Arslan Ahmed

GCU MSD DEPARTMENT Financial statements Nestle Pakistan for the years, 2010,11, 12, 13 and 14 Ratio analysis for Nestle Pakistan Arslan Ahmed 822 MBA 2015 3/30/2016 Submitted to: Mr. SADIR ALI Course: Corporate Finance. Table of Contents: Topic Page numbers Balance sheets 2-5 Income Statements 5 Ratios 8-15 URLs cited 16 Table 1. Balance sheets for the years ended 2014,13,12,11 and 10 Rupees in '000 EQUITY AND LIABILITI ES Share Capital and Reserves 2014 2013 2012 2011 2010 75,000,-: 75,000,000) ordinary shares of Rs. 10 each Issued subscribed and paid up capital Share Premium General Reserve Hedging Reserve Accumulated profit 750,000 750,000 750,000 750,000 750,000 453,496 453,496 453,496 453,496 453,496 249,527 249,527 249,527 249,527 249,527 280,000 280,000 280,000 280,000 280,000 11,658,601 11,859,157 10,577,241 6,629,393 4,598,850 total equity 13,377,625 13,592,180 12,310,264 8,362,416 6,331,873 6,951,459 17,464,812 15,366,964 7,848,050 5,573,750 3,262,372 4,102,160 3,304,091 2,476,871 1,705,508 1,110,999 862,430 637,985 440,377 229,114 13,690 55,415 Deferred taxation Retirement benefits Liabilities against assets subject to 2014 2013 2012 2011 2010 30,550,199 31,467,872 21,970,957 16,230,528 11,370,611 2,233,971 2,351,556 11,549,623 5,370,761 3,076,472 2,392 7,173 11,954 16,735 167,546 167,546 104,178 Long term loan and advances long term deposits and prepayments 317,600 292,304 236,639 161,982 125,674 55,599 71,368 98,663 9,817 9,817 Total Noncurrent assets(D) 33,324,915 34,353,038 33,967,233 21,785,042 14,599,309 1,208,547 - 1,373,239 1,278,416 1,050,804 Non-current assets Authorized capital Non-current liabilities Long term finances Rupees in '000 ASSETS -13,999 Tangible fixed assets Property plant and equipment Capital work in progress Intangible assets Goodwill Current assets Stores and spares finance lease Total nonCurrent Liabilities Current Liabilities Current portion of noncurrent liabilities 11,325,830 Short term borrowingssecured 4,013,825 Short term borrowings from associated companyunsecured Short running finance under mark-up arrangements -secured Customer security depositsinterest fee Trade and other payables Interest and mark-up accrued Contingencie s and commitments Total Current Liabilities total liabilities Total liabilities and Equity 3,082,979 22,429,375 4,831,840 1,939,040 10,778,988 41,686 41,587 3,900,000 4,950,000 7,563,787 57,786 2,143,750 5,949,514 3,356,591 5,937,374 4,175,236 2,780,843 220,957 181,977 184,441 149,791 128,857 14,361,913 9,366,805 9,743,567 7,343,507 4,633,932 147,652 263,776 196,345 128,334 61,404 27,776,840 18,000,989 20,003,413 16,788,455 9,806,572 39,102,670 40,430,364 21,942,453 27,567,443 17,370,359 51,730,695 52,289,521 50,872,717 35,179,859 22,952,232 Stock trade in 9,763,987 7,925,132 8,025,653 7,064,170 4,602,019 Trade debts 272,321 346,041 491,842 276,858 126,499 Current portion of long term loan and advances Advances, deposits, prepayments and other receivables Cash and bank balances 76,082 55,784 45,735 30,914 19,419 6,858,700 7,615,923 6,208,184 4,042,634 2,048,936 226,143 720,065 760,831 702,025 505,516 Total Current assets(E) 18,405,780 17,936,483 16,905,484 13,395,017 8,353,193 Total Assets(D+E) 51,730,695 52,289,521 50,872,717 35,179,859 22,952,232 Table 2. Income statements for the years ending 2014, 13, 12, 11 and 10 Rupees in’000 2014 2013 2012 2011 2010 Sales – net 96,457,743 88,226,869 79,087,696 64,824,364 51,487,302 Less Cost of goods sold - - -57,564,265 -48,099,046 -37,608,733 Gross profit 27,323,990 26,160,797 21,523,431 16,725,318 13,878,569 Distribution and selling expenses -11,085,448 -10,731,584 -8,787,508 -6,862,113 -5,709,078 16,238,542 15,429,213 12,735,923 9,863,205 8,169,491 Administration expenses -2,125,079 -1,957,943 -1,769,803 -1,405,298 -1,311,637 Operating profit 14,113,463 13,471,270 10,966,120 8,457,907 6,857,854 Finance cost - -2,113,096 -1,827,969 -105,035 -513,081 Other operating expenses -1,472,550 -1,439,777 -1,320,319 -1,064,233 -819,084 Other operating income 523,892 194,565 160,142 159,545 170,491 Profit before taxation 11,009,168 10,112,962 7,977,974 7,448,184 5,696,180 Taxation -3,079,897 -2,246,199 -2,113,463 -1,834,507 -1,583,331 Profit after