Global MBA

Module: Accounting and Managerial

Finance

Assignment Title : Analyzing the Annual Report of Nestle Company

Assignment Type : Formal Report

Student Name : Sai Rajendra Wandhekar

Student ID : Q1041442

Date : 08 February, 2023

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 Statement of compliance with academic ethics and the avoidance of
plagiarism

I honestly declare that this essay is entirely my own work and none of its part has been copied from
printed or electronic sources, translated from foreign sources and reproduced from essays of other
researchers or students. Wherever I have been based on ideas or other people texts I clearly declare it
through the good use of references following academic ethics.

(In the case that is proved that part of the essay does not constitute an original work, but a copy of an
already published essay or from another source, the student will be expelled permanently from the
postgraduate program).

Name and Surname (Capital letters): SAI WANDHEKAR

.......................................................................................................................................

Date: .08/02/2023

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TABLE OF CONTENTS

Contents
INTRODUCTION.......................................................................................................................................4

TASK 1.......................................................................................................................................................5

1.1 Segment Analysis of Nestle..............................................................................................................5

1.2 SWOT Analysis of Nestle & PepsiCo...............................................................................................5

TASK 2.......................................................................................................................................................8

2.1. Conceptual framework of Nestle......................................................................................................8

2.2. Assumptions, Principles & Constraints............................................................................................11

TASK 3.......................................................................................................................................................8

2.1. Meaning of financial position............................................................................................................8

2.2. Detailed analysis of Nestle’s liquidity, solvency position, and profitability position.......................11

TASK 4.......................................................................................................................................................8

2.1. Budget of Nestle...............................................................................................................................8

2.2. Forecasted Profit & Loss account statement for Nestle...................................................................11

TASK 5.......................................................................................................................................................8

2.1. Meaning and Relevance of Job Order Costing and Absorption Costing and critically analyze..........8

REFERNCES............................................................................................................................................12

CONCLUSIONS.......................................................................................................................................12

BIBLIOGRAPHY.....................................................................................................................................13

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INTRODUCTION

The importance of financial analysis in revealing a company's financial situation cannot be overstated.
Three examples of conceptual frameworks used by businesses will be discussed in this study, together
with the conceptual framework of accounting. The Nestle Company, a multinational food and beverage
corporation based in Switzerland and traded on the SIX Swiss Exchange, will be the subject of the
report's financial situation.

On the other side, Pepsico will be chosen as a rival of Nestle because it is likewise one of the top brands
in the food, snack, and beverage sectors. In this study, we'll talk about the value of Nestle's balance sheet,
liquidity, and profitability position. On the report, forecasts will also be done for Nestle's budget and
profit & loss statement. The use and significance of job and absorption costs will be briefly explored in
the study.

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Task 1: Segment Analysis on chosen company & its competitor

1.1. Meaning Of Segment Analysis

The process of locating and assessing various market segments or subsets of a company's clientele is
known as segment analysis. Understanding the traits and behaviors of various client segments
enables businesses to better cater their services, products, and marketing initiatives to match their
demands.

In a typical segment analysis, segments are defined based on demographic, psychographic,

geographic, or behavioral criteria, and then the size, growth, profitability, and potential for future
growth of each segment are examined. Making informed judgments about product development,
marketing, and distribution strategies can be done using this information to rank investments in
various market segments.

In the business world, segment analysis aids organizations in comprehending the various wants and
preferences of their target customers, which can improve customer satisfaction and boost sales and
profits.

1.2. Segment analysis between Nestle & PepsiCo

Two of the biggest food and beverage corporations in the world are PepsiCo and Nestle.
Both companies offer a wide range of goods, including soft drinks, snacks, dairy items, and
more.

Both businesses operate in similar market segments:

Beverages: PepsiCo and Nestle both have significant brands in this sector, including Pepsi,
Mountain Dew, and Gatorade, while Nestle has Nescafe and Nestea.

