Analysis of Nestle PDF

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Financial and non financial analysis...

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Nestlé S.A.

Prepared by: Fizza Zainab Jatoi (23920) Zahra Zubair (24779)

Section D

Table of Contents Executive Summary…………………………………………………………………….3 Introduction………………………………………………………………………………..4 Financial Analysis………………………………………………………………………..5 Non financial Analysis…………………………………………………………………11 Recommendations……………………………………………………………………..13 Conclusion………………………………………………………………………………….14 References……………………………………………………………..……….………….15

Executive Summary This report highlights the financial and non financial analysis of Nestle S.A. over the last three years (2016-2018). It indicates the position of the company in the industry through financial analysis by using different financial ratios to assess the company. The financial analysis shows company’s performance over the last three years is stable in comparison to the industry and company is generating reasonable profit through its sales. It also shows that the creditors of the company have higher stakes in the company than the investors. Moreover, it shows that Nestle has twice as many as assets as liabilities, which makes it easier for them to pay their debt. The non financial analysis of Nestle shows the position of the company in the society and its efforts for the betterment of the society. It shows the measures Nestle has taken for sustainable farming and for healthy lives of children all over the world. This report also indicates that Nestle is actively participating in the society through different programs.

INTRODUCTION Nestle is a Swiss multinational food and drink processing company, its headquarters is located in Vevey, Vaud, Switzerland. The company was established in 1905 by the merger of Anglo-Swiss Milk Company that was owned by brothers Charles and George page, and Farine Lactée Henri Nestlé that was formed by Henri Nestle in 1866. It is the biggest food company in the world, with the market capitalization of more than $247 billion. Nestle has 447 factories and is operating in more than 180 countries. It has more than 300,000 employs around the globe and is one of the main shareholders of L’Oreal. Nestle has more than 2000 brands with a wide range of products across market including, bottled water, infant food, medical food, pet food, breakfast cereals, coffee and tea, ice cream, frozen food, medical food, confectionary, dairy products and snacks. Twenty-nine of the Nestle products have yearly sales of more than $1 billion. Nestle ranked no. 33 on the Forbes Global 2000 list of biggest public companies and ranked no. 64 on Fortune Global in 2017. During all these years, Nestle has made several corporate acquisitions including Crosse and Blackwell in 1950, Findus in 1963, Libby in 1971, Klim in 1988 and Gerber in 2007. In 2012, the company acquired Vitaflo and Vital foods. The most recent acquisition of Nestle was in September 2017 when the company acquired majority stakes of blue bottle.

Financial Analysis To evaluate the financial performance of Nestle over the last three years, we are now going to execute a financial analysis of the company using different financial ratios.

Liquidity Ratios: Liquidity ratios are used to measure a company’s ability to reimburse both current and non-current liabilities.

Current ratio: Current ratio= Current assets/ Current liabilities The current ratio of Nestle over the last three years shows the following data (in millions of CHF): 2016 2017 2018

Current assets

Current liabilities

Current ratio

32042 32190 41003

37517 36054 43030

0.854 0.892 0.952

The table above shows that the current ratio of Nestle over the last three years has slightly increased, but the company still does not have enough liquid assets to cover its short term liabilities. The company has more liabilities to pay and their current assets are less in numbers, which indicates that Nestle may have difficulties to meet their short term liabilities as their current ratio is less than 1. But this low ratio can be justified since the company receives cash from the customers before paying their suppliers and Nestlé’s current ratio is better in comparison to the industry’s current ratio of 0.87.

Acid-test Ratio: Acid-test ratio= Current assets – Inventories/ Current liabilities The acid-test ratio of Nestle over the last three years shows the following data (in millions of CHF):

2016 2017 2018

Current assets

Inventories

Current liabilities

Acid-test ratio

32042 32190 41003

8401 9177 9125

37517 36054 43030

0.630 0.638 0.740

The acid-test ratio of Nestle shows that the company relies on its inventory to pay off its short-term liabilities. Compared to the ratio of this particular industry, which is 0.61, Nestle is in a better place because, when the industry depends upon inventory the less than 1 ratio is not a bad sign for companies.

