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I just got around to looking at Coca Cola's(NYSE:KO) '98 Ann Rpt and was surprised to see the S-T Debt up over 66%. If this has already been discussed, please point me in the right direction of the discussion.

It appears to me that applying the new Cash/Debt Ratio to KO's #s would place KO outside of the RM parameters; and while the the new Flowie #s are still within the parameters, they're not as pristine as they were under the old Flowie.

Does this mean that all those bears have been right about KO all this time and that KO is no longer an appropriate RM for beginners wanting to get started on a RM portfolio??? Does anyone believe that KO's cash flow will not be able to service their S-T Debt? Would a sudden economic down turn place KO in "real trouble"? Is the new treatment of debt, in the above mentioned ratios, inappropriate in this instance?

I'd appreciate All Foolish thoughts and comments.

TIA.......Three

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It appears to me that applying the new Cash/Debt Ratio to KO's #s would place KO outside of the RM parameters; and while the the new Flowie #s are still within the parameters, they're not as pristine as they were under the old Flowie.

Does this mean that all those bears have been right about KO all this time and that KO is no longer an appropriate RM for beginners wanting to get started on a RM portfolio???


Hey Three,

I actually replied to this earlier, but it must've fallen into the black hole of posts. Oh well, let me try this again.

If you look at pages 38-39 in this year's annual report, you'll see that Coke's total debt has always been at least twice as high as long-term debt. I think it's fair to say that Coke is an aggressive finanical manager. They view short-term debt as the cheapest option for capital, and from a standpoint of trying to maximize the gulf between cost of capital and return on capital, this is smart.

From a Rule Maker perspective, however, we like to see companies that take a little more conservative stance on debt. Cash-flush companies are in a better position to capitalize on new opportunities and handle the inevitable problems that come along.

I'm sure the company is attempting to use the optimum mix of equity and debt financing, so as to minimize its weighted average cost of capital. Coke operates in a well-defined niche, and its managers probably have precise estimates of future investment needs. Considering the stablity of Coke's business, the current debt levels are probably fine.

Best,
Matt

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