Nestle Ratio Analysis

Submitted to: SIR KHALID

Submitted by: Wali Muhammad Khan (180819)

 LIQUIDITY RATIOS

1- Current Ratio:
It tells us the worth of current assets with which the company pays off
its current liabilities.
Current ratio= Current Assets/ Current Liabilities

Data is from 2014 to 2018

2014 18405780/27777240=0.66
2015 18029598/25143112=0.71
2016 19567821/33027347=0.59
2017 25124489/40265695=0.62
2018 32658174/49123050=0.66
Analysis:
The current ratio stood at 0.14 whereas it was 0.18 the previous year
which meant that it has decreased and so the company would be able to
cover less of the liabilities with its current assets in 2015, however the
ratio rose 0.12 to reach the level of 0.26 depicting that the company is
now in a better position to pay off its liabilities as compared to the
previous year. The ratio decreased in both the succeeding years by 0.1
reaching 0.24, explaining that the company has 0.24 dollar to pay a
liability of 1 dollar.
2-Quick Ratio:
In finance, the quick ratio, also known as the acid-test ratio is a type of
liquidity ratio, which measures the ability of a company to use its near
cash or quick assets to extinguish or retire its current liabilities
immediately.
Quick ratio= quick assets/ current liabilities

2014 8525094/27777240=0.30
2015 8443607/25143112=0.33
2016 8251845/33027347=0.24
2017 9658213/40265695=0.23
2018 12762402/49123050=0.25
Analysis:
The quick ratio explains how well a company can fulfil its short term
obligation, the ratio of nestle over the period of 5 years shows us that the
company has not been in the position to pay off its liabilities, and it
would have to sell some off its assets in case they decide to do it, as the
ratio should be above one to be satisfactory.

3-Net Working Capital:

Net working capital is a liquidity calculation that measures a company's
ability to pay off its current liabilities with current assets.

Net working capital= current assets-current liabilities/ total liabilities

 2014 -9371460/51730695=0.18
2015 -7113514/49267464=0.14
2016 -13459526/50781770=0.26
2017 -15141206/58345619=0.25
2018 -16464876/666s41242=0.24

Analysis:
The answers derived from the calculation of the net working capital ratio
explains that the company’s liability are more than their assets so they
are not in a position to meet them, they have not enough current
resources to meet their current liability, this is primarily caused by a
recent large payment that has caused the current assets to decrease.

4- Cash Ratio:
The cash ratio is a measurement of a company's liquidity, specifically
the ratio of a company's total cash and cash equivalents to its current
liabilities.
Cash ratio= cash & cash equivalents/ current liabilities

2014 226143/27777240=0.0081
2015 253267/25143112=0.0100
2016 353167/33027347=0.0106
2017 1333984/40265695 =0.0331
2018 745694/49123050=0.0151
Analysis:
The cash ratio of the company are not above one and are in decimals
below so this explains that the company does not have sufficient funds
to cover its liabilities which is not a favourable position, as the ratios
were 0.0081,0.0100,0.0106,0.0331,0.0151 from 2014 to 2018
respectively, this can be because of some recent payment and so this has
caused a severe effect on the company’s ability to pay the current
liabilities.

Management Efficiency Ratios

INVENTORY TURNOVER:
The Inventory turnover is a measure of the number of times inventory is
sold or used in a time period such as a year. It is calculated to see if a
business has an excessive inventory in comparison to its sales level.

Inventory turnover ratio= cost of goods sold/ average inventory

2014 69133753/8844559=7.81 times

2015 68859344/9619334=7.158 times
2016 72609392/10340955=7.0215 times
2017 77458749/13282759=5.8315 times
2018 83242655/1755036=4.74 times
Analysis:
The inventory turnover ratio of nestle Pakistan has plummeted to 4.74 in
2018 from 7.81 in 2017 meaning that the rate at which the company is
able to convert its inventory to cost of goods sold was greater in the year
2014 so the company has to improve its performance.
INEVNTORY TURNOVER IN DAYS:
The average number of days goods remain in inventory before being
sold.
No. of days of inventory= no. of days in a period/ inventory turnover

2014 365/7.181=50.82
2015 365/7.158=50.99
2016 365/7.0215 =51.98
2017 365/5.8315=62.5
2018 365/4.74=77

