Evaluation of Corporate Performance
BUS 401 Principles of Finance
Evaluation of Corporate Performance
The company I chose to evaluate The Coca-Cola Company (NYS: KO). The Coca-Cola company is a beverage giant, which manufactures and distributes a myriad of drinks worldwide. Headquarted in Atlanta, Georgia since 1979 they are well known by their flagship drink Coca-Cola among other products which has made them the leading beverage distributor. Boasting over 21 brands that produce more than 1 billion in annual sales, the Coca-Cola company has by far the largest portfolio of brands in the nonalcoholic beverage industry (coca-colacompany.com, 2016), and continues to dominate the market above its competitors. The beverage giant seems to dominate the beverage industry, but the numbers will tell if The Coca-Cola company is a brand worth investing in. In this paper, we will evaluate the corporate performance of The Coca-Cola Company, and to predict further we shall assume a 10% growth increase throughout the company for the following years.
So below we have selected numbers for The Coca-Cola Company’s financial statement provided from their corporate website. The statement provides useful information to assist us in calculating several ratios which we will conduct later. Provided below are the financial numbers for 2017. Again, assuming 10% increase in cost of goods sold (COGS) with a forecast of the company’s 2018 standings:
| 2018 | 2017 | |
| Net operating revenues | 50,654,230 | $46,049,300.00 |
| Cost of goods sold | 19,926,500 | $18,111,500.00 |
| Gross profit | 30,731,580 | $27,937,800.00 |
| Other operating expenses | 7,045,830 | $6,405,300.00 |
| Selling, general & administrative expenses | 18,467,020 | $16,788,200.00 |
| Other operating charges | 1,827,100 | $1,661,000.00 |
| Operating income (loss) | 10,437,460 | $9,488,600.00 |
| Interest income | 776,820 | $706,200.00 |
| Interest expense | 886,930 | $806,300.00 |
| 2018 | 2017 | |
| Consolidated net income (loss) | 7,911,205 | $7,205,000.00 |
| Depreciation & amortization | 2,162,270 | $1,965,700.00 |
| Stock-based compensation expense | 312,180 | $283,800.00 |
| Deferred income taxes | -1,035,760 | -$941,600.00 |
| Equity loss (income), net of dividends | -543,290 | -$493,900.00 |
| Foreign currency adjustments | 191,180 | $173,800.00 |
| Significant losses (gains) on sales of assets – net | 1,386,660 | $1,260,600.00 |
| Other operating charges | 782,870 | $711,700.00 |
| Other items | -271,040 | -$246,400.00 |
| Trade accounts receivable | -33,880 | -$30,800.00 |
| Inventories | -171,820 | -$156,200.00 |
| Prepaid expenses & other assets | 342,430 | $311,300.00 |
| Accounts payable & accrued expenses | -653,400 | -$594,000.00 |
| Accrued taxes | 907,500 | $825,000.00 |
| Other liabilities | -658,400 | -$598,400.00 |
| Operating assets & liabilities | -267,410 | -$243,100.00 |
| Net cash flows from operating activities | 10,643,160 | $9,675,600.00 |
| Purchases of investments | -18,753,790 | -$17,048,900.00 |
| Proceeds from disposals of investments | 20,115,040 | $18,286,400.00 |
| Acquisitions of businesses, equity method investments & nonmarketable securities | -1,013,980 | -$921,800.00 |
| Proceeds from disposals of businesses, equity method investments & nonmarketable securities | 1,252,350 | $1,138,500.00 |
| Purchases of property, plant & equipment | -2,737,020 | -$2,488,200.00 |
| Proceeds from disposals of property, plant & equipment | 181,500 | $165,000.00 |
| Other investing activities | -252,890 | -$229,900.00 |
| Net cash flows from investing activities | -2,197,800 | -$1,098,900.00 |
| Issuances of debt | 33,003,410 | $30,009,100.00 |
| Payments of debt | -30,994,150 | -$28,176,500.00 |
| Issuances of stock | 1,735,740 | $1,577,400.00 |
| Purchases of stock for treasury | -4,454,010 | -$4,049,100.00 |
| Dividends | -7,312,030 | -$6,647,300.00 |
| Other financing activities | 95,590 | $86,900.00 |
| Net cash flows from financing activities | -7,919,450 | -$7,199,500.00 |
| Effect of exchange rate changes on cash & cash equivalents | -7,260 | -$6,600.00 |
| Net increase (decrease) in cash & cash equivalents | 1,507,660 | $1,370,600.00 |
| Cash & cash equivalents at beginning of year | 8,843,890 | $8,039,900.00 |
| Cash & cash equivalents at end of year | 10,351,550 | $9,410,500.00 |
| Total Assets | 96,685,600 | $87,896,000.00 |
| Total Liabilities | 29,913,400 | $27,194,000.00 |
Based on 2017’s numbers provided above and the forecast of 2018’s 10% increase, one can conclude The Coca-Cola company had both negative and positive changes over the past two years, however it does not fully explain the company’s overall health within the past few years, so in the next segment we will use two methods of ratio analysis to determine that. Financial ratio is used to determine the overall health of an organization. In other words, it’s a tool used to reveal to investors how well the company can stay afloat and pay off their debts. It can be used to compare the financial position of different organizations, track changes or compare performance records against that specific industry (Boslaugh, 2013).
