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SCHOOL OF ARCHITECTURE, BUILDING AND DESIGN

FOUNDATION IN NATURAL BUILD ENVIRONMENT

MARCH 2014 INTAKE

BASIC ACCOUNTING (ACC30205)

FINANCIAL RATIO ANALYSIS

GROUP MEMBERS:

1. HWANG WEI LI (0319756)

2. CHEE WEI SHAN (0319572)

3. YAP JIA EN (0319550)

LECTURER: CHANG JAU HO

SUBMISSION DATE: 16 January 2015

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Table of Content

No. Title Page

1 Cover page 1

2 Table of Content 2

3 Background history of Nestlé and its recent

development

3-4

4 Ratio analysis on Nestlé annual report for year 2012

and year 2013

5-8

5 P/E ratio of Nestlé 9

6 Justifications of the worthy of investment for Nestlé

share

10

7 Appendices 11-16

8 References 17

3

Background History of Nestlé

The first European condensed milk factory was opened in Cham, Switzerland in year 1866

by the Anglo-Swiss Condensed Milk Company (Nestle.com) whose founders were

Americans Charles and George Page.

Before setting up the Nestlé company, in year 1867, Vevey, Switzerland, the founder,

Henri Nestlé, who was a trained pharmacist, began experimenting with various combinations

of cow’s milk, wheat flour and sugar in order to develop an alternative source of food

nutrition for babies that couldn’t being breastfeed by their mother. His goal was to help to

solve the problem of the infant mortality from malnutrition. And then the product was named

Farine Lactée Henri Nestlé.

Nestlé’s first customer was a premature baby whose mother was dangerously ill and was

unable to breastfeed the child and thus the baby became malnutrition. But when the baby

drank Farine Lactée, he immediately recovered from the infant mortality caused by

malnutrition. Soon, people recognized and knew the value of the new product and within a

few years, Farine Lactée was being marketed in Europe and also created a demand

throughout Europe.

Meanwhile, Anglo-Swiss Condensed Milk Company has broadened its product line in the

mid-1870s to include cheese and infant formula. The Nestlé Company, which had been

purchased by Jules Monnerat in 1875, responded by launching own brand of condensed

products. Both of the company had a fierce and strong competition until they merged in year

1905, which formed the name of Nestlé & Anglo-Swiss Holding Co.Ltd on November 27,

1936.

After that, Nestlé Company had its name changes for several times after merged with the

companies and this continues until year 1977, a new name, Nestlé S.A. was created. For the

following years till now, they kept launching new products and brand names other than

marketing their products to other countries.

The vision of Nestlé is to become the world’s leading nutrition, health and wellness

company delivering improved shareholder value by being a preferred corporate citizen,

preferred employer, preferred supplier selling preferred products.( Nestle.com). While the

mission of Nestlé which is "Good Food, Good Life" is to provide consumers with the best

tasting, most nutritious choices in a wide range of food and beverage categories and eating

occasions, from morning to night. ( Nestle.com).

Nestlé is a nutrition, health and wellness company, also is the largest food and beverage

company in the world where it manufactures, supplies and produces variety types of products

for various fields. They also encourage product growth through innovation and renovation.

And so, there are many different products sold in market which include prepared dishes and

cooking aids, milk-based products, pharmaceuticals and ophthalmic goods, baby foods,

bottled water, cereals, chocolates and confectionery, coffee, culinary, chilled and frozen food,

dairy, ice-cream, food services and pet care. Everyday, over one billion Nestlé products are

sold worldwide which represents over two thousand global and local brands of the products.

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Recent Development

People nowadays are more aware of the food and beverages they consumed which could

affect their quality of life and of others. They also hope to enjoy the products with a pleasure

and peaceful mind other than the health. Innovation is important for Nestlé because they are

able to create the trustworthy products, systems and services that will improve the

consumer’s lives and also the safe and highest quality products.

