Group Project

FIN421 Financial Planning & Forecasting

The Coca-Cola Company & Subsidiaries

1
Contents
About the Coca-Cola Company...................................................................................................................2
The Beverage Industry................................................................................................................................3
Possible Accounting Conflicts.....................................................................................................................3
Financial Analysis.......................................................................................................................................4
Forecast for 2019.......................................................................................................................................14
Works Cited...............................................................................................................................................16

About the Coca-Cola Company

The Coca-Cola Company is an American origin, multinational beverage manufacturer, marketer,
and retailer. The company produces a secret syrup concentrate, which is transported around the
globe to bottlers. Coca-Cola Company stock is listed on the NYSE as KO, as is currently selling
at an estimated $53.71 per share (3 Dec, 11.42PM PST)

The company operates in over 200 countries and offers a great variety of products, ranging from
fizzy drinks; water, sparkling water; juice; dairy beverages; and (recently) energy drinks. Brands,
apart from the trademark Coca-Cola include Diet Coke, Fanta, Sprite, Minute Maid, Dasani et
cetera, and additionally added the newly acquired Costa Coffee to its diverse product portfolio.

The most prominent competitors the beverage giant must battle in the market are PepsiCo, Dr.
Pepper, Nestle, and Snapple, to name a few. However, Coca-Cola must not only compete with
soft=drink manufacturers, but also those of juices, energy drinks, and healthier beverages, as
these companies have massive command over their respective market segments. Red Bull is an
example of such companies.

Coca-Cola’s revenue is seeing a decline in the past three fiscal years. However, this is not
primarily due to intense competition from aforementioned companies, rather, these losses have
occurred due to massive refranchising of bottling operations. However, it is forecasted for
revenues to rise as most of this refranchising has already been done. Moreover, with Coca-Cola
diversifying into the energy drink segment, the increased demand for sport and energy beverages
will surely benefit the company through acquisitions.

2
The Beverage Industry
Industry experts suggests that there shall be major upturns in the beverage industry in years
spanning 2019-2021. Currently, Cola leads the soft drinks market globally, with 54% of global
market demand being generated solely by Americans. The industry is dominated by the Coca-
Cola Company, with a reported market share of approximately 40%.

As per the “Functional Beverage Market: Global Industry Analysis, Trends, Market Size and
Forecasts up to 2024”, the compound annual growth rate (CAGR) for the functional beverage
market is expected to be nearing 6.3% (2018-2024). Consumers are more readily switching their
preference from fruit juices and carbonated drinks to functional drinks. Manufacturers are also
taking advantage of the fact that customers are willing to pay premiums for products which are
produced by ethical means or through innovation and provide clear benefits.

Pepsi and Coke continue to dominate the functional beverage market; however, the true future of
any company relies upon its supply chain (distribution channel), innovative product offering, and
attractive packaging. Companies which are succeeded, primarily PepsiCo, are doing so by
expanding in untapped markets. It must be noted that Monster beverage is rapidly gaining market
share and may be a significant player in the beverage market soon. [ CITATION Mor19 \l 1033 ]

Possible Accounting Conflicts

The Coca-Cola Company operates under two segments, namely: Corporate and Bottled
Investments [ CITATION Gar12 \l 1033 ], and are further divided by geographical region. The crux
of the situation is that the company follows a matrix and vertical structure of organization, as
most decisions are made by the top management, but have to be implemented differently at each
“local” level. Resultantly, it makes sense that the most accounting issues would occur at the
higher level, where aggregates of all figures must be consolidated. A possible error is that of
including the figures of entities providing their own financial statements, and thus,
compromising the future perspectives of the Coca-Cola company itself in the eyes of the
stockowner. Deconsolidating, hence, is a recommendation so that all entities are accounted for
separately on an equity basis. [ CITATION Gar12 \l 1033 ]

3
Financial Analysis
Revenue: Coca-Cola has experienced a year-on-year decline in net operating revenues from
2016 to 2018, the percent
change being (15%) 2016-
2017 and (10%) in 2017-
2018. The company faced
several favorable factors
in terms of operating
revenues in several areas,
such as its global
marketing mix, where
pricing initiatives and
attractive packaging
boosted sales. North
America also enjoyed
reduced freight costs
(thus, cost of sales has
observed an 11% year-on-year decline). However, in certain bottling investments, the
aforementioned product mixes were unfavorable, hence, negatively impacted revenue growth.
Foreign exchange fluctuations also caused a 1% decline in consolidated revenues.