Leverage Financial Ratios: Debt Ratio: Debt ratio= Total liabilities/ Total assets The following table shows the debt ratio of Nestle over the last three years (in millions of CHF): Total liabilities

Total assets

Debt ratio

2016

65920

131901

0.49

2017

70981

133210

0.53

2018

78612

137015

0.57

The debt ratio analysis shows that Nestle has a stable business; the average debt ratio the over past three years is 0.53, which means Nestlé has twice as many assets as liabilities.

Debt to Equity Ratio: Debt to equity ratio= Total liabilities/ Shareholder’s equity The table below shows, the debt to equity ratio of Nestle over the last three years (in millions of CHF): Total liabilities

Shareholder’s equity

Debt to equity ratio

65920 70981 78612

65981 62229 58403

0.99 1.14 1.34

2016 2017 2018

The debt to equity ratio of Nestle is higher than 1, which is risky because it indicates that the creditors have funded more to the operations than investors. In 2016, the debt to equity ratio was almost 1 which meant that investors and creditors had equal share in business. In the last two years, the stake of creditors in the company has increased which could be because of the lack of performance the company is looking for debt- financing.

Efficiency Ratios: Asset turnover Ratio: Asset turnover ratio= Net sales/ Total assets The table below shows, the asset turnover ratio of Nestle over the last three years (in millions of CHF):

Net sales

Total assets

Asset turnover ratio

2016

89469

131901

0.67

2017 2018

89590 91439

133210 137015

0.67 0.66

The less than 1 ratio shows that the company generates lesser sales than they have assets. It could mean that Nestle is not using its assets efficiently to generate sales because the asset turnover ratio of Nestle is decreasing over the last 15 years. But if we compare it to the ratio of the industry, which is 0.73, we can interpret that the overall asset turnover of this industry is less than 1.

Inventory turnover Ratio: Inventory turnover ratio= Cost of goods sold/ Average inventory The table below shows the inventory turnover ratio of Nestle over the last three years (in millions of CHF):

2016 2017 2018

Cost of goods sold

Inventory

Inventory turnover ratio

44119 45571 46070

8401 9177 9125

5.25 4.96 5.03

The inventory turnover of Nestle shows that the company successfully sold its inventory. The data shows that during last three years the company sold its inventory 5 times more. It also shows that Nestle does not overspend and waste resources by producing too much inventory.

Profitability Ratios: Gross margin Ratio: Gross margin ratio= Gross profit/ Net sales The table below shows, the gross margin ratio of Nestle over the last three years (in millions of CHF): 2016 2017 2018

Gross profit

Net sales

Gross margin ratio

45270 44019 45369

89469 89590 91439

50.59% 49.13% 49.62%

The gross margin ratio of Nestle shows that for every CHF generated in the sales, company earns 0.49 CHF of profit. Nestle has a higher ratio than the industry which means the company makes reasonable profit on their sales.

Return on assets Ratio: Return on assets ratio= Net income/ Total assets The table below shows, the return on the assets ratio of Nestle over the last three years (in millions of CHF):

2016 2017 2018

Net income

Total assets

Return on assets ratio

9624 7760 10171

131901 133210 137015

7.29% 5.82% 7.07%

The return on assets ratio of Nestle is favorable for its investors because it shows that Nestle is effectively using its assets to generate a greater amount of net income.

Non-Financial Analysis The non-financial analysis emphasizes upon the non financial work of the company which includes the company’s local and global obligations as well as their corporate social responsibility (CSR) Nestle recognizes its social responsibility and the company actively takes part in local and global issues. Nestle believes in creating shared value not only for their stakeholders but also for their customers and society. The company also works on saving the environment through their collective efforts, due to this reason Nestle is a part of many environment saving programs. The company wants to make a positive change in the society through their social activities and products. Nestle publishes a CSV report every year to keep a record of their activities, some of their work is mentioned below:

Nestle Cocoa Plan: “The Cocoa Plan” was started by Nestle in October 2009, when the company announced that it will try to get all of their chocolate through certified sustainable cocoa. For this purpose Nestle partnered with UTZ certified and their main focus is Ivory Coast because around 40% of world’s cocoa is produced there. Nestle then worked in creating a higher yielding and more sustainable cocoa tree and distributed 3,000,000 of these trees to the farmers; they also plan to give away 9,000,000 more trees to them. In addition to that, Nestle is also providing training to the farmers by teaching them efficient and sustainable ways to grow cocoa. They have

also raised the issue of child labor because according to the data more than Eight hundred thousand children work in the supply chain of cocoa. Nestle is in contact with Fair Labor Association (FLA) to develop necessary measures to control child labor happening in the cocoa industry. They have developed over 40 schools so far, building schools and community education is the new goal of this ‘Cocoa Plan’.

