FINANCIAL RESEACH REPORT

FINANCIAL RESEACH REPORT

Abstract

Since the foundation and formulation of the Coca-Cola Company by John Pemberton, the corporation has managed to outshine other close competitors in the beverage industry. Diverse factors are translating to the success realized by the Coca-Cola Company in this industry. An in-depth consideration of the fundamental financial ratios when formulating operational decisions is one of the significant factors contributing to the continued success enjoyed by Coca-Cola. The purpose of this analysis is to reflect on the company’s financial strategy and its performance in the industry since the year 2018. The paper reflects on the success of the Coca-Cola Company in utilizing data related to financial performance, thus leading to perfection in the formulation of operational, strategic decisions, and policy frameworks. Precisely, the analysis looks into Coca-Cola’s consideration of fundamental financial ratios and how such information has translated to the continued success enjoyed in the beverages industry.

Introduction

The success of organizations in their specific industry depends on the ability of the management team to formulate strategic decisions, thus leading to market domination. Many enterprises adopt operational choices that enable them to enjoy a competitive advantage, thus outshining other organizations dealing with similar or closely related commodities. Coca-Cola is one of the companies that appreciate the need to consider finance as lifeblood as far as its business enterprises are concerned. Perfection by Coca-Cola’s management to reflect on fundamental financial ratios when formulating operational decisions is associated with the continued success that the company enjoys since its formation. Coca-Cola utilizes diverse techniques of economic analysis, including comparative financial statements and ratios analysis. The techniques equip the management team with information used in analyzing the company’s financial performance in terms of liquidity, profitability, and solvency. Ratio analysis forms the most utilized financial statement enabling Coca-Cola to adopt operational decisions. The paper looks into the five commonly used financial ratios utilized by the company, thus giving an insight into Coca-Cola’s financial health and risk level. Besides, the information obtained through the analysis is used in formulating recommendations concerning the viability of such stock as an investment opportunity..

Coca-Cola Financial Ratios (2016-2019)

1. Current Ratio

An analysis of Coca-Cola’s current assets and current liabilities for the three years gives an insight into its current, cash, and liquidity ratios. The data for the three trading years used in the calculation of these ratios was as follows;

Current assets (US$ in Millions)

1. 31^st Dec, 2017=36,545
2. 31^st Dec, 2018=30,634
3. 31^st Dec, 2019=20,411

Current Liabilities

1. 31^st Dec, 2017=27,194
2. 31^st Dec, 2018=29,223
3. 31^st Dec, 2019=26,973

From the data, the current company ratio for the three trading periods was 1.34, 1.05, and 0.76, respectively. The current ratio deteriorated throughout the three trading years, that is, 2017,2018, and 2019.

2. Liquidity Ratio

From the analysis, it is evident that the company’s current, cash, and quick ratios changed during the three years. There were notable variations in these ratios from one trading year to another(Li, 2019). The current ratio in the company deteriorated from the trading period 2017 to 2018 and also from the trading year 2018 to 2019. Similarly, Coca-Cola’s quick ratio declined from the trading year 2017 to 2018, and from the year 2018 to 2019. The company’s cash ratio deteriorated throughout the three trading years. Coca-Cola’s cash ration reduced from the trading year 2017 to 2018 and also from the trading year 2018 to 2019.

3. Quick Ratio

Data related to the company’s cash and cash equivalents, trade accounts receivables, marketable securities, current liabilities, and short term investments for the three trading years can be used in the calculation of Coca-Cola’s Quick Ratio as follows;

Cash and Cash Equivalents(US$ in millions)

31^st Dec, 2017=6, 006

31^st Dec, 2018=8,926

31^st Dec, 2019=6,480

Short-term Investment (US$ in millions)

31st Dec, 2017=9,352

31st Dec, 2018=2,025

31st Dec, 2019=1,467

Marketable Securities(US$ in millions)

31st Dec, 2017=5,317

31st Dec, 2018=5,013

31st Dec, 2019=3,228

Trade Accounts Receivable-Allowances (US$ in millions)

31st Dec, 2017=3,667

31st Dec, 2018=3,396

31st Dec, 2019=3,971

Total Quick Assets(US$ in millions)

31^st Dec, 2017=24,342

31^st Dec, 2018=19,360

31^st Dec, 2019=15,146

Current Liabilities(US$ in millions)

31^st Dec, 2017=27,194

31^st Dec, 2018=29,223

31^st Dec, 2019=26, 973

Quick Ratios for the three years are 0.90, 0.66, and 0.56, respectively. This showed that the company’s quick ratio deteriorated throughout the three consecutive trading years.

