Thorough Analysis of Coca-Cola’s Statement of Financial Position

What is shareholders equity and what analysis can be done given its meaning? How can long-term debt as part of long-term liabilities impact a company’s business? What is its ideal ratio to long-term assets? We will try to give the right answers to these tricky questions by analyzing in detail each side of the balance sheet. The real one! We’ll even learn how accounts payable figures can be used when analyzing a company! And we will do all this using the example of Coca-Cola (NYSE: KO)

KO stocks have a total rating of 72%, a moderate one by our standards, investing in Coca-Cola stocks can be a somewhat risky investment idea for moderate-risk investors. You can learn more about our methodology. Why did we choose this company to analyze what the balance sheet includes? If we look at what made up the company’s total rating, we will see that the balance score is the weakest component. So, let’s dive into and get one step closer to understanding how you can analyze the financial statement of any company.

A company’s balance reflects a total company`s assets and all of its liabilities. Its analysis is crucial for assessing the company’s financial position, solvency and liquidity. So, the financial position of Coca-Cola Company, which is published following generally accepted accounting principles (GAAP), consists of 3 key parts: total assets, liabilities and shareholders or owner equity on the other. To understand things, they are always equal, that is, the sum of assets cannot differ from the sum of the company’s equity capital and its liabilities — this is an accounting axiom.

In the Eyestock rating, in the balance scoring section, we use 3 points to screen a company. These are key metrics: Current Ratio, Debt-to-equity ratio and CFO-to-debt ratio. In addition to them, there are a few metrics that allow the most meticulous investors to get answers to their questions. To calculate some of the metrics you will only have balance data, for others income statements and cash flow statements can be needed as well. Let’s move along the balance doc lines at a course where these metrics will be our forward guides.

Coca-Cola Assets

Assets are the book value of the company’s tangible and intangible property, as well as cash and debt rights. The company’s assets consist of current and non-current. Current assets include all those that can be turned into cash quickly. By quickly we mean 12 months according to accounting principles.

Look, Coca-Cola’s current assets consist primarily of cash, and short-term investments, which usually include marketable securities or bank deposits. This also includes inventory, which of course must be converted into cash within a year through the production of goods, especially for a business like that. Please note that assets are not only physically available assets but also partially accrued ones. These include accounts receivable and some of prepaid expenses. By the way, you can view the report itself on the SEC website or using this link.

All similar assets that cannot be classified as maximally liquid fall into the non-current section and, together with current ones, give the Total Assets amount. Almost all the lines in this section are quite clear and understandable, except for goodwill. There is probably no point in retelling reference resources; we will try to explain it simply using a relevant example.
In 2018, Coca-Cola acquired the coffee chain Costa Coffee for £3.9 b. At the same time, according to data from Craft, the company’s net assets (that is, assets minus liabilities) were approximately £560 m. That is, Coca-Cola bought the company at a premium to the valuation of its assets, which is absolutely normal for a market economy. After all, the company has at its disposal a good reputation brand, a new client base, some technologies, personnel, etc. Essentially, this is an asset from which a company can earn excess earnings. Moreover, this asset is intangible and cannot actually be identified and assessed by direct methods. So the difference between the purchase price of £3.9 b and £560 m of net assets is the goodwill that Coca-Cola recorded as its goodwill asset. We hope it is more clear now!
Since this is an intangible asset and is subject to manipulation in theory, it is better when goodwill does not occupy a large weight in total assets. Otherwise, investors face additional risk in the form of artificial inflation of assets and distortion of many valuation parameters. For Coca-Cola, as of 2023, goodwill amounts to $18.3 b and it`s almost 19% of total assets.

Coca-Cola Liabibilties

Like assets, liabilities are also divided into current and non-current according to the same principle of their fulfillment within 12 months or beyond this period. Usually, there are debts of various periods, unpaid accounts to suppliers and deferred tax liabilities. Very often, all the company’s liabilities in the document are combined with the company’s capital, since in total they are on the second side of the balance scales. However, we will stop for a while here to talk about the meaning of the Current Ratio.