Nestle for healthier kids: The program was started to help and understand the challenges of child obesity and under nutrition. The company claims that it will help 50,000,000 children lead a healthy life by 2030. The main focus of this program is to ensure that the company promotes a healthy lifestyle and the products produced by them are also healthy. For this purpose, Nestle has removed more than 40,000 tons of sugar from their products since 2016. They have also removed more than 6000 tons of saturated fat and 15,000 tons of salt since 2012. The company is looking forward to add more than 700 million portions of vegetables and about 300 million portions of fiber-rich grains, nuts and pulses by 2020. They also plan to reduce 10% salt and 5% sugar by 2020. The company also launched 1300 nutritious food and drink products in 2018 and provided over 184.7 billion servings of food in the countries where people lack nutrients like iodine and iron. Another part of this program focuses on inspiring the children to eat healthy through supportive programs. In 2018, this program reached over 29 million children in 86 countries. Their supportive programs include Milo sports camp and Nestle for healthier kids school programs. Through their school program they visit different schools in around 80

countries and educate the teachers and the students about a healthy lifestyle.

Sustainable Agriculture Initiative: Nestle, in 2002, partnered with Unilever and Danone to create a platform known as “Sustainable Agriculture Initiative” commonly known as (SAI). It is a non-profit organization which shares practical understanding and plans for the implementation of sustainable agriculture practices in the food industry. This platform now has 60 members, they all share the same view of sustainable farming in order to produce good quality products in a way that does not harm the natural habitat and animal species, as well as protects the rights of the farm workers and their families. The SAI also developed different programs such as Sustainable Performance Assessment (SAP), Executive training about sustainable sourcing and many more. The sample of Nestlé’s influence on sustainable agriculture is also mentioned in academic literature.

Ecolaboration: Nestle Nespresso signed a treaty with Rainforest Alliance on June 22, 2009 called the ‘Ecolaboration’. The goal was to decrease the environmental effects and increase the benefits of cultivation of coffee so that the company can get 80 percent of its coffee through Rainforest Alliance certified farms by 2013. Because these certified farms ensure the safety of the nature and wildlife, it also includes the soil and water conservation. The RA certified farms ensure to protect the rights of health and education of their workers and also provides them good wages. These farms also promote sustainable farming and help the

workers to get clean drinking water in their regions. Nestle signed this pact because it complies with their CSR of SAI.

Recommendations: After a brief analysis of Nestle, we would like to recommend that the company should take part in programs which help to reduce plastic pollution. Although, company is a part of few sustainable farming programs and they also promotes a healthy lifestyle it contradicts with the fact that the packaging of most of their products includes plastic. Since, the company promotes sustainable living it should be aware of the fact that plastic is never fully decomposed and it harms the marine life. The company should work on their plastic consumption because almost all of their products come in plastic wraps including bottled water, Maggi, Nescafe etc. Plastic is one of the main causes of pollution, the food and drink industry is one of the main contributor of plastic pollution and 65% of world’s plastic is used by this industry. Being the world’s largest food and drink company, Nestle should take immediate measures to reduce their plastic consumption and set an example for their industry by using plastic free packaging on their products in order to fulfill their ‘Good food, Good life’ mission.

Conclusion:

Through this analysis we have concluded that, in last three years, Nestle is in a financially stable position. Since the current gross profit ratio of the company is 49.62%. Almost all the financial ratios of the company are higher than the industry and the company is also generating a good amount of net income. The company is also active in the society through many programs some of which were started a decade ago but they are still ongoing and Nestle takes pride in being a part of those programs. The company’s effort in sustainable farming and reducing environmental pollution are also appreciated. The overall performance of the company in last three years has been very beneficial for them because the company is doing what it dreamt to do, they are passionately working on their “Good food, good life” mission.

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