Coca Cola Financial Statement Analysis

Financial Statement Analysis

ACG203-CE

Marianne MarchantMargaret Pesikov

Sean Lenehan

Jeff Braga

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Table of Contents

Questions to be answered 3

Management Discussion & Analysis section and Miscellaneous 3

Income Statement and Profitability 6

Cash Flows 12

Balance Sheet 14

Liquidity and Efficiency 18

Solvency 22

Relevant Documents 25

Balance Sheet 25

Income Statement 26

Evaluation 27

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Questions to be answered:

Management Discussion & Analysis section and Miscellaneous

1. Read the Management Discussion and Analysis and the Chairman’s letter to shareholders. Describe the major products and services of the company.

The Coca-Cola Company is the leading owner and marketer of nonalcoholic beverage brands. Coca-Cola either owns or licenses 500 of the world’s nonalcoholic beverage brands. Coca-Cola is recognized as the world’s most valuable brand. There are approximately 54 billion beverages of all kinds served worldwide, of the 54 billion Coca-Cola accounts for approximately 1.6 billion of those beverages. Coca-Cola sells syrups, concentrates, and sodas to bottling companies and retailers.

2. Describe some of the specific details of the company’s financial and operational performance. Based on what you read in the Management Discussion & Analysis sections, do you get a positive or negative impression about the company? Describe why.

Coca-Cola follows the accounting principles that are generally accepted in the United States (GAAP). When making decisions, the company executives always consider the impact on stakeholders of the company and are careful to behave ethically and follow the policies of Coca-Cola. The company only records revenue when collectability is assured and delivery of all products has occurred. The company attempts to be very realistic when recording information that is not set in stone. Also, Coca-Cola takes potential market risks into account on their financial statements in order to more accurately display the state of their company.

We have a very positive impression of this company. It seems to us that it is very profitable, very dominant, and holds a very large amount of market power. What makes Coca-Cola very unique is their brand name which is nearly impossible for other companies to even attempt to compete with. During the year of 2009, Coca-Cola introduced Minute Maid Pulpy Super Milky in China, launched a beverage named Frestea Green to target active and healthy individuals in Indonesia, introduced Burn Energy Shots in Europe and sponsored several international events. Also, Coca-Cola became the first company in the beverage industry to commit to disclosing all of their beverage energy information (calories, kilocalories, etc) on all of their packaging.

It is evident that Coca-Cola is very focused on the needs of their consumers and is constantly working on developing products that would benefit their customers. Coca-Cola adapts its products to the location to which it intends to market them. For example, in Japan there is a big national interest in recycling, therefore Coca-Cola took this into consideration and created a

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bottle that is very light and able to be compacted so that it takes up very little space when recycled. It is this care for its customers and ethical financial behavior that ensures Coca-Cola’s yearly success and profitability. In the future, Coca-Cola will always be one of the most dominant companies in America as well as in other countries, regardless of the state of the economy.

3. Who is the company’s independent auditor and what type of audit opinion was rendered? What does this opinion mean? Who is responsible for the company’s financial statements?

Earnest & Young is the independent auditor for Coca-Cola Company. Their auditor stated that in their opinion Coca-Cola presented all their data fairly and awarded Coca-Cola a status of unqualified. This means that, to the best of their knowledge, Coca-Cola’s information is accurate. Since Earnest & Young gave Coca-Cola an unqualified status, both Coca-Cola and Earnest & Young are now responsible for the company’s financial statements.

4. What has the company’s stock been selling at over the past three years? You can use quarterly or yearly information. What are your observations about the trend in stock price? What might be the cause(s) for this trend?

Over the past three fiscal years for Coca-Cola, 2007-2009, the company’s stock has reached a high of $63.81 and a low of $39.10.The fact that the company has stayed in the same approximate $20 range means that the company’s sales have stayed somewhat consistent. In the current year of 2010, the company’s stock has reached a high of $64.69 and a low of $49.47. In 2009, it reached a low of $39.10 and a high of $59.11. In 2008, it reached a low of $41.50 and a high of $63.77. In 2007, it reached a low of $45.89 and a high of $63.81. The drop of stock prices was due to a dispute with the company Costco who, in November 2009, stopped purchasing Coca-Cola and Diet Coke products.

5. What has the Price Earnings ratio (P/E) been for the past 3 years? What does the P/E ratio tell you about this company? How does this compare to the industry and nearest competitor?

