen on the income statement. The Cash and Short term investments have grown by 23.80%, 17.93% and 22.46%, increasing the amount of short term and long term investments along with decreasing the accounts receivable by 3.27% is a great business plan for growth. It shows strong management and financial analysis within the company. KO has been looking at their numbers and trying to improve not only in profits, revenue, and sales, but decreasing their debts and long term payables as well (Coca-Cola Co., 2014). When analyzing a company to invest in, one of the invaluable tools that can be used are financial statement analysis, financial ratios are also very important.
Many investors however, do not understand, or want to understand, the financial ratios and are intimidated by the calculations to get ratios, this is where the financial manager comes into play. The ratio’s help the investor, or financial manager, make a more educated, informed decision about the investment. Part of making an educated and overall informed decision is looking at financial ratios. All financial ratio’s fall into four categories; profitability ratios, liquidity ratios, solvency ratios and valuation ratios (Elmarraji, 2014). These financial ratios are more comparison points for financial companies, but they are also used to compare stock of one company to another; as long as they are in the same industry. From the four categories; I took five (5) ratios to examine for KO: the profit margin, receivables turnover, debt to assets, price to earnings, and free cash flow.
One of the key pieces of information that should be analyzed when considering investing in KO is profitability. It is important to consider that high revenues alone do not signify a healthy and strong company that pays dividends to it’s shareholders. Profit margin, a profitability ratio, is calculated by taking a percentage of the revue. The calculation is found by getting a percentage of revenue from the net profit. First you take revenue minus the costs and then divide that number by revenue (Elmarraji, 2014). A profit margin calculation is read in general as the higher the profit margin percentage the better. This ratio needs to be compared with other averages in the industry. KO has had an average profit margin of 18.40% (Coca-Cola Profit Margin (Quarterly), 2014) over the last six quarters verses PEP’s 10.82%. Quarterly numbers can be found in Illustration 1 in the appendix. (Pepsi-Co Profit Margin (Quarterly), 2014).
Liquidity is another important ratio that can measure how quickly a company can covert their assets into cash. Some examples of liquidity ratios are inventory turnover, current ratio, and receivables turnover. Receivables turnover measures the ability to collect on their debts and accounts that are oId to them. To calculate the ratio you take the net credit sales of a company and divide it by the average accounts receivable. This ratio shows the number of times that payments owed to the company are collected, if you take the turnover ratio and divide it by 365 days you will then have the number of days it takes the company to collect on their receivable accounts. When looking at this ratio you want to look for a higher number, it means that the company is collecting their receivables faster and that their clients are paying (Elmarraji, 2014). KO has an average receivables turnover over the last five years; 2013-2009 of 9.07 (Coca-Cola Co. (KO)
Short-term (Operating) Activity, 2014). Whereas; PEP has an average receivables turnover of 9.39; this is a little higher than KO and means that KO should work on getting their payments faster. It is important to analyze all ratio’s together, one alone should not be the deciding factor. Solvency ratios are used to see how well the company is able to deal with their long term obligations financially, as well as their ability to progress their assets in the future. Examples of solvency ratios are; times interest earned, free cash flow, and total debt to assets ratio. Total debt to assets ratio is used to determine how much of the company’s cash and assets Ire used to pay for using debt (Elmarraji, 2014). Total debt to assets ratio is calculated by taking short term and long term debt and adding them together, then dividing by the total assets.
It is important to look for a number that is closer to zero, especially for a company as old as KO. A number close to zero states that the company didn’t use as much debt to pay for it’s assets. KO has struggled the last few years with their debt to asset ratio; since 2009 it has slowly been going up from .48 to 1.12 (Coca-Cola Co. (KO) | Long Term Debt and Solvency Activity, 2014). Free cash flow is also important to look at KO has improved their cash flow operations by a growth rate of 4.72%. This shows that KO has a strong steady stream of cash flow. Having a steady stream of cash flow and revenues on the increase since 2011 shows a strong company against their competitors (7 Reasons Coca-Cola Is A Buy. (n.d.)).
Valuation ratio’s analyzes how attractive it is to invest in a company; some examples are price-to-book, price to sales, price to cash flow, and price to earnings ratios. Investors intend to gain understanding of the stock price and how it compares to competitors (Elmarraji, 2014). The price to earnings (P/E) is the most popular and Ill known ratio in the valuation ratio’s, and generates a per-share basis ratio for investors to analyze. It is a ratio for investors to try to predict what their future cash flow will be, and help determine what the market shares will be in the future and how much investors are willing to pay for a dollar of earnings. To calculate P/E you take the market value of the stock and divide it by the earnings per share. This makes the number easy to understand and compare to the overall market.
