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Warning: TT: undefined function: 32 UNIVERSITI UTARA MALAYSIA SEMESTER A192 SESSION 2019/ BWFF 2033 FINANCIAL MANAGEMENT GROUP ASSIGNMENT GROUP G : NESTLE TOPIC OF ASSIGNMENT ASSESSING FIRM’S FINANCIAL PERFORMANCE [TIME-SERIES/TREND ANALYSIS (3 YEARS)]GROUP MEMBERS:NAME MATRIC NO. ALIA NABILA BINTI ...

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UNIVERSITI UTARA MALAYSIA SEMESTER A192 SESSION 2019/2020 BWFF 2033 FINANCIAL MANAGEMENT GROUP ASSIGNMENT GROUP G : NESTLE TOPIC OF ASSIGNMENT ASSESSING FIRM’S FINANCIAL PERFORMANCE [TIME-SERIES/TREND ANALYSIS (3 YEARS)] GROUP MEMBERS: NAME

MATRIC NO.

ALIA NABILA BINTI MOHAMAD HAYAHUDDIN

269784

ANDI RAIS ANSHORULLOH S

260531

LIM GAIK EAN

262843

NA'IRATUL FATHONAH BINTI ABU BAKAR

269546

NOR FAEZATUL BT KASIM

269851

NAZATUL AMIRA BINTI SA’ABAN

270270

AIDA AFIQAH BINTI MARZUKI

272031

SUREETA A/P TIAN

272743

VAITHESWARY A/P MURUGAN

272856

AHMAD SYAFIQ BIN AHMAD HAFIZ

273425

LECTURER’S NAME: DR. NUR HAFIZAH BINTI MOHAMMAD ISMAIL DATE OF SUBMISSION: 27 APRIL 2020

2

TABLE OF CONTENT

No.

CONTENT

PAGES

1.

Introduction

3

2.

Methodology

4–7

3.

Background of The Company

4.

Ratio Calculation & Analysis and Interpretation

5.

Conclusion and Recommendation

26

6.

References

27

7.

Appendix

28 – 45

8 9 – 25

3

1.0

INTRODUCTION Sometimes it’s not enough to say that a company is in good or bad financial health,

especially if we are trying to compare that company with another one. So, financial ratios is a way that allow us to look at profitability, use of assets, inventories and other assets of a company. From this, we can analyze the financial position of a company by using calculations made on the basis of financial ratios. Financial ratio means are relationships determined from a company’s financial information and used for comparison purpose. Financial ratios also mean the ways of comparing and investigating the relationship between different pieces of financial information. Ratios allow for better comparison through time or between companies. Ratios basically are used both internally and externally. Examples include such often referred to measures as a return on investment (ROI), return on assets (ROA), and debt-to-equity. There are some categories of financial ratios such as short-term solvency or liquidity ratios, long-term solvency or financial leverage ratios, asset management or turnover ratios, profitability ratios and market value ratios. Furthermore, the financial ratios offer entrepreneurs a way to evaluate their company’s performance and compare it other similar business in their industry. Ratios measure the relationship between two or more components of financial statements and used most effectively when results over several periods are compared. Hence, Nestle SDN. BHD. was selected by this group to observe the level or performance of the company’s financial from 2016 to 2018.

4

2.0

METHODOLOGY Ratio Analysis is done to analyze the Company’s financial and trend of the company’s

results over a period of years where there are mainly five broad categories of ratios like liquidity ratios, asset management ratios, leverage ratios, profitability ratios, and market value ratio which indicates the company’s performance and various examples of these ratios include current ratio, inventory turnover, debt-equity ratio, cash coverage ratio, and the price-earnings ratio. The numerator and denominator of the ratio to be calculated are taken from the financial statements thereby expressing a relationship with each other. It is a fundamental tool that is used by every company to ascertain the financial liquidity, the debt burden and the profitability of the company and how well it is been placed in the market as compared to the peers. There are different types of ratios analysis that have been calculated by every company to evaluate business performance. Simply we may divide it as below: 1. Liquidity Ratios Liquidity ratios are an important class of financial metrics used to measures the firm’s ability to pay its bill over short run. Liquidity ratios are divided to five parts which is:

