Fm project

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Fm project

  1. 1. FINANCIAL MANAGEMENT RATIO ANALYSISFOREWORDNestlé S.A. is the largest food and beverage company in the world with amanufacturing facility or office in nearly every country of the world, Nestléoften is referred to as "the most multinational of the multinationals." Nestlémarkets approximately 7,500 brands organized into the followingcategories: baby foods, breakfast cereals, chocolate and confectionery,beverages, bottled water, dairy products, ice cream, prepared foods,foodservice, and pet care.The object of this piece of paper is to present the current situation ofNestlé regarding its ratio analysis. We all have learned a lot by preparingthis project. It provides us a chance to view the practical use of ratioanalysis in market. The practical importance of this analysis is notsomething hidden or fake but it is something that can distinguish us in themarket. -1-
  2. 2. FINANCIAL MANAGEMENT RATIO ANALYSISABSTRACTThis project is divided into seven parts. The first part describes thehistorical background and some recent information about company. Thesecond part describes the de tailed view of financial ratios. The third partconsists of company’s three year financial statements (balance sheet,income statement and cash flow statement).Fourth part gives details about these financial statements. Fifth partcomprises of the theoretical framework of ratio analysis for these threeyears financial statements of the company. Sixth part provides conclusionand recommendations and last but not least is related to the summary ofthis financial ratio. 2
  3. 3. FINANCIAL MANAGEMENT RATIO ANALYSIS.ACKNOWLEDGEMENTFirst of all we are much thankful to our ALLAH, by the help of which we areable to complete our work.Secondly, we are thankful to MR. ADNAN MASOOD, Business ControllerDairy, having an experience of 10 years, and MR. IJAZ AHMAD ControlCoordinator of Supply Chain Division, having an experience of 13 years inNESTLE Pakistan Ltd. In providing every kind of information and relativematerial we needed. They treated us very well and encouraged at everystep that build up our thoughts and increase our knowledge a lot.Special attention to the thing is that only knowing about formulas doesn’tmake any sense or help out in ratio analysis but it’s all about theknowledge provided by MRS. LABIBA SHEIKH as this guided us like lightin darkness. The project presented in this manuscript is completed underthe supervision and guidance of MRS. LABIBA SHEIKH.It is a collective and cohesive effort put by all group members and providedopportunity to get together for the purpose of financial analysis.In the end we again are very thankful to corresponding persons whohelped and guided us in making this project. 3
  4. 4. FINANCIAL MANAGEMENT RATIO ANALYSIS TABLE OF CONTENTSFOREWORD..................................................................................................ABSTRACT....................................................................................................ACKNOWLEDGEMENT................................................................................ABOUT COMPANY.....................................................................................5INTRODUCTION TO RATIO ANALYSIS....................................................7THEORETICAL FRAME WORK OF RATIO ANALYSIS............................9 LIQUIDITY RATIOS.................................................................................... ACTIVITY RATIO....................................................................................... DEBT RATIOS............................................................................................ PROFITABILITY RATIOS..........................................................................CONCLUSIONS AND RECOMMENDATIONS.............................................SUMMARY.....................................................................................................APPENDIX.....................................................................................................BIBLIOGRAPHY............................................................................................Glossary………………………………………………………………………... 4
  5. 5. FINANCIAL MANAGEMENT RATIO ANALYSISThe origins of the Nestlé Company go all the wayback to 1867, when Henri Nestlé created anutritious product for infants that could be usedby mothers who were unable to breast-feed.Henri Nestlé made use of his family escutcheon,the "Nest", a graphic translation of his name,little nest, to personify the business. Evocative ofsecurity, maternity and affection, nature andnourishment, family and tradition, this symbolremains the central element in the Nestlé corporateidentity. Merchant, chemist and inventor Henri Nestlé, established in Vevey, Switzerland, makes a breakthrough when his new formula saves the life of a premature infant. Later that year, he begins production of his new product, Farine Lactée Nestlé. In the years since Nestlé developed his infant formula, the history of the Nestlé Company has been marked by many firsts.The first commercially sold infant formula; the first condensed milkproduced in Europe; the first milk chocolate; the first soluble coffee; thefirst freeze-dried coffee; the first granulated instant coffee -- to name just afew. Today, the Nestlé Company has grown and expanded to include thewidest range of wholesome foods for people throughout the world.Nestlé now produces the worlds favorite brands in 489 factoriesworldwide. In 130 years of growth and diversification, we have never lostsight of our core business: improving the quality of peoples lives throughhigh-quality, nutritious, and convenient prepared foods and beverages.Today, Nestlé brands are known on every continent, and some products --like Nescafe, Carnation and Maggi -- are sold in more than 100 countries.Nestlé, in its 129th year of operation, is the largest food company in theworld and is still based in Vevey, Switzerland. 5
