Multi-national enterprises are the entities which have significant market presence in different parts of the globe. Thus, such entities (MNEs) generally operate in numerous countries under different economic, financial, political and social environment. It is obviously a huge challenge for the management of a MNE to understand the differing economic and financial environments properly to take steps and measures accordingly to achieve the desired objectives of such an entity. In this document a critical analysis shall be made on the financial performance and financial position of a MNE to provide the readers an in-depth knowledge on the various financial indicators that are to be used to assess the performance and position of a MNE.
Coca Cola Company Limited has been chosen to represent as the subject company to conduct a detailed analysis on the financial performance and financial position of the company. In all yardsticks if a company truly symbolize as a MNE it has to be Coca Cola Company Limited (Coca-colacompany.com 2017). The company has its presence almost all the major countries around the globe and definitely it has its strong routes in each and every single continent of the world. An American MNE, the company has it’s headquarter in Atlanta, Georgia though incorporated in Delaware in 1892. It manufactures, distribute and market non-alcoholic beverages in almost all the major countries across the globe. The company is listed in NYSE along with almost all the major stock exchanges in different countries in the world. According to a recent report the company has an astonishing present in global arena with its non-alcoholic beverages being sold in more than 220 countries across the globe. In order to assess the impact of international financial events on the financial performance and position of the company let us proceed with the financial information of the company available in its annual reports.
An entity with the size and scale of operations of Coca Cola Company Limited there is bound to be numerous events in different parts of the world that will influence the operations and management of the company in respective parts of the globe. However, only the significant developments in international financial environment will impact the financial performance of the company considering its core strength and strong management (Kumar 2017). The recent developments in international financial environment and their impact on the financial performance of the company is explained below.
Globalization is certainly not a recent development in international financial environment from any stretch of imagination thus, the readers must be thinking why it has been mentioned as a recent development to explain its impact on the performance of the company. Well the reason is simple, though globalization is certainly a term, all of us are aware of for more than a decade now, still there were numerous countries, especially in certain parts of Asia and Latin America which did not opened their borders for the companies form different countries (Deresky 2017). However, with passage of time the number of countries who have truly embraced globalization have increased substantially. Countries in Middle-east and in certain parts of Asia and South America have opened their borders for MNEs from different parts of the globe. Thus, whereas even till the year 2000 where the company, i.e. Coca Cola Co., used manufacture and distribute its non-alcoholic beverages to only about 120 countries now have significant presence in more than 220 countries across the globe. Thus, the globalization has certainly helped MNEs and especially companies like Coca Cola to truly realize the meaning of global company. The scale of operation has multiplied by many folds (Brondoni 2014).
Compare to the unrest and tension that existed prior to the year 2000, the political landscape have definitely changed. The unrest and war like situations which once exited in different parts of the world including Middle-East, Asia, South America, North America and even Europe to a certain extent, have changed for better (Akhter et al. 2016). With political stability the companies operating in these parts of the world have been able to improve their operating performances. Asia is one of the largest markets of the company include countries like China, India, Pakistan, Afghanistan, Sri Lanka and others have definitely mellowed. Earlier war like situations in these countries used to influence the operations of the company adversely however, with the political stability in these regions the performance of the company have certainly improved significantly.
The information technology revolution has bring a huge change in the way business used to be conducted in MNEs. With the revolution of IT, companies such as Coca Cola co. and such others have used it to stretch its operations in different parts of the world where earlier it was not possible due to lack of infrastructure and innovative technology (Sinclair and Keller 2014). However with the constant innovation in the field of information and technology companies such as Coca Cola co. have truly gone global as the operating expenditures have reduced and the lack of infrastructure have made way for the innovative technology in the form of modern equipment and machineries. Thus, the financial performance of the company has only improved as a result of this.
The emergence of social networking sites such as Facebook, whatsapp, Twitter, Snap Chat and other such platforms have helped the company to market its product globally at a much lesser cost. Thus, the financial performance in the recent times have only improved as a result of social networking sites and their emergence. However, there are certain drawbacks of using social networking sites for promotional activities too (Meyer and Peng 2016). It has given the competitors also the same tool to market their products aggressively and sometimes bad corporate practices such as spreading misinformation directly as well as indirectly using the social networking sites could have damaging impacts on the goodwill and reputation of the company. Thus, the IT department and IT professionals employed by the company must be alter to such situations in order to ensure that if any such moves are made then there are proper and fitting replies are given to counter such moves (Lam and Quinn 2014).
Recent campaigns against the non-alcoholic beverages by raising health issues have certainly influenced the consumer behaviour as can be seen in very recent performances of the company. The revenues of the company have reduced constantly in last three financial years. The ever increasing protest against the adverse health effects of the non-alcoholic beverages have certainly influenced the consumer behaviour (Brigham and Ehrhardt 2013). Thus, if the trend continues and the Company is unable to provide satisfactory explanations to the customers by proving that the non-alcoholic beverages are not going to have any adverse health effects then the future performance of the company will bound to be influenced adversely.
