Unilever and Coca-Cola Companies’ Strategic Financial Management

A relatively large number of companies are represented on the London Stock Exchange, and therefore a detailed analysis of each would take quite a long time. A wide range of investment opportunities should be dictated not only by the successful position of the company’s quotes on the market, but also by various external factors, the availability of information about it, as well as the ability to adequately interpret this information. For this memorandum, two well-known companies Unilever and Coca-Cola Company, were taken, which have their quotations on this exchange. Unilever is an established giant that has been at the forefront of the consumer products market for over a century. Coca-Cola, in turn, is an equally well-known company that consistently pays dividends to its customers, even in the event of a crisis (Brondoni, 2019). As a result, the overall positive quality of these organizations is stability in the market and global brand recognition. These advantages will serve as a starting point in choosing a company for investment based on an analysis of its financial performance.

Coca-Cola Company has stable revenue and cash flow indicators from year to year, which nevertheless tends to decline. Significant deviations are noticeable in the period of 2020 due to the pandemic, which affected almost all companies in the consumer sector (Macrotrends – CocaCola Financial Ratios for Analysis 2005-2021 | KO, 2021). Nevertheless, the company’s net income remains at its level. It is due to the fact that a decrease in revenue indicators is accompanied by a decrease in the production costs of the company’s products sold while maintaining a gross profit. Considering that the company belongs to the consumer sector and logistics costs increased more than significantly during the pandemic, these data indicate that the company is well managed and capable of balancing costs in a crisis (Shin et al., 2020). This fact is also confirmed by EBITDA indicators growing from year to year, showing the company’s ability to reduce operating expenses while maintaining the level of revenue. Coca-Cola’s total assets have been falling recently since the company keeps growing dividend payments to its shareholders, which at the moment has to be done in debt. However, the calculated current ratio in appendix A shows good dynamics compared to previous years.

The cash flow from investment activity at the moment has gone into negative values, which means that the company is investing in fixed assets that can give profit in the long term. Therefore, cash flows from operating activities have a positive trend and have been growing over the past two years, which signals the company’s high liquidity (Macrotrends – CocaCola Financial Ratios for Analysis 2005-2021 | KO, 2021). Competitors have no clear advantage over Coca-Cola, and despite the problems, the company maintains a leading position in the market. The company’s stability allows us to conclude that it is worth considering investments in this company as a long-term bank deposit. Although the company has a reasonably large debt, which has grown significantly due to the pandemic, Coca-Cola can cover short-term liabilities. This view is supported by other analysts who emphasize insider selling in the past three months as a possible risk, although the fair value is more than a third higher than the current trade (Simply Wall St – Coca-Cola NYSE: KO Stock Report, 2021). The shares are unlikely to show extraordinary or sharp growth since they have already realized most of their opportunities. The long history and low degree of diversification, compared to direct competitors, do not suggest possible prospects for a sharp increase in investments. However, the stability of the growth in dividend payments may be a decisive factor for Penco.

Unilever has also been on the market for a long time and has stable revenues, which are almost one and a half times higher compared to Coca-Cola, but the level of operating and net profit compared to Coca-Cola is the same or even lower. Unilever has fewer assets and liabilities but showed a recovery after the start of the pandemic in shareholder’s equity above the level of 2016-2019 (Macrotrends – Unilever Financial Ratios for Analysis 2005-2021 | UL, 2021). Nevertheless, there has been a decrease in the company’s turnover and cash flow over the past year, contrary to expert estimates, which affects both the share price and the dividends paid. Unilever is highly dependent on the end customer, although the company’s management is far enough away from the consumer in the supply chain. Competition is fought for each brand that is represented in various areas of everyday goods, from household chemicals to food. In this regard, it is rather challenging to get an in-depth analysis of the factors affecting the value of shares and the relevance of investments in this company. The company’s EBITDA margin tends to decline, while the net profit margin remains at a level even during a pandemic (Macrotrends – Unilever Financial Ratios for Analysis 2005-2021 | UL, 2021). The company achieves a way out of the crisis by selling some brands to regional owners, thereby keeping the current ratio at the same level as before and after the pandemic.

