Analytical Review 101

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Analytical Review 101 - Part XVI

A Circle has no End

Overall Summary on Analytical Review of Nestle's Financial Statements

If you look at this series of posts, you will have realized that we have spent a substantial amount

of time analyzing the Nestles financial statements. Perhaps more importantly, it would have

struck you that its a LOT OF WORK! Yes, it is. Then again, perhaps it would be wise to reflect on

how much time it took for you to earn RM10K before deciding to invest in a company? It may have

took you perhaps two or three months of your life to save this much money. Then why are you so

eager to invest in shares without spending, say one or two days researching the company you


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intend to invest?

My overall perception of Nestle is that it is a sound company to invest in. Cash flows are managed

well and it has an attractive dividend policy. However, due to its strong brand name and

excellent cash flows, the share price of Nestle is too high compared to its earnings. It is an

excellent blue chip share to invest in, as a hedge against inflation. You may ask me, so at what

price should I decide to buy shares in this company?

My answer is simple: Reread my series of posts and look at the latest quarterly financial results of

Nestle in the link below. Then, make up your own mind and you decide at what price it is worth

investing!

http://www.klse.com.my/website/bm/listed_companies/company_announcements/announcemen

ts/index.jsp

An End of a Long Journey

We have journeyed long through this Analytical Review 101 series. For those of you that have been

diligently reading it, this series of posts may raise more questions than answers. Trust me, this is a

good thing. The world of investing is fraught with perils and dangers. A little knowledge is a

dangerous thing. I hope though, I have highlighted the dangers such ventures to your attention.

Forearmed with such knowledge, an intelligent investor may yet profit from his investments.

For those readers that are interested in downloading Nestle (Malaysia) Berhads 2007 Annual

Report, you can find it via the link below.

http://www.klse.com.my/website/bm/listed_companies/company_announcements/annual_repor

ts/index.jsp

If you that are interested in constructing your own financial dashboards, I will be sending out

my Nestle Financial Dashboard and all the relevant workings in an excel file. If you wish to

receive it, kindly subscribe for my blog via the Feedburner Email subscription on the upper-

right hand side. Your email will not be divulged nor will you be spammed.


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Alternatively, kindly drop a comment in my blog with your e-mail address so that I can send the

spreadsheet to you. Ill be sending out the worksheet on the 30 August 2008 to all my subscribers

or interested commentators.

A New Beginning

A circle has no end! Similarly, there is no end to our journey in the world of investing. One must

learn, unlearn and re-learn about the stock market and our opinions of the companies we invest

in. In my future posts, we will look at the more advanced aspects of investing. We will also look at

the more noteworthy companies in Bursa Malaysia and perform detailed financial analysis to

evaluate whether they are worth investing.

Two Intriguing Questions?

It is surprising to me that none of my readers have yet to pose me these two rather intriguing

question. Some of you know me well, though for others, I am a totally anonymous figure. I do not

wish to disclose my identity merely because I wish to remain low profile. However, if I were a

reader, I would surely ask the blog author this:

Why should I listen to you?

I ask you not to listen to me. Rather, I ask you to merely listen to what I have to say. As with all

things, it is your judgment and discernment that will serve you best. If you agree with what I say,

then act accordingly. Otherwise, let it pass. Comment, if you have any doubts or questions and I

shall endeavor to answer any questions you may have.

Why the PriceLess advice?

At this time and age, if you do not raise such a question, I would indeed be worried. Truthfully,

this blog serves as both a personal motivational and disciplinary tool to ensure that my journey

into the world of investing is both well reasoned and carefully planned. I have gained much from

those that were willing to share their knowledge and wisdom with me, so why should I be miserly

with my own? Remember, what is valuable is sometimes free, but not all those who read can

profit from it.

Feedback


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I would appreciate if you could revert with any comments or feedback you may have on this series

of posts. Further, if you wish to me to explore certain investing topics in greater detail, please do

let me know.

Posted by Avatar at Wednesday, August 20, 2008 9 COMMENTS

Labels: Analytical Review 101

WEDNESDAY, AUGUST 13, 2008

Analytical Review 101 - Part XV

An Investors Dilemma: Choosing between MotherTheresa & Angelina Jolie

Before one decides to invest in the share market, try answering the following question:

If you won a contest and could go out on a date with either Mother

Theresa or Angelina Jolie, which one would you choose?

[For ladies, try choosing between Gandhi and Brad Pitt]

If you ponder long and hard enough, it may be illuminating to realize that parallels can be drawn

between the vastly different emotions Mother Theresa & Angelina Jolie evokes, and the world of

investing.


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Mother Theresa, founder of the Missionaries of Charity in Calcutta spent over forty five years of

her life ministering to the poor, sick and dying while guiding the Missionaries's expansion

throughout India and other countries. In 1979, she was awarded the Nobel Peace Prize for her

work and contributions. Her very name evokes an idealism based on compassion, selflessness and

loving kindness.


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Angelina Jolie, conversely, has been cited as one of the most beautiful woman in the world. She is

an acclaimed actress and has won three Golden Globe Awards, two Screen Actor Guild Awards and

an Academy Award. Mention her name, a sensual, sultry and sexy image comes to mind.

Have you answered the question yet? If so, please read on

Fixed Deposits are equivalent to Mother Theresa

In the world of investment, Fixed Deposits are equivalent to Mother Theresa. Both are stable,

secure and strong. Why do I say that? This is because Fixed Deposits exhibits the following

characteristics:

1. Principal Guaranteed

The principal that you invest is virtually secure. There are veryminimal risks involved when you

put your money in Fixed Deposits. If you invest in RM10K in an FD, rest assured that one year

later, you SHALL see that RM10K still in the bank.

2. Returns Guaranteed & LOW

When placing a FD for a period of time, the interest income receivable is stated up front. True,

the returns are paltry. Yet, the great thing is that they are GUARANTEED. There are no IFs, ANDs

or BUTs Its a sure thing, PERIOD!

3. High Liquidity

If you ever need cash urgently, there are no problems whatsoever in withdrawing out your

principal even though its being placed in FD. In a worst case scenario, you may have to forfeit a

certain portion of your earned interest income.

Angelina Jolie and the Sexy World of Shares

Everybody wants to get on the bandwagon these days and invest in shares! Who doesnt drool over

a hot looking sexy babe? Same thing with shares, just dump your money and watch it

fluctuateOne day its up, the next its down. Just be careful and dont get yourself burnt!

Investments in shares are risky and Ill explain why:

1. Principal Guaranteed to Fluctuate


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When you invest in the shares of a company, you must understand that the only thing that is

certain is your investment SHALL fluctuate! Once you dump in RM10K, a month later, it may grow

to RM15K or shrink to RM5K. If you are the type of person who cannot live with any risk, then

dont invest in shares.

