Financial ratios analysis project at Nestle and Engro Foods

Executive Summary:

The report which is based on the financial ratio analysis of NESTLE and ENGRO
FOODS. By going through all the financial statements it is known that overall NESTLE is
working so well if compared to ENGRO FOODS. But by going through the financial ratio
analysis the facts were that ENGRO is much more competitive than NESTLE. As ENGRO
FOODS is not in the market as long as NESTLE is. This is analysed through financial ratio
analysis that ENGRO is working so efficiently and effectively and is coming up with new
features and advanced technology that others are not using. In the report history of both
companies, SWOT analysis, financial statements, financial ratios, financial ratio analysis,
cash budget and finally the report is concluded and recommendations are given at the end.

Introduction:

This is the project about financial statement analysis of two companies of the same
industry. In this regard the companies which were chosen to be analysed are NESTLÉ
Pakistan and ENGRO FOODS LIMITED. Both the companies are of food industry and are
dealing in food business for many years. The companies are well reputed in the market and
deal in a very wide range of food products. As NESTLÉ, a very, well-known brand started
its’ business life with only one product and that was condensed milk for infants. And now it
has captured everyone’s mind for its tempting products; as chocolates, coffee, bottled water,
powdered milk, flavoured milk, tea whitener and many more.

ENGRO foods is also a very, well-reputed company which produces a wide range of
healthy food products. Is product line contains products such as milk, tea whitener, cream, ice
cream, juices, flavoured milk and many others. ENGRO foods is the 1st company which is
using Bactofuge technology. The company has not been in this business for as long as
NESTLÉ is, but the way it has grown up is appreciable. It has come up with innovative
features in its products. Through its financial statements it is analysed that how efficiently it
has increased its share price from Rs. 17 to Rs. 25. It provides many incentives to it
stockholder’s is also growing its market share. 
 Vision:

“Nestlé’s global vision is to be the recognized leading Nutrition, Health and Wellness
Company. Nestlé 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 play a significant and responsible role in the Social, Economic, and
Environmental sectors of Pakistan.”

Mission:

“Nestlé 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, Nestlé contributes to your well-being and enhances
your quality of life.” 3.4 Goals and Objectives The goals and objectives of Nestlé Pakistan
are simple and well designed with the core strategies to meet the demand of the consumers
and to fulfil the needs of the customers.
 Data table:

ANALYSIS OF INCOME STATEMENT OF NESTLE AND ENGRO

We have made analysis between Engro and nestle companies .here we analyse 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 Engro. 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 complains 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
Capital Market Analysis:
Ratios Price Earnings (PE)
Ratio Price Earnings (PE) Ratio = Market Price per 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.