Spot stimulation of top-level sales growth can be achieved by investing quite large sums shortly in each in-demand area, including e-commerce retail, herbal food, and beauty products. It would help Unilever reach its long-term baseline target of 3% to 5% sales growth, restoring its previous forecast set in 2020, which had to be pushed back in April due to uncertainty caused by the pandemic (Tashanova et al., 2020). Cash flow from operating activities at Unilever is growing steadily year after year, while investment activities are constantly in the red, in contrast to Coca-Cola, where negative values ​​have been observed only in the last two years. Unilever is constantly investing for the future; goodwill indicators, intangible assets, and long-term investments have been growing steadily for over ten years (Macrotrends – Unilever Financial Ratios for Analysis 2005-2021 | UL, 2021). As a result, the company has a more stable development strategy, which, with a significant diversification in comparison with Coca-Cola, signals a positive development in any problematic situations. The company’s financial performance is shown in appendix A.

At the same time, in general, the company has much more opportunities for diversification and growth potential than Coca-Cola, but at the moment, the company’s active indicators do not signal a possible leap. In the long term, the company has good stability and more opportunities than Coca-Cola, but the financial analysis favors the beverage giant, which also has a high level of stability. In this connection, this memorandum calls for investing in the Coca-Cola Company to get more profit in the long term.

Formation of the company’s financial plan or the cash flows of the investment project involves the calculation of the need for working capital. Periods of turnover of short-term assets and liabilities are often used to solve this problem – actual or planned. In cases where an aggregated description of cash flows is permissible, calculating the need for financing working capital as a percentage of changes in income or expenses is economically justified and quite convenient (Goswill et al., 2018). Such cases include, for example, the valuation of a company using the discounted cash flow method, an express appraisal of an investment project. The percentage of change in working capital is determined based on the same information as the turnover periods of short-term assets and liabilities. Therefore, the degree of reliability of the received percentage is the same as that of the calculated turnover indicators.

The choice of a working capital financing strategy determines the presence and volume of the need for short-term financing. It can be calculated as the difference between the amount of long-term financing and the cumulative capital requirement, which is the increasing investment in buildings, equipment, stocks, and other assets over time (Bhattacharya, 2021). When the volume of long-term financial resources the enterprise receives exceeds its cumulative need for capital, the enterprise has a surplus of funds that can be used for short-term investment. The benefits of using a commercial loan must be weighed against the costs — the loss of benefits from the unused discount. Nevertheless, even if these costs are very high and therefore businesses use other sources of short-term credit to maximize the benefits associated with the discount, the cost savings of other forms of short-term finance must offset the loss of flexibility and convenience of commercial credit.

Retained Earnings

The constant search for a balance in pricing is an essential point for any enterprise, which always strives to maximize the difference between the cost of producing a product or service and its profit in a positive way. It is the easiest, but not the fastest, way to make this profit without increasing Penco’s liabilities. Retained earnings can be distributed for various purposes: for example, directed to dividends to shareholders of the company, which always helps to increase the reputation and attractiveness for new investors (Uzomah and Ihe, 2021). In another case, Penco may initiate a buyback of its own shares in order to reduce the number of shares in circulation, and as a result, increase their value. Companies invest in their assets no less often, and this can be both a long-term investment and the creation of new projects for development.

In this case, the situation with investments in Unilever and Coca-Cola Company shares specified in the memorandum is considered. Increasing retained earnings by not paying dividends for the purpose of long-term investments is considered a sufficiently good approach, which can bring profit to shareholders in the future. However, it is worth considering whether Penco paid high dividends to its shareholders before this investment decision. If yes, this approach will be a blow to reputation, and long-time shareholders may negatively perceive a radical change in dividend payments. If not, then this approach can be considered as an option. However, the decision not to pay this profit can be challenged by the shareholders, who are the company’s actual owners.

In any case, in the long term, shareholders will want to receive dividends, which are expected to be higher than now, as gratitude for the expectation and faith in the company. Consequently, Penco needs to weigh the pros and cons of using this source of funding, which is subject to financial obligations and reputational ones. Negative experience, lousy investment in the above companies can create disgusting advertising for future Penco investors. As a result, managers tend to take a combined approach to retained earnings by increasing dividends and investing in the company (Bagheri, Ramezani, and Poursaeed, 2018). Given that the amount chosen for investment is considerable and probably exceeds the indicators of cash flow and actual retained earnings, this approach can only be used after a time when this amount has accumulated.

