Project/ Presentation

Comparative Financial Statement Analysis between Nestle & Engro Foods

ACCT 2023: Introduction to Financial Accounting (BSCS4)

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Session:______2017-2021______

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ACKNOWLEDGEMENTS & Dedication
Thanks to Allah Almighty Who is most beneficent and merciful, I would like to thanks
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NESTLE
“Good Food, Good Life”

Introduction:

Nestle, the Company which is renowned for its vast collection of food products. The Company
was formed in 1905 by the merger of the Anglo-Swiss Milk Company, established in 1866 by
brothers George Page and Charles Page, and Farine Lactee. Nestle was found in 1866 by Henri
Nestle. The company grew significantly during the First World War and again following the
Second World War, expanding its offerings beyond its early condensed milk and infant formula
products. The company has made a number of corporate acquisitions, including Crosse &
Blackwell in 1950, Findus in 1963, Libby's in 1971, Rowntree Mackintosh in 1988 and Gerber in
2007.
As Nestle started with a condensed milk and later it climbed so fast at the ladder of success that
it is now a leading brand in food products with so many sub-brands. Currently Nestle is dealing
with bottled water, breakfast cereals, coffee, confectionery, dairy products, ice cream, pet foods,
other beverages, shelf stable, chilled, Ice cream, Infant nutrition, performance nutrition, health
care nutrition, frozen foods, refrigerated products, food services and professional products and
snacks.29 of Nestle's brands have annual sales of over 1 billion Swiss francs (about $ 1.1 billion)
Nestle has around 450 factories, operates in 86 countries, and employs around 328,000 people. It
is one of the main shareholders of L'Oreal, the world's largest cosmetics company.

NESTLE in Pakistan:

Nestle has been serving Pakistani consumers since 1988, when parent company, the Switzerland-
based Nestle SA, first acquired a share in Milk Pak Ltd. Today Nestle is fully integrated in
Pakistani life, and is recognized as the producer of safe, nutritious and tasty food, and leaders in
developing and uplifting the communities in which they operate. Nestle Pakistan ensures that
their products are made available to consumers wherever in the country they might be
convenience is at the heart of the Nestle philosophy, and there aim is to bring products to
people's doorsteps.
The following details about Nestle Pakistan are as follow:
Ticker: NESTLE
Country: PAKISTAN Major Industry: Food & Beverages
Sub Industry: Diversified Food

2011 Sales: 64,824,364,000 Employees: 2,422

Currency: Pakistan Rupees Market Capture: 210,875,565,600
Fiscal Year Ends: December
Shares Outstanding: 45,349,584 Share Type: Ordinary
Vision
“Nestle’s global vision is to be the recognized leading Nutrition, Health and Wellness Company.
Nestle Pakistan subscribes fully to this vision of being the number one Nutrition, Health, and
Wellness Company in Pakistan. In particular, we envision to; Lead a dynamic, passionate and
professional workforce – proud of our heritage and positive about the future. Meet the nutrition
needs of consumers of all ages – from infancy to old age, from nutrition to pleasure, through an
innovative portfolio of branded food and beverage products of the highest quality. Deliver
shareholder value through profitable long-term growth, while continuing to

Mission
“Nestle is dedicated to providing the best foods to people throughout their day, throughout their
lives, throughout the world. With our unique experience of anticipating consumers’ needs and
creating solutions, Nestle contributes to your well-being and enhances your quality of life.”
Goals and Objectives
The goals and objectives of Nestle Pakistan are simple and well designed with the core
strategies to meet the demand of the consumers and to fulfill the needs of the customers.

Following are the main goals and Objectives;

1. To be, the best and quality providing brand among other brands in Pakistan.
2. To fulfill customers’ needs and requirements.
3. To capture it’s desired market share.
4. To dwell into the life of people and consumers.
5. To boost up its sales.
6. To create value for customer.
7. To keep the loyalty of customer with Nestle.
8. To be the top nutrition company of Pakistan.
9. To be the leading FMCG company around the world as well as in Pakistan.
10. It aims to be the socially responsible and helping company in bad times.
11. Nestle aims to be proactive innovation and renovation culture, which is the key to
Nestle’s success in the marketplace.
12. Nestle aims to have fully integrated systems with suppliers & retailers so that every
single market can be tapped & focused.