  6. 6. FINANCIAL MANAGEMENT RATIO ANALYSISNestlé has been serving Pakistani consumers since 1988, when the parentcompany, the Switzerland-based Nestlé SA, first acquired a share inMilkpak Ltd. Today Nestle is fully integrated in Pakistani life, and arerecognized as producers of safe, nutritious and tasty food, and leaders indeveloping and uplifting the communities in which they operate.The first half of the 1990s proved to be a favorable time for Nestlé: tradeBarriers crumbled and world economic markets developed into a series ofMore or less integrated trading areas. The opening of Central and EasternEurope, as well as China, and a general trend towards liberalization ofdirect foreign investment was good news for a company with interests asfar-flung and diverse as Nestlé. While progress since then has not been asencouraging, the overall trends remain positive. Nestlé is looking forwardfor stronger financial position.Nestle is committed to the following Business Principles in all countries,taking into account local legislation, cultural and religious practices: • Nestles business objective is to manufacture and market the Companys products in such a way as to create value that can be sustained over the long term for shareholders, employees, consumers, and business partners. • Nestle does not favor short-term profit at the expense of successful long-term business development. • Nestle recognizes that its consumers have a sincere and legitimate interest in the behavior, beliefs and actions of the Company behind brands in which they place their trust, and that without its consumers the Company would not exist. • Nestle believes that, as a general rule, legislation is the most effective safeguard of responsible conduct, although in certain areas, additional guidance to staff in the form of voluntary business principles is beneficial in order to ensure that the highest standards are met throughout the organization. • Nestle is conscious of the fact that the success of a corporation is a reflection of the professionalism, conduct and the responsible attitude of its management and employees. Therefore recruitment of the right people and ongoing training and development are crucial. • Nestlé continues to maintain its commitment to follow and respect all applicable local laws in each of its markets. 6
  7. 7. FINANCIAL MANAGEMENT RATIO ANALYSISFinancial ratio analysis is the calculation and comparison of ratios whichare derived from the information in a companys financial statements. Thelevel and historical trends of these ratios can be used to make inferencesabout a companys financial condition, its operations and attractiveness asan investment.One of the ways in which financial statements can be put to work isthrough ratio analysis. Ratios are simply one number divided by another;as such they may or not be meaningful. In finance, ratios are usually twofinancial statement items that may be related to one another and mayprovide the prudent user a good deal of information. Of the myriad of ratiosthat could be generated, some will be more meaningful than others.Generally ratios are divided into four areas of classification that providedifferent kinds of information: 1. LIQUIDITY RATIOS 2. TURNOVER RATIOS 3. DEBT RATIOS 4. PROFITABILITY RATIOS 1. LIQUIDITY RATIOSA class of financial metrics that is used to determine a companys ability topay off its short-terms debts obligations. Generally, the higher the value ofthe ratio, the larger the margin of safety that the company possesses tocover short-term debts.A companys ability to turn short-term assets into cash to cover debts is ofthe utmost importance when creditors are seeking payment. Bankruptcyanalysts and mortgage originators frequently use the liquidity ratios todetermine whether a company will be able to continue as a going concern. 2. ACTIVITY RATIOAccounting ratios measure a firms ability to convert different accountswithin their balance sheets into cash or sales.Companies will typically try to turn their production into cash or sales asfast as possible because this will generally lead to higher revenues. 7