The size of Nestlé Company is increasing year by year. Due to the increased size, they are

developing more and more variety products to be offered to the market to fulfil the

customers’ needs and to ease their life. Also, the numbers of the employees worldwide are

getting more and more which also helps the company to become more successful in

continuing the vision to be the world’s leading nutrition, health and awareness company.

(Nestle.com)

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Ratio Analysis on Nestlé’s Annual Report

For year 2012 and year 2013

Profitability Ratios (based on Group) for the year 2012 and 2013

Profitability

Ratios 2012 2013 Interpretation

Return on Equity (ROE)

505,352 (751,206+652,719)/2

X 100% = 72%

561,701 (816,444+751,206)/2

X 100% = 71.7%

During the 2012-2013 period, the business’

ROE has decreased from 72% to 71.7%. This means the owner

is getting less return from his capital.

Net Profit Margin

(NPM)

505,352

4,556,423 X 100%

= 11.1%

561,701

4,787,925 X 100%

= 11.7%

During the 2012-2013

period, the business’ NPM has increased

from 11.1% to 11.7%. This means the business is getting

better at controlling its expense.

Gross Profit

Margin (GPM)

1,553,184

4,556,423 X 100% = 34.1%

1,698,017

4,787,925 X 100% = 35.5%

During the 2012-2013

period, the business’ GPM has increased from 34.1% to 35.5%.

This means the business is getting

better at controlling its COGS expense.

Selling Exp. Ratio (SER)

758,635 4,556,423

X 100% = 16.6%

824,372 4,787,925

X 100% = 17.2%

During the 2012-2013 period, the business’

SER has increased from 16.6% to 17.2%.

This means the business is getting worse at controlling its

sell expense.

General Exp. Ratio (GER)

139,663 4,556,423

X 100% = 3.1%

136,171 4,787,925

X 100% = 2.8%

During the 2012-2013 period, the business’

GER has decreased from 3.1% to 2.8%. This means the

business is getting better at controlling its

general expense.

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Financial Exp. Ratio (FER)

3,726 4,556,423 X 100%

= 0.08%

6,625 4,787,925 X 100%

= 0.14%

During the 2012-2013 period, the business’ SER has increased

from 0.08% to 0.14%. This means the

business is getting worse at controlling its financial expense.

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Stability Ratio (based on Group) for the year 2012 and 2013

Stability

Ratios

2012 2013 Interpretation

Working Capital

RM840,703 RM929,392

= 0.90 : 1

RM929,987 RM1,071,862

= 1.64 : 1

During the 2012 to 2013 period the business's

working capital has increased from 0.90:1 to

1.64:1. This is means the business ability to pay its current liability is getting

better. In addition, it does not satisfy the minimum

requirement to 2 : 1 .

Total Debt RM1,153,963÷RM1,905,169×100% =60.57%

RM1,272,290÷RM2,088,734×100% =60.91%

During the 2012 to 2013 period the business's total debt ratio has increased

from 60.57% to 60.91%. This means the

businesses’ total debt has increased. In addition the business exceeds the

maximum limit of 50%.

Stock Turnover

Average inventory =(RM411,170+RM517,57

3)÷2 = RM464,371.5

365𝑑𝑎𝑦𝑠 ÷RM3,003,239

RM464,371.5

= 56.4 days

Average inventory =(RM

408,614+RM411,170)÷2 = RM409,892

365𝑑𝑎𝑦𝑠

÷RM3,089,908

RM409,892

= 48.4 days

During the 2012 to 2013 period the business's

stock turnover ratio has decreased from 56.4 days to 48.4 days. This means

the business is getting faster at selling their

good.

Debtor Turnover

Credit sales for the year 2012 is 50% of net sales.

Credit sales

=RM4,556,423×50

100

=RM2,278,211.5 Average debtors =(RM394,144+RM444,85

4)÷2 =RM419,499

Debtor turnover =

365𝑑𝑎𝑦𝑠

÷RM2,278,211.5

RM419,499

=67.2 days

Credit sales for the year 2013 is 50% of net sales.