Both businesses have a wide range of snack brand names; PepsiCo offers Lay's, Doritos,
and Cheetos, while Nestle offers KitKat, Aero, and Smarties.

Dairy: PepsiCo's involvement in this market is restricted to their Tropicana brand, whereas
Nestle has a significant presence with brands like Nesquik, Carnation, and Gerber.

Overall, both businesses have robust and broad product portfolios, although PepsiCo is more
dominant in the drinks market than Nestle is in the dairy industry.

1.3. SWOT Analysis

A strategic planning tool known as SWOT analysis aids firms in determining their Strengths,
Weaknesses, Opportunities, and Threats (SWOT). It is a framework that aids companies in
assessing both internal and external variables to better understand their current status and
make future decisions.

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Both Nestle and PepsiCo are reputable businesses with well-known brands and wide-ranging
product lines. Nestle enjoys a solid reputation for producing high-quality goods and has a strong
distribution network, but it is having trouble adapting to shifting consumer preferences and
having a small market share in the health and wellness sector. The impression of PepsiCo's
products as harmful and their limited presence in the health and wellness market, on the other
hand, pose hurdles despite their tremendous brand awareness and financial stability. Both
businesses have room to develop by entering new areas and taking advantage of the rising
demand for healthy products. They are, however, also threatened by fierce competition and
shifting customer tastes. Both businesses will need to keep innovating and adapting to shifting
market trends and customer preferences if they want to stay competitive.

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TASK 2 : Explain what conceptual framework is. Explain any three Assumptions/ Principles/
Constraints and illustrate their applicability by showing examples from the chosen case
company.

2.1. Meaning of Conceptual Framework

A conceptual framework is a methodical way of organizing and comprehending a complicated

idea, hypothesis, or concept. It aids in thinking organization and clarity by providing a visual
depiction of the interactions between many variables and concepts. A conceptual framework in
research acts as a road map for the study, illuminating the connections between variables,
theories, and the research issue under consideration. It aids in locating knowledge gaps and
serves as a foundation for the creation of new theories or the improvement of established ones.
In order to explain difficult concepts and help researchers and practitioners make wise
judgments, conceptual frameworks are frequently employed in the social sciences, business,
and other professions.
A conceptual framework for Nestle could incorporate several crucial elements that aid in
comprehending the business strategy, operations, and success aspects of the organization. A
conceptual framework for Nestle might contain, among other things:

1. Product Portfolio: Nestle has a broad range of products, with a specialization in health
and wellbeing. This covers a broad range of food and drink items, including coffee,
candy, bottled water, and pet food.
2. Market Presence: Nestle is well-known throughout the world and has a heavy emphasis
on emerging areas for expansion. The business operates in more than 190 nations and
has a strong distribution network.
3. Business Plan: Nestle has a long-term business plan that places a strong emphasis on
innovation, sustainability, and a dedication to health and wellbeing. The business also
places a lot of emphasis on R&D to promote growth and innovation.
4. Corporate Social Responsibility: Nestle is dedicated to sustainability and social
responsibility, which includes community involvement, ethical sourcing, and
environmental sustainability.
5. Financial Performance: Nestle has a proven track record of profitability, steady sales
growth, and solid financial performance. The company's significant market presence,
wide range of products, and successful business strategy all contribute to its great
financial performance.

Using these components, it is possible to analyse the activities of the business and come to
well-informed conclusions on the business and success aspects of Nestle.

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2.2 Assumptions, Principles, Constraints

A. Assumptions

i. Consumer behavior assumption: Nestle's conceptual framework assumes that

consumers base their purchases on considerations such as their needs,
preferences, and the perceived value of the good. For instance, Nestle believes
that if its coffee products are perceived as being of great quality and reasonable
price, consumers will buy more of them.

ii. Competitive environment assumption: The conceptual framework assumes that

Nestle operates in a competitive environment and must take its competitors'
activities into account in order to stay competitive. For instance, Nestle must
keep an eye on what its rivals are doing and modify prices, marketing plans, and
product offerings as necessary.

iii. Technology and innovation: These are assumed to be important factors in

Nestle's operations and must be considered when making decisions, according
to the conceptual framework. For instance, Nestle makes investments in R&D to
create new products and enhance its production techniques. It also embraces
cutting-edge technology like automation and artificial intelligence to boost
productivity.