  8. 8. FINANCIAL MANAGEMENT RATIO ANALYSISSuch ratios are frequently used when performing fundamental analysis ondifferent companies. The asset turnover ratio and inventory turnover ratioare good examples of activity ratios.The most used activity ratios are INVENTORY TURNOVER, AVERAGECOLLECTION PERIOD, AVERAGE PAYMENT PERIOD and TOTALASSET TURNOVER. 3. DEBT RATIO A ratio that indicates what proportion of debt a company has relativeto its assets. The measure gives an idea to the leverage of the companyalong with the potential risks the company faces in terms of its debt-load.A debt ratio of greater than 1 indicates that a company has more debt thanassets; meanwhile, a debt ratio of less than 1 indicates that a companyhas more assets than debt. Used in conjunction with other measures offinancial health, the debt ratio can help investors determine a companyslevel of risk.Generally used DEBT RATIOS are DEBT RATIO and TIME INTERESTEARNED RATIO. 4. PROFITABILITY RATIOSA class of financial metrics that are used to assess a businesss ability togenerate earnings as compared to its expenses and other relevant costsincurred during a specific period of time. For most of these ratios, having ahigher value relative to a competitors ratio or the same ratio from aprevious period is indicative that the company is doing well.These are closely linked with income ratios, which shed light upon theoverall effectiveness of management regarding the returns generated onsales and investment. 8
  9. 9. FINANCIAL MANAGEMENT RATIO ANALYSISLIQUIDITY RATIOSLiquidity ratios include the current ratio and the quick ratio. Differentanalysts consider different assets to be relevant in calculating liquidity.Some analysts will calculate only the sum of cash and equivalents dividedby current liabilities because they feel that they are the most liquid assets,and would be the most likely to be used to cover short-term debts in anemergency. 1) Current ratio = Current assets / Current liabilities Current assets include cash, marketable securities, inventory, and prepaid expenses. Current liabilities includes accounts payable (1 year or less), current portions of long-term debt, and salaries payable. The current ratio measures the ability of the firm to pay is current bills while still allowing for a safety margin above their required amount needed to pay current obligationsFOR 2005: Current ratio = 3,518,718 / 4,333,228 Current ratio = 0.812FOR 2006: Current ratio = 4,627,685 / 5,224,488 Current ratio = 0.886FOR 2007: Current ratio = 5,623,823 / 5,978,522 Current ratio = 0.941 9
  10. 10. FINANCIAL MANAGEMENT RATIO ANALYSIS 2) Quick ratio = (Current Assets - Inventory) / Current Liabilities The quick ratio is similar to the current ratio but eliminates the inventory figure in the current assets section of the balance sheet. The inventory figure is thought to be the least liquid figure and should thus, be eliminated. Generally, the quick ratio should be lower than the current ratio because it eliminates the inventory figure from the calculation. For 2005: Quick ratio = (3,518,718 – 1,742,904) /4,333,228 Quick ratio = 1,775,814 / 4,333,228 Quick ratio = 0.410 For 2006: Quick ratio = (4,627,685 – 2,236,646) /5,224,488 Quick ratio = 2,391,039/5,224,488 Quick ratio = 0.458 For 2007: Quick ratio = (5,623,823 – 2,829,879)/ 5,978,522 Quick ratio = 2,793,944/5,978,522 Quick ratio = 0.467 10
  11. 11. FINANCIAL MANAGEMENT RATIO ANALYSISACTIVITY RATIO An indicator of how rapidly a firm converts various accounts into cash or sales. In general, the sooner management can convert assets into sales or cash, the more effectively the firm is being run. 1. Inventory Turnover = Cost of Goods / Total Inventory The inventory turnover ratio measures the number of times during a year that a company replaces its inventory. The turnover is only meaningful when comparing other firms in the industry or a company’s prior inventory turnover. Differences in turnover rates result from differing operating characteristics within an industry. The higher the inventory turnover rate means the more efficiently a company is able to grow sales volume For 2005: Inventory Turnover = 12,357,079/ 1,742,904 Inventory Turnover = 7.090 For 2006: Inventory Turnover = 15,778,330/2,236,646 Inventory Turnover = 7.054 For 2007: Inventory Turnover = 20,291,270/ 2,829,879 Inventory Turnover = 7.170 11
  12. 12. FINANCIAL MANAGEMENT RATIO ANALYSIS 2. Avg. collection period=Accounts Receivable/(Sales / 360 days) Total accounts receivable includes all outstanding credit obligations from customers. The sales figure includes sales for the prior four quarters of financial performance. The figure may also include amounts on a quarterly basis only. The accounts receivable period is a measure of a company’s ability to collect accounts receivable within a timely and reasonable period. The accounts collection period varies from industry to industry. The smaller the accounts receivable period, the more effectively a company is in managing and collecting money from customers. For 2005: Avg. Collection period = 865,897 / (17,142,363 / 360 days) Avg. Collection period= 865,897 / 47,617.675 Avg. Collection period= 18.18 days For 2006: Avg. Collection period = 2,109,314 / (22,030,958/360 days) Avg. Collection period = 2,109,314 / 61,197.11 Avg. Collection period = 34.47 days For 2007: Avg. Collection period = 2,022,387 / (28,235,393/360 days) Avg. Collection period = 2,022,387 / 78,431.65 Avg. Collection period = 25.79 days 12
  13. 13. FINANCIAL MANAGEMENT RATIO ANALYSIS 3. Avg. Payment Period = Accounts Payable/(Purchases/360 days) The accounts payable turnover ratio includes all outstanding obligations that a company owes its creditors. The total purchases include a percentage of sales based on historical figures. For 2005: Avg. Payment Period = 2,233,660 / (9,496,409/360) Avg. Payment Period = 2,233,660 / 26,378.91 Avg. Payment Period = 84.68 days For 2006: Avg. Payment Period = 2,296,078 / (11,676,369/360) Avg. Payment Period = 2,296,078 / 32,434.36 Avg. Payment Period = 70.79 days For 2007: Avg. Payment Period = 3,151,288 / (16,006,343/360) Avg. Payment Period = 3,151,288 / 44,462.06 Avg. Payment Period = 70.88 days 13