SWOT Analysis

Strengths
Strength of Nestle is the presence of its factories or operations in almost every country in the
world employing around 283000 people. The sales values have touched CHF 109.9 billion, with
a net profit of CHF 18.0 billion. Nestle has recorded a financial growth even in times of
recession by promoting the sales of smaller and cheaper versions of products in
developing economies.
Weaknesses

Nestle do not have direct market outlets and this can be one of the weaknesses as it can cause
difference in profit made. There another weakness is not having enough raw material production
units; they depend on either local raw material producers or through other trade channels.

Opportunities

Nestle’s weakness of not having a direct outlet can be converted as an opportunity by

introduction of new direct outlets. The acquisition of Cadburys for an example is an opportunity
since they are one of the main competitors for Nestle. Setting up their personal farms and raw
material production units is an opportunity as it would reduce the cost for Nestle. By acquisitions
Nestle can enter the new market, which is easy through already existing companies. Nestle has
great opportunities in a society which is becoming more and more health conscious.
Threats
Their weakness of not having enough raw material production units (which cause them to depend
on other producers) and their dependency on other producers can threaten to reduce the quality
of products they offer. The contamination of food products is a major threat to Nestle in the
market. Intense competition in its market segments also possesses a major challenge to Nestle as
its competitors are also trying to increasing their product ranges which might make inroads into
Nestle's profit.

ENGRO FOODS
The Local Flavor with a global Vision

Engro Foods (Pvt.) Limited (EFL) has been established in 2005 as part of a diversification
process at the Engro Group. The plant located at Sukkhur on 23 acre land, has the raw milk
reception capability of 300,000 liters per day and UHT milk capacity of 200,000 liters per day.
The plant has been established at a cost of Rs. 1 billion which provides direct employment to 750
people. Engro Foods has entered the Food business through milk processing and sale with the
company’s vision to pursue growth opportunities based on country fundamentals and own
strength. It also positions the company to leverage its corporate social responsibility initiatives
and work closely with rural communities to promote integrated farming and livestock
development. This effort is expected to play a pivotal role in poverty alleviation and improving
livelihoods of the poor in the milk collection areas.
Vision
“To be the Premier Pakistani Enterprise with a global reach, passionately pursuing
value creation for all stake holders”.
Mission
“To help farmers maximize their farm produce by providing quality plant nutrients and technical
services upon which they can depend. To create wealth by building new businesses based on
company and country strengths in Petro chemicals, Information Technology, Infrastructure and
other Agricultural sectors. In pursuing the mission we shall at all-time be guided in our conduct
and decision making by our Core Values.”
Goals and Objectives:
Following are the main goals and Objectives;

1. To possess leadership among other companies.

2. To introduce innovative products.
3. To capture diversified marked and international focus.
4. To maintain quality and work for continuous improvement.
5. Can did and open communications.
6. External & Community Involvement
7. To focus on individual growth and development.
8. Enthusiastic pursuit of profit.
9. To keep satisfied ethics and integrity.
10. To promote safety, health and pure environment.
11. To create opportunities of enjoyment and fun.
12. To promote teamwork and partnership.

SWOT Analysis

Strengths

Engro Foods is a well-established brand name; customers automatically have a brand

association. They can easily afford research and development costs in order to introduce new
products. They have strong supply chain (good PR with farmers provides world class supply
chain management). The increasing sale figures form years to years showing customer
satisfaction upon Engro Foods Limited products. Engro Foods involve in consumer and product
research before and after launching a product. Engro Foods is having strong relationship with
global research partners like AC Nielsen, JWT Asiatic. Company is not relying on third parties
for sale and distribution and has its own sale and distributing network. Engro Foods Limited only
has the third-generation UHT milk plant in the country. Engro Foods Limited plant is the only
plant in Pakistan that uses Bactofuge technology to virtually eliminate bacteria and ensure
premium quality and hygiene.