2. Returns Guaranteed to Fluctuate

Returns in the form of dividend payout by companies are also uncertain. Usually the discretion

whether to pay dividends (and the quantum) or otherwise, lies solely with the company. As

minority shareholders, one does not have much leverage to request for dividends. So, unlike FDs,

dont be surprised if you dont get a single sen out of your investment until you sell it.

3. Highly Liquid IF YOU ARE DETACHED

Yes, shares are highly liquid. Unfortunately for you, if the RM10K you invested shrunken to RM5K,

are you willing to sell it off? Thats a 50% loss on your capital! Conversely, if the stock market is

booming and your RM10K has ballooned to RM20K, are you willing to cash out and let go of your

shares? Or are you going to hold on and hope it goes up further???

Analytical Review

With this in mind, lets look at the Financial Dashboard below. As discussed above, we can

compare FDs to Shares although there are vast differences:

FD Interest Income = Earnings

The FD Interest Income is a certain and guaranteed. However, earnings for companies are

susceptible to competition, economy and a host of other factors. Interest rates are certain and

are computed in advance during FD placement, whereas the current earnings of a company is

largely uncertain at the time of investment.

FD Principal = Share Price


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The Principal that you invest in FD does not fluctuate. However, share prices fluctuate daily

depending on the mood of Mr. Market and the global economy.

FD Interest Rate = Earning/Market Price %

Whilst the FD Interest Rate is a sure thing, historical Earnings/Market Price % is not always, a

reliable indicator of future returns. Firstly, we are never sure of the earnings at the time of

investing. as we are relying on historical information. Secondly, the market price fluctuates daily

making it difficult to quantify the probable return we can make on our investment. Depending on

the competition and economic situation, a profitable company in the past may turn out to be

unprofitable in the future. This is a risk for all businesses and as investors, we have to bear with

it.

With this in mind, let us look at Nestles Earnings/Market Price %. It is hovering around 4.5 % to

4.8% for the past three years. As Nestle is in a stable industry with a strong brand name, this

appears reasonable. Yet, FD rates are approximately 3.7% per annum, Nestle only offers an

additional return of 1%. Is it really worthwhile investing? Although there is an upside in terms of

capital appreciation (i.e. share price goes UP!), perhaps one should consider whether there are

other companies yielding a higher rate of return.

Conclusion:It is important to note that investment in shares is like dating a hot babe! Yes, its alluring at first

sight, but exercise wisdom and caution, and hopefully youll avoid getting burnt. So, look before

you leap!

Posted by Avatar at Wednesday, August 13, 2008 7 COMMENTS


WEDNESDAY, JUNE 25, 2008

Analytical Review 101 Part XIV


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Money Talks, Bullshit Walks: You

and Mr. Market

Ultimately, as Intelligent Investors, we are only concerned about one thing. What is the value of

the shares we are buying, truly worth? Based on our analysis, if we feel the company is worth

between a range of RM30-35 per share and it is currently trading at RM25, then it worthwhile to

purchase the shares in the company. Eventually, the market will price the Company's shares

according to its underlying value.

Consequently, before investing, it is important to carry out an analysis backed up by financial

data, rather than relying on speculation and market rumors. In future posts, we shall see how to

use these historical data in conjunction with the market data to assess whether investing in a

company is worthwhile.

Sources of Market Data

The Business Week website gives you free access to the market price and volumes traded, of

major companies. Most of the market price and trading volume, of major listed companies are

free available on the Internet, so just Google for such information.


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The link to view the share price of Nestle is here:

http://investing.businessweek.com/research/stocks/charts/charts.asp?symbol=NESM.KL

The Real Deal: Share Price

Up to now, we have been analyzing historical information based on the annual audited financial

statements. Such historical information furnishes us the track record of management's ability to

generate returns for its investors. However, we are missing a vital link: the Share Price!

The Share Price of a Company on a particular day represents the last transacted price between a

willing buyer and willing seller. For an Intelligent Investor, the Share Price of a company DOES

NOT represents the worth of a Company.

WHAT! WHAT [insert expletive here] ARE YOU TALKING ABOUT?

Mr. Market

Well, the reason is very simple. Markets are IRRATIONAL! I shall let Warren Buffett explain further

on this concept. This is extracted from one of his letters to the shareholders of Berkshire

Hathaway.

Ben Graham

Ben Graham taught me that the key to successful investing was the purchase of shares in good

businesses when market prices were at a large discount from underlying business values. The true

investor welcomes volatility. Ben Graham explained this in Chapter 8 of The Intelligent Investor.

There he introduced "Mr. Market," an obliging fellow who shows up every day to either buy from

you or sell to you, whichever you wish. The more manic-depressive this chap is, the greater the

opportunities available to the investor. That's true because a wildly fluctuating market means

that irrationally low prices will periodically be attached to solid businesses. It is impossible to

see how the availability of such prices can be thought of as increasing the hazards for an investor

who is totally free to either ignore the market or exploit its folly.

Ben Graham told a story 40 years ago that illustrates why investment professionals behave as

they do: An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news.


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We have looked at how to obtain the current share price of our target company. In addition, we

have briefly explored the key investment strategy of an Intelligent (or Value) Investor. Please also

keep in mind, Warren Buffett's illuminating explanation on the concept of Mr. Market, and how

one can profit from market foibles and irrationalities . In my future posts, we shall use the share

price of the company in conjunction with historical data, to assess the underlying value of a

company.

Posted by Avatar at Wednesday, June 25, 2008 3 COMMENTS


FRIDAY, JUNE 20, 2008

Analytical Review 101 Part XIII

SOLVENCY AND DEBT

RATIOS'

It has been stressed that cash is of primary importance for a company. Without cash, the company

would not be able to function, even if it is making substantial amount of paper profits. In order to

measure whether the company has sufficient cash reserves or able to convert its assets into cash

to meet its obligation, there are two financial terms that we must be conversant with.

Liquidity

Liquidity refers to the ability of the company to meet its short term obligations and commitments

(i.e. those liabilities due within a year from the Balance Sheet date). The liquidity ratios discussed

earlier, gives an indicator of the how relatively liquid a company is.


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Solvency

Solvency is a gauge of the companys ability to meet its long term liabilities (i.e. commitments

exceeding a period of one year from the Balance Sheet date). The Debt Ratios' above are intended

to reveal whether the Company is able to meet its long term liabilities in the long term. When we

say a company is solvent, this means that the Company should be able to repay all its long term

loans and borrowings and other commitments, in the future, usually due to its large assets base

and ability to generate favorable operating cash flows.