  14. 14. FINANCIAL MANAGEMENT RATIO ANALYSIS 4. Total Asset Turnover = Sales / Total Assets The total asset turnover is a measure of how efficiently and effectively a company uses its assets to generate sales. The higher the total asset turnover ratio, the more efficiently firm’s assets have been used. For 2005: Total Asset Turnover = 17,142,363 / 8,836,780 Total Asset Turnover = 1.94 For 2006: Total Asset Turnover = 22,030,958 / 12,927,902 Total Asset Turnover = 1.704 For 2007: Total Asset Turnover = 28,235,393 / 15,848,574 Total Asset Turnover = 1.782 14
  15. 15. FINANCIAL MANAGEMENT RATIO ANALYSISDEBT RATIOSDebt ratios measure the total amount and proportion of debt within theliabilities section of a firm’s balance sheet. These figures are normallyappropriate for comparing a company performance from one period toanother. a) Debt Ratio = Total Liabilities / Total Assets The debt ratio is calculated by dividing the total liabilities by total assets. The higher this ratio, the greater the degree of outside financing by creditors. It indicates that the firm is more highly leveraged (debt) and highly risky for creditors. For 2005: Debt Ratio = 6,881,733 / 8,836,780 Debt Ratio = 77.88% For 2006: Debt Ratio = 10,396,822 / 12,927,902 Debt Ratio = 80.42% For 2007: Debt Ratio = 11,736,869 / 15,848,574 Debt Ratio = 74.06% 15
  16. 16. FINANCIAL MANAGEMENT RATIO ANALYSIS b) Times Interest Earned = EBIT / Interest Times interest earned ratio measures the ability of the firm to service all debts. The figure will indicate how many times a company can cover its fixed contractual obligations to its creditors. The higher the times interest earned ratio, the more likely the firm can meet its obligations. The figure is determined from the income statement by finding the operating profit margin. The operating profit margin is the profits of the firm before interest and taxes are subtracted. The interest figure is the interest obligations for the prior four quarters of financial performance from the use of long term debt funds. For 2005: Times Interest Earned = 2,114,085 / 180,108 Times Interest Earned = 11.74 For 2006: Times Interest Earned = 2,640,418 / 447,774 Times Interest Earned = 5.90 For 2007: Times Interest Earned = 3, 511,145 / 584,434 Times Interest Earned = 6.01 16
  17. 17. FINANCIAL MANAGEMENT RATIO ANALYSISPROFITABILITY RATIOSThe profitability figures measure the ability of the business firm to earn aprofit from its operations through assets, sales, and equity. a. Gross Profit Margin = ( Sales - Cost of Goods Sold )/ Sales The gross profit margin indicates the percentage of each sales dollar remaining after a firm has paid for its goods. The higher the GPM the better pricing flexibility and cost management controls a firm has in its operations For 2005: Gross Profit Margin = (17,142,863 – 12,357,079)/17,142,863 Gross Profit Margin = 4,785,784 / 17,142,863 Gross Profit Margin = 27.92% For 2006: Gross Profit Margin = (22,030,958 – 15,778,330)/22,030,958 Gross Profit Margin = 6,252,628 / 22,030,958 Gross Profit Margin = 28.38% For 2007: Gross Profit Margin = (28,235,393 – 20,291,270)/28,235,393 Gross Profit Margin = 7,944,123 / 28,235,393 Gross Profit Margin = 28.14% 17
  18. 18. FINANCIAL MANAGEMENT RATIO ANALYSIS b. Operating Profit Margin = Operating Profits / Sales The operating profit margin indicates the profits of the company before interest and taxes are deducted from firms operations. The higher the operating profit margin, the greater pricing flexibility a firm has in its operations. However, it could also indicate the degree of cost control management a firm possesses. For 2005: Operating Profit Margin = 2,114,085 / 17,142,863 Operating Profit Margin = 12.33% For 2006: Operating Profit Margin = 2,640,418 / 22,030,958 Operating Profit Margin = 11.99% For 2007: Operating Profit Margin = 3,511,145 / 28,235,393 Operating Profit Margin = 12.44% 18
  19. 19. FINANCIAL MANAGEMENT RATIO ANALYSISRatio Formula 2006 2007 2008 GUL AHMAD AL KARAMLIQUIDITY 2008 2008CURRENT RATIO CURRENT ASSETS/ 0.941 0.855 CURRENT LIABILITIESQUICK RATIO (CURRENT 0.467 0.387 ASSETS- INVENTORY) / CURRENT LIABILITIESACTIVITYINVENTORY COST OF GOODS 7.170 13.917TURNOVER SOLD / INVENTORYTOTAL ASSET SALES / TOTAL 1.782 2.515TURNOVER ASSETSDEBTDEBT RATIO TOTAL 74.06% 78.0% LIABILITIES/ TOTAL ASSETSTIMES INTEREST EBIT / INTEREST 5.897 6.421EARNED RATIOPROFITABILITYGROSS PROFIT GROSS PROFIT / 28.38% 7.40%MARGIN SALESOPERATING OPERATING 12.44% 7.30%PROFIT MARGIN PROFIT / SALES 19
  20. 20. FINANCIAL MANAGEMENT RATIO ANALYSISNET PROFIT EARNINGS 6.39% 4.40%MARGIN AVAILBLE FOR COMMON STOCKHOLDERS EQUITY / SALESEARNINGS PER EARNINGS 39.81 24.53SHARE AVAILBLE FOR COMMON STOCKHOLDERS EQUITY/ NO. OF SHARES OF COMMON STOCK OUTSTANDINGRETURN ON EARNINGS 11.39% 11.0%TOTAL ASSETS AVAILBLE FOR COMMON STOCKHOLDERS EQUITY / TOTAL ASSETSRETURN ON EARNINGS 43.90% 41.20%COMMON EQUITY AVAILBLE FOR COMMON STOCKHOLDERS EQUITY / COMMON STOCK EQUITY 20