Weaknesses
One major weakness of Engro Foods in dairy products, which is that 85% of its milk collection
centers are in Punjab, while processing unit is in Sindh. Higher transportation cost. Dependency
on TETRA PAK for the entire packing of its dairy products. Paying higher cost of packing of
products results in higher overall products cost. The product range of Engro Foods narrows as
compared to its competitors.
Opportunities
Pakistan is the fourth largest milk producing country. So, it’s an opportunity for company to
grow in this sector. Engro Foods can increase awareness though different media, by showing ads
those are according to cultural requirements of Pakistan. By increasing the milk related products
company can go globally. Engro can launch products like dry milk, cereal and Yogurts etc.
Growing dissatisfaction with milkmen’s milk and increasing awareness about health and hygiene
issues have led to increased processed milk consumption.
Threats
Engro Foods competitors Nestle and Haleeb are biggest threat. There are opportunities and doors
for new players are open who can be the future competitors. Consumer is aware now, there is
need to maintain the quality of products. If Engro Foods will not do so it loses its business in
foods. There is threat from the customer side. Consumer’s perceptions and price differentials can
cause a threat for the company. Consumer’s preferences change with time and prices might
create certain barriers in terms of the profit margins for ENGRO FOODS.
Balance Sheet Analysis of NESTLE and ENGRO FOODS
The asset side of balance sheet shows the size of the firm so by comparing balance
sheet of both companies we analyzed that the fixed asset of the nestle company is greater than
ENGRO foods which means that nestle has invested more in the fixed assets than ENGRO
foods whether by starting new project or by any other source. Due to high investment in fixed
assets long term loan and advances of nestle are also greater than engro foods and total assets
of nestle are also greater than engro foods which shows that the size of nestle is greater than
engro. Nestle has more cash and bank balance than engro foods and has more reserves which
shows that nestle hold more than dividing whereas engro divides more than holding with it
means nestle pays less dividend as compared to engro foods.
ANALYSIS OF INCOME STATEMENT OF NESTLE AND ENGRO
We have made analysis between engro and nestle companies .here we analyze that sales of nestle
(64824, 364) is more as compare to engro (29859,226). Because their investment in fixed asset is
more as compare to angro. Production is also increase due to more investment. And as
production increase ultimately their sales is also increase. Nestle have more cost of goods sold
that is (48099, 046) whereas engro have (23230,445). Because engro have only dairy products
whereas nestle have broad category of products. As nestle sales is more so their gross profit is
also more as compare to engro. Nestle have more distribution and selling expense as compare to
engro because engro have their own distribution channels whereas nestle relay on others for
distribution. As well as engro products are also less and due to this their distribution expenses are
less. Nestle company employee (328000) are more as compare to engro. As well as they uses
more advertising compains so that’s why their administrative expenses are more. Nestle Finance
cost is also more because their interest expense are more. Operating expense of nestle (1064233)
engro (208902) means they use more directions to run their business. Nestle operating income is
also more nestle is a well-known brand and they generate high income. Nestle have more tax
because they have more products that is (1834,507) whereas engro products are limited and their
tax is (471,687). Nestle have more no of shares and more earning.so Earning per share of nestle
is also more that is 102.94 as compare to engro that is 1.22 So after analysis of income statement
we see that nestle have more sales and more profit than engro which shows that nestle company
is good than engro.
Ratios of NESTLÉ for Financial Statement Analysis
a. Liquidity Ratios
Current Ratio
Current Ratio = Current Assets / Current Liabilities
= 13,395,017 / 16,788,455
= 0.80
Quick Ratio
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
= (13,395,017 – 7,046,126.522) / 16,788,455
= 0.38
Net Working Capital Ratio
Net Working Capital = (Current Assets –Current Liabilities) / Total Assets
