Nestle S.A.

Running Head: NESTLE S.A. (NSRGY)
Nestlé S.A. (NSRGY)
Lynn University
Estelle Cornu

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Introduction
Nestlé S.A. is a Swiss company that provides nutrition, health, and wellness products
worldwide. The company that operates through six segments –Zone Europe; Zone Americas;
Zone Asia, Oceania and Africa; Nestle Waters; Nestle Nutrition; and, Other Businesses-
manufactures and markets a wide range of food and beverage products, including milk,
chocolate and confectionery, cereals, bottled water, coffee, baby foods, pharmaceuticals.
Nestlé's was founded in 1866 and is headquartered in Vevey, Switzerland.
This project aims to analyze the financial health of Nestlé S.A., considering first the
global environment and risks of the company, and then examining its performance against
that of Unilever. The outcome of this financial analysis is to determine whether the
company’s stock should be bought or sold.
Environmental Scan
Nestlé S.A., a multinational packaged food company, falls under the food and
beverages industry. To understand the environment within which Nestlé operates, I will
conduct an environmental scan based on the following factors.
 Political/ Legal
The political and legal environment is characterized by laws and regulations
(consumer laws, health and safety laws, etc.) that influence the way businesses operate. In the
food and beverages industry, corporations have to comply with laws and regulations of their
home country as well as the countries they do business in. Nestlé that operates and sales its
products in over hundred countries must adapt to the different laws and regulations of each
nation in order to build good standing relationship with the government –and have growth
opportunities. In addition, food and beverage companies must be aware of health and safety
legislations, commercial standards and consumer protection laws. Regarding product safety,
the law provides for accurate labelling and advertising, and food import regulations. Also,

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quality control is of great political importance. Specifically, the quality of Nestlé products
should be the same in every country the company is. The Nestlé seal of guarantee reflects the
company’s “quality” commitment to its customers –a guarantee for safety and reliability.
 Economical
Economic factors such as economic growth, inflation, interest rates, exchange rates
and consumer confidence directly impact on the business strategies and decisions-making
processes. Depending on the country, economic growth may be more or less important,
influencing company’s profits. The multinational Nestlé highly benefits from the rapid
economic growth and improvement of investment environment in developing countries. When
entering a new market or launching a new product, the company needs to consider consumers’
income level and purchasing power in order to adjust its offer to the region (product-quality
and price). Similarly, the company needs to understand the specific country’s rates in
employment, inflation, and exchange to determine whether it can maximize profits –
considering employment costs, currency exchanges, and taxes.
Overall, Nestlé’s sustainable strategy is to increase the world’s access to higher quality
food, while contributing to social and economic development, and preserving the environment
for future generations.
 Sociocultural
The sociocultural environment includes demography, traditions, religions and
aesthetics, consumer living, diet habits, etc. In today’s society, the food and beverages
industry is subject to changes in consumers’ lifestyle. Consumers are more likely to accept
new, different products –the more alternatives they have in a same industry, the less they are
loyal to particular brands. As a multinational company, Nestlé manufactures and markets
products specifically suited towards the regions, with brands marketed to certain
demographics. Nestlé food/beverages products are thus adapted to local consumer tastes,

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following the different cultures, geographies, needs, flavors and habits of people. In addition,
growing consumer trends towards a healthier life forced food and beverages companies to
rethink about their offerings. Health conscious consumers are pickier about the products,
looking for the healthier option. Nestlé is probably the best example company for nutrition,
health and wellness, providing healthier food and beverages substitutes.
 Technological
Nowadays, the technological environment influences how companies do business,
presenting many potential opportunities and threats. On one hand, advanced technologies
offer new product lines, product improvement and new marketing promotion strategies (e.g.
e-commerce). With a large R&D network, Nestlé has the opportunity to gather all resource
available in its country operations so as to satisfy different people’s needs. As a vital part of
Nestlé R&D, new technologies and processes allow the company to develop safe, nutritious
foods and beverages. Advance in science also allows the company to improve its products
such as Milo, the chocolate malt beverage brand, benefitting now from a healthier formula.
On the other hand, technology can be a threat for businesses since websites, social media and
mobile apps give consumers more insights into food and beverages products (e.g. product
research, price comparison). And, online consumers’ opinion may be as harmful as beneficial
for companies. However, Nestlé may use these technological tools to promote its different
brands and products.
 Natural Environment
The natural environment relates to factors such as weather conditions, natural
disasters, climate change and health hazard, all of which affect businesses’ operations. To
limit adverse effects, food and beverages companies are gradually reducing their
environmental impacts, shifting towards socially responsible behaviors. Nestlé, the world’s
largest food company, is committed to sustainable development and environmentally