B. Principles

i. Sustainability: The company Nestle is dedicated to sustainability in all facets of

its operations. This include cutting waste, obtaining raw materials ethically, and
lowering its carbon footprint. By 2025, Nestle, for instance, wants all its
packaging to be recyclable or reusable.

ii. Innovation: Nestle is always seeking for fresh approaches to enhance its goods
and satisfy shifting consumer demands. Introducing new product lines and
enhancing current ones to make them healthier and more practical are both
included in this. To accommodate the rising demand for vegetarian options,
companies like Nestle have created plant-based substitutes for meat products,
such as the "Awesome" burger.

iii. Health and Wellness: Nestle is dedicated to encouraging healthy living and
offering wholesome food options to consumers. This involves promoting physical
activity and healthy eating practices, as well as providing products with less
sugar and salt. As an illustration, Nestle created the "Nestle for Better Kids"
program, which offers information and services for families to support children in
leading healthier lifestyles.

C. Constraints

i. Regulations: At both the national and international levels, Nestle is governed by a

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 number of laws, including those pertaining to food safety, labeling, and
advertising. As an illustration, Nestle must abide by FDA rules for food labeling,
which mandate that it include accurate details about the ingredients, nutritional
value, and allergen information of its goods.

ii. Competition: Nestle competes with other big food and beverage corporations in a
market that is very competitive. Due to this, it may not be able to control prices
and promote growth. For instance, Nestle could need to offer discounts or new
products in response to competitive pressure in order to stay competitive.

iii. Raw Material Costs: Raw material prices, including those for dairy, cocoa, and
coffee, can vary greatly. This may have an impact on Nestle's profitability and
constrain its capacity to fund projects promoting innovation and sustainability. For
instance, a rapid rise in coffee bean prices could influence Nestle's coffee
business and financial results.

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TASK 3: Analysis of Ratios, Financial Position, and Data that Can Be Used to Determine the
Company's Solvency

3.1. Meaning of Financial Position

A company's entire financial stability and health, as shown by its balance sheet and other financial
statements, is referred to as its financial position. By analyzing the company's assets, liabilities, and
equity, which give a quick overview of the company's financial situation and capacity to fulfill its
responsibilities, this position is established. The company's financial status can be used to decide on
future investments or business strategy as well as to analyze the risk involved in investing in or doing
business with the company.

The balances of an organization's assets, liabilities, and equity at the end of the fiscal year are also
referred to as its financial position (Kurniawan, 2021). An organization's assets and obligations are listed
in its balance sheets, and when assets exceed liabilities, the organization is said to be solvent (Wraith,
2022). If the total number of liabilities exceeds the realizable worth of the company's assets, that situation
is known as insolvency.

In Euro
Notes 2021 2020
Assets

Current assets
Cash and cash equivalents 12/16 7018.55 5257.89
Short-term investments 12 7037.64 3388.75
Inventories 6 12034.39 10145.16
Trade and other receivables 7/12 11203.77 10792.98
Prepayments 577.51 479.09
Derivative assets 12 279.22 311.36
Current income tax assets 1209.26 711.10
Assets held for sale 2 68.30 3130.63
Total current assets 39,428.64 34,216.96

Non-current assets
Property, plant and equipment 8 28468.93 25952.98
Goodwill 9 31147.59 27740.76
Intangible assets 9 22320.16 20236.09
Investments in associates and joint ventures 14 11857.62 12057.49
Financial assets 12 2836.35 2605.34
Employee benefits assets and reimbursement rights 10 2427.57 470.05
Deferred tax assets 13 1263.50 1290.62
Total non-current assets 1,00,321.72 90,353.33