Looking at all of these ratio’s combined is the best way to analyze and make a decision about a company especially since; The ratio analysis, financial statements, and historical stock prices are all easy to find on the internet. KO has had liquidity ratio’s increase since 2011, this increase is important to an investor since it shows that the company is able to recover from a downward fiscal period or issue. KO has also overcome financial struggles and shown that there is strong leadership that will help sustain a company through the many economical ups and downs that companies see. Since KO has continued to pay out dividends and increase their dividend’s every year for over half a century, it shows that the company is strong and investors should be willing to pay a higher price than the competitors who do not have the same track record as KO (7 Reasons Coca-Cola Is A Buy. (n.d.)).
KO is a strong healthy company that has already lasted over 100 years with it’s beginning starting January 29, 1892. Examining the quick ratio, current ratio, price per earnings, and earnings per share is a good indicator of how strong the company is, especially if the numbers are looked at over time. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. KO has .90 in assets to every 1.00 dollar of debt. You would generally want a better quick ratio; looking over the last four years; KO has been increasing their Quick Ratio, numbers are in Illustration 3 in the appendix.
Illustration 3 shows that PEP does have a stronger current ratio as of right now, but it is important to note that KO has been increasing theirs over time, and that shows a strong company coming back from a negative situation (The Coca-Cola Company, 2014). The current ratio shows the ability for KO to pay back it’s short term debt obligations. The higher the ratio the better the company is able to pay. KO has 1.13 for every 1.00 of debt. This is a strong indicator that KO has the ability to pay back their debts and still has liquid assets (The Coca-Cola Company, 2014).
Price per earning and Earnings per share are a way for the investor to analyze and predict what they will have in their dividends and stock prices in the future. Price per earnings shows the market price of the stock, and earnings per share shows the investor the company’s profitability. KO has a P/E ratio of 24.20 and Earnings per Share of 1.80. Showing 1.80 in earnings for every 1.00 of stock, and the stock is worth 24.20 (The Coca-Cola Company, 2014). Mergers, acquisitions, as well as economic and political issues all play into the stock prices and confidence of the public in the company. KO is a great dividend stock option for any investor. It has been considered on of the most stable dividend stocks of all stocks on the New York Stock Exchange (NYSE).
KO has consistently paid and increased dividends since their inception into the NYSE in the 1920’s. KO pays about 52% of their free cash flow in their dividends, and is expecting to continue their growth and pay out trend (7 Reasons Coca-Cola Is A Buy. (n.d.)). KO has been known to have it’s soda war between itself and PEP, and this war has gone on for decades. While PEP may be one of the worlds most familiar consumer food and beverage company, it is most known for the rivalry with KO. (D’Altorio, 2012.) Looking at the CEO’s direction for Pepsi with hiring Ill-known nutritionists for the snack based area of Pepsi, and not focusing as much on the beverages, it seems that the beverage war is truly over. Over the last five years, KO has outperformed PepsiCo ,and the two stocks have moved almost hand in hand (7 Reasons Coca-Cola Is A Buy. (n.d.)).
Illustration 2 in the appendix shows that the prices have continued to increase over the course of time since the initial stock offerings of both companies. With all the mergers and acquisitions both companies have grown, and Coke was able to do a stock split 2:1 option in 2013 to help their stocks grow even more over the course of time.
As you can see from Illustra-tion 2 the last time the Pepsi stocks Ire as high as they have been in January of this year, they fell $21 a share. Upon first glance it seems that investing in Pepsi is a better option, I disagree. The stock price of Coke dropped so drastically in 2013 due to a 2:1 stock split the company approved late in 2012. This split gave all shareholders an extra share per share they already owned, increasing the amount of outstanding shares Coke had on the market. Along with the decision to do a 2:1 stock split Coke also decided to change the accounting method of how they determine market related value of their assets (Financial Reports and Information, 2014). A stock split is done when a company sees that the share prices are at levels that are either too high, or beyond that of a similar company, which Coke’s Ire higher than Pepsi’s in 2012. The goal is to make the stock shares more affordable to the smaller investors and still keep the underlying value of the company.
The smaller investors buy into the cheaper stocks and end up boosting up the prices again and increasing the demand. So the loIr Coke prices are temporary. This stock split shows the strength of the company and is a good indication that it is safe to purchase stocks in this company before prices rise again. KO, as opposed to PEP is essentially 100% a beverage company whereas; PEP is 40% beverages and 60% snacks (Brodie, 2013). The eternal battle I have seen between PEP and KO is not just a matter of tastes, but is a matter of different turfs entirely (Lewitinn, 2013). KO has also been making strong investment decisions of their own lately, such as a the deal they have made with Green Coffee Mountain Roasters as a step in the direction of the Keurig and moving in the direction with Keurig to produce Keurig cold beverages at home.