Effective Interest ratio

We have computed the Effective Interest ratio in Part X. Briefly, the effective interest rate ratio

gives an indication of the interest rates incurred by the Company on its loans and borrowings.

Low interest rates on loans and borrowings, are beneficial to the shareholders as the shareholders

will pocket the excess between:

1. The returns generated by the Company using these loans and borrowings; and

2. The interest costs associated to these loans and borrowings.

This concept is also referred to as gearing. There is an additional benefit in that, interest

expenses are tax deductible and will reduce tax liabilities due to the Inland Revenue.

Operating Cash to Interest (OCI) ratio

The OCI ratio is crucial as it gauges whether the company can generate sufficient cash from its

operations to service interest payments on its loans and borrowings.

An high OCI ratio (e.g. in excess of 10x) is favorable as this reveals the Company can service its

debts with ease. If the OCI ratio is 1.5x or lower, its ability to meet interest expenses may be

questionable. Once the OCI ratio falls below 1.0x, alarm bells should start ringing, since the

Company's operating cash flows are insufficient to service interest payments. What about the

repayment of the principal amount?

Debt Service Coverage (DSC) ratio

Whereas the OCI ratio compares the Operating Cash Flows to the Interest Costs, the DSC ratio

compares the Net Profit for the Year against the Interest Costs. In effect, we are comparing the


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book profits against the interest expense. Generally, the higher the ratio, the more favorable it is.

The general consensus is that the Company can service its interest costs and repay its' loans, if

the ratio is 1.35x or more. However, this will vary from industry to industry and care must be

taken when attempting to interpret this ratio.

Analytical Review

The effective interest ratio appears favorable to Nestl as it is paying a very low interest of 4.82%

(2006: 5.80%) on its loans and borrowings. The companys abilities to obtain such favorable rates

is partly due to its healthy operating cash flows and strong credit rating.

Analysis of the OCI ratio discloses that there has been deterioration in this ratio by 44.83% to

19.58x (2006: 35.49x). This is mainly due large amounts of cash tied up in inventories as at year

end. However, a ratio of 19.58x indicates that that Nestl should have no problems whatsoever, to

service interest on its loans and borrowings.

A review of the DSC ratio indicates that this amount has also declined to 19.68x (2006: 26.19x).

Still, this indicates that Nestl is still highly profitable. The profits generated by the Company are

more than sufficient (i.e. 20x) to repay interest expenses incurred. This is in line with the OCI

ratio.

Conclusion:

Generally, Nestl appears to be liquid and solvent. All indicators suggest that the Company has

strong operating cash flows, sufficient to service its' interest costs. Despite the large loans and

borrowings due in 2008, there are strong assurances that the Company would be able to refinance

such loans and borrowings, for reasons outlined earlier.

Posted by Avatar at Friday, June 20, 2008 1 COMMENTS



Analytical Review 101 Part XII


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Day Payables Outstanding

and the Cash Conversion Cycle

Day Payables OutstandingIn my earlier post, we discussed about the Trade Payables amounts. Trade Payables consists of

amounts due to creditors and suppliers. It is noteworthy that the Trade Payables represents a

source of financing to the company. Essentially, the company is purchasing goods or services from

suppliers on credit, paying only after the credit period is due.

A indicator of the credit terms obtained by the company from its suppliers can be derived from

the DPO ratio. Generally, this ratio indicates the length of time taken by the company to pay its

trade payables. This ratio will vary from industry to industry. As such, it is more useful to comparethis ratio over a period of time or against other companies in the same industry.

A high DPO ratio (e.g. in excess of 90 days) is considered favorable as the company is obtaining

excellent credit terms and financing from its trade creditors. However, it is important to note the

trend of the DPO ratio. If the Trade Payables amount and DPO ratio has increased significantly

within a short period, it may indicate that the company is facing cash flow problems and is unable

to pay its trade creditors on time. This can be corroborated by reviewing the cash flow

statements and other liquidity ratios as discussed earlier.

Cash Conversion Cycle (CCC)

The CCC ratio attempts to quantify the time taken by the company to convert its inventories into

cash, after accounting for the credit period (i.e. financing) provided by its trade creditors. The

CCC ratio is significant as it indicates the efficiency of the company in converting inventories into


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cash. The lower the ratio, the faster the company is the rate of conversion of companys

inventories into cash. Conversely, a high ratio indicates that the company may be facing problems

in collecting debts from its customers or have non-saleable stocks. This would contribute to the

delay in converting its' inventories or receivables into cash.

This ratio will vary widely based on the industry the company is in. A company with a long

gestation period such as construction companies will have a long CCC ratio whereas one in the

FMCG industry should have a relatively low CCC ratio. Comparing this ratio over a period of time

or companies in the same industry will provide a clearer picture of the effectiveness of

management in generating operating cash flows.

Analytical Review

An investigation of Nestls financial statements reveals that its DPO ratio is 49.46 days (2006:

42.68 days). This means that Nestl has either obtained more favorable credit terms from its

suppliers or is successful in delaying payments to its trade creditors. This modest increase of

15.9%, divulges the fact that Nestl may be delaying payment to its trade creditors as most of

its' cash are tied up in its inventories. A review of its operating cash flows discloses that the

company is on sound financial footing and does not have problems in paying its trade creditors on

time, if necessary. Overall the DPO ratio is generally favorable.

The CCC ratio has increased by 11.3% from 45.28 days in 2006 to 50.41 days currently. This

increase indicates that Nestl's efficiency in converting its inventories into cash, has decreased.

Further investigation exposes the fact that there is a disproportionate increase in inventories

(35%) compared to the increase in revenue (4.29%). This is the main contributor to the increase in

the CCC ratio and the reduction in operating cash flows by 18.82% to RM291MIL compared to

RM358MIL in 2006.

Conclusion:

The DPO and CCC ratio reveals that Nestl is less efficient in converting its inventories into cash.

Still, the CCC ratio and operating cash flows are still reasonable, even though it is less impressive,

when compared to 2006. We have completed our review of the liquidity ratios and cash flow

movements of the company. Next, we shall look at the Debt Ratios and Nestl's solvency.



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Analytical Review 101 Part XI

LIQUIDITY CURRENT AND

QUICK RATIOS'

Earlier on, we reviewed the Current Assets and Liabilities section of the Balance Sheet in detail.

Current Assets are generally cash or assets that the company should be able to convert into cash

within the period of one year.

Similarly, Current Liabilities are obligations or commitments that must be settled by the company

within a year.