taxation 7,929,271 7,866,763 5,864,511 5,613,677 4,112,849 Earnings per share – basic 174.85 129.37 129.32 102.94 90.69 Ratios for the year 2010 to 2014 Ratios: 2014 2013 2012 2011 2010 Current Ratio(Current assets/Current liabilities) 0.6626 0.9964 0.8451 0.7979 0.8518 Quick Ratio (Current assets-Inventory/Current liabilities) 0.2676 0.4854 0.8451 0.3009 0.2754 Cash Ratio(Cash/Current liabilities) 0.0081 0.0400 0.0380 0.0418 0.0515 Total Debt Ratio(Total assets-Total equity/Total assets) 0.7559 0.7732 0.4313 0.7836 0.7568 Debt to Ratio(Total equity) 2.9230 2.9745 1.7825 3.2966 2.7433 3.8670 3.8470 4.1325 4.2069 3.6249 6.5472 6.3751 5.9991 80.5247 13.3660 Cash coverage 8.0477 7.7888 7.1612 95.8704 15.8391 Inventory Turnover 6.3006 6.7473 6.1246 5.7655 6.6531 Days Sales in Inventory 57.9308 54.0958 59.5959 63.3078 54.8617 Receivables ratio - - - - - Days Sales in Receivables 1.0305 1.4316 2.2699 1.5589 0.8968 Total Asset turnover 1.8646 1.6873 1.5546 1.8427 2.2432 Equity debt/total Equity Multiplier Times ratio interest earned Turnover Profit Margin 0.0822 0.0892 0.0742 0.0866 0.0799 Return on Assets 0.1533 0.1504 0.1153 0.1596 0.1792 Return on Equity 0.5927 0.5788 0.4764 0.6713 0.6495 Price Earning ratio - - - - - 0.5788 0.4764 0.6713 0.6495 DuPont Identity 0.5927 Ratio Interpretation: Short term Solvency Ratios: Current Ratio: The current ratio for the latest year 2014 shows that the assets in relation to liabilities have declined over the years. For the year 2014 we find that there is 66 paisa to cover current liabilities worth Rs.1. whereas, in 2010 there was 85 paisa to cover liabilities worth Rs.1. This is not a good situation as although the current assets have grown over the years the current liabilities have grown at a faster rate. In 2012, the industry average current ratio for food and beverage industry was 1.87 (BizMiner) while the current ratio of Nestle was 0.845, below by more than 100 percent. This shows that Nestle is not in a good paying position and could face problems in covering its short term debts. Current Ratio(Current assets/Current liabilities) Quick Ratio (Current assets-Inventory/Current liabilities) - - Current Ratio(Current assets/Current liabilities) - - - Quick Ratio (Current assetsInventory/Current liabilities) - 2010 2011 2012 2013 2014 - Quick Ratio: A clearer picture of the liquidity situation is offered by this ratio as it takes out the least liquid assets that of inventories out of the current assets figure. This leaves out only those assets which are more liquid and can be converted into cash at a faster speed in case of a need to cover short term debts. Again the ratio shows an alarming situation as there is only paisa 0.268 to cover the current liabilities worth Rs.1. Although assets have increased, the inventories have also increased or remained constant hence the ratio improved in the year 2012 as liabilities did not increase very significantly. However, the liabilities increased by almost 50 percent from the end of 2013 to end of 2014 and hence the ratio came down to almost the same it was in 2010. However in comparison to the industry average for food processing for the year 2015 and 2016 in which the averages were 0.14 and 0.26 (CSIMarlet Company) respectively one realizes that Nestle is in a good position in comparison with the other companies in the food processing industry. Cash Ratio: An even better ratio to measure short term solvency is the cash ratio as it only accounts for the most liquid asset, cash. Cash figure in relation to the current liabilities is a better measure as it shows how much money the company has is in relation to the liabilities to be paid in one year. The ratio for the year 2014 shows that the cash is 0.0081 times the current liabilities or just 0.8 Total Debt Ratio(Total assets-Total percent of the liabilities. Ratios equity/Total assets) - Years Total Debt Ratio(Total assets-Total equity/Total assets) Long-term Solvency or financial leverage ratios: Total debt ratio: The industry average for this ratio in 2011 was 0.55 (SlideShare) while the ratio for Nestle Pakistan was 0.7836 which shows that the ratio is higher than it should be by 30 percent. Having this ratio lower is better however having