NO

RATIOS

EQUATIONS

i

Current Ratio

Current Ratio = Current Assets / Current Liabilities

ii

Quick Ratio

Quick Ration = (Cash – Inventory) / Current Liabilities

iii

Cash Ratio

Cash Ratio = Cash / Current Liabilities

iv

Networking Capital

NWC to TA = NWC / TA or (Current Assets –

to Total Assets

Current Liabilities) / TA

Interval Measure

Interval Measure = Current Assets / Average daily

v

operating costs

5

Average daily operating costs = (COGS + Operating Expenses) / 365

2. Asset Management Ratios Asset management ratios is a set of ratios which measure how effectively a firm is managing its assets. It is also the key to analyse how effectively and efficiently your small business is managing its assets to produce sales. Asset management ratios are divided to seven parts which is:

NO

RATIOS

EQUATIONS

i

Inventory Turnover

Inventory Turnover = COGS / Inventory

ii

Day’s Sales in

Day’s Sales in Inventory = 365 / Inventory

Inventory

Turnover

Account

Account Receivables Turnover = Sales / Accounts

Receivables

Receivable

iii

Turnover iv

v

vi

Day’s Sales in

Day’s Sales in Receivable = 365 / Account

Receivable

Receivables Turnover

Networking Capital

NWC Turnover = Sales / NWC or Sales / (Current

Turnover

Assets – Current Liabilities)

Fixed Asset

Fixed Asset Turnover = Sales / Net Fixed Assets

Turnover vii

Total Asset

Total Asset Turnover = Sales / Total Assets

Turnover

3. Leverage Ratios The leverage ratio is the proportion of debts that a bank has compared to its equity or capital. The leverage ratio measures the firm’s ability to meet its obligation or financial leverage. Leverage ratios are divided to six parts which is:

6

NO

RATIOS

EQUATIONS

i

Total Debt Ratio

Total Debt Ratio = (Total Assets – Total Equity) / Total Assets

ii

Debt-Equity Ratio

Debt-Equity Ratio = Total Debt / Total Equity

iii

Equity Multiplier

Equity Multiplier = Total Assets / Total Equity or 1 + (Debt / Equity)

iv

v

vi

Long-Term Debt

Long-Term Debt Ratio = Long-Term Debt / (Long-

Ratio

Term Debt + Total Equity)

Times Interest

Times Interest Earned Ratio = Earnings before

Earned Ratio

Interest and Taxes / Interest

Cash Coverage

Cash Coverage Ratio = (Earnings before Interest and

Ratio

Taxes + Depreciation) / Interest

4. Profitability Ratios Profitability ratios are a class of financial metrics that are used to calculate the potential of a business’s to make income relative to its revenue, operating costs, balance sheet assets, and shareholders' equity over time, using data from a specific point in time. Profitability ratios are divided to four parts which is:

NO

RATIOS

EQUATIONS

i

Gross Profit Margin

Gross Profit Margin = Gross Profit / Sales

ii

Net Profit Margin

Net Profit Margin = Net Income / Sales

iii

Return on Assets

ROA = Net Income / Total Assets

(ROA) iv

Return on Equity (ROE)

ROE = Net Income / Total Equity

7

5. Market Value Ratio Market value ratios are used to assess the current share price of a publicly-held company's stock. These ratios are employed by current and potential investors to determine whether a company's shares are over-priced or under-priced. Market value ratios are divided to four parts which is:

NO

RATIOS

EQUATIONS

i

Price-Earnings

PE Ratio = Price per share / Earnings per share

Ratio (PE Ratio)

(EPS)

Market-to-book-

Market-to-book-ratio = Market Value per share /

ratio

Book Value per share

Enterprise Value

Enterprise Value = Market Value of Stock + Book

ii

iii

Value of Liabilities – Cash iv

Earnings before

EBITDA Ratio = Enterprise Value / EBITDA

Interest and Taxes + Depreciation + Amortization (EBITDA) Ratio It may be possibly the best way for small business owners to use financial ratios is to conduct a formal ratio analysis on a regular basis. The raw data used to compute the ratios should be recorded on a special form monthly. Then the relevant ratios should be computed, reviewed, and saved for future comparisons. Determining which ratios to compute depends on the type of business, the age of the business, the point in the business cycle, and any specific information sought. For example, if a small business depends on a large number of fixed assets, ratios that measure how efficiently these assets are being used may be the most significant.