  21. 21. FINANCIAL MANAGEMENT RATIO ANALYSIS c. Net Profit Margin = Net Profits /Sales The net profit margin measures the amount of profits available to shareholders after interest and taxes have been deducted on the income statement. The higher the profit margin, the more pricing flexibility a firm may have in its operations or the greater cost control initiated by management. For 2005: Net Profit Margin = 1,148,722 / 17,142,863 Net Profit Margin = 6.7% For 2006: Net Profit Margin = 1,363,290 / 22,030,958 Net Profit Margin = 6.19% For 2007: Net Profit Margin = 1,805,212 / 28,235,393 Net Profit Margin = 6.39% 21
  22. 22. FINANCIAL MANAGEMENT RATIO ANALYSIS d. Earnings per share(EPS) The earnings per share measures the per share dollar return to owners of a company. EPS= earnings available for common stockholders equity / number of shares of common stock outstanding For 2005: EPS= 1,148,722 / 45,350 EPS= Rs. 25.33 For 2006: EPS= 1,363,290 / 22,030,958 EPS= Rs. 30.06 For 2007: EPS= 1,805,212 / 45,350 EPS= Rs, 39.81 22
  23. 23. FINANCIAL MANAGEMENT RATIO ANALYSIS e. RETURN ON TOTAL ASSETS(ROA) Return on total assets shows that how much the firm is performing well in generating profits with its available assets. ROA= earnings available for common stockholders equity / Total assets For 2005: ROA= 1,148,722 / 8,836,780 ROA= 13% For 2006: ROA= 1,363,290 / 12,927, 902 ROA= 10.55% For 2007: ROA= 1,805,212 / 15,848,574 ROA= 11.39% 23
  24. 24. FINANCIAL MANAGEMENT RATIO ANALYSIS f. RETURN ON COMMON EQUITY(ROE) The return on equity measures the return earned on the owners’ equity in the firm. The higher the rate the better the firm has increased wealth to shareholders. ROE= earnings available for common stockholders equity / Common stock equity For 2005: ROE= 1,148,722 / 1,957,047 ROE= 58.70% For 2006: ROE= 1,363,290 / 2,531,080 ROE= 53.86% For 2007: ROE= 1,805,212 / 4,111,705 ROE= 43.90% 24
  25. 25. FINANCIAL MANAGEMENT RATIO ANALYSISConclusions and recommendationsCompany has the current ratio of 0.812 in 2005, 0.886 in 2006, and 0.941in 2007 that is not a good ratio as a current ratio of at least 2.0 is citedacceptable in manufacturing firms. So it shows that firm is not able to payits short term obligations as they come due.Company’s quick ratio is 0.410 for 2005, 0.458 for 2006, and 0.467 for2007 that is not good because the quick ratio of 1.0 is acceptable inmanufacturing firms. As quick ratio provides a better measure of overallliquidity only when a firm’s inventory cannot be easily converted into cash.So it shows that company is not in good condition to pay its short termobligations.Company’s inventory turnover is 7.090 for 2005, 7.054 for 2006 and 7.170for 2007. As inventory turnover shows the liquidity of firm’s inventory andso is compared in the same industry or with firms past inventory turnover.In this ratio Analysis Company has maximum inventory turnover in 2007Average collection period of firm for 2005 is 18.18 days, for 2006 is 34.47days and for 2007 is 25.79 days. The average collection period ismeaningful only in relation to the firm’s credit terms. If the firm’s credit termis greater than average collection period then that average collectionperiod will be acceptable.Firm’s average payment period for 2005, 2006 and 2007 are 84.68, 70.79and 70.88 days respectively. This figure is meaningful only in relation tothe average credit terms extended to the firm. A good average paymentperiod should be less than the average credit terms extended.The total assets turnover of the firms for 2005 is 1.94, for 2006 is 1.704and for 2007 is 1.782. Total assets turnover shows that how muchefficiently firm is using its assets. The given figures show that companyturnover its assets 1.94 times in 2005, 1.704 times in 2006 and 1.782times in 2007.Company’s debt ratio for 2005, 2006 and 2007 are 77.88%, 80.42% and74.06% respectively. It means that firm has financed its 77.88% assets bydebt in 2005, and 80.42 % assets in 2006 and 74.06% in 2007 as these 25
  26. 26. FINANCIAL MANAGEMENT RATIO ANALYSISratios are high so they shows the firm’s degree of indebtedness and themore financial leverage it has.Gross profit margin of firm for 2005, 2006 and 2007 are 27.92%, 28.38%and 28.14% respectively. The firm has higher gross profit in 2006. Thehigher gross profit margin is better as it shows the lower relative cost ofmerchandise sold.Company’s operating profit margins for 2005, 2006 and 2007 are 12.33%,11.99% and 12.44% respectively. Operating profit margin shoes the “pureprofits” that is profits without interest, taxes and preferred stock dividends.The firm has high operating profit in 2007 that is not a good indicator offirm’s position.Net profit margin of firm for 2005 is 6.701%, for 2006 is 6.19% and for2007 is 6.39%. The high net profit margin is better as it shows thepercentage of each sales dollar remain after all costs and expensiveincluded interest, taxes and preferred stock dividends has been deducted.The firm’s net profit margin is not s good and the maximum net profitmargin is 6.701% in last three years. Firm has earned earnings per share for 2005, 2006 and 2007 Rs. 25.33,Rs. 30.06 and Rs. 39.81 respectively. Which shows the amount in rupeesthat is earned on each outstanding share of common stock equity. Thefirms EPS is improving as shown from the figures. Higher EPS cause inattracting new peoples to invest in the company.Return on total assets of firm is 13%, 10.55% and 11.39% for 2005, 2006and 2007 respectively. This shows that the firm has earned 13%, 10.55%and 11.39% in respective years on each rupee of asset investment. Thefirm is not performing well in generating profits with its available assets.Return on equity of firm is 58.7%, 53.86% and 43.90% for 2005, 2006 and2007 respectively. It indicates that how much firms earned on its eachrupee of common stockholder’s investment. This ratio is decreasing fromlast three years. The higher the ratio, the better off is the owners. 26