In order analyse the financial performance of the company it is important to have the extracts of profit and loss account of the company as provided in the Annual report 2016 of Coca Cola Company Limited. The consolidated income statement of the company for the current year is provided below:
From the above income statement it is easy to see that the overall revenues of the company in last few years have reduced by a fair margin. Similarly, the gross profit, operating income, income before taxes and consolidated net income of the company have also reduced by a fair margin in the last few years (Petty et al. 2015). However, in order to properly understand and analyse the financial performance of the company in the two most recent consecutive financial periods, ratio analyses would be helpful and beneficial.
Gross margin = Gross income X 100 / Revenue.
Operating margin = Operating income X 100 / Revenue
Net income margin = Net income X 100 / Revenue
|
Profitability ratios |
||
|
Profitability |
2015-12 |
2016-12 |
|
Gross margin |
60.53 |
60.67 |
|
Operating Margin |
19.70 |
20.61 |
|
Net income margin |
16.60 |
15.59 |
The profitability ratios help us to assess the financial performance company. As can be seen that though the overall revenue, gross income, operating income and net income of the company has reduced by a certain margin in the current year ending on December 31, 2016 from the previous year. However, the gross margin and operating margin both have increased in the current year from the previous year (Rowley and Cooke 2014). The increase in gross margin and operating margin indicates the increase in efficiency in core business operations of the company. Thus, the company has been able to achieve reduction in cost of goods sold to earn gross profit at a higher rate in the year 2016 compare to the immediate previous year. Increase in operating margin in the year 2016 to 20.60% compare to 19.70% of 2015 indicates the increase in operating efficiency of the company.
Efficiency ratios help us to assess the efficiency of an organization with which it has used its resources in the business operations.
|
Efficiency ratios |
||
|
Efficiency |
2015-12 |
2016-12 |
|
Asset Turnover (Average) |
0.49 |
0.48 |
|
Return on Equity % |
28.77 |
28.30 |
|
Return on Invested Capital % |
8.18 |
7.51 |
|
Interest Coverage |
9.61 |
9.94 |
Asset turnover of the company has declined in the current year to 0.48 whereas in the year 2015 it was 0.49, indicative of decline in the ability of the company to use its assets in generating revenue for the company. Return on equity of the company has decreased to 28.30% from 28.77%. This clearly indicates that though the overall return of the company has reduced but return on owners’ capital has improved. The increase in interest coverage ratio to 9.94 2016 from 9.61 of 2015 further substantiate the fact that the overall efficiency of using the funds have deteriorated in the year 2016 compare to the previous year (Masterman 2014).
The table containing the liquidity ratios of the compan, i.e. current ratio and quick ratio, to assess the impact of financial performance of the year 2016 on the liqudity position of the company.
|
Liquidity |
2015-12 |
2016-12 |
|
Current Ratio |
1.24 |
1.28 |
|
Quick Ratio |
0.89 |
0.98 |
Current ratio shows us the ability of an organization to pay off its current liabilities using the current assets of the organization (Martin et al. 2017). The current ratio of 1.28 in the year 2016 compare to 1.24 of 2015 indicates the improvement in the liquidity position of the company as its ability to pay off its current obligations by usin current assets have improved in the year 2016. Simsilarly, the qucik ratio which is even more liquid version tan current ratio of 0.98 in 2016 substantiates the improvement in liquidity position as the quick ratoo in 2015 was 0.89. Thus, the liqudity position of the company has improved in the year 2016 compare to prvious year.
The interest expenses in the year 2016 has been $733m though seems less compare to the previous year 2015’s interest expense of $856m but the interest expense of 2015 included charges of early extinguishment on certain long term debt amounting to $320m. Thus, this clearly indicates that the finance charges on borrowed fund in the year 2016 has increased significantly (Madura 2015). This suggests that the company has taken additional loans to finance different projects compare to using the retained earnings or issuing ordinary shares in the market.
The net income attributable to the shareholders of the company in the year 2015 was $489m that has increased to $835m in the year 2016. This is an increase of $346m in net income attributable to the shareholders (Jackson and Singh 2015). This indicates that the financial strategy used by the company to take additional debt for financing different projects of the company has paid huge dividend to the shareholders of the company as their income have increased by almost 72% in 2016 from the previous year.
The payment of dividend in the year 2016 has been increased to $6,043m compare to $5,741m in the previous year 2015. It clearly suggests that the financial strategy of the company to pay higher amount of dividend despite the decline in overall revenue and profit has ensured that the share prices in the market are not affected adversely (Lee and Tang 2017). The financial strategy is about taking financial decisions keeping in mind the interests of the organization, its shareholders and other stakeholders.