Total assets 139,750.36 124570.29

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In Euro
Notes 2021 2020
Liabilities and equity

Current liabilities
Financial debt 12 10136.12 12 019
Trade and other payables 7/12 20 907 18 515
Accruals 5 051 4 917
Provisions 11 532 508
Derivative liabilities 12 464 254
Current income tax liabilities 2 962 2 661
Liabilities directly associated with assets held for sale 2 12 848
Total current liabilities 40 020 39 722

Non-current liabilities
Financial debt 12 36 482 27 928
Employee benefits liabilities 10 3 779 5 118
Provisions 11 1 106 1 029
Deferred tax liabilities 13 3 794 2 636
Other payables 12 234 1 081
Total non-current liabilities 45 395 37 792

Total liabilities 85 415 77 514

Equity 17
Share capital 282 288
Treasury shares (6 194) (6 643)
Translation reserve (22 266) (24 397)
Other reserves (45) (365)
Retained earnings 81 363 76 812
Total equity attributable to shareholders of the parent 53 140 45 695
Non-controlling interests 587 819
Total equity 53 727 46 514

Figure1: Balance Sheet of Nestle for FY 2020-2021

(Source: Nestle)

Information regarding Nestle's balance sheet for the fiscal year 2020–2021 is shown in Figure 1. Figure 1
also showed that Nestle had more assets than liabilities during the previous two years and that its worth
exceeded that of its net asset. The growth in Nestle's net assets in 2021 suggested that the company's
solvency position had improved in that year. This showed that Nestle's solvency position improved more
in 2021 than it did in 2020.

3.2. Liquidity Position Analysis

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 1.68
1.8
1.6

Ratio in percentage
1.4
1.05 0.980.81
1.2
0.68
1 0.60 0.830.66
0.8 Current Ratio
0.6 Quick Ratio
0.4
0.2
0
2021 2020 2021 2020
Nestle PEPSICO

Graph 1: Liquidity Analysis of Nestle & PepsiCo

(Source: Nestle & PepsiCo)

This organization's ratio shows how well a business is at managing its liquidity. The organization's ability
to meet its short-term obligations is shown by its liquid ratio (Pereira et al. 2019, p.5). A current ratio is
"between" 1 and 1.5 when the ideal ratio is taken into account. In the graph 1, it can be seen that
Nestle's current ratio declined by 0.63% in 2021, yet it was still excellent compared to PepsiCo. Both
companies' quick ratios are less than 1, which indicates that they don't have enough cash on hand to
cover their debts and other obligations. However, it may be claimed that Nestle has better liquidity than
PepsiCo from a comparison standpoint.

3.3. Solvency Position Analysis

4 3.63
3.28
3.5
3 2.51
Ratio in percentage

2.5
2
1.5 0.921 Debt to assets
0.68 Debt to equity
1 0.441 0.44 0.48
0.5
0
2021 2020 2021 2020

Nestle PEPSICO

Graph 2: Solvency Analysis of Nestle & PepsiCo

(Source: Nestle & PepsiCo)

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The solvency ratio of both businesses may be evaluated from Graph 2 based on how well they have
done throughout the years at using their capital to make a profit. The two largest food and beverage
firms' debt-to-assets and debt-to-equity ratios are computed to determine how effectively they are
running their businesses (Ruwanti et al. 2019, p.5). The debt-to-asset ratio, on the other hand, shows
how much asset will be needed to pay off all debt, and a high ratio suggests default risk (Husna and
Satria, 2019). In the years 2021 and 2020, respectively, Nestle's debt to assets was 3.63% and 0.921%, as
seen in the graph above. PepsiCo's debt-to-assets ratio for the same years was 2.51% and 3.28%, which
clearly shows that Nestle has handled its debt better than PepsiCo.

