Financial Ratios Analysis of Nestle

Abstract

Assessment of financial performance and soundness is critical to any company. this gives the general

direction of a firm in assessing its strength and weakness in comparison to other peers in the industry.

Information obtained from financial ratios analysis is important not only to a firm's manager but also

relevant to stakeholders in making informed decisions. This study is an assessment of Nestle SA

company, by adopting financial ratios analysis. The data is obtained from the company’s financial

statements during 4 years. The study indicated that Nestle has a strong position in its liquidity and

profitability, which it has enjoyed in the last four years, through its management efficiency and a well-

reputed in the food and beverage industry.

Introduction

Nestle is a multinational corporation that largely specializes in the manufacture of food

products and pharmaceuticals among other things. The company was founded in 1866 and has its

headquarters in Vevey, Switzerland . The company was founded by US brothers George Page and

Charles Page when they realized that there were abundant milk supplies of fresh milk in Switzerland.

When they identified this, the two brothers applied knowledge that they had gained in their homeland

to establish its first production facility for condensed milk in Cham. The company currently operates in

more than 187 countries and majorly produces various products such as chocolate products, baby

foods, powdered milk, and instant coffee among other things. Since its foundation, the company has

grown systematically with the firm having various mergers and takeovers. In 1905, the company

merged with Anglo-swiss Condensed Milk Company and later Alimentana SA of Kempttal,
Switzerland in 1947 . At the start of the 20 th century, Nestle Company began diversifying its products.

In 2002 for example, the company acquired Ralston Purina and Chef America (frozen-food company.

In 2010, the company managed to enter into the frozen-pizza market through the purchase of Kraft

Foods in the U.S and Canada for about $3.7 billion. In July 2011, the company also agreed to purchase

Hsu Fu Chi International Ltd at a stake of 60 percent for about $1.7 billion. Over the years, the

company has managed to acquire various companies such as Pfizer Inc. and Mead Johnson Nutrition.

Besides, in 2013, the firm announced that it was going to expand its R&D in Singapore, with a primary

aim of creating jobs and enhancing health and nutrition in the region.

About Ration Analysis

Ratio analysis or in other terms financial ratios are evidenced to be used in calculating the

profitability and financial position of an organization . During the process of ratio analysis, the

organization concerned usually involves some parties that include the customers, the management,

owners of the firm, suppliers, competitors, and other relevant parties (AlEisaei and Nobanee, 2020).

These individuals are included with a view of applying the company's financial statements concerning

their evaluations. In a study done by Horrigan (1968), he indicates that ratio analysis has been in

existence since the early years and the main reason for its development was to use the analysis in

properties. Over recent times, ratio analysis has been utilized majorly as a standard tool for analyzing

financial statements. In the 19th century, the main reason for the use of ratio analysis has been to

understand the power of financial institutions and also the shift in the management of the organization.

This means that ratio analysis was useful in understanding the credit approach and the managerial

approach of the firm concerning how it pays its debts. For example, in a study that was done in the 19 th

century, it was found that successful firms have higher ratios as compared to unsuccessful

organizations. In another study, it was seen that the relationship between financial ratios and capacity
to pay indicates the results of ratio analysis and often influence the borrowing capacity of an

organization . Ratio analysis is also essential in organizations since it can predict the failure of a firm as

early as five years before it collapsed (Bint-Tariq and Noabnee, 2020). In this way, ratio analysis is a

powerful tool that is quite essential in organizations given that it can be used to evaluate the debt and

possible failure of a firm shortly (Al Dhaheri and Noabnee,2020

Methodology and data

In table 1, all data of Nestle company was gathered through yahoo finance. The data was used to

determine the ratios by computing the formulas. The ratios were measured only for the past four years

in which the financial activity of the company is analyzed. This compares how well the company is

doing and which weak spots they should focus on.

Table 1: Financial Data

Item/Year 2019 2018 2017 2016

Current Assets 35,663,000 41,003,000 32,190,000 32,042,000

Current Liabilities 41,619,000 43,030,000 36,054,000 37,517,000

Inventories 9,343,000 9,125,000 9,061,000 8,401,000

Cash 10,263,000 10,301,00 8,593,000 8,401,000

Receivables 9,187,000 8,871,000 10,199,000 10,023,000

Total Assets 127,940,000 137,015,000 130,380,000 131,901,000

Total liabilities 75,078,000 78,612,000 67,603,000 65,920,000

Total Equity 52,035,000 57,363,000 61,504,000 64,590,000

Sales 92,865,000 91,750,000 90,121,000 89,786,000

Cost of Goods Sold 46,647,000 46,070,000 44,923,000 44,199,000

Interest 1,214,000 1,006,000 766,000 753,000

Net Income 12,609,000 10,135,000 7,183,000 8,531,000

All numbers are in millions, Source: Yahoo finance

Discussion and Analysis

Liquidity Ratios

Liquidity ratios analysis gives a company its position on how it can efficiently meet its short-term

obligations. This ratio often determines if a firm can pay its liabilities should they arise at any given

point of time. Under this subsection, we shall analyze three components- Current ratio, Cash ratio, and

Quick ratio and evaluate the position of Nestle Company on its position.

