mac project report _ nestle india ltd

An Analysis of Financial Statements of Nestle India Ltd. as of

December 31

Karen Dias Roll No: 34459 Exe MBA B 2011-2014

An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459

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TABLE OF CONTENTSIntroduction ............................................................................................................................................................ 3 The Income Statement ....................................................................................................................................... 3 The Balance Sheet .............................................................................................................................................. 4 Assets .............................................................................................................................................................. 4 Liabilities ......................................................................................................................................................... 4 Equity .............................................................................................................................................................. 4 Ratio Analysis ...................................................................................................................................................... 5 What is financial ratio analysis? ..................................................................................................................... 5 Uses of Ratios ................................................................................................................................................. 5 Limitations & problems of Ratio analysis ....................................................................................................... 5 Types of Ratios ................................................................................................................................................ 5 Interpretation of various Ratios: ........................................................................................................................ 6 Turnover Ratios: ............................................................................................................................................. 6 Liquidity Ratios: .............................................................................................................................................. 6 Profitability Ratios: ......................................................................................................................................... 6 Solvency Ratios: .............................................................................................................................................. 7 Financial Statements to be Analysed...................................................................................................................... 8 Balance Sheet of Nestle India Ltd. as at 31 December 2010 ............................................................................ 8 Profit And Loss Account of Nestle India Limited for the year ended December 31, 2010 ............................... 10 Common Ratios .................................................................................................................................................... 12 Liquidity Ratios: ................................................................................................................................................ 12 Long term solvency ratio: ................................................................................................................................. 13 Coverage Ratios ................................................................................................................................................ 14 Inventory Ratios:............................................................................................................................................... 15 Receivables Ratios: ........................................................................................................................................... 16 Computing Profitability Ratios: ......................................................................................................................... 17st

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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459 Computing Market Value Measures: ................................................................................................................ 18 Conclusion ............................................................................................................................................................ 19 Bibliography .......................................................................................................................................................... 19

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INTRODUCTION THE INCOME STATEMENTThe income statement reports the increase or decrease in profitability of a company over a period of time. An income statement measures company revenues and expenses for a specific period of time (e.g. month, quarter, or year). Revenues are the cash inflows resulting from a company's sales activities. Expenses are the cash outflows associated with generating those sales. The difference between a company's revenues and expenses is either a gain or a loss. This statement is different than the balance sheet, which is a statement of the financial position of a company in terms of assets and liabilities at a point in time. The ability to read and understand the income statement is a very valuable skill. In evaluating companies, knowledge and understanding of the income statement can help assess the financial health, stability, and ability of the organizations under consideration. Analysing an Income Statement Financial statements for publicly traded companies are available from major financial Web sites like Yahoo! Finance, MSN Money, and Google Finance. Many companies also post annual reports under Investor Relations on their Web sites.

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THE BALANCE SHEETThe balance sheet lists what a company owns and owes at a specific point in time. This statement is different than the income statement, which measures profitability over a specific period of time. The balance sheet shows the financial strength of a company in three major categories: Assets, Liabilities, and Equity. Assets are equal to Liabilities plus Equity.

ITEM DESCRIPTION ASSETSCash - A company's available cash is the most liquid of all assets. Marketable Securities/Stocks - A company's investment in the stock market. Company pension plans often invest in stocks and bonds. Net Receivables - The amount of money that customers owe the company. Companies can usually collect most, but not all, of their receivables. Consequently, a company normally reserves a portion that they deem uncollectible and expense that amount to the Income Statement. Inventory - Dollar value of inventory that a company has on hand. Property, Plant, and Equipment - Real estate, plant machinery, and assets with a life of several years. Plant machinery and other assets must be depreciated over time, and the value of that depreciation is subtracted from the net asset value. Real estate is not normally depreciated. Goodwill - The most common form of intangible asset, goodwill is the difference between the price a company pays to buy another company and the book value of the acquired company's assets. Intangibles - An asset not physical in nature, such as intellectual property. Long-Term Investments - Investments which are not highly liquid.

LIABILITIESAccounts Payable - The amount of money owed to suppliers for goods and services purchased by the company which haven't been paid yet. Companies often have 30-60 days' worth of payables at any given time. Short-Term Debt - Bank loans used for short-term purposes, normally less than one year. Long-Term Debt - Loans for long-term purposes, such as financing an expansion. These loans are normally 5-25 years in length.

EQUITYPreferred Stock - Amount of stock which provides a specific dividend before any dividends are paid to common stockholders. Most preferred shares do not provide voting rights. Common Stock - Amount of stock whereby owners have equity in a company and voting rights. Retained Earnings - The difference between total assets and total liabilities. 4|P a g e


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RATIO ANALYSIS WHAT IS FINANCIAL RATIO ANALYSIS?A financial ratio is a relationship of two values of financial statements. Ratios basically are mathematical expressions, which are calculated to derive certain conclusion. The ratio may be expressed as number of times, proportion or percentage. There are number of ratios, but which to consider for a particular type of analysis is left to the personal judgement of the analyst. As a matter of fact, all the ratios are for different purposes and have different objectives.