8

3.0

BACKGROUND OF THE COMPANY NESTLE COMPANY BACKGROUND Since 1912, Nestle was started in Malaysia as Anglo-Swiss Condensed Milk Company

in Penang. As it grew, the company moved to Kuala Lumpur in 1939 and now the head office located at Mutiara Damansara, Selangor. Nestle was known as one of the biggest halal producers that produces over 10,000 products and offer more than 8500 brands with locally made leading household brands names as Milo, Maggi, Nespray, Kitkat and Nescafe. Nestle offers 11 categories of products which is dairy, beverages, foods, ready-to-drink, infant and maternal nutrition, healthcare nutrition, breakfast cereals, chilled dairy, ice cream, confectionery and out-of-home. They export their products to 50 countries worldwide and the company was listed on Bursa Malaysia on 1989. Nestle purpose is enhancing quality of life and contributing to a healthier future that divide to three. First, for individuals and families that enabling healthier and happier lives. Other than that, for communities that helping develop thriving and resilient communities. Last but not least, for the planet that stewarding resources for future generations. In Malaysia, under Alois Hoffbauer’s watch, Nestle has been keeping up with the everchanging technology landscape by emphasizing on the importance of digital advancement and innovation because of that, Nestle achieve many awards and achievements which is Environmental Responsibility Award in 3rd Global Good Governance Award 2018, Halal Industry Development Corporation (HDC) Awards 2018, Putra Brand Award 2018 that six Nestle Malaysia brands recognized, Malaysia’s 100 leading graduate employers award 2018 that most popular graduate employer and The Edge Billion Ringgit Club Awards 2017 that their get highest return on equity over the past three years. As their performance, they achieve 41 recipes certified with healthier choice logo and one of their products which is Kitkat are made with 100% sustainable cocoa to ensure the products always meet the local customer satisfaction.

9

4.0

RATIO CALCULATION & ANALYSIS AND INTERPRETATION

1. LIQUIDITY RATIO

i.

Current Ratio 2016

2017

2018

1,030,036

1,073,112

1,215,416

1,576,843

1,622,058

1,782,079

= 0.65

= 0.66

= 0.68

The current ratio of Nestle Malaysia Berhad company has 0.65 times in 2016, increased it in 2017 to 0.66 times, and increased to 0.68 times in 2018. It is because Nestle Malaysia Berhad Company decided to increase the number of its assets. Although they increased also their liabilities the proportion is still good, therefore they can improve their number of current ratios. In this case, Nestle Malaysia Berhad Company has a great number in terms of current assets in 2018. That’s means in 2018 Nestle Malaysia Berhad Company financial condition is the best as it has enough liquid assets for its operation.

ii.

Quick Ratio 2016

2017

2018

1,030,036 - 455,337

1,073,112 - 467,316

1,215,416 - 530,378

1,576,843

1,622,058

1,782,079

= 0.36

= 0.37

= 0.38

The quick ratio of Nestle Malaysia Berhad Company has 0.36 times in 2016, it increased to 0.37 times in 2017 and increased to 0.38 times in 2018. It is because Nestle Malaysia Berhad Company decided to increase the number of their assets

10

and inventory. Although they increased also their liabilities the proportion is still good, therefore they can improve their number of quick ratio. That shows that in 2018 Nestle Malaysia Berhad Company has enough quick asset or liquid assets to cover its short-term debt immediately.

iii.

Cash Ratio 2016

2017

2018

23,996

12,615

7,011

1,576,843

1,622,058

1,782,079

= 0.02

= 0.007

= 0.004

The Cash Ratio of Nestle Malaysia Berhad Company has 0.02 times in 2016, after that decrease to 0,007 times in 2017 and decrease again to 0.004 times in 2018. it is because the number of cash of Nestle Malaysia Berhad Company was decreasing for the past 3 years. Besides that, the number of Current Liabilities always increase from 2016 to 2018.

iv.