Price Earnings Ratio = Current Stock Price per Share / Earnings per Share

Stock Price – 12/31/07 $160 12/31/08 $121 12/31/09 $158

Earnings per Share – 2007 $2.59 2008 $2.51 2009 $2.95

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Coca-Cola Price Earnings Ratio each year – 2007 $160 / 2.59 = $61.78

2008 $121 / 2.51 = $48.21

2009 $158 / 2.95 = $52.56

In 2007, the Coca-Cola Company had an immensely high Price Earnings Ratio of $61.78, meaning that investors were optimistic about the future prospects of the company. However, in 2008, the Price Earnings Ratio fell heavily down to $48.21, meaning that investors were beginning to question the future prospects of the company. Once 2009 came around, the ratio rose to $53.56, showing that the company is beginning to bounce back and is showing more of a promising future. Over the years, the Coca-Cola Company has steadily grown in stock price. Over the past few years, even when they were having difficulties in 2008, they showed that they were still able to surpass their competition more and more each year.

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Income Statement and Profitability

6. Calculate and interpret a horizontal analysis on Sales and Net Income for the years presented in your annual report.

Horizontal Analysis on SalesNet Operating Revenues (In Millions) 2009 2008

$30,990 $31,944

Dollar Change in Account Balance:Current Year Balance − Prior Year Balance => $30,990 - $31,944 = $(1,004)

Percentage Change in Account Balance:Dollar Change ÷ Prior Year Balance => $(1,004) ÷ $31,944 = − 3.1%

Horizontal Analysis on Net IncomeConsolidated Net Income (In Millions) 2009 2008

$6,906 $5,807

Dollar Change in Account Balance:Current Year Balance − Prior Year Balance => $6,906 - $5,807 = $1,099

Percentage Change in Account Balance:Dollar Change ÷ Prior Year Balance => $1,099 ÷ $5,807 = 18.9%

As you can see from this analysis, there was an approximately 1 million dollar increase in the Net Income of this company. This is an 18.9% change from the year before and is a promising sign for the company. Net Revenues,

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however, decreased by approximately 3% since 2008. Although, Coca-Cola is earning less money per year according to the analysis on Sales, they were able to reduce their expenses for the year (including cost of goods sold) and greatly impact their net income for 2009 in order to increase their earnings.

7. Describe the trend in sales and net income in the context of the company’s business situation. What are the major reasons for the change in Sales? Changes in Net Income? This should be addressed somewhere in the annual report.

Though Sales in 2009 were less than they were in 2008, the Net Income in 2009 was more than it was in 2008.

Reasons for change in Sales:

The decrease in sales in 2009 since 2008 may be attributed to the fact that people are still only able to spend only a fraction of what they could have spent in the past. Though the economy has been doing better than it has in the past years, prices for certain things are still increasing (ex: Higher Education, Health Insurance, etc.) and the population is far less able and willing to make purchases that are not necessary.

Also, increases in health awareness regarding soft drinks, sugar, etc. may have also resulted in people being more hesitant to purchase Coca-Cola products due to fear of health risks and obesity. This causes a decrease in demand and therefore a decrease in sales.

Reasons for change in Net Income:

Certain factors affecting net income were high costs for sugar and aluminum, bad debt, and an overall weak US economy. Fortunately, in the recent years there has been evidence that the economy is on its way to recovery, hence why the Net Income in 2009 may have been higher than the Net Income in 2008. Slowly, the economy is working more in favor of the food and beverage industry which is why Net Income seems to be increasing at Coca-Cola as well as companies such as Sara Lee, General Mills, Tyson Foods, and Pepsi Co.

Fluctuation of foreign currency exchange rates can affect Sales and Net Income.

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8. Prepare a common-sized income statement for the years represented by your annual report. Be sure to include each item on the company’s income statement as a percent of net sales. Use Chapter 12 examples as a guide, and use an excel spreadsheet with formulas to present this information. Use this spreadsheet to answer question 9 below.

The Coca-Cola Company and Subsidiaries Consolidated Statements of Income

Year Ended December 31, 2009 Current Year 2009(In millions except per share data)NET OPERATING REVENUES $ 30,990 Cost of Goods Sold $ 11,088 GROSS PROFIT $ 19,902 Selling, general, and administrative expenses $ 11,358 Other operating charges $ 313 OPERATING INCOME $ 8,231 Interest income $ 249 Interest expense $ 355 Equity income (loss) - net $ 781 Other income (loss) - net $ 40 INCOME BEFORE INCOME TAXES $ 8,946 Income taxes $ 2,040 CONSOLIDATED NET INCOME $ 6,906 Less: Net income attributable to noncontrolling interests $ 82 NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY $ 6,824 BASIC NET INCOME PER SHARE $ 2.95 DILUTED NET INCOME PER SHARE $ 2.93 AVERAGE SHARES OUTSTANDING 2,314 Effect of dilutive securities 15