Key: Net operating revenue | Operating Income | Income before Tax | Net Income

Gross Profit: Gross profit margin in FY18 increased to 63.05 from 62.6 percent in FY17. This
was due to selling off of divesting certain investments/subsidiaries and was offset by foreign
exchange fluctuations. Moreover, the company adopted a new revenue recognition principle. In
2017, a similar increase was seen (+1.9%) from 2016 for the same reasons.

The historical gross profit

Gross Profit Margin (%)
65 margin for the Coca-Cola
64 Company is quite unstable. At
63 its lowest in 2012 (60.32%), the
62 company was facing issues
61

60 4
59

58
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
such as high commodity costs and having to adjust its supply channels and packaging due to
declining economic situation of customers. Moreover, foreign exchange fluctuations, as well as
acquisition of Great Plains in N. America and bottling operations in Guatemala, Vietnam, and
Cambodia all contributed unfavorably, something which the company felt the lingering impact of
in later years.

The non-alcoholic beverage industry has a gross margin of 54.09% [ CITATION CSI19 \l 1033 ],
which is lower than Coca-Cola’s, thus, the company is performing well above the market
standard.

Operating Margin:

Operating margin is at its peak

Operating Margin (%)
in 2018, at 27.31%. This is
30
primarily due to a decrease in
25
selling, general and
20
administrative of 19%, which
15
reflect refranchising efforts
10
which took place during the
5
year. Moreover, the company
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 was successful in being
efficient and maintaining
productivity, as well as undertaking several productive investments which generated favorable
incomes overall. Alternatively, this ratio declined quite rapidly in the 10s, mostly as the company
was engaged in expensive advertising in order to strengthen its brand positioning and to gain
market share. Moreover, various acquisitions not only lead to increased expenses, but also
increased investment income, thus, results were offset.

Net Profit Margin:

Net Profit Margin (%)
As aforementioned, refranchising
40
efforts have caused Coca-Cola to
35
30 face several declines in
25 profitability in the past, and that
20
15
5
10
5
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
is precisely the case in 2017, which features a sharp fall in net profit margin. Moreover, the
company was further weakened by inefficiencies in its N. American productions during the same
period. This also resulted in the aforementioned 11% decline in sales revenue. However, as de-
franchising efforts come to an end, we can observe tat the net profit margin recovers, and is
higher than the average, apart from the peak in 2010. The peak in 2010 was primarily due to a
2% fall in interest expense as well as an increase in interest incomes by hefty sums.

As per a 2018 report, the Soft Beverage industry has a 10.86% net profit margin, which is
approximately half of what is earned by Coca-Cola in FY18, hence it is once again performing
better than the industry standard. [ CITATION And18 \l 1033 ]

Current Ratio:

The current ratio determines how easily a company would be able to pay off its short=term
obligations considering the value of easily liquefiable assets it holds, i.e. the liquidity position of
a company and how well it can convert current assets into cash to pay off current (short-run)
liabilities. Expert consensus is that a ratio between 1.5-2.00 is optimal, however, this may differ
based on industry standards.

Coca-Cola’s latest current

Current Ratio
ratio lies at $1.04 current
1.6
1.4
assets per $1 of current
1.2 liabilities, which is
1 undoubtedly and unfavorable
0.8
position, as even the slightest
0.6
0.4
of liquidity management
0.2 issues could result in this
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ratio falling below 1:1.
However, the industry
average seems to lie around this figure as well, for example Cott Beverages also has a current
ratio of 1.01:1. Compared to National Beverage, which has a dangerously liquid business at
3.12:1, it seems as if staying near the industry standard may not necessarily harm the company,
but it is better to be safe than sorry.