Table 2: Liquidity ratios of Nestle company

Year/Ratio 2019 2018 2017 2016

Current Ratio 0.856 0.952 0.892 0.854

Cash Ratio 0.2466 0.2393 0.2383 0.2239

Quick Ratio 0.6324 0.7408 0.6415 0.6301

Current Ratio

YEAR Current Ratio

2019 0.856

2018 0.952

2017 0.892

2016 0.854
Calculation of current ratio

Current Assest/Current Liabilities

1; current ratio of 2019 =

CA/CL=356630000/41619000 = 0.856

2. current ratio of 2018 =

CA/CL= 41003000/43030000 = 0.952

3.current ratio of 2017 =

CA/CL = 32190000/36054000 = 0.892

4.current ratio of 2016=

CA/CL =32042000/37517000 = 0.854

The current ratio is a parameter that evaluates the company’s ability to meet its short-term obligations

and the unforeseen cash demands.

This is obtained by dividing current assets and current liabilities. From the 4-year report, the company

has managed a strong current ratio, which implies its strong position to meet unpredicted demands of

cash. The highest figure was achieved in 2018, which represented that Nestle Company was able to
meet 95% of its short-term obligations.

Cash Ratio (Nestle Company)

YEAR Cash Ratio

2019 0.2466

2018 0.2393
2017 0.2383

2016 0.2477

calculation of cash ratio ;

cash + cash equvilaent /current liabilitie

1. cash ratio of 2019

=102630000+0/41619000=0.2466

2. cash ratio of 2018

= 1030100+0/43030000=0.0239

3.cash ratios of 2017

=8593000+0/36054000=0.238
4. cash ratio of 2016

8401000+0/37517000=0.2239

Cash ratio is another important aspect of evaluating a firm position concerning meeting its short-term

obligations. In this aspect, the cash ratio evaluates the capability of a firm to offset the short-term

obligations with its cash and cash equivalents. This is a stricter parameter because it emphasizes the

firm's meeting short term demands with its most liquid assets- cash and cash equivalents. Nestle

Company has reported fluctuations in its cash ratio structure over the 4 years. In 2016, it had a better

position as compared to the other three years. A higher value implies the company is better off. 2017

and 2018 recorded the least cash ratio of 23%. However, in 2019, the company adopted a more focused

approach and increased its efficiency by 1%.

Quick Ratio

YEAR Quick Ratio

2019 0.632

2018 0.7408

2017 0.6415

2016 0.6301

calculation of quick ratio

CA-Inventory/CL
1.QUICK RATIO OF 2019

=35663000-9343000/41619000= 0.632

2. QUICK RATIO OF 2018

= 41003000-9125000/43030000= 0.740

3.QUICK RATIO OF 2017

= 32190000-9061000/36054000=0.641

4. QUICK RATIO OF 2016

= 32042000-8401000/37517000=0.630

Quick ratio assesses the extent to which cash and other currents assets can be readily converted into

cash and meet a company’s short-term obligations. The first year in 2016 reported the lowest ratio,

which implies that it could only meet 0.63 or 63% of its short-term obligations using cash and current

assets. in 2018, the company was at the highest position to convert its cash and current assets into cash

and pay off its cash demands. This shows a positive trend of Nestle Company, meaning that it can

manage its liquidity at any given point in the four years, as well as using the other cash in meeting

other company’s obligations efficiently.

Table 3: Activity Ratios (Nestle Company)

Ratio/Year 2019 2018 2017 2016

Inventory turnover 4.992 5.048 4.957 5.261

Receivables 10.1083 10.3426 8.836 8.9579

Total Asset turnover 0.7258 0.6696 0.6912 0.6807

Inventory Turnover

Ratio/Year Inventory

Turnover

2019 4.992

2018 5.048

2017 4.957

2016 5.2661

Calculation of inventory turnover ratio

1. calculation of inventory turnover 2019

= 46647000/9343000=4.992

2.calculation of inventory turnover 2018

4607000 ÷ 9125000 =0.504

3.calculation of inventory turnover 2017

44923000 ÷ 9061000 = 4.95

4. calculation of inventory turnover 2018

This is an expect used to determine how a company sells its inventory. Inventory turnover is a strong

efficiency indicator of cash flow and the general health o fa business. Higher inventory turnover in

comparison to the industry’s performance can be a good indicator of the overall health of the business

on its sales and efficient purchasing. 2016 reported the highest figure, which implies that the company

is good at managing inventory investments and avoids overstocking. The lower reports from 2017 and

2019 imply that Nestle Company had too many inventory purchases, but generally, the figures are

average.

