Table of Content

Introduction.................................................................................................................................................3
Section A.....................................................................................................................................................4
Development one: Climate Change.............................................................................................................4
Development Two: Sustainability................................................................................................................5
Section B.....................................................................................................................................................6
Dividend Policy and Sources of Finance.....................................................................................................6
Dividend Policy...........................................................................................................................................6
Sources of finance.......................................................................................................................................6
Equity Fund.................................................................................................................................................7
Debt Fund....................................................................................................................................................8
Gearing Ratio..............................................................................................................................................9
Debt to Equity Ratio..................................................................................................................................10
Interest Cover............................................................................................................................................10
WACC and Capital Structure Theory application......................................................................................11
Section C...................................................................................................................................................12
Financial Performance Analysis................................................................................................................12
Profitability Ratios....................................................................................................................................12
Gross Profit Ratio (GPR)...........................................................................................................................12
Operating Profit Ratio (OPR)....................................................................................................................13
Return on Capital Employed (RoCE)........................................................................................................13
Return of Equity (RoE).............................................................................................................................14
Return on Asset (ROA).............................................................................................................................15
Liquidity Ratios.........................................................................................................................................15
Current Ratio.............................................................................................................................................15
Acid Test Ratio..........................................................................................................................................16
Efficiency Ratios.......................................................................................................................................18
Inventory Turnover Days...........................................................................................................................18
Asset Turnover..........................................................................................................................................18
Investment Ratios......................................................................................................................................19
Earnings per share (EPS)...........................................................................................................................19
Dividend cover..........................................................................................................................................20

1
Summary...................................................................................................................................................20
Conclusion.................................................................................................................................................21
References.................................................................................................................................................22
Appendix...................................................................................................................................................23

2
Introduction

A worldwide food and beverage corporation called "Nestlé" was founded in Switzerland in 1866.

With operations in 191 countries and more than 2,000 brands, it is one of the biggest food

corporations in the world. Some of these brands which offer a wide range of goods like tea,

coffee, bottled water, baby and medical food, breakfast cereals, and more are internationally

renowned, while others are just localized. It is a well-known firm in the world, particularly as a

result of the Nestlé milk chocolate bar, one of its most popular products. The business focuses on

the creation and distribution of high-quality, nutritious food items. Nestle is a major competitor

in the food sectors and has a vast portfolio.

Nestlé prioritizes people, products, and brands over systems. Nestlé is in support of long-term,

prosperous corporate growth and even more so, client lifetime value. Nestlé keeps in mind the

need for distribution, affordability, and quality improvement at the same time. Nestlé is still

concerned with meeting the needs, wants, and demands of its customers, nevertheless. Through

innovation and remodeling, Nestlé aims to gain the trust, loyalty, and preference of consumers as

well as anticipate their needs. Nestlé's commitment to quality and client happiness is among its

primary business objectives.

The author of this paper will concentrate on the Nestlé Group's financial evaluation. The

company's financial report for 2021 will serve as the foundation for the sources of information.

3
Section A

Development one: Climate Change

Climate change is a global problem. Business is also affected by it because these climatic

changes have an impact on agriculture, weather, etc. Similar to other major risks, climate change

poses a serious threat to Nestlé's operations and value chain. Dairy farming is one of the

commercial operations that releases methane and other greenhouse gases into the atmosphere,

which contribute to global warming. More specifically, insufficient rainfall in some areas of their

farms had an influence on pastures for the cows to graze on, and exposure of the farm topsoil to

high temperatures had an impact on the health of the soil. The availability and quality of raw

resources are also potentially at danger due to climate change, which has increased input prices

and price volatility (Nestle risk and climate report, 2021).