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AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,329

The Coca-Cola Company and Subsidiaries Consolidated Statements of Income

Year Ended December 31, 2008 Current Year 2008(In millions except per share data)NET OPERATING REVENUES $ 31,944 Cost of Goods Sold $ 11,374 GROSS PROFIT $ 20,570 Selling, general, and administrative expenses $ 11,774 Other operating charges $ 350 OPERATING INCOME $ 8,446 Interest income $ 333 Interest expense $ 438 Equity income (loss) - net $ (874)Other income (loss) - net $ 39 INCOME BEFORE INCOME TAXES $ 7,506 Income taxes $ 1,632 CONSOLIDATED NET INCOME $ 5,874 Less: Net income attributable to noncontrolling interests $ 67 NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY $ 5,807 BASIC NET INCOME PER SHARE $ 2.51 DILUTED NET INCOME PER SHARE $ 2.49 AVERAGE SHARES OUTSTANDING 2,315 Effect of dilutive securities 21 AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,336

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9. Describe the trend in the Gross Margin Ratio and Profit Margin ratio over the past three years? What are these ratios indicating for the company and what might be the major reasons causing them to change from year to year?

Gross Margin Ratio (Percentage of Selling Price that is a Profit) IN MILLIONS

2009(1 – ($11,088 ÷ $30,990)) X 100% = 64.2%

2008(1 – ($11,374 ÷ $31,944)) X 100% = 64.4%

2007(1 – ($10,406 ÷ $28,857)) X 100% = 63.9%

Profit Margin Ratio (Net Income/Net Sales) IN MILLIONS

2009$6,906 ÷ $30,990 = 22.3%

2008$5,874 ÷ $31,944 = 18.4%

2007$6,027 ÷ $28,857 = 20.9%

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The profit margin ratios are indicating that the company was receiving more profit from sales in 2009 than in 2008 and received less profit in 2008 than in 2007.The gross margin ratio is indicating that the percentage of total revenue that the company retains. This has very slightly decreased from 2008 to 2009 but the change is very minimal and most likely does not have much to do with the operation of the company. It increased slightly between 2007 and 2008. The changes in gross margin are very small.

A decrease in gross margin ratio may be caused by an increase in the cost of goods sold. The more expensive it is to produce an item, the less profit the company will retain. An increase in cost of goods sold may be related to scarcity of resources and inflation. An increase in the gross margin ratio is most likely due to a decrease in the cost of goods sold. Also, a decrease or increase in revenue may also affect this ratio.

Profit margin ratio may be affected by several factors. An increase may be a result of an increase in net income from net sales or a decrease in net sales compared to the net income. The opposite is true of a decrease.

10. What were the Return on Assets and Return on Equity ratios over the past

three years? Interpret the trend in each of these ratios.

ROA 2009 2008 2007

15.30% 13.82% 16.33%

ROE 2009 2008 2007

30.15% 27.44% 30.94%

The above data was taken directly off of the Mergent Online Database. There was no calculation required to attain these percentages.

From the year 2008, both the Return on Assets and the Return on Equity ratios have increased in the year 2009.

The increase in Return on Equity is a good thing for stockholders and indicates that a company uses the equity provided by stockholders during that specific year effectively and uses it to generate more equity for the owners.

The increase in Return on Assets indicates that the company is generating more profits from all of its resources and not just the resources provided by the owners. The higher both of these ratios are, the better for the given company. Therefore this increase in Coca-Cola’s ratio is indicating that the company is prospering.

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From these ratios and the ratios in #4, it is evident that Coca-Cola had a decrease in profitability as well as efficiency in the year 2008 and then made a significant rebound in the year 2009.

11. Did the company report any special, unusual, non-operating, or non-routine items in net income over that past 3 years? (This would be found on the income statement below operating income (EBIT) and may be explained in the notes to the financial statements). If so, what are they? If not what might be a possible non-operating item?

In the company’s notes to the financial statements, it reported non-operating items as being sale of equity securities, equity income, other-than-temporary impairment charges, and impairments of North American franchise rights.

Cash Flows

12. What was the overall cash flow in each of the past two years? What does this mean and comment on the trend.

The overall cash flow for the 2009 year is $7,021 million. The overall cash flow for the year 2008 is $4,701 million. These numbers show that Coca-Cola’s sales and production has increased and also that the price of these things may have also increased due to the recession. The increase of cash flow from 2008 to 2009 most likely pushed Coca-Cola to invest more, as you can see from the nearly 2 billion dollar increase in cash from investing activities from 2008 to 2009.