Credit sales

= RM4,787,925×50

100

=RM2,393,962.5 Average debtors =(RM

502,207+RM394,144)÷2 =RM448,175.5

Debtor turnover =

365𝑑𝑎𝑦𝑠

÷RM2,393,962.5

RM448,175.5

=68.3 days

During the 2012 to 2013 period the business's

debtor turnover ratio has increased from 67.2 days to 68.3 days. This means

the business getting slower at collecting its

debts.

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Interest Coverage

𝑅𝑀753,000 + 𝑅𝑀505,352

𝑅𝑀753,000

= 1.7 times

𝑅𝑀610,000 + 𝑅𝑀561,701

𝑅𝑀610,000

=1.9 times

During the 2012 to 2013 period the business's

invest coverage ratio has increased from 1.7 times to 1.9 times. This means

the business’ ability to pay its interest has

become better. In addition, it does not satisfies the minimum

requirement of 5 times

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Price/Earning or P/E Ratio of Nestlé

= 29.05

Nestlé current share price is RM 69.58 per share. It’s earning’s per share is 239.53 sen. This means the

company’s price/earning ratio is 29.05 .This ratio measures how expensive a share is. The higher the

P/E ratio, the more expensive a share is. A P/E of 29.05 means that an investor will need to wait for

29.05 years to recoup his investment. A conservative investor will normally pay no more than P/E of 15

for a share that he likes.

6958

239.53

= 29.05

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Justifications of the worthy of investment for Nestlé share

To determine whether the company is worth investing in, we must consider that the company

have demonstrated good profitability, strong financial stability and its share are available at a

cheap price (P/E) of 15 or lower) to warrant the investment.

After we calculated the profitability ratio and stability ratio, we have come to a conclusion

that we would not suggest the investor to buy the company's shares and invest in the

company because the price is not cheap (P/E of 29.05 which is more than 15) and it take

29.05 years is too long for Investor to claim back his original principal. A conservative

investor will normally pay no more than P/E of 15 for a share that he likes.

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APPENDICES

Appendix A

Nestlé P & L Statement

a) Year 2012

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b) Year 2013

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Appendix B

Nestlé Balance Sheet

a) Year 2012

14

b) Year 2013

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Appendix C

Nestlé Group Financial Highlight

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Appendix D

Nestlé Group Liabilities

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References

•(2015, January 15). Business: The main board of trade. China Press, p.F1.

•2012 corporate governance and financial report. Retrieved January 12, 2015 from

http://www.nestle.com.my/asset-

library/documents/pdf/about%20us/nestle_financial_report_2012.pdf

• Corporate Governance & Financial Report 2013. Retrieved January 12, 2015 from

http://www.nestle.com.my/asset-

library/documents/pdf/about%20us/nestle_corporategovernance_financialreport_2013.pdf

•Reference: papers, formula of profitability ratios and stability ratios. Retrieved January

13,2015.

•Nestlé LC1Company Case Analysis. (n.d.). Retrieved January 15, 2015, from

http://articles.castelarhost.com/nestle_background.htm

•Johnston, I. (n.d.). Nestlé: The world's biggest food company and one of the 'most boycotted'

Retrieved January 15, 2015, from

http://www.telegraph.co.uk/news/worldnews/africaandindianocean/zimbabwe/6235566/Nestl

-the-worlds-biggest- food-company-and-one-of-the-most-boycotted.html

•Reference for Business. (n.d.). Retrieved January 15, 2015, from

http://www.referenceforbusiness.com/history/Mi-Nu/Nestl-S-A.html

•(n.d.). Retrieved January 15, 2015, from http://www.nestle.com/aboutus/history/company-

founder-henri-nestle

•Brian A., V., Timothy W., A., Treneice, P., Mary, M., & Anand Ratnakar, G. (2010).

NESTLÉ: BRAND ALLIANCES IN DEVELOPING MARKETS. Journal for Advancement

of Marketing Education.