Understanding Coca-Cola's Capital Structure (KO)

The Coca-Cola Company (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.

Simply put, capital structure is a measurement used to determine how much debt and/or equity a business employs to finance its operations. Let's look at elements of Coca-Cola's capital structure, including its equity capitalization, debt capitalization, leveraging capacity, and enterprise value.

Key Takeaways

  • The Coca-Cola Company has maintained good control of its finances, including its capital structure, over the years.
  • Coca-Cola had a market capitalization of approximately $244.5 billion, as of November 2021.
  • Coca-Cola's total stockholders’ equity (the amount of money that would be returned to a company's stockholders if all of the assets were liquidated) equals $22.179 billion.
  • In terms of debt capitalization, the other half of the capital structure coin, the company's total amount of liabilities is $66.473 billion.
  • The company's ability to pay off its current liabilities, as measured by its current ratio, has actually increased, and its debt-to-equity ratio has dropped.


Equity Capitalization

Shareholders' equity (or owners' equity for privately held companies), represents the amount of money that would be returned to a company's stockholders if all of the assets were liquidated. 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 number of treasury shares.

As reported on its third-quarter 10-Q, Coca-Cola’s total stockholders’ equity equals $22.179 billion. This includes the sum of $1.76 billion of common stock at par value, $17.929 billion in capital surplus, and $68.494 billion in reinvested (retained) earnings, less $14.25 billion in accumulated other comprehensive income and treasury stock worth $51.754 billion. As of Oct. 1, 2021, Coca-Cola had 4.318 billion shares outstanding and 26 million diluted shares, also known as dilutive securities.

Coca-Cola had a market capitalization of approximately $244.5 billion, as of November 2021.

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 10-Q from October 2021 shows the company to have $15.990 billion in current liabilities, consisting of $12.83 billion in accounts payable and accrued expenses, $1.866 billion in loans and notes payable, $448 million in current maturities of long-term debt, and $846 million in accrued income taxes. Long-term debt, deferred income taxes, and other long-term liabilities cumulatively amount to $50.483 billion, bringing the total amount of liabilities to $66.473 billion.

Leverage

Since the financial crisis of 2008, the Federal Reserve (aka The 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 relatively low-interest rates, bringing Coke’s total amount of outstanding bonds to $45.19 billion.

Despite this debt, Coca-Cola’s ability to pay off its current liabilities has actually increased. Coca-Cola has a current ratio (a comparison of a company’s current assets to its current liabilities) of 1.44, which is generally considered normal; that's increased a bit indicating the growth of assets over short-term debt) since 2016, when it was 1.24.

Its quick ratio, which measures the dollar amount of liquid assets available against the dollar amount of current liabilities of a company stands at 1.31.

Coke's debt-to-equity ratio has dropped, another sign of financial health. This gauge of leverage is used to calculate the ownership in a company versus the amount of money due to creditors, and it's determined by finding the quotient of total liabilities divided by shareholders’ equity. In Q3 2021, Coca-Cola had a debt-to-equity ratio of 2.997. That marks a steady decline since 2017 when it was at 4.04.

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 current EV is at $259.112 billion, compared to $226.204 billion in 2015, and $210.33 billion in 2012. Coca-Cola’s elevated EV should not worry investors, however. It's an incremental increase, especially when compared to other large corporations such as Amazon.com Inc. (AMZN) and Apple Inc. ( AAPL), which have seen their EVs skyrocket as much as 150% at times in the last decade.

Article Sources

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  1. The Coca-Cola Company. "Balance Sheet." Accessed Nov. 12, 2021.

  2. The Coca-Cola Company. "Income Statement." Accessed Nov. 13, 2021.

  3. Macroaxis. "Coca Cola Bonds." Accessed Nov. 13, 2021.