13. Analyze the trend in Operating activities, Investing, and Financing Activities over the years presented on your annual report. Comment on these trends?

The cost of goods sold in 2009 was $11,088 million and the net operating revenues were $30,990 million. The cost of goods sold in 2008 was $11,374 million and the net operating revenues were $31,944 million. The gross profits for 2009 and 2008 were $19,902 million and $20,570 million respectively. There were 3% decreases for both cost of goods sold and net operating revenues from 2009 to 2008. The decreases may have been due to the dispute with Costco in November 2009. Over the past two years the

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company has stayed relatively even as far as profit, costs and revenue. This shows that the company is stable and still able to make sales despite the world’s current economic condition. Total Cash Flow from Operating Activities was 8,186 million in 2009 and was 7,571 million in 2008. Total Cash Flows from Investing Activities was 4,149 million in 2009 and was 2,363 million in 2008. Total Cash Flows from Financing Activities was 2,293 million in 2009 and was 3,985 million in 2008. After looking back over Coca-Cola’s cash flow history, I found that the numbers for investing and financing activities alternate every year. For example, in 2009, more money was spent in investing as opposed to financing. In 2008, more money was spent in financing and less was spent in investing. In 2007, more money was spent in investing activities than financing activities. Judging by this pattern, they go back and forth between financing and investing as their main focus for the year.

14. Calculate Free Cash Flow and Cash Flow Adequacy Ratios for the past two years. Interpret these ratios. What is your assessment of the company’s ability to generate cash over the past two years?

Free cash flow is Net Cash Flow from Operations - Capital Expenditures – Dividends

2009 Free Cash Flow=8,186 million-1,993 million-3,800 million=2,390 million2008 Free Cash Flow=7,571 million-1,968 million-3,521 million=2,082 million

Cash Flow Adequacy Ratio = (Cash Flow from Operations) / (Long-term debt paid + Fixed assets purchased + Cash dividends distributed)

2009: 8,186 million/(5,059 million+9,561 million+3,800 million)= .442008:7,571 million/(7,281 million+8,326 million+3,521 million)= .40

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Free cash flow for the 2009 year was 2,390 million. In 2008, the free cash flow was 2,082 million. The cash flow adequacy ratio for 2009 and 2008 were .44 and .40 respectively. As a general rule of thumb, if a company’s cash flow adequacy ratio is at 1, it is able to generate money freely. If it is below 1, the company may have a large debt or may be operating inefficiently. With the ratio having increased, this shows that the company is recovering but is still not able to generate cash freely.

15. Did the company pay cash dividends during the past year? If so, what percentage of net income were the cash dividends? Does the company have a pattern of paying cash dividends? Why do you think the company pays dividends? If not, why do you think it did not?

3,800 million/6,906 million= 55%3,521 million/5,874 million= 59%The company paid $3,800 million in dividends in 2009 and $3,521 million in 2008. The cash dividends were 55% and 59% of the net income respectively. The company has paid over 3,000 million in dividends over each of the past three years. The net income has stayed relatively the same so this means that the company normally pays about half of their net income to dividends. The company pays dividends so that they can keep their investors happy and continue to be given money by them.

Balance Sheet

16. Calculate and interpret a horizontal analysis on total assets for the years presented in the annual report.

Total Assets: 2009 2008 2007 2006 2005

$48,671 $40,5

19 $43,26

9 $29,96

3 $29,427 Horizontal Analysis:

Dollar Change from 2009-08Dollar Change from 2008-07

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$48,671 – $40,519 = $8,152$40,519 - $43,269 = ($2,750)

Dollar Change from 2007-06Dollar Change from 2006-05

$43,269 - $29,963 = $13,306 $29,963 - $29,427 = $536Percentage Change from 2009-08

Percentage Change of 2008-07

$8,152 ÷ $40,519 = 20.1%($2,750) ÷ $43,269 = (6.4)%

Percentage Change from 2007-06

Percentage Change of 2006-05

$13,306 ÷ $29,963 = 44.4% $536 ÷ $29,427 = 1.8%

The total assets of the Coca-Cola Company in 2005 were $29,427 and increased by a few hundred dollars that next year in 2006. In 2007, the company’s total increased dramatically up to $43,269 but dropped slightly in 2008 to $40,519. The reason for this decrease in total assets could have been due to the major Recession that occurred during that time. By the next year in 2009, however, Coca-Cola was able to get back on its feet and increase its assets even more than they had before as they ended the year with $48,671. Coca-Cola has always been a big name in the refreshment business and has become bigger than ever over the past few years.

