$Coca Cola(KO.US) Why does Coca-Cola have such a high ROE?

Warren Buffett once said, "If I had to choose one indicator to measure a company's operating condition, ROE is the best choice." Since 1980, Coca-Cola's ROE has remained above 20% except for 2017 (in 2017, Coca-Cola sold its bottling business on a large scale globally, resulting in significant one-time losses such as employee relocation compensation and asset impairment). During this period, it peaked at 62% in 1997, which can be considered quite outstanding.

Using the DuPont analysis to break down ROE into three main components: net profit margin, asset turnover, and equity multiplier:

1) Asset Turnover: The asset turnover rate shows that, except for a slight rebound between 1986 and 1995, it has been declining almost continuously, dropping from 1.77 to a low of around 0.4, which has definitely dragged down ROE.

2) Equity Multiplier: Taking advantage of the multiple rounds of quantitative easing implemented by the Federal Reserve after 2008, Coca-Cola seized the opportunity to issue bonds extensively, with the long-term debt ratio soaring from less than 7% to over 35%. As a result, the release of leverage drove the increase in Coca-Cola's equity multiplier, thereby boosting ROE.

3) Net Profit Margin: The stabilizer for high ROE; since 1980, Coca-Cola's net profit margin has continuously and steadily increased from 7.5% to 23.4%.

Overall, on one hand, it comes from Coca-Cola's expansion through leveraging during low-interest periods, and more importantly, it comes from Coca-Cola's continuously improving net profit margin. The increase in net profit margin is partly due to Coca-Cola's strong brand influence, which provides high bargaining power in the industry chain, thus maintaining a high gross profit margin. On the other hand, it is also inseparable from the company's continuous improvement in operational efficiency, leading to optimized expense ratios.