The Coca-Cola Company is a global giant that manufactures and supplies a wide range of soft drinks, syrups, and concentrates. The diversification of this company’s business is relatively high in a narrow direction related only to drinks, in contrast to its direct competitor PepsiCo, which is engaged in the production of food assortment: dairy products and snacks. The company’s strategy has recently been updated, and is now aimed at maximizing the expansion of the product line, focused on consumers and their needs; continuous creation and development of technologies that contribute to economic growth to attract investment and remain competitive; support for social and environmental responsibility through the capabilities of the company and its international experience (“Our Purpose and Strategy,” 2021). The strategy’s success is dictated by the long history and reputation of Coca-Cola, which improves its performance in one specific industry, intelligently managing revenue growth. Potential risks for this strategy are related to the lack of food diversification, which direct competitors have successfully used for a long time; also, with a reputation for lack of utility in the company’s most famous sodas, which they are fighting against marketing right now.
DuPont’s analysis shows that Coca-Cola’s performance is inferior to its direct competitor PepsiCo but significantly better than Mondelez’s. By decomposing the company’s financial ROE, it will be seen that the asset turnover ratio is falling, and the net profit margin and financial leverage do not compensate for this loss (“CocaCola Financial Ratios for Analysis 2005-2021 | KO,” 2021). However, PepsiCo has better performance only due to good leverage, while Coca-Cola has more of its funds, creating room for possible investments and borrowed funds for projects. As a result, the DuPont model fully reflects the company’s strategy discussed above, which, among other things, is aimed at increasing revenue, which has suffered in recent years due to the pandemic and global financial crises.
Coca-Cola’s receivables showed growth until 2020; in 2021, there was a fall of more than 20% due to the pandemic. On the one hand, this moment can be explained by a pandemic and a drop in purchasing power in the consumer industry (Mehta et al., 2020). Since the receivable turnover ratio of the company has remained at the same level for many years, this drop may affect the investment attractiveness of the company, whose ability to cover short-term liabilities will become worse, reducing the turnover of long-term assets, which are growing from year to year (“CocaCola Financial Ratios for Analysis 2005-2021 | KO,” 2021). Recognition of bad debts is also the reason for the decrease in receivables, although the collection of funds can still be done by Coca-Cola, which will take much longer. As a rule, the main determinants, in this case, are a significant change in the customer base and any external factors. Given the company’s scale, only global changes around the world can have a significant impact on this indicator, which is demonstrated by the statistics of 2020.
Dividing receivables into sales, one can see that the percentage of sales on credit does not exceed 20-25% of the total sales. As a consequence, it can be concluded that Coca-Cola mainly sells without deferred payment. Over the three years, the company’s accounts receivable ultimately increased, although it declined from 2018 to 2019, just as the company’s reserves followed the same statistical path. The net change in operating assets and liabilities has generally been growing over the past three years, highlighting the growing trend of long-term assets and liabilities, while current is falling every year (“CocaCola Financial Ratios for Analysis 2005-2021 | KO,” 2021). The company’s credit rating is quoted as A, which means good stability; although not having the highest rating, Coca-Cola is considered one of the most respected companies in the world (“The Coca-Cola Company,” 2021). The company’s liabilities have grown significantly in the last year after the pandemic, but Coca-Cola has even slightly lowered the level of short-term liabilities due to investments.
Coca-Cola regularly pays and raises dividends annually, which has always created a particular attractiveness for investors over the long haul. However, it is worth noting that since 2017 the company has been paying dividends in debt, which is reflected in its financial performance of liabilities. However, good governance at Coca-Cola allows it to cut costs to increase profitability (Brondoni, 2019). Competitors do not have a clear advantage over Coca-Cola; despite the problems, the company maintains a leading position in the market. The company’s stability allows us to conclude that it is worth considering investments in this company as a long-term bank deposit. Although the company has a reasonably large debt, which has grown significantly due to the pandemic, Coca-Cola can cover short-term liabilities, develop further, and consistently pay dividends to its shareholders. This view is supported by other analysts highlighting insider selling in the past three months as a potential risk, with a fair value more than a third higher than current trading (“Coca-Cola NYSE:KO Stock Report,” 2021). The shares are unlikely to show extraordinary or sharp growth since they have already realized most of their opportunities.
Brondoni, S. M. (2019). Shareowners, stakeholders & the global oversize economy. The Coca-Cola company case. Symphonya. Emerging Issues in Management, 1, 16-27.
CocaCola Financial Ratios for Analysis 2005-2021 | KO. (2021). Macrotrends.
Coca-Cola NYSE:KO Stock Report (2021). Simply Wall St.
Mehta, S., Saxena, T., & Purohit, N. (2020). The new consumer behaviour paradigm amid COVID-19: Permanent or transient?. Journal of Health Management, 22(2), 291-301.
Our Purpose and Strategy. (2021). Coca-Cola HBC.
The Coca-Cola Company (2021). Fitch Ratings.