We believe Coca-Cola (NYSE: KO) can stay on top of its debt


David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that The Coca Cola Company (NYSE: KO) has debt on its balance sheet. But does this debt worry shareholders?

What risk does debt entail?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.

Discover our latest analysis for Coca-Cola

What is Coca-Cola’s debt?

You can click on the graph below for historical figures, but it shows that Coca-Cola had $ 42.1 billion in debt in July 2021, down from $ 52.4 billion a year earlier. However, it has $ 13.0 billion in cash offsetting that, leading to net debt of around $ 29.0 billion.

NYSE: KO History of Debt to Equity October 6, 2021

A look at Coca-Cola’s responsibilities

Zooming in on the latest balance sheet data, we can see that Coca-Cola had a liability of US $ 15.3 billion owed within 12 months and a liability of US $ 50.6 billion owed beyond that. In return, he had $ 13.0 billion in cash and $ 4.04 billion in receivables due within 12 months. Its liabilities therefore total $ 48.9 billion more than the combination of its cash and short-term receivables.

This deficit is not that big of a deal as Coca-Cola is worth US $ 229.1 billion, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debts.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Coca-Cola has net debt of 2.2 times EBITDA, which isn’t too much, but its interest coverage looks a bit weak, with EBIT at just 6.3 times interest expense. While these numbers don’t worry us, it’s worth noting that the cost of corporate debt does have a real impact. One way that Coca-Cola could beat its debt would be to stop borrowing more but continue to increase its EBIT by around 18%, as it did last year. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Coca-Cola’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Coca-Cola has recorded free cash flow totaling 83% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.

Our point of view

The good news is that Coca-Cola’s demonstrated ability to convert EBIT into free cash flow delights us like a fluffy puppy does a toddler. And the good news doesn’t end there, because its EBIT growth rate also supports this impression! Given all of this data, it seems to us that Coca-Cola is taking a fairly reasonable approach to debt. While this carries some risk, it can also improve returns for shareholders. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Know that Coca-Cola shows 2 warning signs in our investment analysis , you must know…

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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