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responsible business practices. To improve its environmental performance, Nestlé has adopted
a life-cycle assessment approach (from resources through packaging to products). The
company is committed to improve resource efficiency, that is, produce more using less
resources and waste –preserving natural resources. For instance, Nestlé first achieved zero
waste for disposal in 2013 and also, reduced energy consumption per tonne of product by
26% since 2005. To prevent food waste, guarantee quality and inform consumers, the
company is committed to improve the environmental performance of its packaging, using
renewable resources and recycled materials. Likewise, Nestlé is committed to assess and
optimize the environmental impact of its products, eco-design products and agricultural raw
materials. In addition, the company is committed to provide climate change leadership
through different initiatives, including responsible water stewardship; switching to cleaner
fuels; optimizing distribution networks; and, adapting agricultural and production systems to
the changing climate. Also, Nestlé strives to preserve natural capital (including forests) and,
provide meaningful and accurate environmental information to raise people awareness.
 Competitive Forces
Competitive forces shape the industry, and influence the competitive position of the
company in its industry or market. The business environment in which Nestle operates is
highly competitive, since the company competes against some mastodons of the food and
beverages industry. Nestlé’s rivals are PepsiCo Inc., Kraft Foods Group Inc., Unilever, Mars
Incorporated and Danone S.A. However, Nestlé presents distinctive brands and –healthier-
products, which strengthens its position in its industry. The threat of substitutes is
particularly high in the food and beverages industry since companies offer a wide range of
products that compete with one another (alternatives to daily use products). Lot of Nestlé’s
products can be easily interchangeable such as bottled water. To differentiate itself, the
company must constantly innovate its products, while emphasizing health and wellness

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factors. In this industry, suppliers bargaining power is relatively limited given that
companies, particularly multinationals, have different alternatives to select their suppliers.
Nestlé has strong relationships with its suppliers worldwide, due to its important buying
power and high commitment to quality products. The company works closely with its
suppliers to ensure efficiency, and compliance with Nestlé’s quality standard. Customers
bargaining power is generally weak in the food and beverages industry due to the fact that
consumers are highly fragmented. In the case of Nestlé, however, customers bargaining power
is important regarding the consumption of Nestlé products. Those consumers have very
influential choices, preferring Nestlé products for the quality and healthy benefits. The
company clearly understands consumer needs, introducing “health and wellness” products in
all of its markets. The threat of new entrants is rather low for big companies such has Nestlé
Established since 1866, the company acquired lot of experience in the food and beverages
industry –benefiting now from strong brand equity and customer loyalty. Undoubtedly, new
entrants have low chance to survive due to high cost of business, experienced companies,
supplier and customer loyalty.
Risk Analysis
Nestlé needs to consider a wide range of risks when conducting its operations around
the world. To do so, the Nestlé Group has developed the Enterprise Risk Management (ERM)
process to identify, assess and manage risks that may affect the company. The following are
Nestlé’s potential risks and their impact on its business.
As a giant in its industry, Nestlé particularly needs to care about its brand reputation
and understand consumers’ needs to fully satisfy them. Although Nestlé strives to provide
high-quality products, any event related to serious food safety or other compliance issue will
affect Nestlé’s reputation and brand image. To avoid such situation, the company has
implemented policies, processes, controls and regular monitoring. Likewise, the Nestlé

