Established in 1886, Coca-Cola (KO, Financial) has a long history in the U.S. and has been a public company with its stock on sale at the New York Stock Exchange since 1919. It has become a staple holding in many successful investors‘ portfolios. But is it still working to maintain such a high reputation? An analysis of the numbers will tell us if Coca-Cola is still a company worth owning stock in.
The Method:
Because this is such a large company, the best way to approach its balance sheet is to look for signs of consistency rather than of high potential. Dramatic, exponential growth in value is not something I should expect from a company that is already a giant. Instead, I should be looking at companies like Coca-Cola for indicators of security and stability.
Signs of Stability:
With that in mind, the first thing to look at is the size of the company. Companies which are too small are likely just starting out or not going anywhere. In either case, they are not stocks to turn to for security. You want a large company that already commands its market and has proven its potential time and time again. In terms of the numbers, this means you want a company with a market cap at $1 billion or higher. Coca-Cola more than meets this demand with a market cap at $173.15 billion.
The next thing you need to look at is the consistency of growth over the past five years in order to determine if it is able to sustain its value. In Coca-Cola’s case, it has, indeed, seen steady growth in this time period. The average growth rate is about 18% per year; not particularly notable but certainly a healthy sign nonetheless.
Another important figure in determining the relative health of a company is its cash flow per share. This is the amount of hard cash—rather than earning potentials, sales and other assets—that a company generates. Because it takes into account both taxes and depreciation, it provides a more reliable calculation of the company’s true value. Coca-Cola’s cash flow per share is $2.44 which is above the mean ($1.62) in its market. This is a very good sign of the company’s durability.
Signs of Future Decline:
Another indicator of stability is found in the ratio of price to sales (or, P/S ratio). A strong, enduring company will have not just a high stock value but the revenue to back it up and keep it going. Opinions differ on what a desirable price to sales ratio should be but, for the purposes of this analysis, I will adopt the more conservative opinions which put the ratio at 1.5 or lower. In this case, Coca-Cola—with a P/S ratio of 3.78 does not quite hold up.
Finally, it is very important to look at a company’s debt to equity ratio (or, D/E ratio) because this will tell us whether or not it is truly living within its means and growing organically—rather than artificially stimulating its growth by borrowing money from somewhere else. If a company has a lot of debt, there is a potential risk of its growth slowing or even declining if it encounters any financial difficulties.
In this regard, Coca-Cola does give us some cause for concern. The industry average is a 68.52 percent debt to equity ratio. Coca-Cola, however, is at a dangerously high 112.68. While this is not, in and of itself, a deal breaker, it is something both current stockholders and potential buyers should keep an eye on.
Conclusions:
Despite some causes for worry, Coca-Cola is definitely not a high risk investment. After all these years, it is still a strong and stable stock that will help balance your portfolio. Its high market cap and consistent long-term growth reassures us that the company has both the resources and good business sense to continue being a profitable enterprise well into the future.
By that same token, however, you should not be looking to Coca-Cola for a substantial increase on your initial investment. This is the safe, long-term investment you want to hold onto in order to insure you against any potential losses from the other riskier investments you can (and should) make in smaller, emerging companies.
The Method:
Because this is such a large company, the best way to approach its balance sheet is to look for signs of consistency rather than of high potential. Dramatic, exponential growth in value is not something I should expect from a company that is already a giant. Instead, I should be looking at companies like Coca-Cola for indicators of security and stability.
Signs of Stability:
With that in mind, the first thing to look at is the size of the company. Companies which are too small are likely just starting out or not going anywhere. In either case, they are not stocks to turn to for security. You want a large company that already commands its market and has proven its potential time and time again. In terms of the numbers, this means you want a company with a market cap at $1 billion or higher. Coca-Cola more than meets this demand with a market cap at $173.15 billion.
The next thing you need to look at is the consistency of growth over the past five years in order to determine if it is able to sustain its value. In Coca-Cola’s case, it has, indeed, seen steady growth in this time period. The average growth rate is about 18% per year; not particularly notable but certainly a healthy sign nonetheless.
Another important figure in determining the relative health of a company is its cash flow per share. This is the amount of hard cash—rather than earning potentials, sales and other assets—that a company generates. Because it takes into account both taxes and depreciation, it provides a more reliable calculation of the company’s true value. Coca-Cola’s cash flow per share is $2.44 which is above the mean ($1.62) in its market. This is a very good sign of the company’s durability.
Signs of Future Decline:
Another indicator of stability is found in the ratio of price to sales (or, P/S ratio). A strong, enduring company will have not just a high stock value but the revenue to back it up and keep it going. Opinions differ on what a desirable price to sales ratio should be but, for the purposes of this analysis, I will adopt the more conservative opinions which put the ratio at 1.5 or lower. In this case, Coca-Cola—with a P/S ratio of 3.78 does not quite hold up.
Finally, it is very important to look at a company’s debt to equity ratio (or, D/E ratio) because this will tell us whether or not it is truly living within its means and growing organically—rather than artificially stimulating its growth by borrowing money from somewhere else. If a company has a lot of debt, there is a potential risk of its growth slowing or even declining if it encounters any financial difficulties.
In this regard, Coca-Cola does give us some cause for concern. The industry average is a 68.52 percent debt to equity ratio. Coca-Cola, however, is at a dangerously high 112.68. While this is not, in and of itself, a deal breaker, it is something both current stockholders and potential buyers should keep an eye on.
Conclusions:
Despite some causes for worry, Coca-Cola is definitely not a high risk investment. After all these years, it is still a strong and stable stock that will help balance your portfolio. Its high market cap and consistent long-term growth reassures us that the company has both the resources and good business sense to continue being a profitable enterprise well into the future.
By that same token, however, you should not be looking to Coca-Cola for a substantial increase on your initial investment. This is the safe, long-term investment you want to hold onto in order to insure you against any potential losses from the other riskier investments you can (and should) make in smaller, emerging companies.