As Current Assets and Current Liabilities are assets and liabilities, receivable or due within a

period of one year respectively, it is appropriate to compare these two amounts as an indicator of

the companys liquidity.

Current Ratio

The current ratio (as computed above), compares the current assets of a company against its

liabilities. Generally, the higher the ratio, the more liquid the company is. If the current ratio isequal to 2.0x or more, the company is considered generally liquid, i.e. it should not have

problems in meeting its short term obligations. If this ratio is less than 1.0x, then the company

may have troubles to meet its' short term commitments. However, these are mere guidelines. The

ratio may vary from industry to industry and care must be taken when interpreting this ratio.


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Even when the current ratio is 2.0x or higher, it is important to analyze the components of the

current assets. If the trade receivables or inventories are abnormally large, compared to previous

years, then the DSO or Inventory Turn ratios' may raise alarms concerning the recoverability of the

trade receivables or possibility of overstocking, respectively. If this is the case, although the

current ratio is favorable, the company may still face liquidity issues due to problems in collecting

debts or selling its inventories.

Quick Ratio

Generally, current assets indicate cash balances and those assets that are easily convertible to

cash within a span of one year. If one wishes to be conservative, it may be better to exclude

inventories from the current assets. This is because inventories may not be easily saleable,

especially during a difficult economic climate.

The quick ratio compares HIGHLY LIQUID CURRENT ASSETS (i.e. Current Assets excluding

Inventories) to the current liabilities. By and large, a ratio of 1.0x or higher, signifies that the

company has good liquidity. This is because it can convert its HIGHLY LIQUID CURRENT ASSETS

into cash to meet its short term commitments and obligations. Conversely, a quick ratio of less

than 1.0x, indicates that the company may have issues in fulfilling its short term obligations.

Take note that the figures are merely for guidance and may vary from industry to industry.

Exercise care when interpreting the quick and current ratios.

Even if the quick ratio is 1.0x or higher, liquidity problems could still arise. If the company is

facing troubles collecting amounts due from its customers, it will be reflected in large trade

receivables balance and DSO ratio. In such a case, a quick ratio of 1.0x or more, may be

meaningless as the company is unable to convert its trade receivables into cash to pay its short

term commitments.

Analytical Review

An analysis of Nestls Current Ratio indicates it is hovering around 1.08x (2006: 1.20X). This lower

current ratio is mainly due to the large amounts of loans and borrowings due within one year from

the Balance Sheet date of 31 December 2007. This signifies that if Nestl can convert all these

current assets to cash, it would be able to repay all its commitments. Generally this is

acceptable, especially considering that the banks would have no problems in refinancing these


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loans and borrowings due to Nestls strong operating cash flows.

The Quick Ratio of 0.57x (2006:0.71x) implies that most of the companys current assets are

inventories. However, as Nestls is in the Fast Moving Consumer Goods (FMCG) industry, it should

have little problems in selling its inventories and converting these into cash. The lower ratio is

not worrying as an analysis of the DSO and Inventory Turn ratio suggests that trade receivables are

still being collecting promptly and there is only a moderate decrease in the turnover of

inventories. Overall, operating cash flows are still significantly large to enable Nestl to meet its

short term commitments.

Conclusion:

The Current and Quick Ratios' are convenient ratios to gauge the liquidity of a company. However,

always keep in mind that a Current Ratio and Quick Ratio value of 2.0x and 1.0x respectively, does

not necessarily mean the company is liquid. Further analysis of the DSO and Inventory Turn Ratio

is required. This is to ensure that the favorable Current and Quick Ratios' are not due to mounting

Trade Receivables and Inventories, arising from debt collection problems or non-saleable stocks.




Analytical Review 101 Part X


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LOANS AND BORROWINGS

Financing Company's Operations

To set-up a company, the shareholders need to initially pump in cash to finance the operations of

the company. This is usually represented by the share capital.

Why Borrow?

Even though the operations of the company may be highly profitable, sometimes the shareholders

are unable to expand as they have insufficient cash to finance costly expansions such as buildingnew factories or investing in more sophisticated machineries or R&D. To finance such expansions,

companies often borrow from banks or leasing companies.

Loans

Borrowings from banks usually come in the form of loans. If the company is small one, some form

of security is required, either on the assets of the company such as land & buildings or personal

guarantees from directors of the company. For large companies with excellent credit ratings, the

banks may offer an unsecured loan.

Finance Lease Liabilities

Financing from leasing companies are in the form of purchase of large assets such as plant and

machineries. The leasing companies will pay the suppliers of such machineries. The company will

then undertake to pay the leasing companies a fixed monthly lease payment over a period of time.


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The total monthly lease payments will exceed the purchase price of the plant and machineries.

These lease commitments are recognized in the Balance Sheet as Finance Lease Liabilities.

Operating Cash Flows

Banks and leasing companies are not charities. They expect the company to repay the monthly

installment payments comprising of the principal and interest on a timely basis. A company that

has loans and borrowings, must generate sufficient positive operating cash flows to finance the

monthly installment payments. The Operating Cash to Loans and Borrowings Ratio (OCLB)

indicates the financial ability of the company to repay such loans. A ratio higher than 1.5 is a

positive indicator of the companys abilities to service its loans and borrowings.

Interest Rates and Gearing

A benefit of loans and borrowings is that the interest rates charged by banks and leasing

companies are usually lower than the profits generated by companies.

For example, if the company can generate profits of 15% on every Ringit invested in the Company,

whereas the effective interest on loans is only approximately 5%, it may be desirable to borrow

money to finance expansions. Why? Instead of raising additional share capital from its

shareholders, the company can borrow from the banks instead. The banks are only entitled to a 5%

return on its loans. The shareholders will be entitled to pocket the excess 10% difference (15%

profit 5% interest).

The effective interest rates on loans and borrowings can be computed as indicated above. When

the company is generating a return that is substantially in excess of the effective interest rates,

this is reasonably good as the shareholders will enjoy a higher return at the expense of the banks

and leasing companies. Further, the interest payments to the banks or leasing companies are tax

deductible, which will further reduce the company's tax expense.

In financial terms, this benefit is known as gearing or leverage.

The Dangers

Often companies tend to leverage their Balance Sheets excessively. Whilst using Other Peoples


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Money (OPM) is an enticing idea, there are dangers if taken to the extreme. These include:

1. Downturn in economy or industry

When there is an unexpected downturn in the economy or the industry, the companys operating

cash flows will quickly dry up. Without sufficient operating cash flows, the company must resort to

using its cash balances to repay the banks and leasing companies. If the company is unable to

manage its cash flows well or refinance its loans, it may fail to service its debts. This may result

in the banks or leasing companies foreclose on the loans and file a bankruptcy suit against the

company.