Analysis:
The inventory turnover in days of the company increased steadily to
reach 77 days from 50.82 in the years 2018, 2014 respectively. This
depicits that the company now takes a longer time to covert the
inventory into cost of goods sold which means that the company has
taken a turn for the worse.
RECEIVABLE TURNOVER:
Receivable Turnover Ratio or Debtor's Turnover Ratio is an accounting
measure used to measure how effective a company is in extending credit
as well as collecting debts.
Receivables turnover ratio= net credit sales/ average receivables

2014 9645774/309136=310.02 times

2015 102985916/293533.5=350.84 times
2016 112392654/439648=255.64 times
2017 122214698/672788=181.65 times
2018 124614785/1949032=63.93 times
Analysis:
The ratio increased from 310 in the year 2014 to 350 in the year 2015
meaning that the company has increased its collection of receivables but
it declined in the following years tp 255 and 181 respectively which is
not a good sign.

RECEIVABLE TURNOVER IN DAYS:

Days sales outstanding (DSO) is the average number of days that
receivables remain outstanding before they are collected.

No. of days of sales = no. of days in a period/ receivable’s turnover

 2014 365/310.02= 1.17
2015 365/350.84= 1.04
2016 365/255.64= 1.42
2017 365/181.65= 2.00
2018 365/63.93= 5.70
Analysis:
The ratio declined in 2015 meaning that it took the company a lesser
time to gather its receivables, but the days increased in the following
years showing that the company took a longer time to attain its
receivables.
PAYABLE TUNOVER:
The accounts payable turnover ratio is a short-term liquidity measure
used to quantify the rate at which a company pays off its suppliers.
Accounts payable turnover shows how many times a company pays off
its accounts payable during a period.
Payables turnover ratio= net credit purchases / average payables

2014 10108028/4528422=0.22 times

2015 1387982/5223572=0.26 times
2016 1241861/9895134=0.12 times
2017 989401/15456214=0.06 times
2018 1566514/17805947=0.08 times
Analysis:
The payable turnover ratio decreased from 0.22 in 2014 to 0.08 in 2018
which means that the company pays less of its payables which is a
measure of efficiency as either the company has lesser payables left or
they are in the long term so will have little effect on the company’s
performance which is a suitable indication in itself.
PAYABLE TURNOVER IN DAYS:
The accounts payable days formula measures the number of days that a
company takes to pay its suppliers
No. of days of sales = no. of days in a period/ payables turnover

2014 365/0.22=1659.09
2015 365/0.26=1403.8
2016 365/0.12=3041.6
2017 365/0.06=6083.33
2018 365/0.08=4562.5
Analysis:
The days in which the company pays off its payables stood at 1659 in
the year 2014 but it decreased to 1403 in 2015 depicting that the
company has increased its tendency to clear the payables but the days
then constantly increased from 3041 in 2016 to 6083 in 2017 before
finally halting after taking a slight turn too 4562 in 2018.
ASSET TURNOVER:
Asset turnover or asset turns is a financial ratio that measures the
efficiency of a company's use of its assets in generating sales revenue or
sales income to the company.
Asset turnover ratio= net sales/ average total assets
2014 96457743/86086347=1.12 times
2015 102985916/50499079=2.03 times
 2016 112392654/50024617=2.24 times
2017 122214698/54563694=2.23 times
2018 124614785/62493430=1.99 times
Analysis:
A The ratio in which the investment is converted into sales increased
from 1.12 in the year 2014 to 2.03 in 2015 and further increased the next
year to reach 2.24 but it then declined in the next two years where it
stood a 2.23 and 1.99 in 22017 and 2018 respectively showing that
Nestle Pakistan was not able to achieve the most out of its investment in
the assets in the later years.nalysis:
FIXED ASSET TURNOVER:
Fixed-asset turnover is the ratio of sales to the value of fixed assets. It
indicates how well the business is using its fixed assets to generate sales.

Asset turnover ratio= net sales/ average total fixed assets

2014 96457743/21181257=4.55 times

2015 102985916/32281390=3.19 times
2016 112392654/31225907=3.59 times
2017 122214698/32217539=3.79 times
2018 124614785/18652590=6.68 times
Analysis:
The fixed asset turnover explains how much of the sales are achieved by
the investment in the fixed assets. The ratio decreased to 3.19 in 2015
from 4.55 in 2014 but the showed an increasing trend when it reached
6.68 times in 2018 from 3.59 and 3.79 in the years 2016 and 2017
respectively which is a good sign as it means that the company was able
to achieve a higher proportion of sales from the investments in the fixed
assets.