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 Current ratios

3.5

2.5

1.5

0.5

0
Current Ratios

Coca Cola Cott National

Inventory Turnover: The inventory turnover ratio identifies how well a company converts its
inventory of goods into cash. This essentially involves careful management of inventories
through effective cost control methods and how effective marketing and sales efforts are in
encouraging consumers to buy a product. A rule of thumb is that the higher the inventory
turnover, the better, as that means that the company is rapidly selling out its stocks and a high
demand for its goods exists.

The current industry average inventory turnover lies at 6.36 in Q3 FY19 [ CITATION CSI191 \l
1033 ], and this figure is higher than Coca-Cola’s recent turnover ratio, which is 4.26.
Surprisingly, the soft beverage industry often has a higher turnover, but due to certain events in
Q3 FY19, it has taken a downwards slide.

It can be observed that even Coca-

Inventory Turnover
Cola’s inventory turnover is taking
7
6 a downwards journey in the period
5 2017-18; Inventories themselves
4 have seen a 4% rise in 2018 alone.
3
Coca-Cola practices the First in
2
1
First out (FIFO) inventory
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
7
valuation method and these include not only raw materials, but also packaging and finished
goods.

2010 shows a rise in inventory turnover, which was more or less maintained for a roughly 6-year
period, probably due losses of approximately $11 million (charged to cost of goods sold) in
inventory in Japan due to natural calamities in 2011.

Receivables Turnover/Days receivables turnover:

The accounts receivables turnover is a measure of how effective a company is in collecting

payments owned by clients. It is a key measure of how well a company manages its credit terms,
as well as how quickly short-term debts are paid off by customers. The Day Receivables turnover
gives us the same answers, but in terms of days taken to collect a debt obligation.

Generally, a high turnover is preferred as it indicates swift collection of debts and reduced the
risk of sustaining a bad debt.

Days Receivables Outstanding

50 As per Coca-Cola’s 2018 Annual
45
report, the company ensures that
40
35 all receivables are collected
30
within a six-month period lest
25
20 they turn bad. The decreasing
15
10
turnover figures after 2016, as
5 shown by the graph above, are
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 primarily due to the declining
revenues being experienced by
Coca-Cola. As global demand shifts from carbonated soft drinks, we can safely suggest that this
is an industry-wide problem. As per current statistics, the 2019 industry average lies around an
inventory turnover of 8.98 (around 40 days), which is lower than that of Coca-Cola’s
(approximately 38 days).

Payable Turnover/Days Payable Outstanding:

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 The Days Payable Outstanding
Days Payables Outstanding
reflects the average time it takes
80
70 for a company to pay off its own
60 creditors, such as suppliers or
50
vendors. This ratio allows the
40
30 management to judge whether
20 the company’s cash flows are
10
being managed satisfactorily or
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
not.

A company with a higher Payable Turnover takes longer to invoice its bills and thus can put the
money not paid for other purposes if they believe it shall generate greater benefits. However,
there are often discounts attached to making early payments, which is why some companies keep
this ratio minimal.

The Coca-Cola Company had maintained a steady DPO for about 4 years; however, this ratio
then consistently rose from somewhere in 2014-15. It may be that declining revenues and
increased costs may have encouraged the management to save money and reinvest in more
beneficial areas in this period, and thus, they took advantage of the credit terms afforded to them
by suppliers.

Days Payables Outstanding

Mondelez International, Inc.
The Procter & Gamble Company
The Estée Lauder Companies Inc.
Kimberly-Clark Corporation
Colgate-Palmolive Company
Campbell Soup Company
Coca-Cola Consolidated, Inc.
McDonald's Corporation
Starbucks Corporation
Altria Group, Inc.
0 20 40 60 80 100 120 140

Compared to some players in the beverage industry, such as Mondelez International, Inc., Coca-
Cola has quite a reasonable and fairly average DPO.