  27. 27. FINANCIAL MANAGEMENT RATIO ANALYSISRatio Formula 2005 2006 2007LIQUIDITYCURRENT RATIO CURRENT ASSETS/ 0.812 0.886 0.941 CURRENT LIABILITIESQUICK RATIO (CURRENT 0.410 0.458 0.467 ASSETS- INVENTORY) / CURRENT LIABILITIESACTIVITYINVENTORY COST OF GOODS 7.090 7.054 7.170TURNOVER SOLD / INVENTORYAVERAGE ACCOUNTS 18.18 DAYS 34.47 DAYS 25.79 DAYSCOLLECTION RECEIVABLE /PERIOD AVERAGE SALES PER DAYAVERGE ACCOUNTS 84.68 days 70.79DAYS 70.88DAYSPAYMENT PAYABLE /PERIOD AVERAGE PURCHASE PER DAYTOTAL ASSET SALES / TOTAL 1.94 1.704 1.782TURNOVER ASSETSDEBTDEBT RATIO TOTAL 77.88% 80.42% 74.06% LIABILITIES/ TOTAL ASSETSTIMES INTEREST EBIT / INTEREST 11.74 6.01 5.897EARNED RATIOPROFITABILITYGROSS PROFIT GROSS PROFIT / 27.92% 28.14% 28.38MARGIN SALESOPERATING OPERATING 12.33% 11.99% 12.44%PROFIT MARGIN PROFIT / SALES 27
  28. 28. FINANCIAL MANAGEMENT RATIO ANALYSISNET PROFIT EARNINGS 6.701% 6.19% 6.39%MARGIN AVAILBLE FOR COMMON STOCKHOLDERS EQUITY / SALESEARNINGS PER EARNINGS 25.33 30.06 39.81SHARE AVAILBLE FOR COMMON STOCKHOLDERS EQUITY/ NO. OF SHARES OF COMMON STOCK OUTSTANDINGRETURN ON EARNINGS 13% 10.55% 11.39%TOTAL ASSETS AVAILBLE FOR COMMON STOCKHOLDERS EQUITY / TOTAL ASSETSRETURN ON EARNINGS 58.70% 53.86% 43.90%COMMON EQUITY AVAILBLE FOR COMMON STOCKHOLDERS EQUITY / COMMON STOCK EQUITY 28
  29. 29. FINANCIAL MANAGEMENT RATIO ANALYSISNESTLE PAK LTD.BALANCE SHEETAs at 31 December 2007 Equity and liabilities Share capital and reserves (rupees in ‘000’)Authorized capital75,000,000 (2006: 75,000,000) ordinary shares of Rs. 10 750,000eachIssued, subscribed and paid up capital 453,496Share premium 249,527General reserve 280,000Accumulated profit 3,128,682Non-current liabilitiesLong term finances 4,028,700Deferred taxation 1,371,675Retirement benefits 238,370Liabilities against assets subject to finance lease 119,602 5,758,347Current liabilitiesCurrent portion of: Long term finances - Liabilities against assets subject to finance lease 29,863Short term borrowings – secured 1,035,000Short term running finance under mark-up arrangements 1,637,799– securedCustomer security deposits - interest free 124,572Trade and other payables 3,062,027Interest and mark-up accrued 89,261 5,978,522Contingencies and commitmentTotal 15,848,574 29
  30. 30. FINANCIAL MANAGEMENT RATIO ANALYSIS ASSETS Tangible Fixed Assets (Rupees in ‘000’)Property, plant and equipment 9,074,428Capital work-in-progress 971,183 10,045,611Intangible assets 92,382Long term loans and advances 80,670Long term security depositsCurrent assetsStores and spares 436,573Stock in trade 2,393,30Trade debts 6 344,053Current portion of long term loans and advances 21,279Advances, deposits, prepayments and other receivables 2,022,38Cash and bank balances 7 406,225 5,623,823 30
  31. 31. FINANCIAL MANAGEMENT RATIO ANALYSIS NESTLE PAK LTD. PROFIT AND LOSS STATEMENT For the year ended December 31, 2007 (Rupees in ‘000’)Sales – net 28,235,393Cost of goods sold (20,291,270)Gross profit 7,944,123 (3,538,669)Distribution and selling expensesAdministration expenses (894,309)Operating profit 3,511,145Finance cost (584,434)Other operating expenses (442,914) (1,027,348)Other operating income 65,959Profit before taxation 2,549,756 (744,544)TaxationProfit after taxation 1,805,212Earnings per share - basic and diluted (Rupees) 39.81 NESTLE PAK LTD. Cash FLOW STATEMENT 31
  32. 32. FINANCIAL MANAGEMENT RATIO ANALYSIS For the month ended December 31, 2007 (Rupees in ‘000’)Cash generated from operations 4,534,010(Increase) in long term security deposits -(Increase) in long term loans and advances (27,170)Retirement benefits paid (74,690)Finance cost paid (593,722)Taxes paid (234,803)Net cash generated from operating activities 3,603,625Cash flow from investing activitiesFixed capital expenditure (2,909,391)Sale proceeds of property, plant and equipment 67,321Net cash used in investing activities (2,842,070)Cash flow from financing activitiesReceipt of long term finances -Repayment of long term finances (300,000)Net movement in short term borrowings – secured 335,000Payment of finance lease liabilities (18,333)Dividend paid (226,748)Net cash (used in)/generated from financing activities (210,081)Net increase/(decrease) in cash and cash equivalents 551,474Cash and cash equivalents at the begging of the year (1,783,048)Cash and cash equivalents at the end of the year (1,231,574) NESTLE PAK LTD. BALANCE SHEET 32
  33. 33. FINANCIAL MANAGEMENT RATIO ANALYSIS For the moth ended December 31, 2006 Equity and liabilities Share capital and reserves (rupees in ‘000’) Authorized capital 75,000,000 (2006: 75,000,000) ordinary shares of Rs. 10 750,000 Issued, subscribed and paid up capital 453,496 Share premium 249,527 General reserve 280,000 Accumulated profit 1,548,057 2,531,080 Non-current liabilities Long term finances 3,963,700 Deferred taxation 942,858 Retirement benefits 234,305 Liabilities against assets subject to finance lease 31,471 5,172,334 Current liabilities Current portion of: Long term finances 300,000 Liabilities against assets subject to finance lease 8,392 Short term borrowings – secured 700,000 Short term running finance under mark-up arrangements – 1,817,711 secured security deposits - interest free Customer 102,307 Trade and other payables 2,197,529 Interest and mark-up accrued 98,549 5,224,488 Contingencies and commitment Total 12,927,902 3304