17. For the past year, what is the asset account that represents the largest percentage of total assets? Does this seem to make sense for this type of company? Why? Show the numbers.

In thousands (except share data)

ASSETS

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Jan. 3, 2010

Current assets:Cash and cash equivalents $ 17,770 Restricted cash 4,500 Accounts receivable, trade, less allowance for doubtful accountsof $2,187 and $1,188, respectively 92,727Accounts receivable from The Coca−Cola Company 4,109Accounts receivable, other 17,005Inventories 59,122Prepaid expenses and other current assets 35,016

Total current assets 230,249

Intangible Assets:Property, plant and equipment 326,701Leased property under capital leases 51,548Other assets 46,508

*Franchise rights 520,672Goodwill 102,049Other identifiable intangible assets 5,350

Total $ 1,283,077*Asset account with the largest percentage of total assets

Franchise Rights / Total Assets = $520,672 / 1,283,077 = 40.6%

This seems to make sense for Coca-Cola to have franchise rights as being their largest percentage of total assets. When you sell franchise rights, you are expanding your business quickly with a minimum of capital. It is a very large company that has numerous other brands of drinks such as Sprite, Fanta and Dasani. Franchise rights give Coca-Cola the ability to spread their business and becoming a successful company.

18. Does the company have any intangible assets? If so, what are they and describe what they mean? If not, what are intangible assets and what is an example of an intangible asset?

• Property, plant and equipment – The money that the company spends in order to be capable of owning property, building plants, and purchasing the equipment that are necessary to have for the company.

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• Leased property under capital leases – money in the company that is depreciated over the lease term.• Franchise rights – Selling your business in order to expand quickly with a minimum of capital.• Goodwill- Valued according to the advantage or reputation a business has acquired.• Other identifiable intangible assets - Primarily represents the customer relationships and distribution rights in the company.

19. What are the numbers for Plant Assets at cost, accumulated depreciation, and Plant Assets (net)? How does the depreciation method chosen affect these numbers?

Plant Assets at Cost: $1,283,077Accumulated Depreciation: $567,283

Plant Assets at Cost – Accumulated Depreciation = Net Plant Assets $1,283,077 – 567,283 = $715,794 (Net Plant Assets)

The Coca-Cola Company uses the straight-line method for depreciation when calculating its costs. By choosing to use the straight-line method, Coca-Cola ends up yielding the same expense each year.

20. What is accumulated depreciation as a percent of total Plant Assets? Show the numbers. What general conclusions can you make about this percentage?

Accumulated Depreciation: $567,283Total Plant Assets: $1,283,077

Accumulated Depreciation / Total Plant Assets = Percentage of Accumulated Depreciation $567,283 / 1,283,077 = 44.2%

The percentage of accumulated depreciation shows that, although the percentage is not too high, it tells the company that the assets that they have are beginning to reach their half-life.

21. Is there an Allowance for Doubtful Accounts and, if so, what percent of A/R does this represent? What conclusions can you draw from this percentage? If there is no Allowance for Doubtful Accounts, what does this say about the company’s A/R balance?

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The Coca-Cola Company does have an Allowance for Doubtful Accounts.:Allowance for Doubtful Accounts: $2,187Accounts Receivable: $94,914

Allowance for Doubtful Accounts/Accounts Receivable=Percent of Allowance for Doubtful Accounts

$2,187 / 94,914 = 2.3%From observing the outcome of the percentage that was found, this result shows that the Coca-Cola Company does not need to worry about their Allowances for Doubtful Accounts very much. The reason for such a low percentage could be due to the fact that Coca-Cola is more of a cash-based company than a credit-based company.

22. How many shares of common stock are outstanding? What does this mean? Why is the number of outstanding shares important to the company

The Coca-Cola Company owns about 2.32 billion shares of common stock that are outstanding. This is quite a large number of shares that are outstanding. This means that a good amount of the Coca-Cola shares are held by people who are not part of the company. The number of outstanding shares is important to the Coca-Cola Company because by giving out portions of company control, they can then raise more money to invest, and therefore grow their revenue.

Liquidity and Efficiency

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23. Define liquidity and efficiency. Compute the following ratios for the past 2 years. Show the formula used and the specific numbers used to calculate your ratio. For each ratio, comment on the specific numbers calculated and what these numbers are telling you about your company’s liquidity and efficiency. For the turnover ratios, does the ratio make sense for your company? COMPARE YOUR RESULTS TO THE INDUSTRY AVERAGE FOR THESE RATIOS AS WELL AS TO THE NEAREST COMPETITOR FOR YOUR COMPANY. COMMENT ON THIS COMPARISON.