The company primarily uses derivative financial instruments to reduce the risk of fluctuations that are adverse in nature in foreign exchange rates, commodity rates and interest rates. The company to reduce the underlying risk in transactions denominated in foreign currencies effectively uses hedging instruments (Cheng et al. 2014). Considering the scale of foreign currency operations the strategies used by the company to manage the foreign exchange rates fluctuation risks, commodity rates and interest rates are of immense importance.
Consolidation method is used to manage the foreign exchange currency exposure. Thus, the company net certain exposures and take advantage of offsets which happen naturally. The following extract from annual report would further help us to understand the risk management strategy used by the company to manage the exposure of foreign exchange risk (Cheptegei and Yabs 2016).
The company is certainly exposed to the risk of fluctuations in interest rates as the borrowed capital of the company includes both fixed as well as variable interest rate debts. The company monitors the fix and variable rate of debts including short term and long term debt. Interest rate swaps along with other methods are used to manage the risk of interest rate fluctuations (Eccles and Serafeim 2014). The following extract from manual report of the company would further help us to understand and analyse the interest rate risk management strategy used by the company.
The company is subjected to the risk of increase in commodity prices. In order to manage the risk of commodity price fluctuations the company uses the supplier pricing agreements. The supplier pricing agreements help us to establish prices for certain commodities to manage the risk of fluctuations in the prices of such commodity (Song and Lee 2014). The extract taken from the annual report of the company for the year 2016 would be further helpful to assess the risk management strategy of the company to manage the risks of commodity price fluctuations.
Conclusion:
Considering the discussion above, it can be said that a company that has its presence in different parts of the world requires taking into consideration the different factors that affecting the international financial environment to ensure that the performance of the company is not adversely affected. Only by proper management, financial as well as non-financial aspects of an organization, it would be possible to achieve better financial performance with the limited resources of the organization.
Reference
Akhter, N., Rafique, A., Rafiq, I., Bano, M. and Usman, M., 2016. Organization Structure and Firm Performance in Financial Development for Perspective in Coca Cola Beverages in Pakistan. International Review of Management and Business Research, 5(2), p.494.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Brondoni, S.M., 2014. Global Capitalism and Sustainable Growth. From Global Products to Network Globalisation. Symphonya. Emerging Issues in Management, (1), pp.10-31.
Cheng, M., Green, W., Conradie, P., Konishi, N. and Romi, A., 2014. The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), pp.90-119.
Cheptegei, D.K. and Yabs, J., 2016. FOREIGN MARKET ENTRY STRATEGIES USED BY MULTINATIONAL CORPORATIONS IN KENYA: A CASE OF COCA COLA KENYA LTD. European Journal of Business and Strategic Management, 1(2), pp.71-85.
Coca-colacompany.com. (2017). Cite a Website – Cite This For Me. [online] Available at:
https://www.coca-colacompany.com/content/dam/journey/us/en/private/fileassets/pdf/investors/2015-annual-report-on-form-10-k.pdf [Accessed 22 Dec. 2017].
Deresky, H., 2017. International management: Managing across borders and cultures. Pearson Education India.
Eccles, R.G. and Serafeim, G., 2014. Corporate and integrated reporting: A functional perspective.
Jackson, L.A. and Singh, D., 2015. Environmental rankings and financial performance: An analysis of firms in the US food and beverage supply chain. Tourism Management Perspectives, 14, pp.25-33.
Kumar, R., 2017. Strategic Financial Management Casebook. Academic Press.
Lam, J. and Quinn, F., 2014. The role of sustainability in enterprise risk management. Workiva White Paper.
Lee, H.L. and Tang, C.S., 2017. Socially and environmentally responsible value chain innovations: New operations management research opportunities. Management Science.
Madura, J., 2015. International Financial Management, Abridged. Cengage Learning.
Martin, H.M., Durr, D., Smith, L.M., Finke, R. and Cherry, A., 2017. Analysis of GMO food products companies: financial risks and opportunities in the global agriculture industry. African Journal of Economic and Sustainable Development, 6(1), pp.1-17.
Masterman, G., 2014. Strategic sports event management. Routledge.
Meyer, K. and Peng, M.W., 2016. International business. Cengage Learning.
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial management: Principles and applications. Pearson Higher Education AU.
Rowley, C. and Cooke, F.L., 2014. The changing face of management in China. Routledge.
Sinclair, R.N. and Keller, K.L., 2014. A case for brands as assets: Acquired and internally developed. Journal of Brand Management, 21(4), pp.286-302.
Song, C.Y. and Lee, K., 2014. The Samsung way: Transformational management strategies from the world leader in innovation and design. New York, NY: McGraw-Hill Education.
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