  34. 34. FINANCIAL MANAGEMENT RATIO ANALYSIS ASSETS Tangible Fixed Assets (Rupees in ‘000’) 6,986,049Property, plant and equipment 1,107,052Capital work-in-progressIntangible assets 8,093,101Long term loans and advances 135,020Long term security deposits 66,008Current assetStores and spares 329,346Stock in trade 1,907,300Trade debts 238,291Current portion of long term loans and advances 8,771Advances, deposits, prepayments and other receivables 2,109,314Cash and bank balances 34,663 4,627,685 34
  35. 35. FINANCIAL MANAGEMENT RATIO ANALYSIS NESTLE PAK LTD INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2006 Note (Rupees in ‘000’)Sales – net 22,030,958Cost of goods sold (15,778,330)Gross profit 6,252,628Distribution and selling expenses (2,925,118)Administration expenses (687,092)operating profit 2,640,418Finance cost (447,774)Other operating expenses (245,150) (692,924)Other operating income 57,961Profit before taxation 2,005,455Taxation (642,165)Profit after taxation 1,363,290Earnings per share - basic and diluted (Rupees) 30.06 35
  36. 36. FINANCIAL MANAGEMENT RATIO ANALYSIS NESTLE PAK LTD. Cash FLOW STATEMENT For the month ended December 31, 2006 (Rupees in’000’)Cash generated from operations 1,619,014(Increase) in long term security deposits (750)(Increase) in long term loans and advances (23,464)Retirement benefits paid (69,295)Finance cost paid (394,483)Taxes paid (484,975)Net cash generated from operating activities 646,047Cash flow from investing activities:Fixed capital expenditure (3,584,428)Sale proceeds of property, plant and equipment 63,512Net cash used in investing activities (3,520,916)Cash flow from financing activities:Receipt of long term finances 3,066,850Repayment of long term finances (1,150,000)Net movement in short term borrowings – secured 575,000Payment of finance lease liabilities (5,213)Dividend paid (1,132,770)Net cash (used 1,353,867in)/generated fromfinancing activitiesNet increase/(decrease) in cash and cash equivalents (1,521,002)Cash and cash equivalents at the begging of the year (262,046)Cash and cash equivalents at the end of the year (1,783,048) 36
  37. 37. FINANCIAL MANAGEMENT RATIO ANALYSISNESTLE PAK LTD.BALANCE SHEETFor the moth ended December 31, 2005 Equity and liabilities Share capital and reserves (rupees in ‘000’) Current liabilities: Trade and other payables 11,117 Liabilities directly associated with Assets held for sale 38 Financial liabilities 18,805 Tax liabilities 705 Derivative liabilities 922 Accruals and deferred income 4,231 Total current liabilities 35 Non-current liabilities: Financial liabilities 8,153 Employee benefits liabilities 3,794 Deferred tax liabilities 665 Other payables 185 Provisions 3,347 1 Total non-current liabilities 6,144 Total liabilities Equity Share capital 404 37
  38. 38. FINANCIAL MANAGEMENT RATIO ANALYSISShare premium 5 926Reserve for treasury shares 2 616Translation reserve (3 984)Retained earnings 47 655 52,213Treasury shares (2770)Total equity attributable to the Group 49,847Minority interests 1588Total equity 51,435Total liabilities and equity 103,397 38
  39. 39. FINANCIAL MANAGEMENT RATIO ANALYSISAssets (rupees in 000)Current assetsLiquid assets Cash and cash equivalents 4658 Other liquid assets 12,735 17, 393Trade and other receivables 14, 291Assets held for sale 633Inventories 8, 162Derivative assets 645Prepayments and accrued income 641 24, 372Total current assets 41765Non-current assetsProperty, plant and equipment Gross value 44,976 Accumulated depreciation and (26,142) impairment 18, 834Investments in associates 7, 073Deferred tax assets (a) 1, 697Financial assets 2, 513Employee benefits assets 1, 673Goodwill 26, 990Intangible assets 2, 852Total non-current assets (a) 61, 632Total assets (a) 103,397 39
  40. 40. FINANCIAL MANAGEMENT RATIO ANALYSISNESTLE PAK LTDINCOME STATEMENTFOR THE YEAR ENDED DECEMBER 31, 2005 2005Sales – net 17,142,363Cost of goods sold (12,354,618)Gross profit 4,787,745Distribution and selling expenses (2,090,469)Administration expenses (576,715)Operating profit 2,120,561Finance cost (180,108)Other operating expenses (356,528) (536,636)Other operating income 53,151Profit before taxation 1,637,076Taxation (484,145)Profit after taxation 1,152,931 25.42Earnings per share - basic and diluted (Rupees) 40
  41. 41. FINANCIAL MANAGEMENT RATIO ANALYSISNESTLE PAK LTD.CASH FLOW STATEMENTFOR THE YEAR ENDED DECEMBER 31, 2005 (Rupees in 000)Cash flow from operating activitiesCash generated from operations 3,755,450(Increase)/decrease in long term security deposits 659(Increase) in long term loans and advances (27,992)Retirement and other benefits paid (81,911)Finance cost paid (147,720)Taxes paid (582,411)Net cash generated from operating activities 2,916,075Cash flow from investing activitiesFixed capital expenditure (2,766,273)Sale proceeds of property, plant and equipment 4,622Net cash used in investing activities (2,761,651)Cash flow from financing activitiesReceipt of long term finances 896,850Repayment of long term finances (200,000)Net movement in short term borrowings – secured 125,000Payment of finance lease liabilities (115)Dividend paid (226,346)Net cash generated from financing activities 595,389Net (decrease)/increase in cash and cashequivalents 749,813Cash and cash equivalents at beginning of the year (1,011,859)Cash and cash equivalents at end of the year (262,046) 41