A high ratio suggests a possibility of default in the near future since debt-to-equity ratio gauges the
proportion of debt to equity (Nuryani and Sunarsi, 2020). Nestle's debt to equity ratio was extremely
low in 2020, but it rose by 0.24% in 2021. On the other side, PepsiCo's ratio was low.

3.4. Profitability Position Analysis

60.00 53.35 54.82

48 49.3
50.00
Ratio in percentage

40.00

30.00
19.33
14.44 Gross Profit Margin
20.00
9.59 Net Profit Margin
10.00
0.48
0.00
2021 2020 2021 2020

Nestle PEPSICO

Graph 3: Profitability Analysis of Nestle & PepsiCo

(Source: Nestle & PepsiCo)

The ability of a company to generate revenue from its operations in the form of gross margin, net
margin, and operating margin is shown by this ratio (Oprea et al. 2019, p.15). However, the gross and
net margins of both businesses have been determined in the current calculation, which can be seen in
Graph 3 above. In the years 2021 and 2020, Nestle's gross profit margin was 48% and 49.3%, while
PepsiCo's GPM was 53.35% and 54.82%. Nestle's net margin for the corresponding years was 19.33%
and 14.44%, respectively. PepsiCo's was 9.59% and 0.48 percent. The data makes it quite evident that
PepsiCo has more profitability than Nestle. On the other hand, it may be claimed that in order to
maximize profitability, a firm must concentrate on the caliber of the service it offers to its clients.

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TASK 4: Budget Forecasting for Chosen Company and Preparing Forecasted Profit and Loss
Account

4.1. Budget forecasting for Nestle

An essential step in the financial planning process is budget forecasting. It is a tool that can be used to
foresee the future and make preparations for it. Organizations can distribute resources, plan effectively,
and make informed decisions with the aid of an accurate budget prediction. Budget forecasting starts
with collecting and analyzing historical data. Future trends and budgetary requirements can be
predicted using this data (Shally and Kumar, p.8). Organizations should also take future changes into
account, such as inflation, population expansion, and economic shifts. Organizations must create future
assumptions after the evidence has been analyzed and gathered. These presumptions ought to be
supported by study and experience, and they ought to be modified as required. When deciding how to
anticipate their budget, organizations should take their aims and objectives into account. Organizations
must develop a budget plan when the assumptions have been determined. This strategy should outline
expected revenue and expenditures as well as a budget. A schedule for when the budget will be
executed ought to be included. When constructing a budget forecast, businesses should take
eventualities into account (Stavrinides and Karatza, 2019, p.9). Unexpected occurrences could cause
contingencies that would impact the budget. Organizations should prepare for these eventualities and
develop a backup plan in case they do.

Actual Forecast
Growt
Forecast Forecast
Particulars 2020 in h/
2021 in Million of 2022 in of 2023 in
Million Declin
Million Million
e
Revenue £ £
1.656.231.730,4 1504141830.0 £ £
4 0 2.92% 30,766.70 31,663.81
Cost of sales -£27,529.00 -£27,203.00 - -
£27,858.9 £28,192.7
1.20% 1 7
Gross profit/(loss) £2,366.00 £1,845.00 £ £
2,907.79 3,471.05
Administrative expenses -£1,430.00 -£1,702.00 -
15.98 -£ -£
% 1,201.47 1,009.46
Other income £220.00 £13.00 15.00 £ £
% 253.00 290.95
Operating profit/(loss) £1,156.00 £156.00 £ £

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 1,959.32 2,752.54
Finance income £20.00 £32.00 -
37.50 £ £
% 12.50 7.81
Finance costs -£322.00 -£352.00 -£ -£
-8.52% 294.56 269.45
Profit/(loss) before tax £854.00 -£164.00 £ £
1,677.26 2,490.90
Income tax (expense)/credit -£177.00 -£37.00 378.38 -£ -£
% 419.32 622.72
Profit/(loss) for the financial £677.00 -£201.00 £ £
period 1,257.95 1,868.17

