NESTLE FINANCIAL ANALYSIS

Financial Ratios Analysis of Nestle

Lara Fadel Alkadmani

Abu Dhabi University, Email: [email protected]

Supervised by:

Professor Haitham Nobanee

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.
NESTLE FINANCIAL ANALYSIS

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 (Britannica, 2020). 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 (Nestle, 2020).

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 (Britannica, 2020). At the

start of the 20th 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

(Britannica, 2020).
NESTLE FINANCIAL ANALYSIS

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 (Rehman, et al., 2015). 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 (Horrigan, 1968). 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 19th century, it

was found that successful firms have higher ratios as compared to unsuccessful organizations

(Rehman, et al., 2015). 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 (Moore, Atkinson, & Ku-berg, 1961). 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).

NESTLE FINANCIAL ANALYSIS

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

EBIT 16,027,000 15,424,000 14,779,000 14,216,000

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

NESTLE FINANCIAL ANALYSIS

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 0.2477

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
NESTLE FINANCIAL ANALYSIS

Current Ratio Nestle Company

0.952

0.892

0.856 0.854

2019 2018 2017 2016

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
NESTLE FINANCIAL ANALYSIS

Cash Ratio
0.25
0.248
0.246
0.244
0.242
0.24
0.238
0.236
0.234
0.232
2019 2018 2017 2016

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 0.6324

2018 0.7408

2017 0.6415

2016 0.6301
NESTLE FINANCIAL ANALYSIS

Quick Rati o
0.7408

0.6415
0.6324 0.6301

2019 2018 2017 2016

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

Turnover

Total Asset 0.7258 0.6696 0.6912 0.6807

NESTLE FINANCIAL ANALYSIS

turnover

Inventory Turnover

Ratio/Year Inventory

Turnover

2019 4.992

2018 5.048

2017 4.957

2016 5.2661

Inventory Turnover
5.3
5.25
5.2
5.15
5.1
5.05
5
4.95
4.9
4.85
4.8
2019 2018 2017 2016

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,
NESTLE FINANCIAL ANALYSIS

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

Receivables Turnover
10.5

10

9.5

8.5

8
2019 2018 2017 2016
NESTLE FINANCIAL ANALYSIS

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

Ratio/ Total

Year Asset

turnover

2019 0.7258

2018 0.6696

2017 0.6912

2016 0.6807
NESTLE FINANCIAL ANALYSIS

Total Asset turnover

0.74
0.73
0.72
0.71
0.7
0.69
0.68
0.67
0.66
0.65
0.64
2019 2018 2017 2016

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
NESTLE FINANCIAL ANALYSIS

Debt Ratio Figure

Debt Ratio
0.6

0.58

0.56

0.54

0.52

0.5

0.48

0.46

0.44
2019 2018 2017 2016

Times interest earned ratio figure

Times Interest Earned Rati o

25

20

15

10

0
2 0 19 2 0 18 2 0 17 2 0 16

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
NESTLE FINANCIAL ANALYSIS

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 0.2423 0.1766 0.1167 0.1320

ROA 0.0985 0.0739 0.0550 0.06467

Profit Margin 0.1357 0.1104 0.0797 0.0950

Return on equity figure

0.3

0.25
ROE
0.2

0.15

0.1

0.05

0
2019 2018 2017 2016
NESTLE FINANCIAL ANALYSIS

Return on asset figure

ROA
0.12

0.1

0.08

0.06

0.04

0.02

0
2019 2018 2017 2016

Profit margin figure

Profit Margin
0.16

0.14

0.12

0.1

0.08

0.06

0.04

0.02

0
2019 2018 2017 2016
NESTLE FINANCIAL ANALYSIS

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.
NESTLE FINANCIAL ANALYSIS

References
Britannica. (2020). Nestle SA. Retrieved May 18, 2020, from Encyclopedia Britannica:

https://www.britannica.com/topic/Nestle-SA

Horrigan, J. (1968). A short History of financial ratio. The Accounting Review, 43(2), 284-294.

Moore, G., Atkinson, T., & Ku-berg, E. (1961). Risks and returns in small-business financing.

Towards a Firmer Basis of Economic Policy, 66-67.

Nestle. (2020). The Nestle Company History. Retrieved May 18, 2020, from Nestle Company:

https://www.nestle.com/aboutus/history/nestle-company-history

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Finance News. https://finance.yahoo.com/quote/NSRGY/balance-sheet?p=NSRGY

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NESTLE FINANCIAL ANALYSIS

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