2. Non-viable Business Model

If a company is perpetually refinancing its loans with and the quantum of loans and borrowings on

its Balance Sheet is ballooning, this may indicate that the business model is not a viable one.

Remember, a companys PRIMARY PURPOSE is to generate PROFITS and convert them into CASH!

When a company is unable to generate sufficient operating cash flows to repay its' loans and

borrowings over the long term, you must ask yourself this:

IF NOT NOW(the company can't repay its' loans after a no. of years),THEN WHEN(can the company generate

sufficient cash to do so)?

Analytical Review

A cursory review of the effective interest rates indicates that Nestl is managing to keep its

borrowings costs extremely low. An effective interest rate of only 4.70% (2006: 5.80%) is

extremely favorable as the current FD rates per annum are approximately 3.70%. Further, all the

borrowings of the company is unsecured which reflects the company has excellent credit ratings.

The OCLB ratio is 2.52x (2006: 1.35x) reflecting that Nestl will have little trouble servicing its

debts. Overall, with such strong operating cash flows, the burning question is WHY BORROW

in the first place?

There may be two main reasons for this. Firstly, Nestl wishes to leverage its Balance Sheets to

generate higher returns for its shareholders. Secondly, it may be using these borrowings to

maintain its aggressive dividend payout policy to maintain its share prices.


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Even though RM308MIL of loans and borrowings are due in 2009, Nestl strong operating cash flows

and excellent credit rating, means the company will no problems in refinancing such loans.

Conclusion:

Despite having huge loans and borrowings of RM308MIL and amounts due to related companies of

RM129MIL, Nestl is financially stable. Its operating cash flows are sufficient to enable it to repay

these borrowings in the long term.



TUESDAY, JUNE 10, 2008

Analytical Review 101 Part IX

Balance Sheet Current

Liabilities

What is a Balance Sheet?

The Balance Sheet shows the position of the company as at the end of the financial year (or as at

a specific date). The Balance Sheet contains summary information of all assets and liabilities ofthe company including its' Intangible Assets, Property, Plant and Equipment, Long Term and

Current Assets, Long Term and Current Liabilities and the Shareholders Equity. This is noteworthy

as it gives us an indicator as to the value or worth of a company.

What do Current Liabilities represent?


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These are liabilities or obligations of the business that must be paid in cash within a period of one

year. It usually consists of trade payables, other payables, loans and borrowings and taxation, that

are due within a period of 12 months from the balance sheet date.

1. Trade Payables

Trade Payables consists of amounts due to creditors and suppliers. These amounts arise because

most long term suppliers would give credit terms to the company. The average credit period given

by the supplier would depend on, inter-alia, the relationship between the company and its

suppliers and the type of goods sold or services rendered by its suppliers.

The longer the credit period given by the suppliers to the company, the larger the trade payables

amounts recorded in the Balance Sheet. Why would suppliers grant credit periods to the company?

Wouldnt it be better for the suppliers impose Cash on Delivery (COD) terms on all purchases by

the company?

Purchases by a company are usually on credit terms because most companies expect to be given

credit terms as a gesture of trust and goodwill. Companies usually try to negotiate and obtain

favorable credit terms from its long term suppliers so as to conserve its cash flows.

A sudden increase in trade payables of a company as compared to previous years, is not always

favorable. True, the company is conserving its cash flows by paying its trade creditors later.

However, this may be an indication that the company is facing cash flow problems and is UNABLE

to pay its creditors on time. Another possibility is that the companys operating cash flows may

be used to pay off other more critical obligations such as repayment of loans to banks.

2. Other Payables

These usually consists of:

(a) Amounts due to related companies (trade and non-trade); and

(b) Other payables;

(c) Accrued Expenses.

By and large, this figure is stable and does not change significantly over the long run. It is usually

not significant in the evaluation of the companys value.


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However, in Nestls case, it is significant to note that the company owes its related companies

approximately RM129MIL. Approximately 33.50% of these debts are trade related whereas the

balances of 66.50% are non trade. A review of the cash balances of Nestl reveals a balance of

only RM31.6MIL. If these related companies were to require immediate repayment, the

company would have insufficient cash to repay these obligations.

This further indicates that Nestl may be pursuing an overly aggressive dividend payout policy and

financing this partly through inter-company payables. Approximately 39% of these inter-company

payables (i.e. RM50.15MIL) is a short-term loan denominated, in Japanese Yen and interest

bearing at 3.72% per annum. The balances of RM78.85MIL are unsecured, repayable on

demand and interest-free.

The above facts indicates Nestl dividend policy may not be sustainable in the long run. The

company must conserve its cash flows, if it is to repay its' mounting of debts and obligations.

However, it is pleasing to note that the inter-company payables have been halved in 2007 as

compared to 2006.

3. Loans and borrowings

For a company with such strong operating cash flows, it is disconcerting to note that the

companys short term loans and borrowings have ballooned almost fourfold in 2007. The

companys short term loans and borrowings is currently RM303MIL now, compared to only RM67MIL

in 2006. This is a substantial amount and the company is unlikely to be able to repay this withing a

period of one year, since its cash balances are only RM32MIL. It must refinance these loans.

Further scrutiny is required on the loans and borrowings amounts.

4. Taxation

These usually represents amount of tax payable to the Malaysian Inland Revenue. It is generally

not significant in our evaluation of the value of a company as it is largely out of the company's

control.

Conclusion:


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We have appraised and analyzed the major components of the current liabilities of Nestl. The

important components have been highlighted for further review, namely the inter-company

payables and loans and borrowings. These will be looked in detail, in my future posts.

Posted by Avatar at Tuesday, June 10, 2008 0 COMMENTS



Analytical Review 101 Part VIII

Inventory Turnover

(Inventory Turn)

Always keep in mind that a companys sole purpose is to generate profits and convert these profits

into actual cash received. Therefore, a company with huge inventories, by itself, is meaningless.

It is in the ability of the company to sell these inventories to its customers and convert

them to actual CASH that is the crucial to the stability and profitability of a company. TheInventory Turn ratio is a key performance indicator of the company's ability to do so. The

components of the Inventory Turn ratio are:

Cost of Goods Sold (COGS)

Cost of goods sold comprises of all direct costs attributable to the production of the goods sold by


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a company.

Inventories

Inventories usually consists of raw and packaging materials, work-in-progress, finished goods and

spare parts.

Significance of the Inventory Turn ratio

The Inventory Turn ratio allows us to analyze how long it takes for the company to convert its

inventories into sales to its' customers. This inventory turnover will vary widely based on the

industry the company is in. A company selling large, highly customized machineries will have a

longer inventory turn compared to one in the Fast Moving Consumer Goods (FMCG) industry.