Current Ratio and Quick Ratio (Acid Test Ratio)Receivables Turnover and Day’s Sales UncollectedInventory Turnover and Days Sales in Inventory

Liquidity is the ability for a company to satisfy its short term obligations.

FormulaCurrent Ratio Current Assets / Current Liabilities

Quick RatioCash + Short-term Investments + Accounts Receivable) / Current Liabilities

Receivables Turnover Credit Sales / Average ReceivablesAverage Receivables (Beginning receivables + Ending Receivables) / 2Day’s Sales Uncollected 365 / Receivables Turnover Ratio

Inventory Turnover Cost of goods sold / Average InventoryAverage Inventory (Beginning Inventory + Ending Inventory) / 2Days Sales in Inventory 365 / Inventory Turnover Ratio

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Coca-Cola (2009)

Equation TotalCurrent Ratio 17,551,000 / 13,721,000 1.28

Quick Ratio(7,021,000 + 2,130,000 + 3,758,000) / 13,721,000 0.94

Receivables Turnover 30,990,000 / 3,424,000 9.05

Average Receivables (3,090,000 + 3,758,000) / 23,424,00

0Day’s Sales Uncollected 365 / 9.05 40.33

Inventory Turnover 11,088,000 / 2,270,500 4.88

Average Inventory (2,187,000 + 2,354,000) / 22,270,50

0Days Sales in Inventory 365 / 4.88 74.79

Coca-Cola (2008)

Equation RatioCurrent Ratio 12,176,000 / 12,988,000 0.94

Quick Ratio(4,701,000 + 0 + 3,090,000) / 12,988,000 0.6



0

Day’s Sales Uncollected 365 / 5.15 70.87



0

Days Sales in Inventory 365 / 5.16 70.74

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Pepsi (2009)


Quick Ratio (3,943,000 + 192,000 + 4,624,000) / 8,756,000 1



0




0


Pepsi (2008)


Quick Ratio(2,064,000 + 213,000 + 4,683,000) / 8,787,000 0.79



0




0


Current Ratio: The current ratio for Coca-Cola in 2009 was 1.28, which is a huge improvement from the ratio of 2008 when Coca-Cola was at 0.94. In 2008 Coca-Cola was unable to pay their short term debts with their current assets putting Coca-Cola in a very vulnerable state. This tells me that Coca-Cola is improving their liquidity and efficiency, because their current ratio is improving. They are better able to pay off their current debts in 2009 than they were in 2008. Coca-Cola’s closest competitor, Pepsi, however has a better current ratio that Coca-Cola, Pepsi’s ratio for 2008 was 1.23 and increased to 1.44 in 2009. Since the numbers are rising in both companies we

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know that they are both becoming more liquid, however as Pepsi’s ratio is already quite high I would be worried about it getting too high and staying too high, where as Coca-Cola’s ratio remains closer to 1, This tells us that Coca-Cola invests their assets in more productive-higher yielding assets than Pepsi does.

Quick Ratio (Acid Test Ratio): Coca-Cola’s quick ratio in 2009 was 0.94 which is an improvement from 2008 when their quick ratio was 0.6; however Coca-Cola still cannot pay off their current liabilities without using their inventory. This ratio gives us a better understanding of Coca-Cola’s liquidity and efficiency than the previous, current ratio, because we now understand that Coca-Cola cannot pay its debts without its inventory. This leads us to believe that Coca-Cola is a somewhat risky business, even though it is the largest in the nonalcoholic beverage industry. Their closest competitor, Pepsi, did better than them only be a tiny bit, getting 0.79 in 2008 and 1 in 2009.

Receivables Turnover: The receivables turnover ratio for Coca-Cola in 2009 is high as expected, since it operates primarily on a cash basis. Between 2008 and 2009 the ratio for receivables turnover almost doubled. This means Coca-Cola is good at generating and collecting Sales. Coca-Colas closest competitor, Pepsi, however is doing better than Coca-Cola, in 2008 Pepsi beat Coca-Cola with a ratio of 7.04 and in 2009 with a ratio of 9.29. Coca-Cola has been catching up however, since there is a greater leap between 5.15 (2008) and 9.05 (2009) for Coca-Cola and 7.04 (2008) and 9.29 (2009) for Pepsi.

