AC4410 Accounting and Finance

Company overview

Nestlé SA is a Swiss multinational food and beverage company based in Vevey Switzerland. It is currently considered as the largest food company in the world according to the revenue realised within the financial years 2014-2016. It has obtained 72^nd rank in Fortune Global 500 in 2014 and also got 33rd place in the 2016 edition of Forbes Global 2000. This list was developed for recognition of the largest public companies in the world (J. Chris Leach, 2016).

Nestlé's products include baby food, medical food, bottled water, breakfast cereals, coffee and tea, confectionery, dairy products, ice cream, frozen foods, pet food and snacks. Twenty-nine of Nestlé's brands have annual sales of over 1 billion Swiss francs (about $ 1.1 billion). The list of most popular Nestle brands includes Maggi, Nescafe, Kit Kat, Smarties,Nesquik, Stouffer's, Vittel and Nespresso. Nestlé is currently operating in 194 countries with 447 factories.It is currently employing about 339,000 people. It is also one of the major shareholders of L'Oréal, the largest cosmetics company in the world.

Ratio and analysis

The main aim of ratio and analysis

In accounting, a ratio is a coefficient or a percentage usually calculated through two functional masses of the balance sheet or the income statement. The ratios are used to measure profitability, the structure of costs, productivity, solvency, liquidity and the financial stability.(Timothy R. Mayes, 2016).

Benefits of ratio analysis

There are more than a hundred ratios used by companies all over the world. These ratios are very beneficial as they make it possible to evaluate the financial situation of a company. It aids management in evaluating the financial progress from one year to another. Moreover, it also aids in comparing with other companies in the same sector (Stephen A. Ross, 2016).Methods such as DuPont analysis can formalize these estimates. Ratios can also be integrated into different discriminate analysis approaches.These approaches are mostly combined to calculate a single indicator called a score. These scores are very important for assessing the risks and bankruptcy of an institution (Tracy, 2012).

Limitations of ratio analysis

• Ratio analysis is mostly based on the historical facts and figures which is not so helpful for predicting the future of any company. This is beacuse the current business environment is very unpredictable and dynamic.
• The financial information presented in the balance sheet may not be accurate as the value of financial assets or liabilities will be lowered on account of inflation
• It cannot be regarded as adequate method for comparing the financial results of a company with that of another as the entities tend to adopt the use of different accounting practices. Thus, the use of this technique will not prove to be highly effective in comparing the financial results across different entities

Nestle financial statement analysis from year 2013 to 2016

Profitability Ratios

Gross profit

Gross profit ratio represents the difference between revenue and cost of sale before deducting overheads etc.

The following formula has been used to calculate the gross profit ratio:

Gross Profit Margin = (Gross Profit X 100)/Net Sales

The above table shows gross profit percentage of Nestle Plc for year 2013 to 2016 and analysis shows that there was increasing trend in the gross profit percentage. The gross profit ratio shows that the company has scored well in these metrics. This clearly indicates a good profitability. However, the revenue has fallen from 92,158 in 2013 to 88,469 2016. Nestle profit ratio needs a lot of improvement and downfall could have been due to foreign exchange rate or recession in some of the countries.

Operating Profit margin ratio

Operating profit refers to profit left after bearing all expenses except interest and tax expenses. Operating profit margin ratio shows the percentage of operating profit (EBIT) earned by the company on percentage of net revenue (Gong, 2017).

The following calculation below is used:

Operating Profit Margin = (Operating Profit (EBIT) *100) / Net Sales

The operating ratio of the company has depicted an increasing trend from the year 2013-2016 which depicts its increasing ability to make profit after meeting the variable costs of production such as wages and raw materials. Thus, it can be said that the efficiency of a company has increased to control its cost and expenses in relation with the business operations.

Liquidity Ratios

Current Ratio

The current ratio is a comparison of current assets (Current Assets) of a company or an individual to its short-term liabilities (Current Liabilities).The general liquidity ratio is an indicator of the liquidity of a company or an individual and its ability to repay short-term debts (Eugene F. Brigham, 2014).

Current Ratio = Current Assets/Current Liabilities

The calculation of current ratio shows that it has increased from the financial year 2013-2014 and has decreased from the year 2014-2016. This indicates that the ability of company to meet its short-term obligations have declined over the year 2013-2016 with a declining current ratio. Also, current ratio over the selected financial period is less that 1 that cannot be regarded as good for the company depicting a financial risk from the perspective of investors as it may not be able to meet its short-term obligations.

Acid Test (or Liquid) Ratio

Formula: Quick Assets/Current Liabilities

Where quick assets is equal to current assets less inventories and prepaid expenses

The liquidity ratio analysis shows that the company has the considerable finance to fulfill its short-term obligations. Acid test ratio is less than 1 from year 2013- 2016. It slightly went up in 2014 and then fell in 2015 and 2016. Nestle would struggle if their creditors wanted payment upfront because they may not have enough cash to pay. In 2014 inventory increased by 790, which shows they have stock which has not sold, however the following year this went down and then up again in 2016.

Activity Ratios

Trade receivables

Trade receivables are money billed by a company to its clients/customers after providing products to them in the normal course of business (James M. Wahlen, 2016). These bills are normally given to the customers on formal invoices

Trade Receivable Turnover in days or average collection period = (Trade Receivable X 365 (Days)) /Sales

Average collection period is 54 days from 2013-2016, however in 2013 it was 57 days and then the following years it went down, it shows its customers take less time to pay back compared to 2013. Another reason for longer time frame in 2013 is because trade receivable was higher than the other three years.

Trade Payable

Trade payable is also known as accounts payable. This is the amount payable to a supplier for raw material delivered to the company. The due amount is billed by the supplier on the given credit terms.

Trade Payable Turnover in days = (Trade Payable * 365 (Days)) / Cost of Goods Sold

Trade payable has gone up slightly each year from 2013-2016, the reason for trade payable has gone could be due to cost of goods has fallen.

Conclusion

Nestle company must reduce its expenses to increase its overall profitability.It must also improve its revenue model to generate more sales through its sales teams. Nestle must also increase its product line by using cross-selling strategies. Nestle has to switch to a relationship based model through which it can easily attract its lost customers. It can also improve its and profitability through incentivizing new customers to try its new and latest products with short-term giveaways, specials deals, and discounts.

References

Eugene F. Brigham, J. F. (2014). Fundamentals of Financial Management. Cengage Learning.

Gong, Z. (2017). Comparing the development of two communication technology companies using financial statement analysis. GRIN Verlag.

James M. Wahlen, J. P. (2016). Intermediate Accounting: Reporting and Analysis. Cengage Learning.

McGowan, C. (2014). The Fundamentals of Financial Statement Analysis as Applied to the Coca-Cola Company. Business Expert Press.

Stephen A. Ross, R. M. (2016). Essentials of Corporate Finance, Fourth Edition. McGraw-Hill Education Australia.

Timothy R. Mayes, T. M. (2016). Financial Analysis with Microsoft Excel 2016. Cengage Learning.

Tracy, A. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. Ratio Analysis.