Nestle's Financial Analysis

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Nestle's Financial Analysis

  1. 1. Analysis of Financial Statement Term project (Nestle Pakistan ltd) Presented by: Adnan Abdullah 12856 Monday 6-9 Presented to : Mr Ali Dhamani
  2. 2. Company Overview  Nestle Pakistan Ltd is a subsidiary of Nestle S.A. - a company of Swiss origin headquartered in Vevey, Switzerland  It is a food processing company, registered on the Karachi and Lahore stock exchanges and operating in Pakistan since 1988 under a joint venture with Milk Pak ltd and took over management in 1992  For ten years in a row, the company has won a place among the top 25 companies of the Karachi Stock Exchange  Headquartered in Lahore, the Company operates four production facilities, in Sheikhupura, Kabirwala, Islamabad and Karachi
  3. 3. Products
  4. 4. Objective/Context  The objective is an analysis of a purchase decision for a long-term equity investment in Nestle Pakistan Questions to be answered?  What are Nestle’s earnings potential? What is its recent earnings performance?  What is Nestle’s current financial condition? What risks and rewards does Nestle’s financing structure portray?  What are Nestle’s future business prospects? Are Nestle’s markets expected to Grow?  How does Nestle’s compare with its competitors domestically?
  5. 5. Ratio Analysis:  Profitability Ratios: 2007 2008 2009 2010 2011 Engro Foods 2011 28% 26% 29% 27% 26% 22% 12% 12% 14% 14% 13% 11% 6% 5% 7% 8% 7% 3% Gross Profit Ratio Operating profit Margin Net Profit Margin Profitability Ratios 2007 2008 2009 2010 2011 EF 2011 Gross Profit Ratio 28% 26% 29% 27% 26% 22.00% Operating profit Margin 12% 12% 14% 14% 13% 11.30% Net Profit Margin 6% 5% 7% 8% 7% 3%
  6. 6. 0% 10% 20% 30% 40% 50% 60% 70% 80% 2007 2008 2009 2010 2011 Engro Foods 2011 Return on Assets 11% 9% 16% 18% 13% 5% Return on Equity 44% 35% 68% 74% 61% 12% Concern: Declinining ROA and ROE.
  7. 7. Efficiency Ratios 2007 2008 2009 2010 2011 Engro Foods 2011 Inventory turnover ratio 9.4 10.3 9.2 8.9 8.2 9.8 Asset turnover ratio 2 2.3 2.3 2.5 2.2 2.05 0 2 4 6 8 10 12 Times Efficiency Ratios Concern: Declining ITO ratio and ATO ratio in the subsequent years. It implies that Management is not efficiently managing its inventory and assets to generate revenue.
  8. 8. Liquidity ratios: 0 0.5 1 1.5 2 2007 2008 2009 2010 2011 Engro Food 2011 1.1 1.1 1.1 0.9 0.8 1.8 0.54 0.6 0.43 0.38 0.38 0.9 Times(X) Current Ratio Quick Ratio Liquidity Ratios 2007 2008 2009 2010 2011 Engro Foods 2011 Current ratio 1.1 1.1 1.1 0.9 0.8 1.8 Quick ratio 0.54 0.6 0.43 0.38 0.38 0.9 Declining liquidity ratios: this indicates that Nestle may have problems paying its bills on time and the company will be vulnerable to its short-term creditor demands.
  9. 9. Price/Market Ratios: 2007 2008 2009 2010 2011 Engro Foods 2011 Earning per share 40 34 66 91 103 1.2 Price-to-Earnings Ratio (P/E) 45 39 19 26 35 18.5 Rupees (Rs) 2006 2007 2008 2009 2010 2011 Dividend Pay out ratio 83% 12.60% 77% 98% 72% 53.40% Dividend Yield 2.39% 0.28% 2.02% 5.21% 2.73% 1.53% 0% 20% 40% 60% 80% 100% 120%
  10. 10. Leverage Ratios Nestle’s debt to equity ratio shows an upward trend over the period of 5 years, which is an alarming situation, because it suggests that the percentage of assets which are financed by the debts is increasing. Leverage Ratio 2007 2008 2009 2010 2011 EF 2011 Debt to Equity Ratio 1.6 1.7 1.9 1.9 2.2 2.5 Interest Coverage Ratio 5.4 5 10.5 12.1 7.2 1.9
  11. 11. Earnings Quality (Concern)  Accrual Ratio B/S: In assessing earnings quality of Nestle, we note that the balance sheet based accrual ratio of Nestle is 32% in comparison to 26.5% of its competitor Engro Foods. This indicates that Nestle is accruing more each than Engro Foods.
  12. 12. Earnings Quality (Continue..) Concern:  Allowance for doubtful accounts The % increase in Accounts Receivable and Allowance for doubtful Account seems higher than expected, in relation to change in sales. Not a positive relationship. Deviation in the growth rate of Accounts Receivable and Allowance for doubtful Account. The allowance account did not increased appropriately in relation to Accounts Receivable, 86.2% and 118% respectively. The allowance
  13. 13. Trend Analysis 0% 100% 200% 300% 2007 2008 2009 2010 2011 Trend % Sales - net Net income Nestle’s growth was impressive over the period of 5 years, but it was out paced by even higher growth in the company's net income
  14. 14. Common size (Vertical Analysis)  Income Statement:  Over all, the company’s financial status has improved, while most of the expenses have decreased, which indicates a favorable prospective from an investment perspective.  Balance Sheet:  long term liabilities, long term financing has gone down which is a good sign, as it indicates that company took less loans in 2011, implying less degree of risk in firms capital structure in terms of long term debt.  Total liabilities are almost 78% of assets, of which more than 30% is long- term debt.  Current liabilities are 47% of assets, which is larger than its current assets, not a good sign for Nestles liquidity
  15. 15. Cont..  PP&E constitutes almost 46% of its total assets. The share Of PP&E has dropped over the period, partly because of depreciation of aging assets and it indicates that the expense of PP&E is due in the near future.`
  16. 16. Recommendation/Conclusion:  Nestle has been performing very well in comparison with competitors domestically  Nestle’s earnings performance is good. The earnings growth has been generated internally from operations.  Overall profit margin showed a slight increase but a slight decline in gross profit margin was witnessed. This was mainly due to cost pressure on some Product/  By assessing Nestle’s trend analysis, it can be estimated that Nestle’s Sales and net income will grow significantly  Favourable ROE, although it has decreased, it is still better than competitors ROE.  Nestle’s efficiency ratios are acceptable as they are quite close to the competitors  Nestle has lower earnings quality as evidenced by high accrual ratio and deviation in the growth rate of Accounts receivable and Allowance for doubtful accounts.  Nestle have increased their dependency on debt to meets its obligations and to finance its capital expenditures over the period of time.
  17. 17.  Nestle Pakistan has maintained a firm position in the Pakistani foods market with the leading position in several categories and is expected to continue its strong operations on the basis of its current and past performance. So on the basis of detailed analysis of Nestle and its favourable earnings and growth potential, I will recommend investing in Nestle’s long term Equity shares.

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