  42. 42. FINANCIAL MANAGEMENT RATIO ANALYSIS 1) www.Nestle.Pk 2) Lawrence j. gitman (2006), principles of managerial finance 3) http://en.wikipedia.org/wiki/Financial_ratio 4) http://www.finpipe.com 5) http://www.winne.com 6) Addison Wesley (New York City Of Publishing), 11th Edition, Financial Management 7) http://www.financialregulator.com 42
  43. 43. FINANCIAL MANAGEMENT RATIO ANALYSISAAccounts receivable: Amounts of money owed to a firm by customers who havebought goods or services on credit. A current asset, the accounts receivableaccount is also called receivables.Accrued expenses: Amounts owed but not yet paid for wages, taxes, interest,and dividends. The accrued expenses account is a short-term liability.Acid-test (quick) ratio: Current assets less inventories divided by currentliabilities. It shows a firms ability to meet current liabilities with its most liquid(quick) assets.Activity ratios: Ratios that measure how effectively the firm is using its assets.BBalance sheet: A summary of a firms financial position on a given date thatshows total assets = total liabilities + owners equity.CCapital structure: The mix (or proportion) of a firms permanent long-termfinancing represented by debt, preferred stock, and common stock equity.Cash insolvency: Inability to pay obligations as they fall due.Common-size analysis: An analysis of percentage financial statements whereall balance sheet items are divided by total assets and all income statementitems are divided by net sales or revenues.Common stock: Securities that represent the ultimate ownership (and risk)position in a corporation.Credit period: The total length of time over which credit is extended to acustomer to pay a bill.Current ratio: Current assets divided by current liabilities. It shows a firms abilityto cover its current liabilities with its current assets.D 43
  44. 44. FINANCIAL MANAGEMENT RATIO ANALYSISDebt ratios: Ratios that show the extent to which the firm is financed by debt.Depreciation : The systematic allocation of the cost of a capital asset over aperiod of time for financial reporting purposes, tax purposes, or both.EEarnings per share (EPS): Earnings after taxes (EAT) divided by the number ofcommon shares outstanding.FFinancial ratio: An index that relates two accounting numbers and is obtainedby dividing one number by the other.Financial (statement) analysis: The art of transforming data from financialstatements into information that is useful for informed decision making.IIncome statement: A summary of a firms revenues and expenses over aspecified period, ending with net income or loss for the period.Interest: Money paid (earned) for the use of money.Interest coverage ratio: Earnings before interest and taxes divided by interestcharges. It indicates a firms ability to cover interest charges. It is also calledVerdana interest earned.LLiquidation: The sale of assets of a firm, either voluntarily or in bankruptcy.Liquidation value: The amount of money that could be realized if an asset or agroup of assets (e.g., a firm) is sold separately from its operating organization.Liquidity: The ability of an asset to be converted into cash without a significantprice concession.Liquidity ratios: Ratios that measure a firms ability to meet short-termobligations.MMarket value: The market price at which an asset trades. 44
  45. 45. FINANCIAL MANAGEMENT RATIO ANALYSISPPreferred stock: A type of stock that promises a (usually) fixed dividend but atthe discretion of the board of directors. It has preference over common stock inthe payment of dividends and claims on assetsPrice/earnings (P/E) ratio: The market price per share of a firms commonstock divided by the most recent 12 months of earnings per share; also known asa trailing P/E ratio.Profitability ratios: Ratios that relate profits to sales and investment.SSafety stock: Inventory stock held in reserve as a cushion against uncertaindemand (or usage) and replenishment lead time.Shareholders equity: Total assets minus total liabilities. Alternatively, the bookvalue of a companys common stock (at par) plus additional paid-in capital andretained earnings.Simple interest: Interest paid (earned) on only the original amount, or principal,borrowed (lent).Stakeholders: All constituencies with a stake in the fortunes of the company.They include shareholders, creditors, customers, employees, suppliers, and localcommunities.Statement of cash flows: A summary of a firms cash receipts and cashpayments during a period of time.Stock dividend: A payment of additional shares of stock to shareholders. Oftenused in place of or in addition to a cash dividend.TTreasury bills (T-bills): Short-term, non-interest bearing obligations of the USTreasury issued at a discount and redeemed at maturity for full face value 45
  46. 46. FINANCIAL MANAGEMENT RATIO ANALYSIS 46

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