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Group’s business is subject to seasonality and adverse weather conditions may influence
sales. In addition, one major concern facing the food and beverages industry is obesity. To
help offset this problem, Nestlé products are available in different sizes and varieties designed
to meet all needs and occasions.
As a sustainable company, Nestlé may face circumstances beyond its control. Indeed,
the company heavily relies on the sustainable of raw materials, packaging materials and
services/ utilities. Thus, any natural hazards event or change in macroeconomic environment,
resulting in input price volatilities and/or capacity constraints, could affect Nestlé’s financial
results. Similarly, the company is dependent on sustainable manufacturing/supply of finished
goods for all product categories. Unexpected events in a Nestlé’s key plants, at a key supplier,
contract manufacturer, co-packer, or warehouse facility could disrupt the supply chain and
thus, impact Nestlé’s financial results. Moreover, Nestlé Group considers risks related to
climate change given the impact that it may have on agriculture and food production systems.
As a global company operating in 197 countries, the Nestlé Group needs to consider
all the risks that may influence the company’s ability to do business in a country or region,
such as security, political instability, legal and regulatory, fiscal, macroeconomic, foreign
trade, labor and infrastructure risks. In every country where it operates, Nestlé is subject to
environmental regimes, and so must comply with the environmental protection legislation –
including, the use of natural resources, release of air emissions and waste water, and the
generation, storage, handling, transportation, treatment and disposal of waste materials. The
Group is also subject to health and safety regimes, and so must comply with legislations
related to the protection of the health and welfare of employees and contractors.
In the course of its business, Nestlé is exposed to financial market risks. In the event
of financial market disruption, the company’s liquidities/liabilities (currency fluctuation,

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interest rate, derivatives, and/or hedging, pension funding obligations/retirement benefits,
banking/commercial credit, and cost of capital, etc.) may be affected.
Financial Ratio Analysis
The financial ratio analysis for Nestlé S.A. is based on the information contained in
the company’s 2014 financial statements. In order to evaluate the different aspects of Nestlé’s
operating and financial performance, I will compare the Group’s ratios with those of Unilever.
 Liquidity Ratio
Nestlé S.A. Unilever N.V.
Current Ratio=
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
33,961
32,895
= 1.03
12,347
19,642
= 0.63
Quick Ratio=
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔−𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒊𝒆𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
33,961−9,172
32,895
= 0.75
12,347−4,168
19,642
= 0.42
Liquidity ratios measure the company’s ability to provide sufficient cash to conduct
business. At year-end 2014, Nestlé’s current ratio is 1.03, and its quick ratio is 0.75. With a
current ratio of 1, the company has just enough assets to meet its short-term obligations. With
a quick ratio of 0.75, the company may have difficulty meeting its current liabilities out of its
cash and proceeds. Nevertheless, the liquidity ratios of Nestlé are well above those of
Unilever, meaning that the Group is financially in a better position.
 Asset Management Ratios
Asset management ratios help determine how effectively the company is allocating its
resources as compared to another company in its industry. The following presents the
different asset management ratios for Nestlé S.A. and Unilever N.V.
Average Collection Period =
13,459
91,612/365
= 53.62
5,029
48,436/365
= 37.9

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𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆
𝑨𝒏𝒏𝒖𝒂𝒍 𝑪𝒓𝒆𝒅𝒊𝒕 𝑺𝒂𝒍𝒆𝒔/𝟑𝟔𝟓
Inventory Turnover=
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒔𝒂𝒍𝒆𝒔
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
47,553
9,172
= 5.18 28,3901
4,168
= 6.81
Inventory Holding
Period=
𝟑𝟔𝟓
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓
365
5.18
= 70.46
365
6.81
= 53.6
Fixed-Asset Turnover=
𝑺𝒂𝒍𝒆𝒔
𝑵𝒆𝒕 𝑭𝒊𝒙𝒆𝒅 𝑨𝒔𝒔𝒆𝒕𝒔
91,612
28,421
= 3.22
48,436
10,472
= 4.63
Total Asset Turnover=
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
91,612
133,450
= 0.69
48,436
48,027
= 1.01
Nestlé’s average collection period of 53.62 days in December 31, 2014, indicates the
average number of days that an account receivable remains outstanding. In Comparison to
Unilever, whose accounts receivable collection period is 37.9, Nestlé’s ratio is substantially
higher. This seems not favorable for the company. Also, a large difference between the annual
sales figures and the average account receivables may be due to seasonality –thus, influencing
the average receivable figure.
Nestlé has an inventory turnover of 5.18, meaning that the company has gone through
and sold its inventory 5 times or so in 2014. When comparing the company’s inventory
turnover ratio to that of Unilever (6.81), we notice that Nestlé has a poor inventory
management. This may be due to a slow-down in demand (seasonality) or overstocking of
inventories. In addition, Nestlé’s inventory holding period is 70.46 days, which is much
higher than Unilever’s inventory holding period of 53.6 days. Again, this may be due to the
company’s seasonal sales. A high inventory at the end of the year may indicate that the
company is preparing for the beginning of the coming year, when its sales are more important.
Nestlé fixed asset turnover for the year 2014 was 3.2 times, which is relatively low as
compared to Unilever’s ratio (4,63). A lower fixed asset turnover ratio indicates that the
1
Source : www.marketwatch.com/investing/stock/un/financials

