Industry and Company Overview Based on Balance Sheet: Comparative Analysis of Starbucks Corporation and The Coca-Cola Company
The global beverage industry has an annual worth of $1.4 trillion with a 2.6% expected increase each year. It consists of many market segments including soft drinks, energy drinks, tea and coffee, natural and organic beverages, alcohol, and bottled water. As long as thirst exists, there will be a market for beverages. One big trend is the growing popularity of bottled water. Consumers are seeking healthier ways to stay hydrated, making bottled water a popular choice. The beverage industry has seen an upward trend of health and wellness products as well. While sales of traditional drinks are declining, sales of alternative products like natural and organic beverages continue to see growth. Convenience has also driven growth in the market, with companies that cater to consumer behavior and consumption patterns performing best. In our research we discovered the soft drink market is being challenged by soda alternatives like ready-to-drink coffee. The demand for functional beverages, such as relaxation drinks, energy drinks, or ready-to-drink coffee is gaining popularity due to lower sugar and calorie contents. We chose to examine The Coca-Cola Company and Starbucks Corporation to investigate this further. With 10-ks and health measurements, we will assess each company and conclude which company is healthier.
The Coca-Cola Company controls nearly 40% of the global soft drink industry. Coca-Cola owns 500 brands and produces over 3,900 beverages and has four major industries: the sparkling soft drinks industry, the tea and coffee industry, the juice, dairy and plant-based beverages, and the water, enhanced water and sports drinks industry. Its beverage products are sold in more than 200 countries and territories. Approximately 61 billion beverages are consumed in the world every day. More than 1.9 billion are beverages containing trademarks owned by or licensed to Coca-Cola. The Coca-Cola Company has two types of ownership: public shareholding and institutional shareholding. Coca-Cola is a public company that trades its shares on the New York Stock Exchange, and its stock is owned by thousands of shareholders and investors worldwide. The company is also owned by FEMSA, which is a Mexican beverage company. FEMSA owns about 3 billion shares, which comprise about 70 percent of the company’s total shares. The Coca‑Cola Company has adopted C corporation status. This means there are no limit on the number of shareholders, foreign, or domestic, and it has unlimited growth potential. Because Coca-Cola is owned by shareholders around the world and runs a multinational corporation, shareholders don’t have to be citizens of the United States, which means Coca-Cola can do business with unlimited foreign owners.
Starbucks Corporation is a retailer that depends on consumer discretionary spending. It operates mainly in the retail coffee and snacks store industry. It is a public company that trades its shares on the NASDAQ. As of November 2018, Starbucks had approximately 18,100 shareholders. In fiscal 2018 it performed below the NASDAQ and S&P average, though it has performed higher in previous years. It saw most sales growth in the Americas. The most company-operated stores were opened in China and the Asian pacific area, though the Americas still held more open stores at the end of the fiscal year. Total net revenues increased 10% in 2018. Total net revenues were reported at 24.7 billion compared to 22.4 billion in the previous year. Earnings per share increased to $3.24, compared to an earnings per share of $1.97 in 2017. This increase was primarily driven by gains from the acquisition of an East China joint venture and the sale of its Tazo brand. The net favorable impact from the Tax Act also contributed to the increase. Cash flows from operations were $11.9 billion in 2018, compared to $4.3 billion in 2017. The change was mostly due to receipt of upfront payment from Nestlé in relation to the Global Coffee Alliance.
Coca-Cola’s property, plant, and equipment account is shown on the balance sheet on page 73, titled Property, Plant and Equipment, net. It’s also shown on the statement of cash flows on page 74, as Purchases of property, plant and equipment and Proceeds from disposals of property, plant, and equipment.
Starbucks’ Property, plant and equipment account is shown on the balance sheet on page 50. Starbucks uses the account title Property, plant and equipment, net as well. Property, plant and equipment, net is also listed on page 73 as part of the Supplemental Balance Sheet Information. Additionally, the Statement of Cash Flows on page 51 has a section for Additions to property, plant and equipment.
Coca-Cola does not list specific types of property, plant and equipment on the financial statement. It is listed under the notes on page 105 as land, buildings and improvements, machinery, equipment and vehicle fleet. Coca-Cola had $8,232 million in property, plant and equipment at the end of fiscal 2018. This was calculated by taking the company’s property, plant and equipment of $16,245 million minus the company’s accumulated depreciation of $8,013 million.
Starbucks has property, plant, and equipment accounts listed on the supplementary balance sheet: land, buildings, leasehold improvements, store equipment, roasting equipment, furniture, fixtures and other, work in progress, property, plant and equipment, gross, and accumulated depreciation. At the end of fiscal 2018, Property, plant and equipment, net had $5,929.1 million. Starbucks had an Accumulated depreciation of $7,268.0 million.