too low of a ratio may mean that company may have not borrowed enough to cover operations. The company’s 2014 ratio shows that the company is 78 percent leveraged through long and short term debt. In the year 2012 this ratio dropped and acquired a good position as liabilities decreased from the previous year (by 39 percent) whereas assets increased significantly from the previous year (by 45 percent). However, Nestle has been borrowing and utilizing the debt to acquire both long-term assets and short term assets which shows that money borrowed is being utilized properly and will contribute to higher revenues and profits in future. Debt to Equity ratio: 2014 2013 2012 2011 - Ratios: Debt to Equity Ratio(Total debt/total equity) Debt to Equity Ratio(Total debt/total equity) Years This ratio shows the relative position of the total liabilities to the total equity of the company. This ratio was the best in the year 2012 but increased to 2.92 in the year 2014, which meant that in 2014 the debt grew 2.92 times of the total equity resulting in an alarming situation. However, comparing it with the food and beverage industry average for 2015, one finds that major companies in the food and beverage sector like PepsiCo and Coca Cola had ratios in 2015 of 146.78 and 189.91 (Nickolas, 2015) respectively, showing that these two are aggressively leveraged whereas Nestle is not as highly leveraged in comparison with them. Equity Multiplier: The equity multiplier is the total assets divided by the total equity or in other words the number one added to the debt to equity ratio. The ratio shows that the firm has had it in the range of 3.5 to 4.2 for the five years. For the year 2014 we find the multiplier to be 3.867 which shows that more than two third of the assets have been financed through debt and almost one third through equity (Investopedia). However knowing whether you have a higher or lower multiplier is not as important as knowing which of the two options debt financing or selling new shares to increase equity is costlier. If it costs less to borrow, then borrowing may not at all be a bad option. Coverage ratios: Times Interest earned: TIE is calculated to see how much of the operating profit of the company can be used to cover the interest expense or the finance cost of the debt taken by the company. Whereas in 2011 the company had enough operating profit to cover the interest expense 80.5 times over, in 2014 it could cover the interest only six times over (Horton, 2015). However, having a TIE of 2.5 times or above is a good position for a company. Cash coverage Ratios - Cash coverage 0.0000 Years Cash coverage: Nestle Pakistan’s Cash coverage ratio shows how much operating profit is available after adding the depreciation expense to it to cover the finance cost. Depreciation is a noncash expense hence it is ok to add it back to see how much income is available to cover the interest expenses. This ratio is better the higher it is. It shows that in the year 2011 it was the highest as in this year depreciation was the highest while the finance cost was the lowest. The ratio means for the year 2014 that the operating profit combined with depreciation can cover the interest expense 8.047 times over. Asset management or turnover Ratios: Inventory Ratios: Inventory turnover: This ratio shows that how many times in one year a company can easily convert raw materials into an inventory of finished goods. For the year 2014 for instance we can see that the raw materials inventory can be converted into finished goods 6.3 times, which is not a bad number but is still below 8.11, the industry average for the food processing industry (CSIMarket). Probably it is good enough for the food processing or the food and beverage industry where it is enough to produce six times or less in a year to cater to the demand. Days Sales in Inventory: This ratio is simply the total number of days in a year divided by the inventory turnover ratio to see how many days it takes to convert the raw materials to finished goods. In 2014, it took 57.9 days or nearly two months to complete one production run. Over the five years, the number of days has remained within the range of 54 days and 63 days. Receivables