USES OF RATIOS1. 2. Ratios offer help in intra firm comparisons, industry comparison and also for inter-firm comparison. Financial position of the entity can be studied.

LIMITATIONS & PROBLEMS OF RATIO ANALYSIS1. 2. 3. 4. 5. 6. Ratios are based on financial statements, so contain almost all of the deficiencies of those accounts. Some ratios are open for manipulation and need to be interpreted with care. E.g. stock levels may be kept artificially low at year-end, creating an impression of high efficiency in this area. Inter-firm comparisons are faced with the problem that different organizations might use rather different accounting policies. E.g. depreciation methods etc. Detailed knowledge of a companys markets is seldom obtainable from the published accounts, but is extremely important for assessing future profitability. Ratios are useful when comparing similar organizations operating under similar conditions. Comparisons with different types of organizations can be misleading. There is a real danger that ratio analysis can lead to conclusions, which are over-simplified. e.g. high current ratio.

TYPES OF RATIOS

Sr. No. 1 2 3

Type of Ratio Turnover Ratios Liquidity Ratios Profitability Ratios Solvency Ratios

Various ratios Debtors, Creditors, Inventory Current, Acid test Gross profit, Net profit

4

Debt Equity, Interest coverage, DSCR

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INTERPRETATION OF VARIOUS RATIOS:

TURNOVER RATIOS:Debtors Turnover Ratio: This ratio measures the average number of days credit given to debtors. It helps to assess the efficiency of the debt collection department. Debt collection period should be kept as low as possible, consistent with maintaining customer goodwill and market trend. Creditors Turnover Ratio: This ratio measures the average number of days credit is exploited from suppliers. Credit given by suppliers depends on various factors such as demand & supply position of material, industry trends, competition etc. Inventory Turnover Ratio: This ratio measures the average number of days for which stock is held. It helps to assess the efficiency of stock utilization. Various factors affect the stock level held by the organization such as product, production-seasonal or otherwise, demand pattern, competition, funds availability etc.

LIQUIDITY RATIOS:Current Ratio: This ratio is concerned with the assessment of an organization's ability to meet its short-term obligations. The ratio must be high enough for safety. However, high current assets do not normally lead to high profits in themselves, so the usual trade-off between risk and return exists. Industry norm is 2:1 Acid Test Ratio: This ratio is also concerned with short-term liquidity. In a sense it is more appropriate measure since liquid assets represent the source of funds from which current liabilities will probably be met. Industry norm is 1:1

PROFITABILITY RATIOS:Gross Profit Ratio: GP / Margin on sales Net Profit Ratio: Net profit on sales. It indicates organization's ability to generate profits from sales. Material cost ratio: Material cost to sales Expenses Ratios: Ratio of expenses to sales. Return on Capital: This ratio is expressed as a percentage. Generally, the higher the return the better. Return on Proprietors Funds: This ratio provides a measure of the percentage return on the investment made by the owners.

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SOLVENCY RATIOS:Debt Equity Ratio: This ratio is concerned with establishing the relationship between external and internal long-term financing. The use of long-term debt in the capital structure has both advantages and disadvantages, and in practice the level of debt actually existing is the result of a balancing process. The main advantage of debt is that it provides an opportunity for greater returns to shareholders. Industry norm is 2:1 Proprietary Ratio: It measures the owner's contribution of funds. Interest coverage Ratio: This ratio measures the safety available to Bank for recovery of interest. Industry norm is 2:1 Debt coverage Ratio: This ratio measures the safety available to Bank for recovery of interest & loan instalment. Industry norm is 2.5: 1

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FINANCIAL STATEMENTS TO BE ANALYSED BALANCE SHEET OF NESTLE INDIA LTD. AS AT 31 S T DECEMBER 2010

Nestle Balance Sheet as on 31st December, 2011

Sources of Funds Shareholders funds Capital Reserves and Surplus 96,41,57,000.00 7,58,99,82,000.00 8,55,41,39,000.00 Loan Funds Secured Loans Unsecured loans 0.00 0.00 0.00 Deferred Tax Deferred Tax Assets -Deferred Tax Liabilities 33,27,24,000.00 0.00 33,27,24,000.00 8,88,68,63,000.00 Application of Funds

Fixed Assets Gross Block -Depreciation Net Block Capital Work in Progress 18,54,69,67,000 8,41,95,94,000 10,12,73,73,000 3,48,90,80,000 13,61,64,53,000 Investments 1,50,67,88,000 1,50,67,88,000 Current Assets, loans and advances 8|P a g e


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Inventories Sundry debtors/Accounts receivable Cash and bank balances Other current assets Loans and advances