It is more significant to compare a companys inventory turn ratio over a period of time or

compare the inventory turn of a company with other companies in a similar industry. A short

inventory turn (e.g. less that 60 days) is a favorable indicator, as it means the company is holding

just sufficient stocks to meet customer demands and less cash is tied up in inventories.

On the other hand, if a companys inventory turn ratio has increased dramatically over time (e.g.

to 120 days currently, from 60 days in prior years), this means the company may be facing

problems. A high ratio may indicate that its inventories are non-saleable or is facing an

overstocking situation. This leads to increase in insurance costs, warehousing costs to house the

inventories and possibility of obsolete and damaged stocks. The company may face liquidity issues

as too much of its operating cash are now tied up in the increasing pile of inventories in its

warehouses.

Analytical Review

Nestls inventory turn ratio indicates a significant deterioration of over 26.8% as compared to last

year. Its current inventory turn is now 71 days as compared to 56 days in 2006. This indicates that

Nestl is unable to convert its inventories to sales as efficiently as in prior years.

Revenues have only increased by 4.29%, yet inventories have increased significantly by 35%. This

disproportionate increase in inventories as compared to revenue is highlighted by the

deterioration in the inventory turn ratio. A substantial amount of Nestls cash is tied up in its


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inventories, reducing its operating cash inflow for the year. Management must review this

situation closely to ensure that the inventory is managed to prevent an overstock situation.

Conclusion:

A high inventory turn ratio (especially compared to previous years or companies in a similar

industry) is undesirable. This means that the company is unable to convert its stocks into sales to

customers as efficiently as before. Consequently, additional insurance, warehousing and

financing costs are incurred to maintain the higher level of inventories. Pay a close watch to

the inventory turn ratio as it is a good key performance indicator of the Supply Chain Management

function of a company.




Analytical Review 101 Part VII

Day Sales Outstanding(DSO)

As reiterated (ad nauseam), CASH IS KING! To convert revenue into cash, one of the major

areas a company must execute is to collect debts from its customers. This is represented by the

DSO ratio, which is a key performance indicator (KPI) of the companys credit control function.


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The DSO ratio is made up of two components, namely Trade Receivables and Revenue. Just to

recap:

Trade Receivables

Trade Receivables consist of amounts due from customers. These amounts arise because most

business gives credit period and limits to their customers. The average credit period given to

customers vary depending on the industry they are in.

Revenue

Revenue represents sales to customers for goods sold or services rendered.

Significance of the DSO ratio

The DSO ratio is important is it indicates the amount of time the company requires to collect the

debts from the customers. A very long DSO ratio (e.g. in excess of 90 days) would indicate that the

company is facing credit collection problems or the recoverability of such trade receivables is in

doubt. Whenever the DSO ratios balloons substantially in comparison with prior years, it is an

indication that the company may have expanded too aggressively or relaxed its credit control

procedures in an attempt to secure additional sales.

Conversely, an favorable DSO ratio (i.e. 30-60 days) usually indicates that the company is

managing its credit control function effectively and are collecting all its debts promptly.

Companies with low DSO ratios are usually well managed and should not face any cash flow

problems. When considering whether to invest in the shares of a particular company, a low DSO

ratio is a very favorable sign.

Analytical Review

A review of Nestl DSO ratio indicates that it has been hovering around 29 to 32 days. This is

extremely favorable. On average, Nestl takes approximately about a month to collect debts from

its customers after its products are delivered and sold to its customers.

This is however, not surprising as the bulk of its customers are likely to consist of reputable

dealers, supermarket and hypermarket chains that have strong financial standing. Further, there

is a lower risk of any huge exposure of bad debts as compared to companies in other riskier


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industries such as construction industry.

By converting its trade receivables to cash in such a short time frame, Nestl is able to generate

strong operating cash flows of approximately RM319MIL per annum to sustain its operations.

Conclusion:

Remember, PROFITSDOES NOT EQUALCASH!

Always keep a lookout for the DSO ratio. If profits has increased substantially but DSO

ratio has ballooned (e.g. exceeding 90 days from 30 days in prior years), all is not well in

the company. Ultimately, in order for profits to be realized, the debts from customers must be

collected. If debts from customers are not collectible (bad debts), then the increase in profits

is meaningless!



SATURDAY, MAY 31, 2008

Analytical Review 101 Part VI


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Balance Sheet Current Assets

What is a Balance Sheet?

The Balance Sheet shows the position of the company as at the end of the financial year (or as at

a specific date). The Balance Sheet contains summary information of all assets and liabilities of

the company including its' Intangible Assets, Property, Plant and Equipment, Long Term and

Current Assets, Long Term and Current Liabilities and the Shareholders Equity. This is noteworthy

as it gives us an indicator as to the value or worth of a company.

What do Current Assets represent?

The Current Assets are assets which is expected to be sold or otherwise used up in the near

future, usually within one year. It usually consists of trade receivables, other receivables,

inventories and cash & cash equivalents.

1. Trade Receivables

Trade receivables consist of amounts due from customers. These amounts arise because most

business gives credit period and limits to their customers. The average credit period given to

customers vary depending on the industry they are in.


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Usually, the longer the credit period given to customers, the larger trade receivables amounts

recorded in the Balance Sheet. Why then should the company give credit periods to its' customers?

Wouldn't it be better to have all sales on Cash On Delivery (COD) terms?

This is not possible for most businesses as it is often necessary to give reasonable credit period to

customers for the company to secure sales and maintain customer goodwill.

A sudden increase in the trade receivables of a company compared to previous years is not always

favorable. It may indicate that the company is relaxing it's credit period to customers to secure

additional sales. Another possibility may be the company is facing difficulties in recovering the

debts owed by its customers. Either way, this may result in the company facing cash flow

problems, in the long run.

2. Other Receivables

Other receivables usually consist of:

(i) Other deposits, receivables and prepayments;

(ii) Amount due from related companies and subsidiaries; and

(iii) Loans to employees.

By and large, this figure is stable and does not change over the long run. It is usually not

significant in our evaluation of the company's value.

However in Nestl's case, is noteworthy that Nestl has a long term loan to its' employees

amounting to approximately RM22MIL. Note 9.2 states that Loans to employees are unsecured,

interest free and are not expected to be repayable within the next twelve months.

Nestl employees must be happy to enjoy such benefits. However, as a prospective investor, we

would like to know what criteria is used to give out loans to its employees and what are the

terms of repayment. If the RM22MIL cash was not loaned out to its' employees, and instead was

placed in a Fixed Deposit with 4.5% return per annum, the company would earn an additional

RM1MIL interest income.