Turnover ratio: The ratio evaluates the ability of a company to issue credit to its customers and collect funds from them in a timely manner. The receivables turnover ratio in 2014 was- where as it was- in 2010. It shows that Nestle is becoming slightly less efficient in getting payments for sales made on credit. Days Sales in Receivables: The days’ sales outstanding calculation, also called the average collection period or days' sales in receivables, measures the number of days it takes a company to collect cash from its credit sales. The ratio was 1.0305 in 2014 which meant that the company’s collections department was getting the money owed by creditors in time. The lower this ratio is, the more the company is efficient in collecting its debts. Total Asset Turnover: The asset turnover ratio is an efficiency ratio that shows how well a company can use its assets to generate sales. Nestlé’s total asset turnover in 2014 was 1.8646. This means Nestle was making sales 1.8646 times every Rupee 1 of assets. Profit Margin: The profit margin ratio shows what percentage of sales is left over after all expenses are paid by the business. In other words it is the premium the company gets for the work it performs and the goods it sells. During the 4 year analysis of Nestle we see its profit margin is increased from 7.99% in 2010 to 8.22% in 2014. It means the company is getting better in terms of profitability. s Return on Assets: The return on assets ratio or ROA measures how capably a company can manage its assets to produce profits during a period. In 2014, the company’s return on assets was 0.1533 which was an improved figure over the years. Return on Equity: The return on equity ratio shows how much profit each dollar of common stockholders' equity generates. It can be observed from the figure on the left below that Nestlé’s ROE plunged in 2012 but has risen ever since. The current figure is 0.5927, below the figure for the year 2010, but it’s still acceptable. It means for every 1 Rupee, Nestle generates 0.5927 of net income. This is an important measurement for potential investors because they want to see how efficiently a company will use their money to generate net income. Price earnings ratio: The price earnings ratio shows what the market is willing to pay for a stock based on its current earnings potential. Nestlé’s price earnings ratio clearly decreased from 0.110 in 2010 to 0.0572 in 2014. Investors use this ratio to decide what multiple of earnings a share is worth. This means investors are willing to pay 0.05719 times for the stock. Whether or not Nestle Pakistan qualifies for a loan in the year 2014? The loan applications are decided on the credit history, the liquidity and the financial ratios, and the resulting cash flow numbers as well as the character and the status of the company. Two scenarios exist: Short term loan issuance—short term loan applications need to be judged on the short term liquidity situation. With regards to the liquidity ratios Nestle was above the industry average in its current ratio in 2012; could cover only two thirds of its liabilities through its assets as seen in the quick ratio and possessed only 0.8 percent cash to cover the current liabilities. Based on this situation, Nestle may not be able to cover the loan payments for loans of less than one year. However, it may still be possible to give the loans as Nestle was able to secure short term loans with and without markups of secured nature in the past, meaning thereby it kept its assets as collateral to gain these loans. Long term loan issuance—based on the long-term solvency ratios, in particular the cash coverage ratios, it is advisable to give long-term loans to Nestle. Also from the balance sheets, one can see that Nestle was able to make payments worth millions to cover previous loans. Bibliography BizMiner. (n.d.). Free business statistics and financial ratios. Retrieved 3 28, 2016, from BizStats: http://www.bizstats.com/corporation-industry-financials/retailtrade-44/food-beverage-and-liquor-stores-445/food-and-beverage-stores-445115/show?asset_class_id=5 CSIMarket. (n.d.). Industry efficiency information and trends. 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