Day’s Sales Uncollected: In 2008 it took Coca-Cola 70.87 days to collect their average accounts receivables, and in 2009 it only took them 40.33 days which is a great improvement. Pepsi only took 51.85 days in 2008 and 39.29 in 2009 to collect their average accounts receivables.

Inventory Turnover: Both Coca-Cola and Pepsi’s ratios stayed similar over the two years, which means that their ability to sell inventory is relatively stable. In 2008 Coca-Cola had a ratio of 5.16 and in 2009 had a ratio of 4.88. Pepsi had a ratio of 4.73 in 2008 and 4.31 in 2009. These ratios were not what we expected; we assumed that the ratios would be much higher because Coca-Cola and Pepsi sell their syrup to bottling partners around the world so they do not need to deal with the storing of the bottled product.

Days Sales in Inventory : In 2008 Coca-Cola had 70.74 days worth of inventory left over and 74.79 days worth of inventory left over in 2009. These numbers are not good, because it means they would have be losing money storing these inventories instead of re-investing the assets. Pepsi’s days sales in inventory ratio is even worse than Coca-Cola’s because they had 77.17 days worth of inventory left over at the end of the year, in 2008, and 84.69 days worth left in 2009.

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Based on the ratios examined, it appears that Coca-Cola has sufficient liquidity, however Coca-Cola is less liquid than Pepsi, its leading competitor. One cause for Pepsi to be more liquid the Coca-Cola could stem from the fact that Coca-Cola invests its assets more than Pepsi does which generates more revenues.

Solvency

24. Define solvency. Compute the following ratios for the past 2 years. Show the formula used and the specific numbers used to calculate your ratio. For each ratio, comment on the specific numbers calculated and what these numbers are telling you about your company’s solvency. COMPARE YOUR RESULTS TO THE INDUSTRY AVERAGE FOR THESE RATIOS AS WELL AS TO THE NEAREST COMPETITOR FOR YOU COMPANY. COMMENT ON THIS COMPARISON.

Debt to Total Assets RatioTimes interest earned

Solvency is the company’s ability to pay its long-term obligations.

Formula

Debt to Total Assets Ratio Total Liabilites / Total Assets

Debt to Total Equity Ratio Total Liabilities / Total Equity

Times interest earned (Net Income + Interest Expense + Income Tax Expense) / Interest Expense

Coca-Cola (2009)

Equation Total

Debt to Total Assets Ratio 23,872,000 / 48,671,000 0.49

Debt to Total Equity Ratio 23,872,000 / 24,799,000 0.96

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Times interest earned (6,824,000 + 355,000 + 1,687,000) / 355,000 24.98

Coca-Cola (2008)

Equation Total




Pepsi (2009)

Equation Total




Pepsi (2009)

Equation Total




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Debt to Total Assets Ratio : Coca-Cola’s debt to total assets ratio for 2009 and 2008 was 0.49 this ratio is relatively low, indicating that they do not have a very risky capital structure, especially when comparing these numbers to their leading competitor, Pepsi’s ratio was 0.66 in 2008 and 0.58 in 2009. They are close, but Pepsi seems to have a riskier capital structure than Coca-Cola.

Debt to Total Equity Ratio: In 2009 Coca-Cola had a debt to total equity ratio of 0.96, which is a slight decrease from their 2008 ratio of 0.98. Pepsi on the other hand had a ratio of 1.37 in 2009 and 1.97 in 2008. Coca-Cola is doing better, because they rely less on liabilities than they do on equity. This tells us that there is less risk in investing in Coca-Cola. Both ratios are decreasing annually, however Coca-Cola is still the able to pay off its long-term debts better than Pepsi.

Times Interest Earned: In 2009 Coca-Cola had a ratio of 24.98 which is a large increase from 2008 when their ratio was 18.81. This means that they have a comfortable coverage of interest, and that the coverage has increased from the previous year. Pepsi however is has a declining coverage of interest. In 2008 Pepsi had a ratio of 21.6 but it declined in 2009 to 20.6.

Based on the tree ratios Coca-Cola’s capital structure is trending to less debt, which is decreasing the risks of insolvency. Currently Coca-Cola is not insolvent, and can still handle their debts. Coca-Cola is doing better handling their long-term debts than Pepsi. Pepsi’s capital structure is heading more towards debt which could be risky, but at the moment it appears both Pepsi and Coca-Cola can sufficiently pay off their debts.

