Coca-Cola is a public traded company headquartered in Atlanta, Georgia. It is involved in the production of carbonated beverage drinks. It was invented into deals with marketing tactics; it is the marketing leader in the world. The company produces various drinks such as Coca-Cola life, Coca-Cola Citra, Coca-Cola Cherry, Coca-Cola Zero sugar and Diet Coke. The company produces filtered sweeteners and water as the products. The company merchandise Coca-Cola, distribute and sell to retail stores. The company has grown in the recent years to be the world market leader in the production of soft drinks.
The return on equity and return on capital for Coca-Cola Company will be calculated for the last two years. Return on equity shows the profitability of a company showing shareholders’ investment. It is expressed as a percentage by diving the net income by the total shareholder’s equity.
Return on equity = Net Income/Shareholders equity
2016
($6,527,000,000/$23,062,000,000)*100% = 28.30%
2017
($1,248,000,000/$17,072,000,000)*100% = 7.31%
The above data indicates that Coca-Cola company generated higher returns on equity in the financial year ended 2016 than 2017. This an indication of the decline of the company performance from 28.30% to 7.31%. This is a significant decline in equity performance of the firm.
Return on capital measures how capital generates a return on investment as a profitability ratio. It usually indicates the effectiveness of a firm when converting capital to profits (Stickney, 2004). The ratio is also known as the return on invested capital. It is very useful when determining the operation of a business, which considers price fluctuations in the business operation. The ratio is very crucial, especially when evaluating the performance of a business. The return on capital is calculated by subtracting dividends and then divided by addition of the equity and debts.
Return on capital = (Net Income-Dividend)/(debts + equity)
2016
($6,527,000,000/$87,270,000,000)*100% = 7.17%
2017
(1,248,000,000/87,896,000,000)*100% = 1.42%
There is a decline in the return on capital from the year 2016 to 2017. This is an indication of a decline in the performance of the company attributed to the decrease in the net profit of Coca-Cola enterprise. The cost of capital and cost of equity also requires an estimation. The estimated cost of equity is 2.75% while the estimated cost of capital is 4.2% for Coca-Cola firm. The company needs to take drastic actions to revert the negative trend in its performance. The financial year ended recorded a significant decline hence the decline of both the return on capital and return on equity.
References
Stickney, C. P., Brown, P. R., & Wahlen, J. M. (2004). Financial reporting and statement analysis: A strategic perspective. South-Western Pub.