The company conducted multiple climate change risk assessments, including those at the site,

supplier, and project levels as well as climate change scenario analysis, in order to lessen these

effects. Nestlé has thus identified and begun working on certain initiatives that improve

regenerative agriculture at scale, such as by lowering methane and other GHG emissions from

the dairy sector. The results of the pilot research in South Africa are quite encouraging after just

one year. Their leading test farm decreased its "head count" of cows by 100 while simultaneously

increasing its overall milk yield by 12%. It sequestered 4200 more tonnes of CO 2 and cut

emissions by 40% by switching to solar power. It also observed a rise of 45% in soil active

carbon. There is still tremendous room for carbon sequestration (Nestle risk and climate report,

2021).

4
Development Two: Sustainability

Concerns about procuring sustainable raw materials have been raised by the company. The main

possible hazards associated with raw materials include price volatility and input cost increases,

as well as availability and quality issues. These hazards could affect the quantity and quality of

raw materials through reduced yields, yield unpredictability, and, over time, a decrease in

cultivable land (Nestle risk and climate report, 2021).

Nestle's management created a sustainable sourcing initiative, in which the business has invested

for more than 20 years, to reduce these risks. Farmers now produce more sustainably and with

more resiliency thanks to the advancement of regenerative agriculture. This program includes

putting in biogas digesters at dairy farms and planting 20 million trees a year in areas where

cocoa, coffee, and palm oil are sourced. Additionally, the company gives new coffee plantlets to

farmers that do better in areas where extreme weather occurrences occur. As a result, the

business can produce the sustainable raw materials needed for their manufacturing (Nestle risk

and climate report, 2021).

5
Section B

Dividend Policy and Sources of Finance

Dividend Policy

A business dividend policy is a formal plan for distributing dividends to its shareholders (CFA,

2022a). Nestle pays dividend annually to its shareholders. A breakdown of dividend payment in

the last 2 years is shown below;

Table 1: Nestle dividend payment between 2018-2021 (Nestle, 2022)

Year Bearer Share (CHF) Registered share (CHF) Dividend (CHF)

2018 - 79.80 2.45

2019 - 104.78 2.70

2020 - 104.26 2.75

2021 - 127.44 2.80

Sources of finance

The provision of funding for a business's need for short-term working capital, fixed assets, and

other long-term investments are sources of financing. The source of fund used by businesses

could either by from internal or externa sources. The term "internal sources of financing" refers

to funding that comes from within the company. An organization can make use of owner's

capital, retained earnings, and asset sales, among other internal methods. Because an

organization won't have to pay interest on the money, internal finance can be regarded as the

least expensive kind of financing. However, finance from individuals or other sources that don't

6
directly do business with the organization are considered external sources of funding (Ang,

1992).

Nestle group uses both equity and debt funding to finance their business operations. The

company has a total share equity of CHF46.514B for 2020 and CHF53.727B for 2021. Their

debts comprised of both long term and short-term liabilities. The company’s total current

liabilities as at 2020 and 2021 stood at CHF39.722B and CHF40.020B respectively. While the

long term liabilities were CHF37.792B and CHF45.395B for 2020 and 2021 respectively (Nestle

Annual Report, 2021).

Equity Fund

When a business raises capital through equity financing, it issues shares to investors to fund its

daily operations. This type of financing is crucial throughout the early stages of a company's

development. When using this kind of financing, investors profit from increases in share value as

well as from dividend payments made by the business in which they have invested. The primary

benefit of equity financing is that it provides an alternative funding source to obtaining loans

from banks or other financial institutions.

From the excerpt of Nestle balance sheet below, a total of CHF282 million shares were issued

and paid fully for in 2021 while CHF288 million shares were issued and paid fully for in 2020.

Even with the share treasury stock, translation and other reserves, the company had a positive

total equity of CHF53.727 and CHF46.514 in 2021 and 2020 respectively (Nestle Annual Report,

2021).