Receivables Turnover (Nestle Company)

Ratio/Year Receivables

Turnover

2019 10.1083

2018 10.3426

2017 8.836

2016 8.9579

Calculation of receivable turnover

1. calculation of receivable turnover 2019

928635000/9187000=10.10

2.calculation of receivable turnover 2018

9175000/8871000=10.34

3.calculation of receivable turnover 2017

90121000/10199000=8.836

4.calculation of receivable turnover2016

89786000/10023000=8.95

Receivable Turnover

This is the number of times per year, that a company collects its accounts receivables on average. The

ratio is used to ascertain the ability of a firm to issue a credit to its clients and collect funds from them

efficiently. The first two years reported a lower ratio of receivables turnover, but over the years, the

company adopted aggressive collection techniques. Besides, the higher turnover attained in 2018

implies that the company derived a combination of aggressive collection team and conservative credit

policy, even though the figure decreased slightly in 2019, Nestle Company has a high number of

quality customers.

Total Asset Turnover

Asset

turnover

2019 0.7258

2018 0.6696

2017 0.6912

2016 0.6807

Calculation of assest turnover ratio

sales/totle assests

1.calculation of assest turnover ratio 2019

92865000/127940000=0.725

2.calculation of assest turnover ratio 2018

9175000/137015000=0.066

3.calculation of assest turnover ratio 2017

90121000/130380000=0.6912

4.calculation of assest turnover ratio2016

89786000/131901000=0.6807

This is another activity ratio that evaluates a firm’s ability to use its assets in generating sales
effectively. It is obtained by dividing net sales by average total assets. this ratio ascertains how a firm

efficiently engages its total assets, unlike fixed asset turnover. This aspect evaluates how much

inventory or services are sold per every dollar of the assets used in the period analyzed.

Nestle Company achieved the total asset inventory turnover in 2019, which implies that less money is

required for an investment to generate sales. Low ratios in 21016 and 2018 imply the firm had a decline

in sales and had much investment in fixed assets.

Table 4: Debt Ratios of Nestle

2019 2018 2017 2016

Debt Ratio 0.5868 0.5737 0.5185 0.4997

Times Interest 13.2018 15.33 19.29 18.87

Earned Ratio

Calculation of debt ratio

1. Debt ratio of 2019

75078000/127940000=0.5863

2. Debt ratio of 2018

78612000/137015000=0.5737

3 .Debt ratio of 2017

67603000/13038000=0.5185

4 .Debt ratio of 2016

Times Interest Earned Ratio Figure

Calculation of Times interest earned ratio

EDBIAT/Interest

1.Times interest earned ratio of 2019

16,027,000/1214000=13.2018

2.Times interest earned ratio of 2018

1542000/1006000=15.33

3.Times interest earned ratio of 2017

14779000/766000=19.29

4.Times interest earned ratio of 2016

14216000/753000=18.87

Debt ratio determines how a firm has liabilities more or less than assets. In this ratio, the company can

recognize if they are putting themselves in a risky situation in case the interest rates were to increase

out of a sudden for the loans. Also, it shows how the firm can cover its debts. For Nestle, their debt

ratio has been increasing.

As for the time's interest earned ratio, it measures how a company can pay off its debt responsibilities

based on their current profit. Nestle’s time's interest earned ratio has been decreasing since 2016.
However, they reached the highest point in 2017 for the past four years.

Table 5: Profitability ratios

2019 2018 2017 2016

ROE 24.231 17.66 11.67 13.2

ROA 9.85 7.39 5.5 6.467

Profit Margin 13.57 11.04 7.91 9.5

Return on equity calculation

1.Return on equity 2019

12609000/52035000*100=24.231

2.Return on equity 2018

10135000/57363000*100=17.66

3.Return on equity 2017

7183000/61504000*100=11.67

4.Return on equity 2016

8531000/6459000*100=13.2

Return on asset calculation

1.Return on asset 2019

2.Return on asset 2018

10135000/137015000*100 = 7.39

3.Return on asset 2017

7183000/130380000*100 = 5.5

4.Return on asset 2016

8531000/131901000*100=6.467

Profit margin ratio calculation

1. Profit margin ratio 2019

12609000/92865000*100=13.57

2.Profit margin ratio 2018

10135000/91750000*100=11.04

3.Profit margin ratio 2017

7183000/90121000*100=7.97

4.Profit margin ratio 2016

8531000/89786000*100=9.50

Profitability ratios

Firms usually use profitability ratios as a way to measure the company’s capability of making a profit
compared to their costs or any other expense during a period. Return on equity, return on asset, and

profit margin is all considered to be types of profitability ratios. Return on equity is measured by

dividing net income over equity to analyze how efficiently a company is making money from the

equity investments. Besides, the return on asset ratio measures the company’s net income to its total

assets. As for Nestle, their return on asset ratio increased the most in 2019. This is considered to be

positive because it shows that the company is earning more money on less investment. Profit margin, it

determines net income to sales in which it evaluates how good the firm is performing at handling their

finances. In 2019, nestle had increased their profit margin ratio.

Conclusion

Financial ratios analysis gives a true representation of a company’s financial health and soundness.

During the past four years, despite fluctuations in its financial statement and the economy in general,

Nestle Company has achieved efficiency in all its operations. Results from profitability show how the

company has advanced. The company did not make many profits in 2017 as they were spending more

on their expenses profile, had huge investments in inventory, increasing the cost of sales due to low

demand for its products. However, 2017 and 2018 they performed better and have improved in their

finance’s management, reducing their debtor’s collection period and managed their investment in total

assets concerning their sales.