= (13,395,017 –16,788,455) / 35,179,859
= – 0.10
b. Profitability Analysis Ratios
Return on Assets (ROA)
Return on Assets (ROA) = Net Income / Average Total Assets*
= 4,524,771 / 10,873,970*
= 0.42
Return on Equity (ROE)
Return on Equity (ROE) = Net Income / Average Stockholders' Equity**
= 4,524,771 / 6,597,144.5
= 0.69
Return on Investment (ROI)
Return on Investment (ROI) = Net Profit After Taxes / Total Assets
= 4,668,357 / 35,179,859
= 0.13
Net Profit Margin
Net Profit Margin = Net Profit After Taxes / Net Sales
= 4,668,357 / 64,824,364
= 0.01
Gross Profit Margin
Gross Profit Margin = Gross Profit / Sales
= 16,725,318 / 64,824,364
= 0.26
Earnings Per Share (EPS)
Earnings Per Share (EPS) = Earnings After Taxes / Number of Shares
= 4,668,357 / 45,350.272
= 102.94
c. Activity Analysis Ratios
Asset Turnover Ratio
Asset Turnover Ratio = Net Sales / Total Assets
= 64,824,364 / 35,179,859
= 1.84
Inventory Turnover Ratio
Inventory Turnover Ratio = Cost of Goods Sold / inventory
= 48,099,046 / 7,046,126.522
=6.83
d. Capital Structure Analysis Ratios
Debt to Equity Ratio
Debt to Equity Ratio = Total Liabilities / Total Stockholders' Equity
= 2,756,443 / 7,612,416
= 3.62
Debt to Asset Ratio
Debt to Asset Ratio =Total Debt/ Total Assets
= 2,756,443 / 35,179,859
= 0.08
Interest Coverage Ratio
Interest Coverage Ratio = Income Before Interest and Income Tax Expenses*** /
Interest Expense
= 6,586,973*** / 84,109
= 78.31
e. Capital Market Analysis Ratios
Price Earnings (PE) Ratio
Price Earnings (PE) Ratio = Market Priceper Share / Earnings per Share
= 4,844 / 102.94
= 47.06
Ratios of ENGRO FOODS for Financial Statement Analysis
a. Liquidity Ratios
Current Ratio
Current Ratio = Current Assets/ Current Liabilities
= 6,369,139 / 3,480,987
= 1.83
Quick Ratio
Quick Ratio = (Current Assets – Inventories)/Current Liabilities
= (6,369,139– 3,046,859.795) / 3,480,987
= 0.95
Net Working Capital Ratio
Net Working Capital = (Current Assets – Current Liabilities)/Total Assets
= (6,369,139 – 3,480,987) / 16,639,184
= 0.17
b. Profitability Analysis Ratios
Return on Assets (ROA)
Return on Assets (ROA) = Net Income/Average Total Assets*
= 890,973 / 14,549,624
= 0.06
Return on Equity (ROE)
Return on Equity (ROE) = Net Income/Average Stockholders' Equity**
= 890,973 / 2,923,870.5
= 0.03
Return on Investment (ROI)
Return on Investment (ROI) = Net Profit After Taxes/ Total Assets
= 890,973 / 16,639,184
= 0.05
Net Profit Margin
Net Profit Margin = Net Profit After Taxes / Net Sales
= 890,973 / 29,859,226
= 0.03
Gross Profit Margin
Gross Profit Margin = Gross Profit/ Sales
= 6,628,781 / 29,859, 226
= 0.22
Earnings Per Share (EPS)
Earnings Per Share (EPS) =Earnings After Taxes / Number of Shares
= 890,973 / 730,305.7377
= 1.22
c. Activity Analysis Ratios
Asset Turnover Ratio
Asset Turnover Ratio =Net Sales/Total Assets
= 29,859,226 / 16,639,184
= 1.79
Inventory Turnover Ratio
Inventory Turnover Ratio = Cost of Goods Sold / Inventory
= 23,230,445 / 3,046,859.795
= 7.62
d. Capital Structure Analysis Ratios
Debt to Equity Ratio
Debt to Equity Ratio = Total Liabilities / Total Stockholders' Equity
= 9,402,242 / 7,236,942
= 1.30
Debt to Asset Ratio
Debt to Asset Ratio = Total Debt/ Total Assets
= 9,402,242/16,639,184
= 0.57
Interest Coverage Ratio
Interest Coverage Ratio = Income Before Interest and Income Tax Expenses*** /
Interest Expense
= 1,388,430 / 25,770
= 53.88
e. Capital Market Analysis Ratios
Price Earnings (PE) Ratio
Price Earnings (PE) Ratio = Market Price of Common Stock per Share / Earnings per
Share
= 25 / 1.22
= 20.49
Financial Ratios Analysis
Liquidity Analysis
Current Ratio
Current ratio tells us the short term solvency of the firm and tells the ability of
the firm to repay its short term obligations. In nestle the firm has 0.80 ability to repay
against the $ 1 loan and Engro has 1.83 so this implies that Engro food has more
ability to repay its short term obligations.
Quick Ratio
Quick ratio measures the firm’s ability to pay off short term obligations
without relying on the sale of inventory. Nestle has the quick ratio of 0.38 whereas
Engro foods has 0.95 chances of paying off its short term obligations without relying
on the level or sales of inventory.
Profitability Analysis
Return on Investment
How much a firm is returning to its stockholder only in the case if the firm is
earning profit? Nestle have return on investment ratio 0.13 or 13% whereas Engro
foods has 0.05 or 5% means nestle is returning more than Engro foods so it is better to