7
 Figure 1: Equity position of Nestle Group (Source: Nestle Annual Report, 2021)

Debt Fund

Debt financing is the process of obtaining loans from banks, financial institutions, or other

businesses in order to sustain a company's activities. Some interest expenditures are paid before

to the debt's maturity, and the loan principle is repaid at a later date. The first significant

drawback of debt financing is that businesses must repay both the principal and interest on their

loans, which could put a strain on their finances (Brav, 2009). The statement of financial status of

a corporation must treat this debt as a liability.

According to Nestle Annual Report (2021), below is the breakdown of their long-term debts for

2020 and 2021. Nestle financial debts as shown in Figure 1 is made up of commercial paper,

bonds, lease liabilities and other financial debts.

8
 Figure 2: Debt position of Nestle Group (Source: Nestle Annual Report, 2021)

Gearing Ratio

The gearing ratio is a crucial indicator of a company's stability because it is taken into account

when seeking outside funding. If a firm is already heavily geared, it may be very difficult for it to

borrow further money because potential lenders may look more closely at its structure and think

that it may not be able to pay its debts when they are due because it is already exposed to so

many creditors. In order to meet the demand for interest payment, a company with excess

gearing would need to generate a larger amount of profit before interest and tax (Siyanbola,

Olaoye and Olurin, 2015). Calculating for the gearing ratio, we have;

Non−current liabilities × 100 2021 2020

Non−curent liabilities+total equity
45.395 B ×100 37.792 B ×100
45.395 B+ 53.727 B 37.792 B+46.514 B

45.80% 44.83%

(Source: Consolidated Financial Statements of the Nestlé Group 2021)

The gearing ratio is seen to increase from 44.83% in 2020 to 45.80% in 2021. This means that,

Nestle increased the funding for their business operations more with liabilities in 2021 than the

equity funds. However, there has been a slight increase in the equity fund by 1.55% from the

previous year however, this did not have any significant impact on the reduction of the gearing

ratio.

9
Debt to Equity Ratio

This is a measure of the proportion of debt relative to equity, a business is using to finance its

business operations when compared to its equity (Nasution, Putri & Dungga, 2019). It is

calculated as:

Total Liabilities
Debt ¿ Equity Ration= '
Total Shareholde r s Equity

2021 2020

Debt to equity ratio 85.415 B 77.514 B

53.140 B 45.695 B

1.607 1.696

(Source: Consolidated Financial Statements of the Nestlé Group 2021)

From the calculations, Nestle had an improved debt to equity ratio in 2021 than in 2020 with a

value of 1.607 in 2021 to a value of 1.696 in 2020. This means that, the business experienced an

increase in equity funding or less interest payment in 2021 than in 2020.

WACC and Capital Structure Theory application

According to the net income capital structure theory (Durand cited in Cerkovskis, Gajdosikova &

Ciurlau, 2022) any change in the capital structure of a business will cause a change it their

WACC. The value of the WACC is low, it increases the market value of the business thereby

creating wealth for the shareholders. Liability financing may have some tax advantages over

equity financing for both depositors and the company because the taxation systems in the world

subject businesses to corporate tax and individuals to income tax, which double taxes bonuses if

the business is backed by the issuance of stock. In order to recover short- and intermediate-term

financing, capital structure theory is a crucial long-term source of funding.

10
An analysis of Nestle group annual report 2021, debt financing has increased by about 16.59%

from 2020 (debt financing increased CHF39.947B in 2020 to CHF46.574B in 2021) while equity

financing increased by 15.51% from 2020 (equity financing increased from CHF46.514B in

2020 to CHF53.727B in 2021). This showed that, the company used more of debt funding for

their business in 2021 which was reflected in an increased gearing ratio of 45.80% in 2021 as

compared to 44.83% in 2020 (Nestle Annual Report, 2021).

