Coca Cola (NYSE: KO) company’s analysis reveal that the return on equity (ROE) and net income have decreased moderately but the net income to its shareholders however has increased. The net income for the latest years 2012, 2013 and 2014 were $ 9.0 billion, $ 8.6 billion and $ 7.1 billion respectively. And the corresponding equity ratios were 28.00 %, 26.03 %, and 22.36 % respectively. The reduction in the overall net income in each year has contributed to the reduction in the ratios also.
Why the decline of Coca Cola’s ROE.
KO’s gross revenue saw growth in the last 10 years, nearly double than before, from $23.1 billion in 2005 to $ 46.0 billion in 2014. The same period however saw a reduction in gross margin on sales from 64.5 % to 61.1 %. Thus the sales and net income have increased but there has not been a proportional increase in the growth of net income. This has resulted in the ROE not only declining but also dropping below the last 10 years average of 29.54 % and also the latest three years’ ratio.
Coca Cola versus Competition
The major competitor for Coca-Cola is PepsiCo Inc. (NYSE: PEP). PEP’s ROE ratios for 2012 was 28.87 %, for 2013 was 28.99 % and for 2014 was 31.29 %. Net income was $ 6.2 billion, $ 6.7 billion and $ 6.5 billion respectively for the same period. It can be seen that these indicate a stable and slight increase in the performance of PEP compared to KO. Moreover, PEP is also ahead of KO in reported annual sales with $ 66.7 billion in 2014 against $ 46.0 billion. But PEP’s net income however is lower than KO. This can be seen in the figures of PEP’s 53.7 % in gross margin and 14.4 % in operating margin against KO’s 61.1 % and 21.1 % respectively in 2014.
PEP has a diversified portfolio. Apart from nonalcoholic beverages which KO also competes, it is into food products under the brand Frito-Lay chip. However, the margins from food products are lower than the beverage products. This is reflected in KO’s more net income from less revenue compared to PEP.
The health conscious consumers have forced the decrease in demand for the soda products. Hence, both brands are going for diversification in the nonalcoholic beverages. They are investing more in juices, bottled water, sports drinks, iced tea and coffee beverages as alternate products.
Other factors
The performance of KO is also affected by non-ROE and other factors which do not reflect in the ROE ratio. One of them is that KO’s reduction of outstanding common shares in the last three years. Even though it is minimum from 4.6 billion to 4.4 billion as of December 2015, overall stock holder equity is impacted. Any analysis considering only the ROE ratio, may not reflect this. Long term debt has also been taken by KO over the past 10 years increasing from $ 3,9 billion in 2005 to $ 20.1 billion in 2014. The company’s growth has been funded thus and it is not uncommon to do the same when the sales is doubled during the same period. This also is not reflected in the company’s ROE analysis