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3. Inventories

Inventories usually consists of raw and packaging materials, work-in-progress, finished goods and

spare parts. Manufacturing and distribution groups like Nestl must keep raw and packaging

materials to convert them into finished goods such as ice-cream, powdered milk and drinks. Those

raw materials that are still being processed into finished goods at the financial year end, will be

classified as work-in-progress. Spare parts are consumables held, often for routine maintenance

works and repairs of factory equipment.

Although inventories are assets of the company, it is important to examine this figure. When the

inventories in the Balance Sheet is too high compared to previous years or to its cost of sales, this

may indicates that the company is facing fierce competition and is unable to sell its inventories

fast enough. Such a situation can easily lead to financial troubles. Large inventory balances may

lead to additional warehousing rental, insurance premiums and risk of obsolete, damaged or non-

saleable stocks. It is critical to ensure the company maintains stringent inventory management

before making your investment decision.

4. Cash and cash equivalents

Cash and cash equivalents are cash, either in the bank or placed under fixed deposits with

financial institutions. These are highly liquid instruments with minimal capital risk. Cash is critical

to the survival of a company, so always keep a close watch on this balance.

Conclusion:

We have appraised and analyzed the major components of the current assets of Nestl. Some of

the important things to watch out for, when reviewing the components in the Current Assets have

also been highlighted. My next post will look at the Current Liabilities section.

Posted by Avatar at Saturday, May 31, 2008 0 COMMENTS


WEDNESDAY, MAY 28, 2008

Analytical Review 101 Part V


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THE IMPORTANCE OF CASH FLOW

STATEMENTS

Today, we will be reviewing one of the most fundamental components of the annual audited

financial statements, namely the Cash Flow Statements.

What is Cash Flow Statements (CFS)?

Cash Flow Statements is a summary of the companys cash inflows (funds coming in) and cash

outflows (funds going out) for a period of one year (in the context of the annual audited financial

statements). The CFS tracks the movement in the companys cash and cash equivalents.

What does the Cash Flows from Operating Activities (Operating Cash

Flows) tell me?

Simply put, the Operating Cash Flows are cash generated from the company during its ordinary

course of business such as cash received from its customers less all operating cash outflows such

as payments to trade creditors, employees, tax and money tied up in working capital (e.g.

inventories and trade debtors).


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The Operating Cash Flows indicates whether the companys business is sustainable and is

generating sufficient cash flows to fund its business. Unless the company is a new start-up or are

involved in long term projects (such as construction companies), operating cash flows should

always be positive.

If the company has negative operating cash flows, you need to be very careful if you intend to

invest in such companies. Why? Well, if the company cannot generate enough cash to fund its

operations, how long do you think the company will last? More importantly, is the business

sustainable in the long run?

What does the Cash Flows from Investing Activities (Investing Cash Flows)

tell me?

For a company, it is not enough to generate a small positive Operating Cash Flows. It must

generate sufficient positive Operating Cash Flows to finance its investing activities. In other

words, the Company must have enough cash generated to finance enhancements to its'

manufacturing capabilities & technologies. It must also have cash to purchase new property, plant

and equipment to replace its existing factories, equipment and other fixed assets. Interest

received from investments and proceeds from disposals of property, plant and equipment will also

be classified under this category.

Generally, Operating Cash inflows must be sufficient to finance Investing Cash outflows. If it is

insufficient over a period of time, the company must finance its investing activities through loans

and bank borrowings. When this occurs, you must ask yourself, is the company incurring these

loans for expansion purposes or merely replacing its current ageing assets.

If it is for the former purpose, the additional future revenues and operating cash flows arising

from its' expansion should suffice to repay the loan and interest. However, if it is for the latter

purpose, then further analysis is required. If a company cannot generate sufficient Operating Cash

inflows to finance replacement of its property, plant and equipment, is the business really viable?

What does the Cash Flows from Financing Activities (Financing Cash

Flows) tell me?

Financing cash inflows consists mainly of cash received by securing additional loans and bank


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borrowings. Cash outflows from financing activities usually consists of dividend payments to

shareholders, repayment of borrowings &loans and payment of finance lease liabilities.

Commonly, Financing Cash Flows are usually cash outflows except when there are huge loans or

bank borrowings secured for a particular year. The Financing Cash Flows indicates how much of

cash is being utilised to fund the operations of the company. Over the long term, perhaps for a

period of three to five years, the Operating Cash inflows must be large enough to cover both the

Investing and Financing cash outflows. This will indicate that the company is a viable one and is in

a position to repay its loans and borrowings over a period of time.

Overview

The sum of the Operating Cash Flows, Investing Cash Flows and Financing Cash Flows will indicate

the increase or decrease in cash and cash equivalents for the year. This indicates how healthy the

company is, in terms of cash flows. Healthy cash reserves are crucial for the stability and strength

of a company. It would be desirable to review a company's CFS over a period of five years to

analyze whether the company's business is viable.

Analytical Review

Please click on the picture above to see the Analytical Review comments.

Conclusion:

A detailed review of the Cash Flow Statements over a five year period is crucial in analyzing the

financial health of a company you intend to invest in. Remember, in the long term, the company

must have more CASH INFLOWS (cash coming in) than CASH OUTFLOWS (cash going

out).

Posted by Avatar at Wednesday, May 28, 2008 7 COMMENTS


MONDAY, MAY 26, 2008

Analytical Review 101 Part IV


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Quality of Earnings Ratio

Lets start with a quick quiz: What is the lifeblood of any business? [Highlight answer below]

CASH

Of all the figures in the financial statements, cash is the least susceptible to manipulation and

creative accounting.

There are numerous techniques used to improve the cash flow position as at year end such as

deferring payments to creditors, obtaining down payments from customers or aggressive debtors

collection strategies. However, there is a limit to these techniques and Cash is still the most

reliable gauge of the companys overall performance.

The Quality of Earnings Ratio attempts to assess the quality of the Profit for the Year earned by

the Company. In short, it assesses how much of the Profit for the Year has been successfully

converted by the company into cash. Some of you might be scratching your head

Remember this:

PROFIT FOR THE YEARDOES NOT EQUATE TOCASH

RECEIVED

Remember, in order to convert the profit earned into cash, a company must collect all the debts

owed to it by the customers. Some of these debts may not be collectible, hence resulting in bad

debts. Inventories held by the company may be subsequently damaged or expire, resulting in


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additional inventory provisions. There could also be some aggressive earnings management (i.e.

creative accounting) by the company to boost profits which is not sustainable. Therefore, it is

critical to look at the Quality of Earnings ratio to assess the quality of the profits indicated on its

financial statements. Let us review the components of this ratio.