NWC to Total Assets 2016

2017

2018

1,030,036 - 1,576,843

1,073,112 - 1,622,058

1,215,416 - 1,782,079

2,494,610

2,556,986

2,847,282

= -0.22

= -0.21

= -0.20

Net Working Capital (NWC) to total assets of Nestle Malaysia Berhad Company has -0.22 times in 2016, it increased to -0.21 times in 2017, and increase again to -0.20 in 2017. It is because Nestle Malaysia Berhad Company has a bigger number of current liabilities than current assets. Besides that, the number of total assets always be increased from 2016 to 2017. In this case, it

11

shows that Nestle Malaysia Berhad Company has low liquidity in terms of an ability to cover its short-term financial obligations by comparing its current assets to its total assets.

v.

Interval Measure 2016

2017

2018

1,030,036

1,073,112

1,215,416

-5871.96

-7196.24

-6406.04

=-175.42

= -149.12

= -189.73

Interval Measure of Nestle Malaysia Berhad Company has -175.42 times in 2016, it increased to -149.12 times in 2017 and decreased to -189.73 times in 2018. It is because the number of average daily operating measure in 2017 is lowest around -7196.24 and followed by -6406.04 in 2018 and -5871.42 in 2016. Besides that, the number of current assets always be increased from since 2016. In this case, it can be shown that how long Nestle Malaysia Berhad Company can operate until it needs another round of financing.

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2. ASSET MANAGEMENT RATIOS

i.

Inventory Turnover 2016

2017

2018

(3,066,051)

(3,330,141)

(3,381,380)

455,337

467,316

530,378

= 6.73

= 7.13

= 6.38

Zafir Mohd Makhbul and Fazilah Mohamad Hasum (2007) have defined inventory turnover to measure inventory management efficiency. It shows how many times an inventory can be sold in one year. The higher the turnover of inventory, the better it is because it shows that companies can sell inventories quickly and reduce inventory opportunities to obsolete or damaged. Every company has a different inventory turnover value, based on how their managing the company. Usually, the ideal of inventory turnover for the company between 4 to 6 times. Turnover on inventory for Nestle Malaysia Berhad Company for 2016 was 6.73 times. This means that Nestle's company can sell its inventory 6.73 times a year. In 2017, the turnover for Nestle Berhad Company increased to 7.12 times, but in 2018 there was a decline in inventory turnover to 6.37% which is lower than 2016. This represents an inventory turnover for the company for three years is not consistence. Nestle Berhad Company recorded a significant increase in sales costs from 2016 to 2018. In 2016, it increased to RM3 066 051 and then increased to RM3 330 141 and slightly increased the following year to RM 3 381 380. In line with sales cost, value Inventory also increased from 2016 from RM 455 337 to RM 467 316 and in 2018 it recorded a total inventory of 530 378. Through the analysis performed, inventory turnover for all three years showed inconsistent performance due to cost of sales and the value of the company's inventories is not growing well. Although the performance of Nestle Berhad Company is inconsistent, it is still in good standing and in the ideal range.

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ii.

Days’ Sales in Inventory 2016

2017

2018

365

365

365

-6.73

-7.13

-6.38

=-54.23

=-51.19

=-57.21

According to K.R. Subramanyam and John J. Wild (2009), Average inventory sale period shows the number of days it took to make one round of sales. The average high inventory sales period is not good because it shows that companies take a long time to sell their own inventory. A company that takes long time to sell its inventory will be at risk of damage, theft and expiration. Inventories may not be too fast to sell because the company may experience shortages of inventory, its need to be balance. The number of days it takes for Nestle's company to sell its inventory from 2016 to 2018 shows an increase and a decline. The average inventory sale period for Nestle Malaysia Berhad Company was in the same range from 2016 to 2018 for 50 to 60 days. In 2016, the inventory sale period was 54 days, while the fastest sale period in 2017 was 51 days, which represents the best period for all three years. While in 2017, the day sales in inventory took 57 days to sell the inventory. From the analysis, Nestle Berhad Company has shown that the sales period of the inventory is inconsistent but still in good condition, so the risk for the inventory to damaged or outdated is low.

iii.

Account Receivables Turnover 2016

2017

2018

5063506

5260490

5519045

544307

580848

605414

=9.30

=9.06

=9.12

14

Account receivable turnover is ...