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.

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 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 $22.81 billion. This includes the sum of $1.76 billion of common stock at par value, $18.69 billion in capital surplus, and $70.89 billion in reinvested (retained) earnings, less $15.87 billion in accumulated other comprehensive income and treasury stock worth $52.67 billion. As of Dec. 23, 2022, Coca-Cola had 4,325 billion shares outstanding, giving it a market cap of approximately $275.5 billion.

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 2022 shows the company to have $26.44 billion in current liabilities, consisting of $116.10 billion in accounts payable and accrued expenses, $3.39 billion in loans and notes payable, $729 million in current maturities of long-term debt, and $1.2 billion in accrued income taxes. Long-term debt, deferred income taxes, and other long-term liabilities cumulatively amount to $46.69 billion. Coca-Cola’s total liabilities are $68.04 billion.

Leverage

Despite this debt, Coca-Cola’s ability to pay off its current liabilities has actually increased. Coca-Cola’s current ratio (a comparison of a company’s current assets to its current liabilities) is 1.12, which is generally considered normal for the industry. This means that Coca-Cola has $1.12 in liquid assets to cover every dollar of current debt.

Its quick ratio, which measures the dollar amount of liquid assets available against the dollar amount of current liabilities of a company, stands at .97.

Coke’s debt-to-equity ratio has dropped, another sign of financial health. This leverage gauge 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 2022, Coca-Cola had a debt-to-equity ratio of 2.78, down from 2.795 in 2021.

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 $333.77 billion. 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.

The Bottom Line

Coca-Cola has been operating for over 100 years and has seen its share of economic turmoil. The company continues to use debt wisely, has a large amount of cash and equivalents available, and continues to perform during troubling times. It has also provided investors with dividends for many years, signifying its ability to manage its finances well.