As shown on page 80 of the notes, Coca-Cola uses the straight-line method over the estimated useful lives of assets to record depreciation. Buildings and improvements have 40 years or less range, machinery, and equipment and vehicle fleet have 20 years or less range. Coca-Cola’s land is not depreciated because it has an unlimited useful life.
Starbucks’ notes on page 58 reveal that Property, plant and equipment includes all accounts listed on the balance sheet, as well as assets under capital leases. All Property, plant and equipment except land are carried at cost less accumulated depreciation. Cost includes all costs necessary to acquire and prepare assets for use, including internal labor and overhead. Starbucks uses straight-line depreciation. Depreciation ranges from 2 to 15 years for equipment and 30 to 40 years for buildings.
At the end of the 2018, Coca-Cola had net income of $6,476 million and average total assets of $85,556 million. The company’s return on assets was 7.56%. This ratio shows how much profit Coca-Cola generated from its assets. Generally an ROA over 5% is good, so Coca-Cola is considered good.
Starbucks had a 22.6% return on assets in 2018, which is also good. A 22.6% ROA shows that Starbucks is able to earn more money with less invested capital than Coca-Cola.
The notes on page 38 gives Coca-Cola’s intangible assets: trademarks, bottler franchise rights, goodwill, and other intangible assets. The company classifies intangible assets into three categories: intangible assets with definite lives subject to amortization, intangible assets with indefinite lives not subjects to amortization, and goodwill. These intangible assets are recorded at fair value and amortized over their useful lives ranging from 1 to 20 years.
Starbucks has three intangible asset types as well: goodwill, finite-lived tangibles, and indefinite-lived tangibles. Starbucks’ notes on intangible assets begin on page 59. Goodwill is reported at $3,541.6 million on the balance sheet. The account other intangible assets is also listed on the balance sheet and reported at $1,042.2 million. Other intangible assets include finite-lived and indefinite-lived intangible assets. Starbucks’ finite-lived assets are: acquired and reacquired rights, trade secrets, licensing agreements, contract-based patents and copyrights. The assets are amortized over their estimated useful lives. Indefinite-lived tangibles, trade names and trademarks, are tested periodically, usually during the third fiscal quarter. Starbucks then calculates the estimated fair value of intangible asset groups. Fair value is the amount a buyer is willing to pay for the asset. There were not any significant Other intangible asset impairment charges during 2018.
The Coca-Cola Company’s current liabilities are shown on page 73 on the balance sheet. The company’s current liabilities include account payable, accrued expense, loans, notes payable, current maturities of long-term debt, accrued income taxes, liabilities held for sale, and liabilities held for sale-discontinued operations.
Starbucks’ current liabilities are found on the balance sheet on page 50. Current liabilities include accounts payable, accrued liabilities, insurance reserves, stored value card liability and current portion of deferred revenue, and current portion of long-term debt.
Coca-Cola’s contingent liabilities are mainly related to customers, bottlers, vendors, and container manufacturing operations, owned by third parties of $600 million. Coca-Cola has also established contingencies for legal proceedings when they determine that there may be adverse consequences. Information on contingent liabilities is shown under the note on page 110.
Starbucks’ contingent rent liability is listed on page 61 of the notes. This liability was disclosed in the notes, indicating it was deemed reasonably possible to occur. However, the notes also state if a contingent rent liability is deemed probable, it is recorded in accrued occupancy costs, located in the accrued liabilities section on the balance sheet. It is also recorded on the corresponding rent expense. Contingent rent was included in the Leases section for 200.7 million.
Coca-Cola’s long-term liabilities are shown on the balance sheet on page 73. The long-term debt account reports $25,362 million. The notes on page 108 show Coca-Cola’s long term debt includes U.S. dollar notes due 2019-2093, U.S. dollar debentures due 2020-2098, U.S. dollar zero coupon notes due 2020-2024, Euro notes due 2019-2036, Swiss franc notes due 2022-2028, other, due through 2098, and fair value adjustments. These long-term debts are shown with amount and average rate, which represents the weighted-average effective interest rate. The adjustment for weighted-average maturity as of December 2018 was approximately 19 years. Amortization of these fair value adjustments will result in a decrease in interest expense in future periods.
Starbucks’ long-term liabilities are located on page 50 on the balance sheet. Starbucks has the following long-term accounts: long-term debt, deferred revenue, and other long-term liabilities. The notes on page 76 show the company has issued multiple senior notes this year. There are long-term notes due in 2020, 2023, 2024, 2025, 2028, 2047 and 2048. Starbucks pays interest semi-annually. The company has a large amount of deferred revenue this year due to an upfront payment from Nestlé.