Profit for the Year

We have discussed what the Profit for the Year represents earlier. In principal, it represents the

gain made by the company for the sales of its products less all costs incurred by the company.

Net Cash from Operating Activities

This component represents the cash generated by the company during the year from its normal

operating activities excluding investing and financing activities. Generally, this amount indicates

the cash received from customers, payments to creditors & employees, cash tied up in working

capital and income tax payments. A well managed company should have a very strong operating

cash flow. Otherwise, the company may run into liquidity problems later on.

Analytical Review

For a company like Nestl, a strong operating cash flow is expected. Such an established company

with excellent brands should get very favorable terms from its customers. Most of its customers,

comprising of established dealers and hypermarkets chains would not have problems paying their

debts on time.

A review of Nestl Quality of Earnings Ratio indicates that this ratio has been hovering, on

average, at 100%. This is a strong indication that in terms of cash flows, the company is doing very

well in managing its working capital and converting profits into cash. Nestl has been exceptional

in the management of its' cash flows.

Conclusion:

Always check and review the quality of profits earned by the companies you plan to invest in. A

strong Quality of Earnings Ration (close to 100%), indicates that the company is financially sound

whereas a weak ratio (anything less than 80%) requires further detailed analysis of the divergence

between profits and cash earned.

Posted by Avatar at Monday, May 26, 2008 0 COMMENTS


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SATURDAY, MAY 24, 2008

Analytical Review 101 Part III

Profit Before Tax and Net

Profit, Margins

How is Profit Before Tax arrived at?

If you look at Nestls Income Statement; Profit Before Tax is arrived by using the Gross Profit less

the following major items:

(a) Distribution and selling expenses

These expenses are mainly transportation costs incurred in delivering its products to its

distributors & direct customers such as hypermarkets and dealers. Other selling costs consists of

salespersons salaries, commissions, entertainment and other expenses. Advertising campaigns and

product promotions expenses are also classified here.

(b) Administrative expenses

Costs incurred by back office departments such as Finance, Procurement, Credit Collection and

Information Technology are usually lumped under these categories. Other fixed overheads

(excluding factory overheads) will also be categorized here.

(c) Interest income

Interest income usually consists of interest earned on excess cash placed by the company in fixed

deposits, short term money market deposits and other interest earning instruments.

(d) Interest costs

Interest costs consists of financing costs due to loans and borrowings secured by the company to

finance its operations and capital expenditures.


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How is the Tax Expense arrived at?

Tax expense consists of income tax liability payable by the company on its profits and deferred

taxes. The income tax liability is largely out of the Companys control, so it is of lesser importance

in our analytical review.

How is the Profit After Tax arrived at?

Profit After Tax = Profit Before Tax Tax Expense

Analytical Review

The Profit Before Tax (PBT) margin gives us an indication of the profit made by the Company from

its' sales less ALL costs incurred including COGS and indirect costs such as selling, marketing,

administration, financing and other costs.

An overview of the PBT margin of Nestl from 2003 to 2007 indicates that its' margin has been

hovering around 10% to 11% for the past four years. Overall, this figure is reasonably good as it

means the company is making a profit of approximately RM0.11 for every Ringgit of sales made.

The Profit After Tax (PAT) margin signals the profit made after deducting the income tax payable

to the Malaysian government. Review of the PAT margin for the past five years suggests that PAT

margin is improving. However, this is largely due to tax incentives obtained as indicated in note 18

of the annual audited financial statements.

Conclusion:

A profit after tax of approximately 8% per annum is reasonable. However, it is not that impressive

considering RISK FREE interest income from fixed deposits are approximately 3.70% whereas

returns from EPF are about 5%. Please remember that Profit After Tax DOES NOT EQUAL TO Cash

Earned as there is a timing difference in turning profits into cash (as indicated by the Quality of

Earnings Ratio).

Further, there is always a moderate risk involved in investing in companies, even in one as

established as Nestl. As indicated earlier, comparison with Nestls competitors PBT and PAT


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margins may give us a more complete picture as to the Nestl's strength and weaknesses vis--vis

the industry.

Posted by Avatar at Saturday, May 24, 2008 1 COMMENTS


FRIDAY, MAY 23, 2008

Analytical Review 101 Part II

Gross Profit%

What does the Gross Profit % represent? To understand this, we need to understand two

components, Revenue and Cost of Goods Sold.

Revenue

Revenue, turnover and sales all mean the same thing. It represents sales to customers for goods

sold or services rendered. For a company like Nestl, its revenues, inter-alia, are derived from

the marketing and the sale, both locally and for export, of ice-cream, powdered milk and drinks,

liquid milk and juices, instant coffee and other beverages, chocolate confectionery products,

instant noodles, culinary products, cereals, yogurt and related products.

Cost of Goods Sold (COGS)


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Conclusion:

By performing some basic computations, we know now that Nestl appears to profitable as it is

making approximately RM0.32 for every RM1 of sales. These profits appear sustainable as the

Company has managed to maintain its Gross Profit % despite the rising costs of raw materials

foodstuff.

Posted by Avatar at Friday, May 23, 2008 0 COMMENTS


THURSDAY, MAY 22, 2008

Analytical Review 101 Part I

Before we start, I would like to quote Steven Covey, from

his book The Seven Habits of Highly Effective People:

BEGIN WITH THE END IN MIND!

So, you should ask yourself: What is the end product of my efforts to calculate these financial

ratios and performing analytical reviews?


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Well, it should look similar to the financial dashboard above!

In order to analyze and assess companies' quantitatively; we need to construct financial

dashboards to make sense of all the information contained in the annual audited financial

statements. We will be attempting to construct the above dashboard to help us assess whether

the company is worth investing based on its current market share price.

The information contained in the financial dashboard above is based on the Annual Audited

Financial Statements of Nestl (Malaysia) Berhad, downloaded from the Bursa Malaysia website.

For those of you interested in learning about the construction of the financial dashboards and

performing analytical reviews, kindly download the Annual Report for Nestl (Malaysia) Berhad

for the financial year ended 31 December 2003 to 2007. All the analytical reviews and financial

ratios calculated will be based on Nestls audited financial statements. The link to the Bursa

Malaysia is available on my Investment Resources Link section.

Please go through the financial dashboard above carefully. I will be reviewing each financial ratios

in detail, in my subsequent posts so that we can make sense of the information in the financial

dashboard.

Posted by Avatar at Thursday, May 22, 2008 0 COMMENTS


Analytical Review 101

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