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Relevant Documents:

Balance Sheet

THE COCA-COLA COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2009 2008

(In millions except par value) ASSETS CURRENT ASSETS Cash and cash equivalents Short-term investments

$ 7,021 2,130

$ 4,701 —

TOTAL CASH, CASH EQUIVALENTS AND SHORT- TERM INVESTMENTS 9,151 4,701

Marketable securities Trade accounts receivable, less allowances of $55 and $51, respectively Inventories Prepaid expenses and other assets

62 3,758 2,354 2,226

278 3,090 2,187 1,920

TOTAL CURRENT ASSETS 17,551 12,176

EQUITY METHOD INVESTMENTS OTHER INVESTMENTS, PRINCIPALLY BOTTLING COMPANIES OTHER ASSETS PROPERTY, PLANT AND EQUIPMENT — net TRADEMARKS WITH INDEFINITE LIVES GOODWILL OTHER INTANGIBLE ASSETS

6,217 538 1,976 9,561 6,183 4,224 2,421

5,316 463 1,733 8,326 6,059 4,029 2,417

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TOTAL ASSETS $ 48,671 $ 40,519

LIABILITIES AND EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses Loans and notes payable Current maturities of long-term debt Accrued income taxes

$ 6,657 6,749 51 264

$ 6,205 6,066 465 252

TOTAL CURRENT LIABILITIES 13,721 12,988

LONG-TERM DEBT OTHER LIABILITIES DEFERRED INCOME TAXES THE COCA-COLA COMPANY SHAREOWNERS’ EQUITY Common stock, $0.25 par value; Authorized — 5,600 shares; Issued — 3,520 and 3,519 shares, respectively Capital surplus Reinvested earnings Accumulated other comprehensive income (loss) Treasury stock, at cost — 1,217 and 1,207 shares, respectively

5,059 2,965 1,580 880 8,537 41,537 (757) (25,398)

2,781 3,011 877 880 7,966 38,513 (2,674) (24,213)

EQUITY ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY EQUITY ATTRIBUTABLE TO NONCONTROLLING INTERESTS

24,799 547

20,472 390

TOTAL EQUITY 25,346 20,862

TOTAL LIABILITIES AND EQUITY $ 48,671 $ 40,519

Income Statement

THE COCA-COLA COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31, 2009 2008 2007 (In millions except per share data) NET OPERATING REVENUES Cost of goods sold

$ 30,990 11,088

$ 31,944 11,374

$ 28,857 10,406

GROSS PROFIT Selling, general and administrative expenses Other operating charges

19,902 11,358 313

20,570 11,774 350

18,451 10,945 254

OPERATING INCOME Interest income Interest expense Equity income (loss) — net Other income (loss) — net

8,231 249 355 781 40

8,446 333 438 (874) 39

7,252 236 456 668 219

INCOME BEFORE INCOME TAXES Income taxes 8,946 2,040

7,506 1,632

7,919 1,892

CONSOLIDATED NET INCOME Less: Net income attributable to noncontrolling interests 6,906 82 5,874 67 6,027 46 NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF THE COCA-COLA COMPANY $ 6,824 $ 5,807 $ 5,981

BASIC NET INCOME PER SHARE1 $ 2.95 $ 2.51 $ 2.59

DILUTED NET INCOME PER SHARE1 $ 2.93 $ 2.49 $ 2.57

AVERAGE SHARES OUTSTANDING Effect of dilutive securities 2,314 15 2,315 21 2,313 18

AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,329 2,336 2,331

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1 Basic net income per share and diluted net income per share are calculated based on net income attributable to shareowners of The Coca-Cola Company. Refer to Notes to Consolidated Financial Statements. 67

Evaluation:

TEAM EVALUATION FORMTeam Name/Number:__Coca Cola Company ____________________Case/Project Name:_ Coca Cola_______________________________

Ground Rules:• The group must agree on the evaluation for each person in the

team.

• The following attributes should be considered.

1. Contribution to group discussion

2. Quality and conciseness of writing

3. Contribution to organization of the assignment

4. Amount of initiative and effort

5. Dependability and reliability

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6. Attendance at team meetings

• Based on the above criteria, you must allocate total points to each person based on the number of people in the group. For example, 4 people x 100 points each would mean that 400 total points should be allocated, 5 people = 500 total points.

• If everyone contributed equally to the project, each person should be allocated 100 points.

• If a person contributed more than the others, that person could be allocated more than 100 points, but that means that another person must be allocated less than 100 points.

Person 1 Person 2 Person 3 Person 4 Person 5 Person 6 Total

NAME

Marianne Marchant

Margaret Pesikov

Jeff Braga

Sean Lenehan

Points allocated

110 105 100 85 400

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Coca Cola Financial Statement Analysis

Documents

Transcript of Coca Cola Financial Statement Analysis