coca cola financial statement analysis

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 approxima

Financial Statement Analysis

ACG203-CE

Marianne Marchant Margaret Pesikov Sean Lenehan

Jeff Braga

Table of Contents

Management Discussion & Analysis section and Miscellaneous 3

Questions to be answered:

Management Discussion & Analysis section and Miscellaneous

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

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

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

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

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

years? What does the P/E ratio tell you about this company? How does this compare to the industry and nearest

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

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

Income Statement and Profitability

Income for the years presented in your annual report

Horizontal Analysis on Sales

$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 Income

$6,906 $5,807Dollar 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.

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

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

(In millions except per share data)

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

(In millions except per share data)

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

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

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

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

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

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

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

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

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

2009: 8,186 million/(5,059 million+9,561 million+3,800 million)= 44

2008:7,571 million/(7,281 million+8,326 million+3,521 million)= 40

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

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

the years presented in the annual report.

Dollar Change from 2009-08

Dollar Change from 07

2008-15