11
Section C

Financial Performance Analysis

1. Profitability Ratios

This ratio shows how well the company can produce a profit and return on investment. The ratios

show the business's financial health and how well it is managing its assets (Lesakova, 2007).

a. Gross Profit Ratio (GPR)

This ratio emphasizes revenue from sales of Nestle products. It is calculated as follows;

Revenue−Cost of goods sold

GPR= × 100
Revenue

2021 2020

GPR 87.088 B−45.468 B 84.343 B−42.971

×100 × 100
87.088 B 84.343 B

47.79% 49.05%

(Source: Consolidated Financial Statements of the Nestlé Group 2021)

The gross profit ratio of Nestle shows that, the GPR reduced from 49.05% in 2020 to 47.79% in

2021 which means that profitability was reduced between the 2 fiscal years of business.

12
 b. Operating Profit Ratio (OPR)

This is the profitability of a company from its operations before tax and interest deductions. It is

calculated as follows;

Operating Profits
OPR= × 100
Sales Revenue

Operating 2021 2020

Profit 11.697 B 14.796 B

×100 × 100
87.088 B 84.343 B
Ratio
13.43% 17.54%

(Source: Consolidated Financial Statements of the Nestlé Group 2021)

The company operating profit ratio dropped by 4.11% in 2021. However, the operating profit for

the company is considered to be good since it is not below 20%.

2. Liquidity Ratios

This is an indicator to measure a company’s ability to meet its short-term liabilities (Robinson,

et. al., 2015).

a. Current Ratio

This is a business's current asset to current liability ratio. It aids companies in assessing their

capacity to pay off short-term loans (debts due for payments in the coming year). It is calculated

as;

13
 Current Assets
Current ratio=
Current Liabilities

2021 2020

Current ratio 39.257 B 34.068 B

40.020 B 39.722 B

0.981 0.858

(Source: Consolidated Financial Statements of the Nestlé Group 2021)

From the calculations, Nestle had a better current ratio in 2021 than in 2020 with a 0.981 in 2021

compared to 0.858 in 2020. The current ratio of the business is good for the business.

b. Acid Test Ratio

To ascertain if a company can pay its short-term liabilities, an acid test ratio is carried out. Here,

short-term assets are compared to short-term liabilities (Tugas, 2012). The quick ratio is another

name for this ratio. It is calculated as follows;

Current Assets−Inventory
Acid Test Ratio=
Current Liabilities

2021 2020

Acid Test Ratio 39.257 B−11.982 B $ 34.068 B−10.101 B

40.020 B 39.722 B

0.6815 0.6034

The acid test ratio showed that Nestle’s liquidity position undergone a change in a space of one

financial year with an improved acid test ratio from 0.6034 in 2020 to 0.6815 in 2021. This

means that Nestle’s performance in terms of meeting short-term financial obligations was better

in 2021 than in 2020.

14
 3. Efficiency Ratios

This is a measure of how well a business uses its assets and liabilities internally (Rashid, 2021).

a. Inventory Turnover Days

This is a typical indicator of a company's operational effectiveness in terms of the management

of its assets. It is calculated as;

Average Inventory
Inventory Turnover Days= ×365
Cost of Goods Sold

2021 2020

Inventory Turnover 11.982 B 10.101 B

×365 ×365
45.468 B 42.971 B
days
26.35 days 23.51 days

(Source: Consolidated Financial Statements of the Nestlé Group 2021)

In 2020, Nestle needed an average of 23.51 days to turn its inventory into sales but in 2021, the

company required an average of 26.35 days to turn its inventory into sales. This means that,

Nestle sales is less efficient in 2021 compared to its 2020 turnover days.

b. Asset Turnover

This is the ratio between the value of a business’s sales or revenue and the value of its assets. It is

calculated as thus;

Revenue
Asset Turnover=
Total Assets

2021 2020

Asset Turnover 87.088 B 84.343 B

139.142 B 124.028 B

15
 0.6259 0.68

(Source: Consolidated Financial Statements of the Nestlé Group 2021)

The asset turnover shows that Nestle experienced a better asset management in 2020 than in

2021 which was observed with a better efficiency ratio of 0.68 in 2020 when compared to 0.6259

in 2021.