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Return on Equity (ROE):

The return on equity

ROE
indicates the
40
profitability of a
35
company compared to
30
the profit it keeps to
25
itself, including any
20
capital injections.
15

10
Hence, the higher the

5
ROE the better, as

0 that indicates that a

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
firm is profitable.
Coca-Cola’s peak
ROE in 2010, 37.79% indicates that for every $1 worth of shareholder’s equity, the company
was able to generate $0.37 of profit. Similarly, at its lowest ROE is $6.22 in 2017, which
provides a mere $0.06 per dollar in profit.

Coca-Cola managed to pull itself out of the massive ROE slump of 2017 by debt financing. The
company does not improve its capital situation through stock issue, but taking on debt capital
may expose it to issues such as high interest expense (resulting in declining net profit margins).

The industry average for ROE is around 32.42%, which Coca-Cola has successfully passed by
the year ending Dec 31st 2018.

Return on Assets (ROA):

The ROA ratio indicates

ROA
how much a company earns
30
compared to the resources it
25
has available. Thus, it is
20

15

10

5
10
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
derived by dividing the net income after interest and taxation by total assets held by the
company.

The ROA is dependent upon the Net Profit; hence, we can see that the peaks and troughs of the
graph reflect that of the net profit curve. However, these are more pronounced due to the large
sums of total assets. Moreover, the return on assets has quite an apparent declining trend, which
shows that Coca-Cola has not been effective in maximizing returns from its assets. Clearly,
Coca-Cola company is making low returns on high investment. However, this is improving in
2018, and s forecasted by industry experts to grow as well in the near future.

The average ROA statistic for the beverage industry stands at roughly 14%, and while Coca-Cola
has been below that point this 2014-2017 and a great degree of 2018, we can see an improvement
has already occurred, as the current ROA is 15.14%.

Return on Investments (ROI):

Return on investment can be

ROI
considered as a sort of cost-
30
benefit analysis for your
25
investment: has the investment
20
been efficient or is this money
15
useful somewhere else? The
10 relative return provided by an
5 investment is evaluated, keeping
0 in mind its cost.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

The ROI may not only be used

for gauging profitability of stock, but rather, it is so simple and flexible, that it may be used for a
variety of purposes, such as whether to expand a factory.

A positive and high ROI is always preferable, and while Coca-Cola does have a positive ROI, it
is declining the same fashion as the ROE. Coca-Cola’s re-franchising efforts are probably the
root behind the decline, especially how sharply it falls in 2017. However, just like most ratios
above, the company is recovering quite impressively in 2018 and industry experts have reached
favorable conclusions.

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The industry average ROI lies at 19.21%, however Coca-Cola has not been at this level since
2012 and still has only managed to reach 15.14% positive ROI.

Price/Earnings Ratio:

As the name suggests, this calculation is the ratio of Market price per share and Earnings per
Share.

Most ratios prefer higher

P/E Ratio
results, but for the PE Ratio
180
160 to be high means that one
140 must pay a higher price to
120
100 receive $1 earned by the
80 company in the fiscal year.
60
40
However, it is often better to
20 pay more for good stocks,
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 than to pay less for volatile
and risky ones.

When a company’s earnings are in decline, the Earnings per share decline as well. This results in
the PE Ratio to rise significantly, especially if the firm has a relatively stable market price.
However, as we see below, the market price of Coca-Cola’s shares was generally rising (though
at a declining rate and then eventually falling) during this period:

The fact that Coca-

Market Price per Share
Cola’s EPS grew up
50
45
to 485% in this period
40 lead to this massive
35 growth. The PE Ratio
30
gives investors and
25
20 other stakeholders
15 insight into market
10
expectations from the
5
0 company. Coca-
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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Cola’s PE Ratio in 2018 is still greater than the industry standard, which in 26.80%.[ CITATION
Sim19 \l 1033 ] Thus, we can confidently interpret this to be that participants in the market expect
Coca-Cola to perform better than its competitors and are optimistic about the future.