Now we will conduct a Liquidity ratio analysis for the fiscal year of 2017. The ratio analysis I am using for Liquidity are current ratio and cash ratio. The formula is as follows:
Current Ratio = Current Assets/Current liabilities
3.23= 87,896,000/27,194,000
Cash Ratio = (Cash & Cash Equivalents + Short Term Investments)/Current Liabilities
.68 = (8,039,900+10,554,500)/27,194,000
Next is Financial Leverage which I will use the debt-to-equity ratio and consumer leverage ratio:
Consumer Leverage Ratio = Total household debt/Disposable Personal Income
1.23=18,977,000/15,358,000
DE Ratio = Total Debt/Total Equity
1.43= 27,194,000/18,977,000
Next, we will conduct the ratio of Asset Management, which we will use Inventory and Total Assets Turnover which formulas are as follows:
Inventory Turnover = COGS/Inventory
4.99 = 13,256,000/2,655,000
Total Assets Turnover = Sales/Total Assets
0.014 = 1,283,000/87,270,000
Next, we will determine the Profitability Ratio, which we will use Return on Assets (ROA) and Return on Equity (ROE):
ROA = Net Income/Total Assets
0.014 = 1,283,000/87,270,000
ROE = Net Income/Total Equity
0.067 = 1,283,000/18,977,000
Next, we will determine Debt ratio, using Debt/Equity(D/E) Ratio and Debt ratio:
D/E = Total Debt/Total Owners Equity
3.07 = 58,376,000/18,977,000
Debt = Total Debt/Total Assets
.66 = 58,376,000/87,896,000
Next, we will determine the Per-Share ratio, using Earnings Per-Share and Book Value Ratios:
Earnings Per-Share = Net Income/# of Shares Outstanding
.299 = 1,283,000/4,288,000
Book Value = Owners Equity/# of Shares Outstanding
4.42 = 18,977,000/4,288,000
The Dupont System is a great tool that can be used to analyze price performance and is widely used in accounting practices and many financial statement textbooks to investigate profitability. In an applied discipline like accounting, the use of the DuPont components in forecasting future Return on Equity (ROE) has immediate implications for practitioners in equity analysis, earnings forecasting and capital markets (Jin, 2017). Using the DuPont System, we will calculate the ROE for the Coca-Cola Company. The formula is shown below:
ROE = (Net Profit Margin) * (Asset Turnover) * (Equity Multiplier)
6.76 = 0.02 * 0.77 * 4.63
Based on the numbers provided, the Coca-Cola company is moving (slowly) in a positive direction. Current ratio reveals the relative amount of working capital, meaning the company has enough short-term assets to pay off their short-term debt. The company’s liquidity, or their ability to meet long-term obligations as they mature (Wainwright, 2012). For example, the company has over 87 million in total assets, and 64 million in total liabilities. An ideal ratio would be 1:1 or higher, so if the company were to face a financial obstacle they would have the assets to cover their obligations.
Overall, The Coca-Cola company is a financially healthy company, and worth an investment provided the company stays financially healthy and continue to maintain enough assets to meet their long-term obligations. Since Coca-Cola is a worldwide company, there are always risks to consider when operating globally. Foreign currency exchange rates, interest rates and inflation are the three major external factors that affect foreign markets, and changes in these three factors stem from economic conditions, government policies, monetary systems and political risks (Milani & Rivera, 2004). The Coca-Cola Company must always consider the factors for operating worldwide and continue to expand their markets to countries that do not sell their products. However, for a company of this caliber, one believes Coca-Cola is a worldwide company that thrives in the beverage industry.
References
Boslaugh, S. P. (2013). Ratio Analysis. Salem Press Encyclopedia
Hickman, K. A., Byrd, J. W., & McPherson, M. (2013). Essentials of finance. San Diego, CA:
Bridgepoint Education Inc.
Jin, Y. (2017). DuPont Analysis, Earnings Persistence, and Return on Equity: Evidence from Mandatory IFRS Adoption in Canada. Accounting Perspectives, (3), 205. https://doi-org.proxy-library.ashford.edu/10.1111/1911-3838.12142
Milani, K., & Rivera, J. (2004). The rigorous business of budgeting for international
operations. Management Accounting Quarterly, 5(2), 38-50. Retrieved from
https://search-proquest-com.proxy-library.ashford.edu/docview/222804752?accountid=32521
Wainwright, S. K. (Ed.). (2012). Principles of Accounting: Volume I [Electronic version]. Retrieved from https://content.ashford.edu/
Our Billion Dollar Brands (2016). The Coca-Cola Company. Retrieved from