1. 1
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
2. 2
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. 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.
4. 4
RecentDevelopment
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)
5. 5
Ratio Analysis on Nestlé’s Annual Report
For year 2012 and year 2013
Profitability Ratios (basedon Group) for the year2012 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.
6. 6
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.
7. 7
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÷RM1,905,1
69×100%
=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.
8. 8
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
9. 9
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 of29.05 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
10. 10
Justifications of the worthy of investment for Nestléshare
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.
17. 17
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.