invest in nestle.
Net Profit Margin Ratio
Net profit margin is calculated by dividing the net profit after taxes by the
sales means after paying the taxes you are earning some of the profit it means firm is
doing its business well. Nestle is earning 0.01 or 1% against $ 1 and Engro food is
earning 0.03 or 3% it shows in the profitability ratios Nestle is earning more than
Engro foods.
Gross Profit Margin Ratio
It tells that how much a firm will receive against $ 1 sales. Nestle has 0.26
gross profit margin ratio and Engro has 0.22. So in this case nestle is earning more
profit than Engro foods.
Activity Analysis
Asset Turnover Ratio
This ratio measures the turnover of the entire firm’s asset. It is calculated by
dividing the sales by total assets of the firm. If firm shouldn’t increase its sales so
there is a possibility that a firm will sale its some assets. There is 1.84 chances of
asset turnover in nestle and 1.79 in Engro foods against every $ 1.
Inventory Turnover Ratio
Inventory turnover is calculated by dividing the CGS by inventory. The
inventory turnover of nestle is 6.83 times and of Engro foods is 7.62 times. Here the
best ratio is of Engro foods that is much more than nestle.
Capital Structure Analysis
Debt to Equity Ratio
Debt to equity ratio shows the comparison to equity this ratio tells that how
much firm has ability to pay its debt and if equity is more than the total debt of the
firm so firm will face low risk. In nestle the firm has 3.62 against $ 1 to pay debt
whereas Engro food has 1.30 to pay against $ 1 debt. Here Nestle has more ability to
pay its debt.
Debt to Asset Ratio
Debt to asset ratio shows if the firms have more assets regardless of total debt
than that firm will easily pay off its debts. The debt to asset ratio in nestle is 0.08
whereas 0.57 in Engro foods. So Engro foods will pay off its debt more easily than
nestle.
Interest Coverage Ratio
Interest coverage ratio measures the extent to which the operating income of
the firm can decline before the firm is unable to meet its annual interest cost. Nestle
has 78.31 times interest coverage ratio whereas Engro foods has 53.88 times interest
coverage ratio so Engro foods has less chances of failure and facing bankruptcy than
nestle.
Conclusion
After all the findings, it is concluded that financial ratios are the basic and most important part of
any business. It describes the firm’s financial position. As the data indicates that NESTLE is an
international brand and has expanded its business on the large geographical area and also offers
the large range of products, but on the other side ENGRO food offers the limited range of the
products and most of them are dairy products. From the financial statements it is clear that the
financial position of the NESTLE is far better than ENGRO as it is more preferred by the
customers and also an internationally distributed. It also has less risk. It gives more return
because it gains more profit than ENGRO.On the other hand ENGRO deals with the limited
products in a limited geographical area but on the basis of financial ratios ENGRO has a better
financial position and also has an opportunity to expand its business. Both the companies have
some opportunities and threads and they need to work on it.
Recommendations
NESTLE doesn’t have any direct market and outlets so it can be a disadvantage so they should
facilitate their customers through pricing strategies and if they start direct market or open the
outlets so the prices will fall automatically and customers need not to pay any extra money to the
suppliers. NESTLE Pakistan mostly depends on the local raw material and sometimes the quality
of the raw material is not as good as in the other countries so they should not rely on the local
raw material if they want to provide the quality products. ENGRO foods should introduce other
product lines and expand the business. ENGRO foods should distribute their products to more
geographical areas. As NESTLE is a well-known product and ENGRO food is not as known
internationally as NESTLE is, so they need to spend more money on the marketing activities.
ENGRO food is better than NESTLE in the financial analysis so if they expand their product line
and cover the same geographical area as NESTLE has covered so ENGRO can appear as a strong
competitor of NESTLE and HALEEB.
References
1. NESTLE annual report 2011
2. ENGRO FOODS annual report 2011
3. www.nestle.pk
4. www.engrofoods.com