Question

I need assistance answering the following questions based on the Coca Cola's Debt-To-Equity, Interest Coverage, and Debt-To-Total-Asset ratios attached from the last 5 years which i highlighted. Thanks in advance...

How is Coca Cola financing its assets? How much risk is associated with the bonds issued by the company? How can this risk be measured? Please explain.

Profitability TTM Tax Rate % Net Margin % 2009-12 22.80 22.02 0.69 15.30 1.96 30.15 20.79 26.20 Asset Turnover (Average) Return on Assets % Financial Leverage (Average) Return on Equity % Return on Invested Capital % Interest Coverage 2010-12 16.74 33.63 0.58 19.42 2.35 42.32 26.69 20.43 2011-12 24.52 18.42 0.61 11.21 2.53 27.37 14.87 28.43 2012-12 23.06 18.78 0.57 10.86 2.63 28.00 14.27 30.75 2013-12 24.84 18.32 0.53 9.74 2.71 26.03 12.58 25.79 2014-12 23.60 15.43 0.51 7.80 3.04 22.36 9.86 20.31 2015-12 23.31 16.60 0.49 8.07 3.53 26.31 10.63 12.22 2015-12 19.49 15.59 0 .47 7.36 3.78 26.85 9.53 12.10 2017-12 82.47 3.52 0.40 1.42 5.15 6.22 2.02 9.02 2018-12 19.44 20.20 0.37 7.52 4.90 37.79 10.58 10.09 14.36 23.09 0.39 8.89 4.67 41.91 12.79 11.13

Answer 1

Coca Cola has been financing its assets through the issuance of the equity as the Long term Debt to Total Asset is prevailing between 0.31 to 0.36 from Dec 15 to Dec 19. It means that around 65% (ie. 1.00-0.35) of assets are financed through equity share issuance.

The bonds (long-term) issued by the company has been observing a risk due to following:

a) The interest coverage has reduced from 26 times in 2009 to 10 times in 2018, which shows reduction in the income attributing towards the interest to Long-Term Bonds.

b) The return on Invested capital has reduced to 50% from 2009 to 2018.

c) The financial leverage has been enhanced from 1.96 times to 4.90 times. It means that the company is getting highly leveraged, which shows that company is being reducing its equity and taking higher and higher risk by taking more and more debt.

d) Profitability has been reduced from Net Margin 22% in 2009 to 4% in 2017. Also, the return on assets has reduced to 50% from 2009 to 2018.

e) The quick ratio is showing a ratio of lower to 1 times. It means that company is short of liquidity.