Financial Statement Analysis of a Public Company

ACC 205

Principles of Accounting I

Financial Statement Analysis of a Public Company

The Coca-Cola Company, headquartered in Atlanta, Georgia since 1979, manufactures products in the beverage industry on a massive scale. The Coca-Cola brand is known worldwide. In fact, there are only two countries where their products are not offered, Cuba and North Korea (There Are Now Only Two Countries in The World Where Coca-Cola Doesn’t Do Business, 2012). Myanmar only recently obtained the authority to sell and distribute Coca-Cola brands in its country. Coca-Cola’s New York Stock Exchange, NYSE, identification symbol is KO (Investor Relations: The Coca-Cola Company, 2016).

Coca-Cola or as it is often referred to, Coke, is the number one provider of sparkling and still beverages. They sell over 1.9 billion servings in 200 countries every day (Freeman, & Martin, 2003), this is mainly due to the breadth of their offerings in their $20 billion brand. There are over 3800 products available worldwide. Of those 3,800 products, 18 of the brands they offer come in reduced, low or zero calorie options for the health-conscious consumers. The Coca-Cola company isn’t just soda either. Some of their brands include Honest Tea, Simply Orange, Minute Maid, Dasani, Powerade, Vitamin Water, Fresca, Fanta, Sprite, Smart Water, Mellow Yellow, Odwalla, Coke, Coke Zero, Diet Coke, Ciel and Fuze (Brands: The Coca-Cola Company, 2016).

Coca-Cola Company’s main competitors are Pepsi Co., Monster Beverage Corp., Dr. Pepper Snapple Group as well as International subsidiaries of the Coca-Cola Company (Coca-Cola Co. Top Competitors and Peers, 2016). Their latest innovative idea to edge out their competition was the Freestyle machines. These machines are usually placed in areas such as restaurants, for example, Wendy’s has the Freestyle machine installed in all of the newer and renovated locations. These machines have a variety of flavors that allows customers to customize and mix their flavors of drinks.

Horizontal Analysis of Income Statement and Balance Sheet

Coca-Cola Co. Income Statement for Fiscal Years 2013, 2014 and 2015 with parallel analysis (KO Income Statement, 2016).

(In millions)

Coca-Cola Co Balance Sheet for Fiscal Years 2013, 2014 and 2015 with horizontal analysis Coca-Cola Co (KO Income Statement, 2016)

(In millions)

Horizontal analysis is a technique used to read financial statements, and it shows the change in the amounts of similar accounts over a specified period. Parallel analysis is used when correlating data from different frames of time side by side (Wainwright, 2012). Every item listed has an entry on the analysis and represents past and present time. Each entry shows a dollar and a percentage difference within the different frames of time that represent an increase or decrease in cost incurred to operate.

On the income statement and the balance sheet, The Coca-Cola Company showed both negative and positive trends in the company. Between 2014 and 2015 the income statement showed net sales decreased from $45.99 million in 2014 to $44.29 million in 2015 (-3.85%). However, the cost of sales reduced as well. It dropped from $17.88 million in 2014 to $17.48 in 2015, a decrease of 2.33%. This resulted in an almost 1.3 million dollar drop in gross profit. There were also in the company’s income tax expenses. They paid less in 2015 due to the fact they had less revenue to base it on.

Ratio Analysis

Another area to address with The Coca-Cola Company is the company’s liquidity. The company’s cash is measured using the current ratio, quick ratio, and cash-to-current liabilities ratios. The current ratio assists management with determining if the company has sufficient current assets to accommodate its limited responsibilities and is defined by subdividing current assets by current liabilities (Bujaki & Durocher, 2012). Coca-Cola had over $90 million in current assets and $26.9 million in current liabilities in 2015; and $92 million in current assets and $32.37 million in current liabilities in 2014 (KO Income Statement, 2016). An ideal present ratio is 1.0 because it shows that a company has equal amounts of existing assets and current liabilities and should be able to meet current liabilities if they were suddenly due. Based on the company’s current assets and current liabilities information, its current ratios were 1.24 for 2015 and 1.2 for 2013.

While the current ratio results are positive, they do not consider Coca-Cola Company’s true liquidity and require a more conservative approach such as the quick ratio. The quick ratio, which is similar to the current ratio, is a more traditional approach because it excludes inventory, the company’s most illiquid current asset (Bujaki & Durocher, 2012). With the exclusion of stock from existing assets, the current assets balance for 2015 would be $30.49 million and $29.89 million in 2014. Using these figures to replace those used in the present ratio would result in a quick ratio of 1.13 for 2015 and 0.92 for 2014. The ideal quick ratio is also 1.0, which means Coca-Cola’s current liabilities were still covered with the exclusion of its most liquid current assets for the Fiscal Year 2015.

The last ratio is considered very conservative. It is the cash-to-current liabilities ratio. This ratio measures a company’s cash against its current liabilities and excludes all other assets because they would need to be converted to cash before enabling a company to satisfy short-term liabilities. Perrigo had $32.99 million in cash and cash equivalents in 2014 and $33.40 million in cash and cash equivalents in 2015. Using this information and the current liabilities’ balances previously discussed results in cash-to-current liabilities ratios of 0.74 in 2015 and 0.67 in 2014, which means if the company had to cover all current liabilities at the end of 2015 or 2014, they would not have had sufficient cash to cover all of it.

I would recommend that an individual invest in The Coca-Cola Company. During the past three years, the company’s sales have slightly declined. However, this is a worldwide company with a long history of excellent results. Additionally, the company is continually adding a new product to increase sales and diversity in the marketplace. Coca-Cola shares would be beneficial over a more extended period than a short-term investment.

References

Brands: The Coca-Cola Company. (2016). The Coca-Cola Company. Retrieved from http://www.coca-colacompany.com/brands/the-coca-cola-company

Bujaki, M., & Durocher, S. (2012). Industry Identification through Ratio Analysis Industry Identification through Ratio Analysis.Accounting Perspectives, 11(4), 315-322. doi:10.1111/1911-3838.12003

Coca-Cola Co Top Competitors and Peers. (2016). Financials.morningstar.com. Retrieved from http://financials.morningstar.com/competitors/industry-peer.action?t=KO

Freeman, B., & Martin, C. (2003). Coca-Cola Company.

Investor Relations: The Coca-Cola Company. (2016). The Coca-Cola Company. Retrieved from http://www.coca-colacompany.com/investors

KO Income Statement. (2016). NASDAQ.com. Retrieved from http://www.nasdaq.com/symbol/ko/financials?query=income-statement

There Are Now Only Two Countries in The World Where Coca-Cola Doesn’t Do Business. (2012). Business Insider. Retrieved from http://www.businessinsider.com/myanmar-coke-2012-6

Wainwright, S. K. (Ed.). (2012). Principles of Accounting: Volume I [Electronic version]. Retrieved from https://content.ashford.edu/