The Coca-Cola Company: Financial Analysis

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Carbonated soft drinks are the second largest category after drinking water among all soft drinks. It includes all carbonated beverages with added aroma and sweeteners, except for some beverages like energy drinks. According to forecasts, the market for carbonated drinks is growing; from 2017 to 2022, it will increase in volume by 6.8% (“Coca-Cola Company,” n.d.). This market is a broad field, which is almost unlimited in the range of ideas and possibilities. Experimenting with the development of new formulations is inexpensive, and the number of ideas is enormous. As a rule, they are easy to put on a conveyor belt, which allows creating niche marginal novelties and moving forward in the competition.

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Competition in this area is fierce, with little shelf space and purchases made on impulse. Thanks to their resources and classic techniques of advertising, distribution, and merchandising, market leaders take all the consumer’s attention to themselves. To “catch” their consumer, other producers need bright and strong “baits and lures.” They should be based on real values and ideas that can respond to consumer demand.

There are different needs of people that organizations in this industry must take into account. For example, buyers can pay more but want to know for what. The mere energy boost from cheap soda is no longer enough, and people want natural ingredients, purity, more energy, athletic performance, better mood, and less stress. Buyers also want to be healthy but are not ready to spend a lot of time on it. In addition, they have formed preferences, but the product must be available to them in a convenient place and on time.

One of the largest multinational corporations working in this area is The Coca-Cola Company. The company’s profile sector is consumer goods, the industry is food, the market niche is carbonated drinks. This giant consumer market is the world leader in the production of non-alcoholic beverages. The leading brand of the manufacturer is the eponymous Coca-Cola carbonated drink. The company’s share in the specialized segment of carbonated drinks exceeds 40%; its products are represented worldwide. The company also sponsors numerous international non-profit organizations such as FIFA, IIHF, and the World Olympic Games. However, over the past quarters, Coca-Cola has lost its position in the world markets due to the too-strong dollar and competition from the main competitor – PepsiCo. Because of this, in recent years, there has been a deterioration in operating results. In any case, the return on investment and the profitability of current activities are still fairly high.

At the same time, the market of soft drinks itself is going through difficult times. World consumption today barely exceeds 41 liters per person. In 2005, consumption was just over 35 liters per person. Thus, in physical terms, the demand for such drinks grew by only 17%. In monetary terms, the profile segment of the world market today does not exceed $110 billion (“Annual reports,” n.d.). In addition, the strengthening of the dollar against world currencies reduced American companies’ competitiveness in this market in the world. Consequently, companies are forced to target fast-growing markets with relatively stable local currencies.

The main activity of Coca-Cola, as already mentioned above, is the production of soft drinks. The company’s core segment is sweet drinks, the share of which exceeds 42% (“Our financial results,” n.d.). This giant owns 5 of the 6 best-selling soda brands in the world – Coca-Cola, Diet Coke, Fanta, Schweppes, and Sprite. However, the overall product line is much broader. It covers almost all soft drink market segments, from natural juices to energy drinks and bottled water. In addition, the company is jointly producing Nestea iced tea with the Swiss Nestle. The largest competitor in the global market is another American company of a similar profile – PepsiCo.

Due to the strengthening of the dollar, in geographic terms, the largest share of revenues in recent years fell on the American market – almost 47% (about $21.7 billion). Moreover, in 2013 this figure was slightly lower – 46.1%. At the same time, business in the Asia-Pacific region and Latin America suffered – the share of these markets decreased by 0.1%, respectively, to 11.4% and 10%. On the other hand, sales in Europe rose despite a sharp weakening of the euro – the European market share in the business structure grew from 9.9% to 10.5% ($ 4.85 billion).

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Simultaneously, the American market contributes only 25.2% to the structure of operating profit, as high costs reduce the marginality of business in this region. The most considerable contribution to operating profit is made by the European market – 29.4%. This is due to the euro’s devaluation and, accordingly, a decrease in production costs directly in European countries. At the same time, business margins in the United States fell to 11%, while in Europe they jumped to almost 59% (“Our financial results,” n.d.). In general, the company lost 5% of its potential revenues from currency fluctuations.

Segmentally, Coca-Cola’s business relies mainly on the Coca-Cola brand of the same name – the share of this product in the revenue structure reaches 40% (about $ 18billion). However, other company brands are gradually occupying an increasing share in the structure of revenues due to active advertising. Total expenditures in this direction last year exceeded $2.5 billion (“Our financial results,” n.d.). In general, due to the stagnation of the global market for sugary carbonated soft drinks over the past 8 years, the company is trying to promote other brands. This will allow in the future to deepen the diversification of business and thus reduce market risks. However, so far in this business, the main competitor of the company – PepsiCo – has achieved more serious success.

Coca-Cola’s financial results look pretty weak. For fiscal 2014, total revenues were nearly $46 billion, down 2% from a year earlier. Net income fell more significantly – by more than 17% to $7.1 billion, while in 2013 it was $8.58 billion (“Coca-Cola Company,” n.d.). In the second quarter of 2015, the results were contradictory – revenue grew by 1.25% to $ 10.71 billion, but net profit decreased by almost 4% – to $ 1.57 billion. The decrease in profit is due to increased interest payments on debt obligations to $ 447 million against $124 million a year earlier. At the same time, income from owning securities increased only to 155 million dollars against 123 million in the second quarter of the 2014 financial year. On the contrary, gross profit grew by 1.7% to $ 6.6 billion (“Coca-Cola Company,” n.d.). True, the gross margin remained practically the same – 61.6%.

Fundamentals are also mixed. The company’s debt burden is average – the Debt / Equity ratio, which determines the ratio of debt to equity, is 1.47, while long-term liabilities over 1 year account for only about 0.9. However, even such a seemingly high debt burden is lower than the industry average. Nevertheless, the profitability of investments and current activities is slightly lower than that of peers. Thus, ROE is 22.2%, ROI reaches 10.4%, and ROA is 7.5% (“Our financial results,” n.d.).

At the same time, operating profitability indicators are slightly better than the industry average. Thus, the gross profitability for the last 5 years is 61.2% and 55.3%, respectively, for the company and the industry. The issuer’s operating margin reaches 23%, while its peers are only 18.25%. In terms of margin, there is an even greater difference in favor of Coca-Cola – the current figure is 19.75%, and over the past 5 years, it has reached 26.2% (for peer companies, respectively, 16.5% and 19.15%). However, the company and industry’s comparative earnings per share are $10.38 and $23.78, respectively, and basic earnings per share are $ 1.62 and $ 2.64 per share (“Coca-Cola Company,” n.d.). Taken together, these data indicate an overall strong position for the company and moderate financial risks.

The yield on the issuer’s securities is lower than in the industry. Thus, diluted earnings per share for the company and the industry are respectively $1.62 and $2.64; the profitability ratio is 20.4% and 14.1%. Cash flow per share for the company and industry is $2.4 and $3.46 (“Annual reports,” n.d.). Thus, according to comparative and multiplier analysis, the issuer’s shares look somewhat overbought and have some downside potential. As a result, it is possible to conclude that Coca-Cola securities are not attractive for investments at the moment. However, in the long term, everything will depend on the management strategy for diversifying the business and developing new markets.

References

Annual reports. (n.d.). Coca-Cola Consolidated. Web.

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Coca-Cola Company (KO). (n.d.). Investing.com. Web.

Our financial results are prepared in accordance with international finance reporting standards (IFRS). (n.d.). Coca-Cola HBC. Web.

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