Coca-Cola’s debt ratio for 2018 and 2017, is 0.80 and 0.81 respectively. This is calculated using Coca-Cola’s total liabilities of $66,235 million, divided by total assets of $83,216 million, for 2018, and total liabilities of $70,824 million divided by total assets of $87,896 million for 2017. The lower the debt ratio is, the better it is for the creditors. Coca-Cola’s ratio for 2018 was worse than 2017.
Starbucks’ 2018 debt ratio was .95, calculated by taking total liabilities of 22,980.6 million divided by total assets of 24,156.4 million. For 2017, total liabilities of 8,908.6 million divided by total assets of 14,365.6 million gives a ratio of .62. Considering creditors would prefer a lower debt ratio, this does not look good that the ratio number went up in fiscal 2018. Perhaps this is due to all the long-term debt issued this year. Coca-Cola had a lower ratio comparatively.
Coca-Cola’s times-interest-earned ratios for the 2018 and 2017 are 9.813 and 9.137 respectively. The calculation uses the company’s net income plus income tax expense plus interest expense, divided by interest expense. Because this ratio measures the company’s ability to pay its debt obligations, the ratio of 2018 is better than the ratio of 2017.
Starbucks’ times-interest-earned ratio takes a company’s earnings before interest and taxes, and divides it by their interest expense. The times-interest-earned ratio for 2018 and 2017 are 34.942 and 47.674 respectively. A higher times-interest-earned ratio is favorable because higher numbers means the company poses less of a risk to investors and creditors. Although the ratio decreases from 2017 to 2018, the numbers are still higher than Coca-Cola’s.
Coca-Cola’s stockholders’ equity section on the balance sheets is found on page 73. The company has authorized and issued common stock and treasury stock. At the end of 2018, Coca-Cola has 11,200 million shares authorized, 7,040 million shares of common stock issued and 7,040 million shares of treasury stock issued. Treasury stock can never be outstanding so that leaves 4,268 million shares of common stock outstanding.
Starbucks’ stockholders’ equity section is found on page 50 on the balance sheet. Starbucks has authorized and issued Common Stock. For the most recent balance sheet, Starbucks has 1,309.1 million shares issued and 1,431.6 million shares outstanding. Both Coca-Cola and Starbucks report their numbers in millions, which allows for greater precision. The less rounding of millions and billions, the more accurately the numbers can be represented.
Coca-Cola’s statement of stockholders’ equity is located on page 75 and titled The Coca-Cola Company and Subsidiaries Consolidated Statement of Shareowners’ Equity. There is no information about how many shares Coca-Cola purchased during 2018 on the statement of stockholders’ equity. Also, on the balance sheet, the number of common stocks from 2017 to 2018 did not change. However, under the note on page 63, Coca-Cola repurchased $1.9 billion of the company’s stock in 2018. The cost of the treasury stock in 2018 was $51,719 million. With 2,772 million shares, this comes out to $18.66 per share. Coca-Cola received $1,476 million for issuances of stock in 2018. Since Coca-Cola’s balance sheet shows $0.25 par value, Coca-Cola issued 5,904 million shares in 2018. Coca-Cola declared cash dividends of $3,672 million in 2018. This can be calculated by taking beginning retained earnings of $60,430 million minus ending retained earnings of $63,234 million which gives $2,804 million. Net income of $6,476 million minus $2,804 million equals $3,672 million.
Starbucks’ Statement of Stockholders’ Equity is located on page 52. It is titled Consolidated Statements of Equity. Starbucks re-purchased 131.5 million shares of common stock during fiscal 2018. For whatever reason, treasury stock is not listed on this statement or on the balance sheet. At $0.001 par value per share, treasury stock would come out to $131,500. There was no indication of stock issuances either. On the balance sheet, it shows common stock decreased from 1.4 million to 1.3 million shares in 2018. Starbucks declared cash dividends at $1.32 per share, paying $1,743.4 million.
Coca-Cola’s return on equity for fiscal 2018 was 33.98%. This was calculated using Coca-Cola’s net income ($6,476 million) divided by shareholders’ equity ($19,058 million).
Starbucks’ return on equity was calculated using net income (4,518.3 million) divided by total shareholders’ equity (1,169.5 million). Starbucks had an ROE of 386.34% for fiscal 2018. Anything over 15% is considered good. 386% seems unreasonably high, but the numbers have been checked.