Forecast for 2019

Industry experts are in agreement that the Coca-Cola Company specifically can expect a
Compound Annual Growth Rate of around 5-6.5% in 2019. [ CITATION Mor19 \l 1033 ] The
company can expect higher growth, especially in revenues, due to several factors, such as a
favorable pricing mix, growth in concentrate and syrup sales, organic growth in the company’s
sports, caffeinated and energizing beverages, and in plant and juice=based products. The EPS is
expected to be $2.01, which is primarily boosted due to refranchising efforts and efforts to boost
productivity in operations. However, fluctuations in foreign exchange have historically offset
positive gains, thus will count in the increased COGS.

While Selling, General & Admin expenses will increase, they are expected to do so in a
consistent fashion as with the preceding years. This will be most likely due to higher packaging
costs as well as those of distribution as Coca-Cola tries to expand its channels. However, a

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reduction in promotional costs may offset this. Movements of EPS, PE Ratio and Dividends are
as follows:

To calculate figures for the Forecasted Balance Sheet, we have used industry growth rates in
order to predict the movement of Coca-Cola’s Assets, Equity and Liabilities. [ CITATION CNN19 \l
1033 ][ CITATION NAS19 \l 1033 ]

Total Current Assets are expected to fall by 30.81% while total assets may experience a 0.64%
rise, which will result in an overall increase in fixed assets. Shareholder’s equity is to increase by
2.5% due to investor confidence, and through that prediction, we have calculated share capital as
well as share premium.

A 21.51% increase in long-term liabilities is expected, as Coca-Cola intends to raise capital

through debt financing instead of share issue. Total liabilities will also see a 0.08% increase as
the general trend suggests that Coca-Cola will continue raising current liabilities, such as DPO.

Additional Funds Needed, which is calculated as (Projected increase in assets – spontaneous

increase in liabilities – any increase in retained earnings) is $(5,076.51), which suggests that
Coca-Cola will have excess funds during the year, which it may invest elsewhere.

14
Works Cited
Simply Wall St, 2019. What Does The Coca-Cola Company’s (NYSE:KO) P/E Ratio Tell You?. [Online]
Available at: https://simplywall.st/stocks/us/food-beverage-tobacco/nyse-ko/coca-cola/news/what-
does-the-coca-cola-companys-nyseko-p-e-ratio-tell-you/
[Accessed 03 December 2019].

CNN Business, 2019. Coca-Cola Co.. [Online]

Available at: https://money.cnn.com/quote/forecast/forecast.html?symb=KO
[Accessed 03 December 2019].

CSI Market, Inc., 2019. Nonalcoholic Beverages Industry. [Online]

Available at: https://csimarket.com/Industry/industry_Efficiency.php?ind=502
[Accessed 03 December 2019].

CSIMarket, Inc., 2019. Profitability by Company within Nonalcoholic Beverages Industry. [Online]
Available at: https://csimarket.com/Industry/Industry_Profitability.php?ind=502
[Accessed 03 December 2019].

Gary A. Porter, C. L. N., 2012. Financial Accounting: The Impact on Decision Makers. 2nd ed. s.l.:Cengage
Learning.

Mordor Intelligence, 2019. FUNCTIONAL BEVERAGE MARKET - GROWTH, TRENDS, AND FORECAST (2019
- 2024). [Online]
Available at: https://www.mordorintelligence.com/industry-reports/functional-beverage-market
[Accessed 03 December 2019].

NASDAQ, 2019. Coca-Cola Company (The) Common Stock (KO) Earnings Report Date. [Online]
Available at: https://www.nasdaq.com/market-activity/stocks/ko/earnings
[Accessed 03 December 2019].

Sather, A., 2018. Examining the Net Profit Ratio of Different Industries and its Stages. [Online]
Available at: https://einvestingforbeginners.com/net-profit-ratio-industry-age/
[Accessed 03 December 2019].

Vigeo Eiris, 2019. The Beverage sector displays limited performance in its management of water, despite
this being a crucial resource for the industry. [Online]
Available at: http://vigeo-eiris.com/the-beverage-sector-displays-limited-performance-in-its-
management-of-water-despite-this-being-a-crucial-resource-for-the-industry/
[Accessed 03 December 2019].

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