Cash conversion cycle:

The cash conversion cycle (CCC) is a metric that expresses the time
(measured in days) it takes for a company to convert its investments in
inventory and other resources into cash flows from sales.

Cash conversion cycle= no. of days of inventory held+ average

collection period – average payment period

2014 46.6+1.1-1659 -1611.3

2015 51+1.04-1403 -1350.96
2016 52+1.42-2281 -2227
2017 63+2-6083 -6018
2018 77+6-4562.5 -4479.5
Analysis:
Smaller or shorter calculations are almost always good. A small
conversion cycle means that a company's money is tied up in inventory
for less time. In other words, a company with a small conversion
cycle can buy inventory, sell it, and receive cash from
customers in less time. As the company has answers in negative, this
means they have good cash conversion cycle.

Earning per Share:

Earnings per share (EPS) is a figure describing a public company's profit
per outstanding share of stock, calculated on a quarterly or annual basis.
Earning per share= profit after interest and tax/no. of common shares
outstanding

2014 7929271/45350 174.85

2015 8760930/45350 193.18
2016 11846973/45350 261.23
2017 14641782/45350 322.86
2018 115544582/45350 254.56

Analysis:
The high price earning ratio means that the company has very high
profitability, and as shown, nestle’ has very high price earning ratio,
which means that company is very profitable. The company with high
profits mean, all of their operations are running well.
Dividend per Share:
Dividend per share (DPS) is the sum of declared dividends issued by a
company for every ordinary share outstanding.

Dividend per share= total dividend declared/ no. of outstanding common

shares

2014 4081463/45350 89.99

2015 2267479/45350 49.9
2016 8389675/45350 184.9
2017 3627967/45350 79.9
2018 3401219/45350 75

Analysis:
High dividend per share proves to be good for the company and it’s
share holders. We can see that DPS is exceptionally high in 2016 which
means that company was most profitable in 2016. However, profitability
is increasing with every passing year.

Dividend payout ratio:

The dividend payout ratio is the fraction of net income a firm pays to its
stockholders in dividends: The part of earnings not paid to investors is
left for investment to provide for future earnings growth.
Dividend payout ratio= dividend per share/ profit after interest and tax

2014 84.9/7929271 0.00001

2015 49.9/8760930 0.000006
2016 184.9/11846973 0.000015
2017 79.9/14641782 0.0000054
2018 74.9/11544582 0.0000064

Analysis:
The dividend payout ratio between 35-55% is considered healthy for the
company and from investor’s point of view. A company that is likely to
distribute roughly half of its earnings as dividends, means the company
Is well established. According to data, company was doing best in 2017.

Price earning ratio:

The price-earnings ratio, also known as P/E ratio, P/E, or PER, is the
ratio of a company's share price to the company's earnings per share.
The ratio is used for valuing companies and to find out whether they are
overvalued or undervalued
Price earning ratio= market price per share/ earning per share

2014 90/0.15 600

 2015 50/0.17 294
2016 185/0.23 804
2017 80/0.25 320
2018 75/0.17 441

Analysis:
A company with high price earning ratio usually indicates positive
future performance and investors are willing to pay more for this
company. According to data, the company was doing very well in 2016,
as compared to rest of the years.

Market to book ratio:

The book-to-market ratio is used to find a company's value by
comparing its book value to its market value
Market to book ratio= market price per share/ book value per share

2014 90/10 9
2015 50/10 5
2016 185/10 18.5
2017 80/10 8
2018 75/10 7.5

Analysis:
It does not work well for companies with mostly intangible assets. Any
value under 1.0 is considered good market to book ratio. The company
has very high market to book ratio. Which means that company has a lot
of intangible assets.

Retention ratio:
The retention ratio refers to the percentage of net income that is retained
to grow the business, rather than being paid out as dividends. It is the
opposite of the payout ratio, which measures the percentage of profit
paid out to shareholders as dividends.
Retention ratio= 1- dividend payout ratio

2014 1-0.00001 0.99999

2015 1-0.000006 0.9999944
2016 1-0.000015 0.999985
2017 1-0.0000054 0.9999946
2018 1-0.0000064 0.9999936

Analysis:
High retention ratio has proven to be good for the company as it refers to
the percentage of net income that is retained to grow the business, rather
than being paid out as dividends. The company has almost same
retention ratio in all the years.