Current Ratio

Current Ratio is the first key metric by which we evaluate the company’s balance sheet (BS) when calculating our rating. Dividing the value of current assets by current liabilities, we find out the company’s ability to repay all its short-term liabilities with available liquid assets. The value of 1.5 is the benchmark for calculating a company rating by Eyestock methodology.
Why is the current ratio important? Short-term obligations are easier to obtain, but more expensive to service, refinance and restructure, and this metric shows the company’s solvency in the short term. And if a company abuses obligations, this is not a very good signal for investors.
What is the Current Ratio for Coca-Cola? 1.14 is higher than 1, which in many sources is a kind of watershed between short-term debt problems and their absence, but this is less than our benchmark for an ideal company of 1.5 and historically this has always been the case for this business.

Debt-to-Equity Ratio

To achieve the second key metric for evaluating the solvency, we need to go back into the report and find equity. The key value for equity formation is called retained earnings or «reinvested earnings», as Coca-Cola called it in the report. Retained earnings are one of the pillars for a mature company like Coca-Cola showing the net income the company has saved over time and can be reinvested, distributed or aimed at acquisitions. Once we have received the value of shareholders’ equity, we can find out how much more or less it is than the company’s debt. To search for debt, we take only borrowings that require interest payments. Comparing debt and equity we get the debt-to-equity ratio. Their equality is acceptable for most companies, but we play it safe and, to determine the ideal company for investment and further calculate the rating of the rest, we assume that the amount of debt should be half as much as equity. This is additional stability for the business and security for its shareholders.

But in the case of Coca-Cola Company debt exceeds equity by 1.6 times. This suggests that the company may be exposed to additional risks, especially in the event of a sharp change in conditions in the debt capital market. The weakness of this indicator has a significant impact on our rating. But wait! What is the probability that all the creditors will come at once and ask
to fulfill all its liabilities at a specific point in time, and Coca-Cola will have no funds left to pay them off? This is how one can interpret the meaning of this ratio. Zero. It should not be taken literally. This is just a metric. But there is another method for assessing debt burden.

Cash Flow-to-debt Ratio

As with Understanding the Income Statement of Arista Network, we need to find the value of net cash from operating activities. We need it to look at the debt burden from the other side. Up to this point, we have assessed exclusively BS metrics. Let’s bring the analysis closer not to theoretically manipulated values, but to those actually carried out through the company’s bank accounts. To do this, we will calculate the Cash Flow-to-Debt ratio. Will Coca-Cola be able to cover all of its debt obligations of $42 b with its annual operating cash flow of $11.6 b? Definitely not. This is another signal about the company’s weak financial position. Here is the result of all three ratios that led us to such a low financial position assessment.

Additional metrics

If we divide the value of assets by equity, we get the level of financial leverage or equity multiplier. Financial leverage shows how much of a company’s assets are financed by debts and other liabilities assumed. The higher the value of this indicator, the more often the company resorts to borrowing to purchase new assets.
Coca-Cola`s equity multiplier is 3.7, that is, for every dollar of own funds there are $3.7 borrowed when forming assets. This metric indirectly demonstrates the level of aggressiveness in the use of the scale effect by management. While we don’t have a benchmark for this metric because we don’t use it to rank companies, we can compare a company to its peers and find that Pepsi Co (PEP) has a higher leverage of 5.4, while Monster Beverage (MNST) has more conservative with a value of 1.2.

The Cash Conversion Cycle (CCC) can also be an additional metric for analysis for the most meticulous investors. It is the number of days it takes for a company to turn investments in production and sales into cash. To calculate it, we need data on the cost of goods sold, which can be found in income statements, and the account payable and receivable from the BS. The lower the indicator, the more efficient the business model of the company. A negative value of the indicator indicates that the company is a net creditor in relation to its counterparties. Coca-Cola has a negative value (-198), while PEP’s CCC is -108 and MNST’s is 108! The conclusion is simple: Coca-Cola is the best company among its competitors in organizing the process of creating and selling inventories.

Now you know everything about financial position analysis.
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