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Case study · Judge a company
Coca-Cola's 2025 annual report against Graham's tests
A case study for the end of "Judge a company": a real company's latest annual report, read the way an analyst would, run through Graham's tests, with a solution set out like a research note.
General education, not financial advice.
The Coca-Cola Company's annual report for 2025 (its Form 10-K, filed with the US Securities and Exchange Commission on 20 February 2026) is public and free to read. This case uses it to practise the whole level: reading the accounts, applying Graham's tests, and writing up what you found. It is an exercise in analysis, not a recommendation to buy or sell the shares, and the figures will be out of date by the time you read this.
From the balance sheet, 31 December 2025 (millions of dollars)
| Item | 2025 |
|---|---|
| Total current assets (incl. 5,342 held for sale) | 31,044 |
| Total current liabilities | 21,281 |
| Long-term debt | 42,119 |
| Shareholders' equity (Coca-Cola's share) | 32,169 |
| Shares outstanding (millions) | 4,302 |
From the income statement, 2025 (millions of dollars)
| Item | 2025 |
|---|---|
| Net operating revenues | 47,941 |
| Income before income taxes | 15,998 |
| Interest expense | 1,654 |
| Other operating charges | 1,261 (2024: 4,163) |
Diluted earnings per share, ten years (dollars)
| 2016 | 2017 | 2018 | 2019 | 2020 |
|---|---|---|---|---|
| 1.49 | 0.29 | 1.50 | 2.07 | 1.79 |
| 2021 | 2022 | 2023 | 2024 | 2025 |
|---|---|---|---|---|
| 2.25 | 2.19 | 2.47 | 2.46 | 3.04 |
Dividends: 2.04 a share in 2025. The report says the February 2026 increase was the company's 64th consecutive annual increase.
Price: the report's cover gives the market value of shares held by non-affiliates on 27 June 2025, based on that day's closing price; dividing by the shares outstanding gives a price of about 70 a share. Use 70.
Your task
- Financial strength. Work out the current ratio and net current assets. Do they pass Graham's tests (current ratio at least 2; long-term debt no more than net current assets)? What else in current assets should you notice?
- Earnings record. Were there earnings in every one of the ten years? Did three-year average earnings grow by at least a third? What happened in 2017?
- Dividends. Does the record pass Graham's 20-year test?
- Price. Work out the P/E on the last three years' average earnings, the price-to-book ratio, and P/E × price-to-book. What price would pass Graham's price tests?
- Safety of the debt. How many times are the interest payments covered?
- Write it up as a short research note: a summary, what passes and fails, what the tests miss, the main risks, and what would change your view. No buy or sell call: say what the analysis shows.
Solution
Try the task first, then open one step at a time and compare.
Summary
A large, very profitable, steadily growing business with a long dividend record, carrying more debt than Graham liked and priced far above his limits. On Graham's defensive tests it passes size (revenue of about 48 billion dollars, far above any threshold), earnings stability, earnings growth and dividends, and fails financial strength and both price tests. It shows how a business can score well on quality and still fail Graham's tests on price.
Financial strength
- Current ratio: 31,044 ÷ 21,281 ≈ 1.46. Graham asked for at least 2: fails.
- Net current assets: 31,044 − 21,281 = 9,763 million, against long-term debt of 42,119 million: fails by a wide margin.
- Read the line items. 5,342 million of current assets are held for sale: the company's bottling operations in Africa, where it agreed in 2025 to sell part of its interest. 2,570 million of liabilities held for sale sit on the other side. Leaving both out, the ratio is 25,702 ÷ 18,711 ≈ 1.37, lower still. An analyst always checks what makes up a ratio, not just its value.
- Context Graham's test misses: a business that sells its products for cash quickly and is paid before it pays its suppliers can run safely with a low current ratio. Graham's tests were written with the industrial companies of his day in mind. That is a reason to look harder, not to ignore the result.
Earnings record
- Stability: positive earnings in all ten years: passes.
- 2017's 0.29 came from a provisional tax charge of about 3.6 billion dollars after the US Tax Cuts and Jobs Act, a one-off accounting effect, not a collapse in the business. This is exactly why Graham used averages.
- Growth: three-year average 2016–2018 = (1.49 + 0.29 + 1.50) ÷ 3 ≈ 1.09; 2023–2025 = (2.47 + 2.46 + 3.04) ÷ 3 ≈ 2.66. Growth ≈ 143%, far above one-third: passes. Part of it is the low starting point caused by 2017's tax charge.
- Quality of earnings: both 2024 and 2025 include large "other operating charges" (in 2024 mainly a 3.1 billion remeasurement of the payment owed for the fairlife milk business; in 2025, 1.26 billion including trademark impairments). Read the notes before trusting any single year.
Dividends
Paid every year and raised for 64 years in a row: passes Graham's 20-year test easily. The 2025 dividend of 2.04 is about 67% of 2025 earnings per share.
Valuation
- P/E on three-year average earnings: 70 ÷ 2.66 ≈ 26.3. Graham's limit is 15: fails. The earnings yield is about 3.8%; compare it with what a high-grade bond pays on the day you read this.
- Book value per share: 32,169 ÷ 4,302 ≈ 7.48. Price-to-book ≈ 70 ÷ 7.48 ≈ 9.4, against Graham's 1.5: fails.
- P/E × price-to-book ≈ 26.3 × 9.4 ≈ 247, against Graham's 22.5: fails by more than ten times.
- Prices that would pass: 15 × 2.66 ≈ 40 for the P/E test. For the combined test, P/E × P/B ≤ 22.5 means price ≤ √(22.5 × 2.66 × 7.48) ≈ 21.
- Why book value misleads here: the company has bought back a great deal of its own stock over the decades (treasury stock of about 56 billion dollars at cost), which shrinks equity on the balance sheet, and its most valuable asset, the brands, is mostly not on the balance sheet at all. Graham's asset test punishes exactly this kind of business.
Safety of the debt
Earnings before interest and tax ≈ 15,998 + 1,654 = 17,652 million; ÷ 1,654 ≈ 10.7 times interest. Comfortable by Graham's standards for bonds, even though the balance-sheet test fails: the debt is large, but earnings cover the interest many times.
What the tests miss, risks, and what would change the view
- What the tests miss: brand strength, pricing power and the cash the business generates, which explain why buyers pay 26 times earnings. Graham's tests deliberately ignore these, because they are the hardest things to judge and the easiest to overpay for.
- Risks to check in the report's risk section: changing tastes and health rules on sugar, currency swings (most sales are outside the US), a dispute with the US tax authority the report describes, and reliance on independent bottlers.
- What would change the view: a much lower price relative to earnings; earnings, after one-offs, growing fast enough to justify the multiple; or less debt relative to net current assets.
- Conclusion of the analysis: the business passes Graham's quality tests and fails his price tests by a wide margin, so by his defensive standards the price leaves no margin of safety. The analysis does not tell you whether to own it; it tells you what you would be paying for.
Check yourself
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