It takes just three figures to show why The Coca-Cola Company (US:KO) is such a great business. They are: 14.9 times, 11 days and 27.9 per cent. Sure, the figures mean nothing in themselves; but, put into a context, they help explain why Warren Buffett loves Coca-Cola, the company, as much as he loves the eponymous fizzy drink. More important, the logic behind the numbers can help explain why the Sage of Omaha might focus more attention on the UK-headquartered global drinks group, Diageo (DGE), in which he has taken a small stake.
Start with 14.9 times. That’s the number of times Coca-Cola turned over its working capital in 2022. Working capital is roughly what it says on the can – the amount of capital tied up in the day-to-day running of a company. In a manufacturer, mostly that means funding inventories (from raw materials to finished goods) and the amounts owed by customers (receivables) but minus what the company owes to its own suppliers. Working capital is chiefly funded by short-term debt but, wherever it comes from, it costs. Therefore a company’s bosses have much incentive to use it as efficiently as possible. The measure of that efficiency is the number of times in an accounting period – usually a year – that working capital is turned into sales. So, in 2022, Coca-Cola, which produced $43bn £33.84bn) of sales, turned over its working capital 14.9 times.
No multiple of working capital to sales is necessarily good or bad and some companies get away without needing working capital (in effect, their suppliers and creditors provide the capital for them) so there is no multiple. Coca-Cola has been in that happy position itself in two of the past five years. However, the rule of thumb is that the less working capital needed – and therefore the higher the multiple – the better.