Understanding Coca-Cola’s Capital Structure (KO)

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The Coca-Cola Company (NYSE: KO) is the oldest and most prominent beverage company in the world. Founded in 1886, Coca-Cola has stayed at the top of its industry through multinational brand recognition and savvy control of its finances, including its capital structure.

Equity Capitalization

Simply put, capital structure is a measurement used to determine how much debt and/or equity a business employs to finance its operations. Representing shareholders’ ownership in a company, the amount of equity invested in a business is found by calculating the sum of retained earnings and common stock, minus the amount of treasury shares. Coca-Cola’s total stockholders’ equity equals $25.764 billion, as of its most recent 10-K in December 2015. This includes the sum of $1.76 billion of common stock at par value, $14.016 billion in capital surplus and $65.018 billion in retained earnings, less $10.174 billion in accumulated other comprehensive loss and treasury stock worth $45.066 billion. As of its latest 10-Q in July 2016, Coca-Cola had 4.323 billion shares outstanding and 54 million diluted shares, also known as convertible securities. Coca-Cola had a market capitalization of approximately $187.791 billion, as of Aug. 8, 2016.

Debt Capitalization

Debt, the other portion of capital structure, determines the accumulative amount of capital owed to creditors. Debt is first broken down into two categories: current liabilities, due within a year’s time, and the rest of the liabilities that mature in over a year. Coca-Cola’s latest 10-K from December 2015 shows the company to have $26.93 billion in current liabilities, consisting of $9.66 billion in accounts payable and accrued expenses, $13.129 billion in loans and notes payable, $2.677 billion in current maturities of long-term debt, $331 million in accrued income taxes and liabilities held for sale that are worth $1.133 billion. Long-term debt, deferred income taxes and other long-term liabilities cumulatively amount to $37.399 billion, bringing the total amount of liabilities to $64.329 billion. Over the past three years, Coca-Cola’s liabilities have grown by 21%.

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Leverage

Since the financial crisis of 2008, the Federal Reserve (Fed) has kept interest rates at low levels for an extended period of time. This has made it advantageous for many corporations, including Coca-Cola, to augment their leverage through issuing bonds at low interest rates between 1.4 to 3.25%, bringing Coke’s total amount of outstanding bonds to $48 billion. Despite this surge in bond underwriting, Coca-Cola’s ability to pay off its current liabilities has actually increased. Since December 2012, the company’s current and quick ratio have grown by 14% and 16%, respectively, to 1.24 and 0.885.

However, Coke’s debt-to-equity ratio has significantly changed. This gauge of leverage is used to calculate the ownership in a company versus the amount of money due to creditors. The debt-to-equity ratio is determined by finding the quotient of total liabilities divided by shareholders’ equity. In 2012, Coca-Cola had a debt-to-equity ratio of 160%. Over the course of the past three years, that ratio increased to 250%: a growth of 56%.

Enterprise Value

Enterprise value (EV) is a measurement often employed by investment bankers to determine a company’s price if it were to be put on the market. EV is calculated by finding the sum of a business’s market cap and its net debt. Net debt is found by subtracting the cumulative value of a corporation’s liabilities and debt from its total cash and cash equivalents. Coca-Cola’s EV from 2012 to 2015, only grew by 7.6% from $210.33 billion to $226.204 billion. This is mostly due to a 19.5% increase in net debt to $38.413 billion, over a 5.5% rise in market cap to $187.791 billion. Coca-Cola’s elevated EV should not worry investors, however, as this is an incremental increase, especially when compared to other large corporations such as Amazon.com Inc. (NASDAQ: AMZN) and Apple Inc. (NASDAQ: AAPL), which have seen their EVs skyrocket over 150% during the same span of time.

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