KO acquired a 10% stake in Green Coffee Mountain Roasters and paid nearly 1.25 billion dollars in February, and saw their stake grow to 16% only a couple months later (7 Reasons Coca-Cola Is A Buy. (n.d.)). Along with their branching into the world of Keurig, the are now lauding an incremental marking plan throughout 2014 and 2015 to increase the marketing and thrust sales and profits; KO has spent nearly 400 million dollars on programs like “share a coke,” and FIFA in 2014. Looking at how KO has planned for the future as Ill as remained strong in the worldwide beverage hold, KO may be a little bit more expensive than PEP, but the costs outweigh the benefits to owning stock in such a strong and progressive company and will be a sensible stock to have in any portfolio.
There are never any guarantees when you invest your money, and no investor should just dive in without doing any research on the company. Given the analysis above, and the strong history KO has, it seems to be a smart investment for any investor. Not only does KO sell over 500 brands of products in more than 200 countries, and is recognized worldwide providing more than 1.6 billion drinks a day worldwide. Along with their brand being known worldwide, KO gives their investors a high return on equity, and has increased their stock dividend every year for nearly 50 years straight (Rsstocktips.com, 2011). Looking at the fact that Warren Buffet’s company Berkshire Hathaway owns controlling interest in KO, and KO is their largest stockholding. Berkshire Hathaway only invests in companies that have shown a strong financial background, and are strong enough to withstand economic turns.
This is a strong indicator in itself that KO is a great stock for any portfolio (The Coca-Cola Company, 2014). KO has option of investing with a DRIP or dividend reinvestment plan, so it doesn’t take much to start an investment and grow with the company. Along with the DRIP plan, KO also allows a direct investment plan that allows the investor to buy, sell and reinvest all online without a broker. KO is definitely a strong investment to keep in the portfolio for the long term with their track record through the economic ups and downs over the last 50 years, and how they have remained solid shows that the company is here to stay and a low risk investment (Rsstocktips.com, 2011). Based on the financial review; including financial statements analysis, financial ratio analysis and stock analysis the level of risk for KO from an investor’s point of view should be very low. There are always risks however, so an investor should hold KO stocks for the long term so that any fluctuation in the stock price or stock market has less effect on the investment and portfolio.
It is also important to have more diversity and not just all KO stocks. Looking at the entire overview of KO it is a solid investment with little concerns. KO is solidly growing and paying dividends like they have been for decades. Looking over the financial statements show that the company is increasing revenues, and decreasing costs and expenses. Financial ratios show that the company is strong and financially secure, and stock analysis shows that KO is a great stock to have for any portfolio from beginners to experienced investors. It is important to note and explain to the client how the company has been able to break through their downward trend to a positive holding in the end. KO has celebrated their 128th birthday and is focused on “happiness,” around the world. Most of all; the company has remained steady, paying dividends, and growing with it’s original design and innovation side by side. With strong leadership, smart divisions of their executives to utilize strengths, and the track record of success, it is a smart investment while the stock prices are on the rise.
7 Reasons Coca-Cola Is A Buy. (n.d.). Retrieved December 6, 2014, from http://www.bidnessetc.com/business/7-reasons-cocacola-is-a-buy/
Brodie, L. (2013, February 21). Jim Cramer: Coke or Pepsi—Which Is Really Better?. CNBC.com. Retrieved December 2, 2014, from http://www.cnbc.com/id/100482279
Coca-Cola Co. (2014, January 1). Retrieved December 6, 2014, from http://www.marketwatch.com/investing/stock/ko/financials/balance-sheet
Coca-Cola Co. (KO) | Short-term (Operating) Activity. (2014, January 1). Retrieved December 6, 2014, from http://www.stock-analysis-on.net/NYSE/Company/Coca-Cola-Co/Ratios/Short-termOperating-Activity
Coca-Cola Co. (KO) | Long Term Debt and Solvency Activity. (2014, January 1). Retrieved December 6, 2014, http://www.stock-analysis-on.net/NYSE/Company/Coca-Cola-Co/Ratios/Longterm-Debt-and-Solvency
Coca-Cola Profit Margin (Quarterly):. (2014, January 1). Retrieved December 6, 2014, from http://ycharts.com/companies/KO/profit_margin
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D’Altorio, T. (2012, February 26). Coke vs. Pepsi… Are the Cola Wars Finally Over?. – Investment U. Retrieved December 4th 2014, from http://www.investmentu.com/article/detail/17410/ are-the-coke-vs-pepsi-cola-wars-over#.U5XXwy_D7Io
Elmarraji, J. (2014, January 1). Analyze Investments Quickly With Ratios. Retrieved December 6, 2014, from http://www.investopedia.com/articles/stocks/06/ratios.asp
Financial Reports and Information. (2014, January 1). Retrieved December 6, 2014, from http:// www.coca-colacompany.com/investors/investors-info-reports-and-financial-information
Lewitinn, L. (2013, December 13). The real reason why Pepsi is beating Coke. Yahoo Finance. Retrieved December 2, 2014, from http://finance.yahoo.com/blogs/talking-numbers/real-reasonwhy-pepsi-beating-coke-143021474.html
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