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company has been less effective in using its fixed assets to generate sales. In addition,
Nestlé’s total asset turnover ratio (0.69) is below Unilever’s ratio (1.01). This means that
Nestlé is not using its assets efficiently to generate sales, and probably has a management or
production issues. As a result, Nestlé generates lower level of sales from its assets than its key
competitor Unilever.
 Financial Leverage Ratios
Debt ratio=
𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒃𝒕
61,566
133,450
= 0.46 or 46%
33,764
48,027
= 0.7 or 70%
Debt-to-equity-ratio=
𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒃𝒕
𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚
61,566
71,884
= 0.86 or 86%
33,764
14,263
= 2.37 or 237%
Time Interest Earned=
𝑬𝑩𝑰𝑻
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑪𝒉𝒂𝒓𝒈𝒆𝒔
10,905
521
= 20.93
7,980
𝟒𝟖𝟔
= 16.42
Financial leverage ratios measure the company’s use of financial leverage. Nestlé’s
debt ratio as of year-end 2014 is 0.46. This means that the company’s creditors are financing
46% of the company’s total assets. Nestlé’s debt ratio indicates that the company’s assets are
greater than its liabilities. In addition, Nestlé’s debt-to-equity ratio is 0.86, which means that
the company’s assets are primarily financed through equity (lesser than 1). As a result, Nestlé
Group is perceived as a stable business, all the more so as its debt and debt-to-equity ratios
are well below those of its competitor Unilever –with 70% and 237% respectively.
Nestlé’s times interest earned ratio indicates that the company covers annual interest
payments 20.93 times; this figure is above that of Unilever (16.42). With a higher times
interest earned ratio, the company is able to meet its interest payments. This ratio is further
evidence that Nestlé’s Group is financially in a good position.

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Nevertheless, I would not encourage the company to take on more debt since Nestlé
has just enough current assets to meet its short-term obligations (liquidity ratios). I believe
that the company should first improve its cash flow and then, take on more debt, if necessary.
 Profitability Ratios
Profitability ratios measure how effectively the company’s management is generating
profits on sales, total assets and stockholders’ investment.
Gross Profit Margin=
𝑺𝒂𝒍𝒆𝒔−𝑪𝒐𝒔𝒕 𝒐𝒇 𝑺𝒂𝒍𝒆𝒔
91,612−47,553
91,612
= 0.48 or 48%
48,436−28,390
48,436
= 0.41 or 41%
Net Profit Margin=
𝑬𝑨𝑻
14,4562
91,612
= 0.16 or 16%
5,515
48,436
= 0.11 or 11%
Return on Investment=
𝑬𝑨𝑻
14,456
133,450
= 0.11 or 11%
5,515
48,027
= 0.11 or 11%
Return on Stockholders’ Equity=
𝑬𝑨𝑻
𝑺𝒕𝒐𝒄𝒌𝒉𝒐𝒍𝒅𝒆𝒓′ 𝒔𝑬𝒒𝒖𝒊𝒕𝒚
14,456
70,1303
= 0.21 or 21%
5,515
13,651
= 0.4 or 40%
Nestlé’s gross profit margin ratio is 48%, meaning that the company makes 0.48 cents
on each sale after accounting for the cost of goods sold. With a gross profit margin above that
of Unilever (41%), Nestlé generates more money every time a sale is made –earning larger
profits. A higher gross profit margin ratio also shows that the company makes better decisions
as regards pricing and the control of production costs. In addition, Nestlé’s net profit margin
is 16%, meaning that the company has a net income of 0.16 CHF for each Swiss franc of total
revenue earned. Nestlé net profit margin is higher than that of its competitor Unilever, with a
net profit margin of 11%. Therefore, Nestlé is more efficient at converting sales into profit,
being financially more profitable.
2
Source: www.nestle.com/aboutus/keyfigures
3
Source : www.nestle.com/aboutus/keyfigures