Debt Capital

A company can provide bank loans to increase its working capital, as well as for various purposes. Privately, the company is checked; as a result, all risks are calculated with the issuance of a large loan. With this type of financing, the issuer issues debt securities that are exchanged for cash to perform specific actions (Naidoo, Nkuna, and Steenkamp, ​​2020). The debt, of course, is paid off with interest, which is the main disadvantage of this approach, but the instant receipt of money balances the choice.

If we consider the advantages of this approach, then we can see that enterprises retain the rights to make critical management decisions, regardless of other opinions in this situation. Shareholders have more influence on the retained earnings approach, while on loan from a bank, management continues to retain exclusive control. In addition, for many firms, debt capital is the single and most effective catalyst for growth and a determinant of company expansion (Tan and Luo, 2021). However, the cost of a mistake or failure in this situation is much higher since not only the company’s reputation will suffer. In case of non-payment of the debt, the company will face punishment; as a result, it may default or even go bankrupt.

These borrowed funds, in the case of Penco, will be used to invest in these companies. Unilever and Coca-Cola are distinguished by their stability in paying dividends and Coca-Cola in their growth. As a result, we can conclude that this investment can be considered reliable. However, it is necessary to analyze the possible profit over a long distance, equal to the loan term, to assess the dynamics of financial indicators, starting from the fact that the interest on the loan should not significantly exceed the expected dividends. In this situation, it is necessary to work out several possible scenarios in order to compare the risks that, in the worst case, can lead to bankruptcy and default, which is inadmissible.

Equity Capital

Funds for Penco can also be obtained in exchange for a certain amount of ownership in the form of shares. Naturally, this approach is behind a partial loss of control over management decisions since the new co-owners will have a voting right on the board of directors proportional to the number of shares (Gupta, Krishnamurti, and Tourani-Rad, 2018). The planned plan by the current composition of the Penco management, for the purpose of which the financing for investment is made, may be challenged and rejected in the event of too much dispersion of control over the company’s property. Investment objectives can be challenged in the future, and the purpose for which the funds were used will be liquidated without bringing the expected income. Finally, the probable difficulty is the search for potential shareholders willing to invest the appropriate amount in the company.

Nevertheless, this approach has undoubted advantages over debt capital. First, Penco does not have to pay interest like a borrower. Secondly, the risks of bankruptcy and default are much reduced, which are now wholly dependent on the management. Finally, responsibility is distributed among all shareholders in an equally proportionate control over the shares of the degree. This fact means that in case of failure, the company’s original management will not be in debt with the need to close the company. Penco may also pay attention to various kinds of grants and subsidies, but such large amounts are rarely allocated for investment purposes.

Recommendation

For this situation, it is necessary to use a combined approach, depending on the preliminary analysis. Coca-Cola and Unilever are stable companies that do not promise short-term revenues: for the most part, the potential of these companies has been exhausted. However, the stability of the market and the analysts’ point of view on the high expected value of the shares almost guarantee a certain percentage of income that can be predicted. If this percentage is significantly higher than the lending interest rate, then the debt capital approach seems to be the best in this situation since it ensures the preservation of control of the current management, instant financing, and stability in planning.

However, if the expected dividend income will not cover short-term debt obligations to the bank, the best solution would be the retained earnings approach since it retains control over Penco by the current management and, at the same time, excludes the possibility of default or bankruptcy. On the other hand, this approach could harm the company’s reputation if it has consistently paid high dividends to shareholders up to this point. Only in this situation does Penco need to resort to equity capital, which complicates control, but retains confidence in the company’s future financial position.

Appendix A

Financial Ratios for Coca-Cola Company and Unilever

All financial indicators were taken from Macrotrends and ratios were calculated with these formulas (Macrotrends – CocaCola Financial Ratios for Analysis 2005-2021 | KO, 2021; Macrotrends – Unilever Financial Ratios for Analysis 2005-2021 | UL, 2021):

Reference List

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