Coca-Cola conducts training programs such as in-house workshops and e-learnings where appropriate. A process has been introduced to ensure that employees understand the Code of Business Conduct and compliance with each vision, and all employees are required to prove compliance. In addition, Coca-Cola established a universal consulting service (KO Ethics Line) that allows employees to report anonymously by phone or email if they find a violation of the Code of Business Conduct. This proves that Coca-Cola strives to comply with ethics and laws.
An example of internal control at Starbucks is separation of duties. In every Starbucks store, at least one person in the operations department will be in charge of collecting and confirming cash received. The cash will then get sent to the accounting department where it can be recorded in the books. This is important to reduce the likelihood of theft. Retailers lose nearly $50 billion annually to theft, so strict separation of duties is important. With proper separation of duties, no single person will have control over the entire cash process.
Ernst & Young LLP audited The Coca-Cola Company in accordance with the PCAOB (the Public Company Accounting Oversight Board). Ernst & Young reported that Coca-Cola maintained internal control, and that the company’s financial statements were presented adequately. Ernst & Young found Coca-Cola provided reasonable and reliable details. This report is located on page 149.
Deloitte & Touche LLP (in accordance with the PCAOB) audited Starbucks and reported their financial statements and notes to be presented fairly and in conformity with generally accepted accounting principles. Deloitte & Touche found Starbucks’ system of internal controls to be adequate. This report can be found on page 89.
Coca-Cola’s statement of cash flows is found on page 74. Coca-Cola used the indirect method to report cash flows from operations because it starts with net income as the base and uses adjustments including depreciation and amortization. Coca-Cola bought less plant assets in 2018. The amount of purchases of plant assets in 2018, 2017, and 2016, are $1,347, $1,675, and $2,261 million respectively. The amount of proceeds from disposals of plant assets in these years are $245, $104, and $150 million respectively. This shows Coca-Cola sold more plant assets in 2018 comparatively. Coca-Cola bought back its own stock of $1,912 million for treasury and paid dividends of $6,644 million ($1.56 per share) in 2018. This is information can be found on page 63.
Starbucks’ statement of cash flows is located on page 51. Starbucks used the indirect method to report cash flows from operations. By starting with net earnings and adjusting to net cash, this indicates Starbucks uses the indirect method. This information can be found on the statement of cash flows. Starbucks bought more plant assets in 2018 than in 2017 and 2016, 1,976.4 million compared to 1,519.4 million, and 1,440.3 million respectively. Starbucks paid 7,133.5 million to buy back its own common stock, and paid 1,743.4 in cash dividends.
Financing activities generated the most cash flows for Coca-Cola. Financing activities are involved in long-term liabilities and equity including issuing stock, paying dividends, and buying and selling treasury stock. Coca-Cola paid $30,568 million for debt and $6,644 million for dividends in 2018. Coca-Cola spent a large amount of cash on paying off liabilities. This section also shows investors that Coca-Cola returns capital to them in the form of cash dividends.
Operating activities generated the most cash flows for Starbucks. This shows the company spent net cash on manufacturing and selling goods, and providing services. A big contributor to this was deferred revenue. Starbucks received an upfront payment from Nestlé for roughly $7 billion. The payment was recorded as a liability and is recognized as other revenue on a straight-line basis.
We believe Starbucks Corporation is healthier than The Coca-Cola Company. On first inspection, Coca-Cola seems healthier because it is the largest beverage company worldwide. Also, if we compare net incomes, Coca-Cola’s is higher (6,476 million compared to 4,518.3 million). However, when we examine the companies’ health measurements, including ROA, ROE, debt ratio, and times interest earned, the numbers show Starbucks to be healthier. Coca-Cola and Starbucks’ ROA in 2018 were 7.56% and 22.6% respectively, which tells us that Starbucks has a much greater capacity to generate capitals and profits. Coca-Cola and Starbucks’s ROE in 2018 were 33.98% and 386.34% respectively; telling us Starbucks can manage and capitalize its equity more efficiently.
We would be more likely to invest in Starbucks. The times-interest-earned ratio for Coca-Cola and Starbucks in 2018 was 9.813 times and 34.942 times respectively. This ratio can measure a company’s ability to pay off debts and usually means it poses less of a risk to investors. Because Starbuck’s number is higher, it means Starbucks has a higher ability to pay off debts. The debt ratios for Coca-Cola and Starbucks in 2018 were 0.80 and 0.62 respectively. This ratio shows how much debt a company has, and tells us Coca-Cola has more debts. Finally, we looked at their statement of cash flows. Coca-Cola spent its net cash on paying off debts. Starbucks spent its net cash on manufacturing and selling goods, and providing services. With all this information we can safely conclude that Starbucks offers a better business and would be a steady, reliable investment for investors.
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