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Nestlé’s return on investment ratio is 11%, which is the same ratio as that of Unilever.
This means that investors earn 0.11CHF per Swiss Franc invested. Nestlé’s positive ROI is
thus considered as a good return, since the investment compares favorably to the cost.
Nestlé’s return on stockholder’s equity ratio is 21%. Nestlé’s ratio is below Unilever’s
ROE of 40%. This may be due to the fact that Nestlé has a fair amount of debt (assets ≥ debt)
as compared to Unilever. As a result, Nestlé offer a fair but lower return to its stockholders.
 Market-Based Ratios
Market-based ratios measure the financial market’s evaluation of a company’s
performance. To have a better understanding of Nestlé’s position, I will compare its market-
based ratios with those of Unilever and PepsiCo.
Nestlé (NSRGY) Unilever (UN) PepsiCo (PEP)
P/E Ratio4
16.1 18.1 22.1
P/BV 3.2 7 8.1
When comparing P/E ratios of these food and beverages companies, we notice that
Nestlé has the lowest P/E ratio with 16.1. PepsiCo has the highest P/E ratio with 22.1, and
Unilever is in between, with 18.1. The difference in ratios indicates the level of risk for the
above companies. In General, the higher the company’s risk, the lower its P/E ratio is. Since
Nestlé’s P/E ratio is inferior to that of Unilever and PepsiCo, the company presents ‘higher’
risk, or lower growth prospects. Investors are willing to pay $16.1 for one dollar of earnings –
or less than for Unilever and PepsiCo. However, a lower P/E ratio may not always be a
negative indicator and may indicate that the company’s stock is healthier.
The price per book value ratio compares companies’ current market price to their book
value. In other words, it shows how the market perceives the value of a future particular stock.
4
Source : Guru Focus (data 2014)

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With a P/BV ratio above 1, Nestlé is trading for more than its book value. However, this
compares unfavorably with its competitors P/BV ratio (Unilever, 7 and PepsiCo, 8.1).
 Dividend Policy Ratios
Dividend policy ratios give more insights with regard to the company’s dividend
strategies and its future growth prospect.
Nestlé (NSRGY) Unilever (UN)
Payout Ratio=
𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅𝒔 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆
𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆
2.20
4.52
= 0.48 or 48%
1.37
2.20
= 0.62 or 62%
Dividend Yield=
𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒅𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆
𝑺𝒕𝒐𝒄𝒌 𝑷𝒓𝒊𝒄𝒆
2.20
74.98
= 0.03 or 3%
2.20
43.53
= 0.05 or 5%
Nestlé payout ratio was equal to 48% as of December 31, 2014. In other words, 48%
of the company’s earnings were paid out as dividends to its common shareholders. This
proportion is reasonable for a company such as Nestlé (assets ≥ debt). Although lower than
that of Unilever (62%), Nestlé payout ratio seems more realistic.
The current dividend yield for Nestlé is 3%. This means that investors will receive
0.03CHF in dividends for every Swiss Franc they have invested in the company –or, 3%
return on their investment. In comparison, Unilever current dividend yield of 5% seems more
appealing for investors since they will receive slightly more, or 0.05€.
Nestlé’s Free Cash Flow (2014)5
How much cash Nestlé generates after accounting for capital expenditures (e.g.
buildings or equipment)? To answer this question, I will examine the company’s cash flow
using the following formula: Free Cash Flow = OCF – CAPEX -  in NOWC.
- Operating Cash Flow= EBIT6
(1-t) + DEPN
5
Source : Nestlé Financial Statements 2014 & Morningstar
6
Source: Nestlé Financial Statements 2014, “Profit before taxes, associates and joint ventures”