4. Cash Ratio

Coca-Cola’s cash ratio deteriorated from one trading year to the other (McGowan, 2014). The ratios for the years 20117, 2018, and 2019 were 0.76, 0.55, and 0.41, respectively.

5. Profitability Ratio

The ratios considered give an insight into Coca-Cola’s financial performance and risks, which should be considered by investors before choosing to invest in the company (Banutu-Gomez, 2012). The current and quick ratios look into the company’s ability to settle the current liabilities utilizing its existing assets and the ability to cater to the company’s short-term obligations using the most liquid assets, respectively. From the analysis, it is evident that the company is not risked to liquidity crisis since Coca-Cola can cater to its short-term obligations using the most liquid assets. Such consideration evidence that the company is fit for the investor to venture into. The fact that Coca-Cola can cater to various short-term obligations proves its excellent financial performance in the beverage industry.

On the other hand, it is appreciating that the investor/client should consider the deteriorating trend in the company’s cash ratio when deciding whether to invest in Coca-Cola or not. Deterioration in an organization’s cash ratio shows that the company finds it challenging to raise cash need to cater for short-term obligations (Argimon et al., 2019). This indicates that Coca-Cola suffers from a decline in revenue hence the client should consider strategic approaches to negate the trend. Such a pattern is influenced by the growing sensitivity to health matters among most consumers. Changes in consumers’ tastes are one of the significant factors translating to this trend. The risk of bad publicity is another necessary consideration that an investor ought to consider. For example, the aspect of sugar and its health implications raises concerns among many consumers. Lack of clarity on such ingredients and the adoption of general packaging risks the company to adverse publicity, which might jeopardize the company’s future performance in the beverage industry.

Key Strategies to Minimize the Risk

There are distinct strategic measures that the investor/client can adopt to minimize such risks. Ensuring the adoption of faultless asset allocation is one of the steps to mitigate the risks (Sherwin, 2018). The move will enable the client to align the investment with the specific predetermined objectives, thus leading to viable financial gains. Besides, the move will allow the investor to align the workforce and other resources with the set goals hence leading to successful endeavors. Diversification of the portfolio is another strategic measure to allow the investor/client to reduce the risks. The client should consider investing in diversified lines of products, thus curtailing the chances of failure incase of the poor performance of a specific product line.

Recommendations

There are diverse recommendations for stock as an investment when tapping on this opportunity. Some of the recommendations include;

1. The client should have an in-depth evaluation of his comfort zone when taking the risk.
2. The client should adopt a perfect investment mix through diversified to curtail the chances of financial frustrations in case of poor performance in a given line of investment.
3. Consideration of cost averaging as far as the dollar is concerned is fundamental to facilitate the attainment of success in the investment.
4. The investor/client should have an in-depth consideration of his financial situation to enable him to come up with a faultless decision before taking the risk.

Conclusion

In summary, the paper reflects on the financial ratios detailing the performance of the Coca-Cola Company. Data contained in the ratios give an insight into the company’s financial performance for the last three years. Cash, liquidity, profitability, quick, and current ratios are considered when analyzing the financial performance of the company. From the financial ratios, it is evident that the Coca-Cola Company realizes a considerably good economic performance. Even though the company enjoys such success, it is worth appreciating that various risks cannot be underestimated. The persistent trend of deterioration in cash ratios evidences that the company’s revenue has declined for the last three years. As such, an investor/client should consider such a trend to enable him/her to adopt strategic measures and negate the pattern.

References

Argimon, I., Bonner, C., Correa, R., Duijm, P., Frost, J., de Haan, J., …&Stebunovs, V. (2019). Financial institutions’ business models and the global transmission of monetary policy. Journal of International Money and Finance, 90, 99-117.

Banutu-Gomez, M. B. (2012). Coca-Cola: International business strategy for globalization. The Business & Management Review, 3(1), 155.

Li, X. (2019).Financial Analysis of the Coca-Cola Company.

McGowan, C. (2014). The Fundamentals of financial statement analysis as applied to the coca-cola company.Business Expert Press.

Sherwin, M. D. (2018). An Optimized Resource Allocation Approach to Identify and Mitigate Supply Chain Risks Using Fault Tree Analysis.Mississippi State University.