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CHAPTER 5

TASK 5
5.1. Meaning & Relevance of Job Order Costing & Absorption Costing
Job Order Absorption and Costing To determine the price of creating a good, cost accounting
uses two methods: costing and costing.
A system called "job order costing" is used to calculate the price of a particular job or order. It
allocates direct labour, direct materials, and overhead costs to specific jobs. Companies that
create distinctive goods or services can benefit from this strategy since it enables the tracking of
task costs and gives data for pricing and cost management.
Direct and indirect expenses are both factored into the price of a product using the absorption
costing approach, sometimes referred to as full costing. The final cost for any product is
calculated by adding together all manufacturing expenses, such as direct materials, direct labor,
and overhead. This method can help determine the cost of production for each unit and can give
information for pricing and budgeting, making it beneficial for businesses that create huge
quantities of comparable goods.
Large global food and beverage producer Nestle makes a variety of goods, such as coffee,
bottled water, candy, and dairy products. Nestle probably uses a mix of Job Order Costing and
Absorption Costing given the variety of their product line. For instance, absorption costing is
used to calculate the total cost of production for a company's normal product lines, whereas job
order costing is sometimes used to calculate the cost of producing a company's special editions
or custom orders.
Let’s make this concept clearer with the brief examples.

Here we can consider the manufacturing of a unique flavor of Nestle's well-known chocolate bar
brand as an illustration. Since each bespoke flavor represents a distinct job or order, job order
pricing would be the more suitable strategy in this situation. The price for the customized
product would be determined using the direct materials, direct labor, and overhead costs related
to the production of this particular flavor.

Let's contrast this with the manufacture of Nestle's popular chocolate bar brand. Due to the
company's extensive production of identical goods, absorption costs would be the better
approach in this situation. The total cost of production for each unit would be calculated by
factoring in all manufacturing expenses, such as direct materials, direct labor, and overhead.
Prices for the common chocolate bars would be determined using this information, along with
decisions regarding the effectiveness of the production process and cost management.

In conclusion, Nestle is able to precisely calculate the cost of production for a wide range of
products by using the job order costing and absorption costing methodologies. The corporation
may make sure that it is pricing its items fairly and deliberating wisely regarding production and
cost control by employing these techniques.

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CONCLUSION

Reports on Nestle's financial health and performance have been debated. This study includes a segment
analysis of Nestle. In contrast, PepsiCo, a rival of Nestle, has five categories. According to a liquidity and
probability analysis, PepsiCo continues to be in a more profitable position than Nestle while maintaining
a higher level of liquidity and solvency. Nestle's P&L account and budget projections for the years 2023
and 2024 are based on historical growth or reduction in a number of transactions. The research has
covered the applicability of Job and Absorption Costing as well as its implications.

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BIBLIOGRAPHY

Journals

https://www.nestle.com/ for Annual Report & Data

www.statista.com for Ratio Analysis

https://www.dairyreporter.com/Article/2022/02/17/Nestle-reports-full-year-results-for-2021

Annual Report available at - https://www.nestle.com/sites/default/files/2022-03/2021-annual-

review-en.pdf

Consolidated Financial Statements of the Nestlé Group 2021" (PDF). Nestle. 17 February 2022. Retrieved 15
April 2022.

PepsiCo, Inc. Company History". Funding Universe. Retrieved December 14, 2010.

LARA FADEL ALKADMANI, HAITHAM NOBANEE (2020) “A study on financial ratio analysis
of nestle” July 2020

Mowbray, Sean (13 May 2017). "A Brief History of the Nestlé Brand". Culture Trip. Retrieved 16 January 2020.

Dr. S. Vijayalakshmi, Issue 06 June 2021, Analysis on Liquidity and Profitability Position of Food
and Beverage Product Industry

https://www.scribd.com/doc/137197151/Nestle-Research-Paper

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