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= 10,268(1-0.33) + 4,966
= 10,268(0.67) + 4,966 = 11,845.56
Nestlé’s operating cash flow was 11,845.56CHF in 2014, meaning that the company
generated 11,845.56CHF million in selling its products. This positive result indicates that the
company is able to generate sufficient positive cash flow to conduct its operations.
- CAPEX= PPE (EOP) – PPE(BOP) + DEPN
= 28,421 – 26,895 + 4,966
= 6,492
Nestlé’s capital expenditure was 6,492CHF in 2014, meaning that the company used
6,492CHF million to acquire assets (e.g. property, plant and equipment).
-  in NOWC= [CA-NIBCD7
] (EOP) – [CA-NIBCD](BOP)
= (33,961 – (17,437+ 5,830)) – (30,066 – (16,072+ 4,190))
= (33,961 – 23,267) – (30,066 – 20,262)
= 10,694 – 9,804 = 890
Nestlé’s change in operating working capital was 890CHF in 2014, meaning that the
company has currently enough assets to meet its short-term liabilities, and run its business.
Nestlé’s positive net operating working capital indicates that the company has a ‘healthy’
financial liquidity position.
- FCF= 11,845.56 - 6,492 - 890 = 4,463.56
Nestlé’s free cash flow was 4,463.56CHF in 2014, meaning that the company
generated 4,463.56CHF million for its shareholders –after paying its expenses and investing
in its growth. Therefore, the company may create more value using free cash flow to pay
dividends, buy back shares of (treasury) stock, retire debt or invest in atypical asset.
7
Source : Nestlé Consolidated Balance Sheet & marketwatch.com, “Trade and other payables” +
“Other current liabilities”

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Market Value Added
Market Value Added represents the wealth that the company has created for its
shareholders since its inception. The following assess and compare Nestlé’s performance with
that of Unilever and PepsiCo –all competing in the same industry.
Nestlé (NSRGY) Unilever (UN) PepsiCo (PEP)
MVA= MVA Capitalization
– Stockholder’s Equity
235.45B – 71B8
=
164.45B
124.13B – 15B9
=
109.13B
146.65B -17.58B=
129.07B
Nestlé has a MVA of $164.45B, meaning that the company has created substantial
wealth for its shareholders. In comparison with Unilever ($109.13B) and PepsiCo (129,07B),
Nestlé has the greatest MVA; thus, it is the highest performing food and beverages company.
Nestlé’s Economic Value Added
The Economic Value Added measures the company’s operating performance based on
its residual wealth. To do so, I will use the following formula:
EVA = EBIT x (1-t) – [Investor Supplied Capital x Cost of Capital10
]
- Net Operating Working Capital= Current Assets – Non-Interest Bearing Current Debt
= 33,961 – (17,437+ 5,830)
= 33,961 – 23,267 = 10,694
- Investor Supplied Capital = PPE + Net Operating Working Capital
= 28,421 + 10,694 = 39,115
EVA(2014) = 10,268x (1-0.33) – [39,115 x 0.0764]
= 6,879.56 – 2,988.39 = 3,891.17
Nestlé’s EVA was 3,891.17CHF million as in 2014, which indicates that the company
generated a healthy economic value on the funds invested in it. With a tax rate of 33% in
8
70.13B CHF converted in US$
9
13.65B € converted in US$
10
Source: Guru Focus, WACC for the year 2014

16
2014, the company generated 6,879.56 million Swiss Francs for its investors. With a cost of
capital of 7.64%, investors expected a return of 0.0764 cents on their investments. Since its
return on capital exceeds its cost of capital, Nestlé creates value for its shareholders and thus,
is a profitable business.
Nestlé’s Weighted Average Cost of Capital
According to GuruFocus, Nestlé S.A.’s Weighted Average Cost of Capital is 6.34% as
of today, and its return on invested capital is 9.20%. These percentages (as explained below)
are rather positive for the company.
The Weighted Average Cost of Capital, or cost of capital, is the average rate of return
that the company expects to pay to all its different investors. Generally, the WACC takes into
account debt and equity, the two major sources of funding for companies. To compute the
weighted average cost of capital, they use the following formula:
WACC= E/ (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 - Tax Rate)
As we can see, the equation deals with both equity and debt, and includes the average
tax rate. The first step consists in determining the weight of equity (E/ (E+D)) and the weight
of debt (D/ (E+D)). “E” represents the company’s market capitalization. As of today, Nestlé’s
market capitalization is estimated at $234968.560 million. The market value of debt is
determined by computing the book value of debt, a combination of the latest short-term debt
and long-term debt. For instance, in June 2015, Nestlé’s latest two-year average short-term
debt was $10888.3395226 million and its latest two-year average Long-Term Debt was
$12157.319326 million –or, a total book value of debt of $23045.6588486 million. When
computing the respective data, we obtain a weight of equity of 0.9107 and a weight of debt of
0.0893. From those results, we can infer than Nestlé has more assets than liabilities, which is
good. The second step consists in determining the cost of equity, and then the cost of debt.
Based on the Capital Asset Pricing Model (CAPM), the equation for the cost of equity is:

17
Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market - Risk-Free Rate
of Return). The advantage of the CAPM is that it considers both the time value of money
(risk-free rate) and the risk (beta). Using a 10-year Treasury Constant Maturity Rate, the risk
free is currently 2.24%. Nestlé’s beta is 0.63. The market premium, (Expected Return of the
Market - Risk-Free Rate of Return), is 7.5%. When computing the data, Nestlé’s cost of
equity is 6.965%. To compute the cost of debt, GuruFocus uses last fiscal year end Interest
Expense divided by the latest two-year average debt. Since Nestlé’s interest expense was $0
million as of December 2014, and its total book value of debt is $23045.6588486 million, the
company’s cost of debt is 0%. Finally, the latest Two years Average Tax Rate used is
29.485%. So, Nestlé’s WACC formula as of today is:
WACC= 0.9107 * 6.965% + 0.0893 * 0% * (1 - 29.485%)
= 6.34%
With a WACC of 6.34% and a ROIC of 9.20%, Nestlé generates higher returns on
investment than it costs the company to raise the capital needed for that investment. This
shows earning excess returns. The company’s positive excess returns on new investments will
increase in the future as growth increase –creating additional value for shareholders.
Conclusion
As the world’s largest food company, Nestlé is financially healthy. Based on the
company’s results for the year 2014, the financial ratio and free cash flow analysis shows
some positive trends. Indeed, Nestlé is not dependent on debt, and has enough current assets
to meet its short-term liabilities. This means that the company is solvent, presenting a lower
risk. Despite poor inventory management, due to the company’s seasonality, Nestlé makes
effective use of its assets, generating profits and positive returns for its shareholders (ROI
11% and ROE 40%). While lower than the industry average, Nestlé’s market based ratio is
rather positive for the multinational company, indicating that its stock is financially healthier

18
(and not overvalued). The Nestlé’s Group has a reasonable payout ratio (48%) and a dividend
yield of 3% –a good bargain for investors looking for capital growth. In addition, Nestlé’s
positive free cash flow shows that the company is able to run its business effectively and
invest in its growth. With a free cash flow of 4,464CHF million in 2014, the Nestlé Group
created wealth for its shareholders. Moreover, Nestlé has a high MVA and positive EVA,
evidence that the company creates substantial value for its shareholders. As of today, the
company is still creating value with a return on investment of 9.20%, against a WACC of
6.34%. Therefore, Nestlé is a profitable business with growth potential perspective.
Considering the positive outcomes, I would recommend to buy the company’s stock.

19
References
Kam, A. (April 9, 2013). Nestle –Environmental Analysis. Retrieved from
http://blogs.baruch.cuny.edu/mgt4880nestle/2013/04/09/update-nestle-
environmental-analysis/
Lim Zhia Xuan, S. (September 4, 2014). External Environment. Retrieved from
https://managementtheoriesnestle.wordpress.com/2014/09/04/external-
environment/
Nestlé S.A. (2014). Annual Report 2014. Retrieved from http://www.nestle.com/asset-
library/documents/library/documents/annual_reports/2014-annual-report-
en.pdf
Nestlé S.A. (February 18, 2015). Financial Statements 2014. Retrieved from
http://www.nestle.com/asset-
library/Documents/Library/Documents/Financial_Statements/2014-Financial-
Statements-EN.pdf
Unilever N. V. (2014). Unilever .Annual Report and Accounts 2014. Retrieved from
https://www.unilever.com/Images/ir_unilever_ar14_tcm244-421557_en.pdf
Yahoo! Finance. (December 2015). Nestlé S.A. (NSRGY). Retrieved from
https://finance.yahoo.com/q?s=NSRGY

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