Internal Financial Performance Analysis of Coca Cola Company (KO) from 2013 to 2015
Internal Financial Performance Analysis of Coca Cola Company (KO) from 2013 to 2015
Introduction
Coca Cola Company is a publicly traded organization in the United States of America that produces, retails and markets non-alcoholic beverages (such as concentrates and syrups etc). It serves the worldwide market except for North Korea and Cuba, since 1950 and 1962, as the drink is associated with American patriotism .
In this section, the financial performance of Coca Cola Company is examined by assessing the financial information and ratios from 2013 to 2015. This is done by analyzing the debt management capacity as well as ability to generate enough net income to provide attractive investment returns to shareholders. All this examination over a three year period is performed by considering the following financial information and ratios:
Debt Management Ratio Analysis
Here two most important ratios of Coca Cola Company are analyzed, from 2013 to 2015, to measure its capabilities to effectively manage its capital structure as well as debt servicing on regular intervals. These ratios include debt-to-equity and interest coverage ratio which are assessed as follows:
Debt-to-Equity Ratio
This ratio measures the extent to which Coca Cola Company is using debt and equity in its capital structure from 2013 to 2015. Analysis reveals that Coca Cola Company employed more short-term debt from 2013 to 2014 but reduced its dependence on short-term debt in 2015 to escape interest rate volatility. However, the company increased its dependence over long-term debt in 2015 by a substantial manner. Overall, Coca Cola Company has been employed more debt than equity stake in its capital structure since 2013.
There is a greater risk that because of depending more on debt levels, the financial flexibility of Coca Cola Company has greatly damaged from 2013 to 2015. In other words, Coca Cola Company seems to be on the verge on bankruptcy if anything goes wrong. Its volatility to fluctuations in interest rate level is really very high though it was able to escape frequent uncertainty in short-term rates. This is because long-term interest rate rarely fluctuates but short-term interest frequently changes with announcement of every monetary policy by the Federal Reserve Bank (FED).
Coca Cola Company would find it difficult in future to raise further capital in the market. If the company manages to get any funding from banking and financial institutions, it will be offered financial support at higher interest rate due to increased riskiness of the Coca Cola Company. Not only the interest rate risk but also the risk of default of Coca Cola Company is also high since 2013. Important to note is that Coca Cola Company has been in practice to retire its equity stake into the business. Instead, Coca Cola Company is making itself more dependent on interest bearing debt.
Interest Coverage Ratio
This ratio is also known as Times Interest Earned (TIE) as it gauges the capability of the Coca Cola Company to service its debt or fixed interest payments on a regular interval since 2013. Analysis of financial information makes it apparent that when Coca Cola Company employed optimal debt level in its capital structure in 2013, it capacity to service regular finance cost was high. As the company employed more short-term debt in 2014, the capability of Coca Cola Company to repay its lenders declined dramatically. This was normally dictated by increased usage of interest bearing funding as well as rise in interest rate volatility concerning short-term debt.
The position worsened further when Coca Cola Company increased its dependence on longer term debt or liabilities in 2015, instead of taking the debt down to a controlled or optimal level. All this could easily be proven by rising or positive trend in interest expense or finance cost of Coca Cola Company from 2013 to 2015.
Profitability Ratio Analysis
Under this section, the manner in which Coca Cola Company generates enough income, not sales revenue, through effective asset utilization for the purpose of rewarding its shareholders of common equity is examined. This capability is assessed by considering the below mentioned financial metrics or ratios:
Return on Assets
The total assets of Coca Cola Company showed a positive trend from 2013 to 2014 but declined by the end of financial accounting year of 2015. However, Coca Cola Company kept generating more net income from 2014 to 2015 by keeping tighter controls over its business costs and operating expenses. Due to dramatic increase in short-term debt and interest bearing expense (finance cost), the net income of Coca Cola Company declined in 2014. Increased reliance over shorter term debt raised the interest rate volatility and expense of Coca Cola Company in 2014. When company became more dependent on longer term debt and retired interest veering short-term liabilities, the net income of Coca Cola Company improved from 2014 to 2015.
In 2013, Coca Cola Company generated a net income of $9.53 for each dollar invested in acquisition and maintenance of the total asset mix. In contrast, due to increase in total assets in the denominator for more than that of net income, this capacity declined. In 2014, Coca Cola Company generated a net income of $7.71 by investing every $1 in the total assets. This capacity reduced in 2013 due to increase in denominator (total assets) for several reasons. These include dramatic increases in cash and cash equivalents to improve liquidity management practices as well as more investments in property, plant and equipment by the end of 2014.
While total assets declined in 2015, the capacity of Coca Cola Company to generate more net income from effective asset utilization, compared to 2014, improved by a slight margin. Now, Coca Cola Company can generate $8.16 for every one dollar it invests in the total asset mix. It reflects efficient asset utilization or effective asset management of effective and in the year 2015.
Return on Equity
This ratio I aimed at measuring how much earnings effective and is making available for distribution among its shareholders of common equity after paying all business costs and covering every operating expense. Important to note is that the management of has been retiring most of its equity stake since 2013. It is depending more on interest bearing debt from 2013 to 2015 due to interest rate volatility has increased.
In 2013, Coca Cola Company could make available $25.88 for every $1 invested by common equity holders as a return on investment. This return on investment declined in 2014 as the not only the equity stake but also the net income declined due to increase in interest expense. It became difficult for Coca Cola Company to provide more return on investment to its shareholders.
Compared to last year, Coca Cola Company provided more investment return to shareholders (about $28.7 in 2015) against their investment of each $1 in company’s operational activities. The return to equity holders increased in 2015 as net income increased while the equity stake in Coca Cola Company’s capital structure was retired.
Conclusion and Recommendation
After a careful and detailed analysis of financial performance of Coca Cola Company depending upon debt management and profitability assessments, it is found that the company is vulnerable to interest rate volatility and risk of default due to increase in interest bearing debt and retirement of equity. Due to this single factor, the financial flexibility, ability to generate enough net income through efficient asset management for rewarding equity investors declined in 2014. Therefore, it is recommended to the management of Coca Cola Company to refrain from further employing debt in its capital structure. Failure to do so will further damage company’s reputation and financial flexibility to raise debt funding in the market.
References
BBC. (2012, September 11). Who, What, Why: In which countries is Coca-Cola not sold? Retrieved March 19, 2016, from British Broadcasting Company (BBC-Magazine): http://www.bbc.com/news/magazine-19550067