4. Investment Ratios

a. Earnings per share (EPS)

This equates the company's profits to the typical number of shares outstanding during the period,

and it is viewed as an indicator of the real growth of the company. It is calculated as;

Net Income
Earnings per share=
Number of ordinary shares

2021 2020

Earnings per share 22.562 B 8.740 B

3.723 B 2.032 B

6.06 4.30

(Source: Consolidated Financial Statements of the Nestlé Group 2021)

Based on the calculations, there has been an improvement in the earnings per share of Nestle

between 2020 and 2021. At 2020, the earning per share was CHF4.30 but in 2021, the earning

per share was CHF6.06. This shows that Nestle experienced improved performance and growth

compared to the previous year’s performance.

16
 b. Dividend cover

This shows the number of times a business can pay dividends to its shareholders. It is calculated

as:

Net Profit
Dividend cover= odinary shareholders ¿
Total dividend declared ¿

2021 2020

Price per earning 22.562 B 8.740 B

7.681 B 7.700
ratio
2.94 times 1.135 times

(Source: Consolidated Financial Statements of the Nestlé Group 2021)

The company experienced a higher dividend cover in 2021 (2.94 times) than in 2020 (1.135

times). Since the ratio is more than 1, this means that Nestle Group earnings in both years of

business was able to pay the shareholders’ dividends.

Conclusion

The financial ratio of Nestle group has revealed the true status of the company between 2020 and

2021 business year. As observed, the business experienced a significant improvement in its

operations. The business experienced about 7.5% organic growth and 5.5% real internal growth,

the trading profit margin was 14% while the earnings per share increased by 41.1% and the

dividend paid to shareholders saw an increase value by 1.8%. Thus, Nestle group had a good

business year in 2021.

17
References

Ang, J. (1992). On the theory of finance for privately held firms, Journal of Small Business
Finance 1, 185–203.

Brav, O. (2009). Access to capital, capital structure, and the funding of the firm, Journal of
Finance 64, 263-308.

Cerkovskis, E., Gajdosikova, D., Ciurlau, C.F. (2022). Capital structure theories: Review of
literature, Ekonomicko-manazerske spektrum, 16(1), 12-24.

CFI (2022a). Sources of funding. Available at:

https://corporatefinanceinstitue.com/resources/knowledge/finance/sources-of-funding/
[Accessed 15 July 2022]

Lesakova, L. (2007). Uses and limitations of profitability ratio analysis in managerial practice.
5th International Conference on Management, Enterprise and Benchmarking. Budapest,
Hungary. June 1-2.

Nasution, Asrizal & Putri, Linzzy & Dungga, Shinta. (2019). The Effect of Debt to Equity Ratio
and Total Asset Turnover on Return on Equity in Automotive Companies and Components
in Indonesia. 10.2991/icame-18.2019.20.

Nestle (2021). Nestle annual report 2021. https://www.nestle.com/investors/annual-report

Nestlé’s TCFD Report (2021). Creating Shared Value and Sustainability Report 2021. Nestlé’s
2021 climate risk and impact report.

Rashid, C. (2021). The Efficiency of Financial Ratios Analysis To Evaluate Company's

Profitability. 119-132.

Robinson, T., Henry, E., Pirie, W., Broihahn, M. (2015), International Financial Statement
Analysis. 3rd ed. New Jersey: John Wiley & Sons, Inc

Siyanbola, T., Olaoye, S. & Olurin, O. (2013). Impact of Gearing on Performance of Companies.
Nigerian Chapter of Arabian Journal of Business and Management Review. 3. 68-80.
10.12816/0011650.

18
Tugas, F. (2012), Comparative analysis of the financial ratios of listed firms belonging to the
education subsector in the Philippines for the years 2009-2011. International Journal of Business
and Social Science, 3(21), 173-190.

19
Appendix

20
21
22
23
24