Is The Coca-Cola Company (KO) a Cash King?

With soft-drink growth in the U.S. slowing to a trickle, companies such as The Coca-Cola Company (NYSE:KO) and Pepsi increasingly have to look to emerging markets such as China and India for growth opportunities. The burgeoning middle class in these foreign markets offers tremendous growth opportunities as more consumers gain the income to purchase such affordable luxuries as soda. But along with these opportunities comes fierce competition for market share. While Coke has certainly benefited from its powerful brand — No. 1 in the world — Pepsi has managed to put up a strong fight. In China, Pepsi has managed to grab some market share, with Coke suffering a 4% decline in sales volume there at the end of last year.

But as these companies battle it out in foreign markets, they can’t afford to neglect the competition at home. Dr Pepper Snapple remains small compared to the big players, but it has managed to gain a foothold in the U.S. Still, it has faced obstacles related to limited domestic growth opportunities. Its fourth-quarter earnings from 2012 indicated a volume decline of 1% and suggested that 2013 earnings would not meet analyst expectations.

SodaStream also poses a threat as it expands its retail presence and forms strategic partnerships with well-known brands such as Kraft Foods Group Inc (NASDAQ:KRFT), which can help build SodaStream’s popularity as it promotes its own Crystal Light and Country Time SodaStream syrups.

The cash king margin can help you find highly profitable businesses, but it should only be the start of your search. The ratio does have its limits, especially for fast-growing small businesses. Many such companies reinvest all of their cash flow into growing the business, leaving them little or no free cash,  but that doesn’t necessarily make them poor investments. Conversely, the formula works better for slower-growing blue chips. You’ll need to look closer to determine exactly how a company is using its cash.

Still, if you can cut through the earnings headlines to follow the cash instead, you might be on the path toward seriously great investments.

The article Is Coca-Cola a Cash King? originally appeared on Fool.com.

Jim Royal has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, McDonald’s, PepsiCo, and SodaStream. It owns shares of McDonald’s, PepsiCo, and SodaStream.

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