5,75,95,16,000 63,28,54,000 2,55,29,15,000 0 1,51,44,12,000 10,45,96,97,000

Current liabilities and provisions Liabilities Provisions 7,61,67,02,000 9,07,93,73,000 16,69,60,75,000 Net Current Assets -6236378000 8,88,68,63,000

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PROFIT AND LOSS ACCOUNT OF NESTLE INDIA LIMITED FOR THE YEAR ENDED DECEMBER 31, 2010

Nestle Profit & Loss Statement

INCOME Sales Domestic Export Gross Less: Excise duty Net sales Other income 60,22,85,62,000 3,53,72,59,000 63,76,58,21,000 1,21,83,96,000 62,54,74,25,000 42,65,41,000 62,97,39,66,000 EXPENDITURE Materials consumed and purchase of goods Manufacturing and other expenses Interest Depreciation Adjustment due to decrease / (increase) in stock of finished goods and work-in-progress 31,38,51,05,000 19,49,52,29,000 1,07,45,000 1,27,75,33,000 -82,94,27,000 51,33,91,85,000

PROFIT BEFORE IMPAIRMENT, CONTINGENCIES AND TAXATION

11,63,47,81,000

Impairment loss/(gain) on fixed assets (Refer Note 1 - Schedule N) Provision for contingencies (Refer Note 2 - Schedule N)

0 18,36,79,000

PROFIT BEFORE TAXATION

11,45,11,02,000

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Income tax expense Current tax Deferred tax Fringe benefit tax 3,25,17,02,000 1,27,52,000 0 3,26,44,54,000

PROFIT AFTER TAXATION Balance brought forward BALANCE AVAILABLE FOR APPROPRIATION Appropriations: Dividends: Interim Final proposed Corporate dividend tax General reserve SURPLUS CARRIED TO THE BALANCE SHEET BASIC AND DILUTED EARNINGS PER SHARE (IN RUPEES)

8,18,66,48,000 1,42,52,03,000 9,61,18,51,000

3,47,09,66,000 1,20,51,96,000 77,19,97,000 81,86,65,000 3,34,50,27,000 84.91

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COMMON RATIOSBelow I have calculated the values of the common ratios that we discussed in class:

LIQUIDITY RATIOS:Liquidity ratios help us study the short term position of the organisation. They also help us understand how well the working capital is being used. This is of most interest to commercial banks and short term creditors. The liquidity ratio of Nestle India Ltd is calculated below:

Liquidity Ratios Current Ratioshould be high

Current Assets = Current Liabilities

10,45,96,97,000.00 = 16,69,60,75,000.00

0.63

If you look at the balance sheet, you will see that the following items are included in Current Assets: Inventories Sundry debtors/Accounts receivable Cash and bank balances Other current assets Loans and advances

Current liabilities includes both liabilities and provisions. Schedule F and Schedule G, in the attached 2010 Annual Report, give more detailed information about the Current Assets and Liabilities.

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LONG TERM SOLVENCY RATIO:The long term solvency ratio is the ratio that shows you the long term picture of the company by studying the ratio of assets to long term loans that the company has. For Nestle the picture is:

Long term solvency ratio Debt Equity Ratioshould be low

Long term debt = Total Equity

0.00 = 8,55,41,39,000.00

0.00

Assets to Debt ratioshould be high

Total Assets = Long term debt

25,91,56,62,000.00 = 0.00

#DIV/0!

As you can see from above and from the balance sheet, Nestle India has no long term debt. This is unusual but should give a sense of security to someone who is trying to understand the long term viability of the company. It reduces its dependence on outside variables and gives it more money to play with.

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COVERAGE RATIOSWhile the ratios above study data from the Balance Sheet, the coverage ratios depend on data from the Profit & Loss Statement. It indicates whether the business generates sufficient profit to service interest payment.

Computing Coverage ratiosmeasures operational efficiency

Times Interest Earned

EBIT = Interest

11,64,55,26,000.00 = 1,07,45,000.00

1083.81

Cash coverage

EBIT + Depreciation Interest

12,92,30,59,000.00 = 1,07,45,000.00 =

1202.70

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INVENTORY RATIOS:The first ratio given below measures how quickly inventory is sold. The second gives us the expected number of days between manufacture or purchase of inventory, and sale. Cost of goods sold includes total cost of manufacture or purchase of goods but does not include financial costs, depreciation costs, admin costs etc.

Inventory Ratiosmeasures how quickly inventory is sold

Inventory Turnover

Cost of goods sold = Inventory

50,88,03,34,000.00 = 5,75,95,16,000.00

8.83

How many days of inventory are in stock

Days' sales in inventory

365 = Inventory turnover

365.00 = 8.83

41.32

This ratio should be low as a high ratio here would indicate that there is inefficiency in stocking of the inventory creating the possibility that the inventory is stale or obsolete. However, if the ratio is too low is also indicates the possibility that the business may run the risk of being unable to satisfy all its customers if it runs short of stock. Nestle has about 41 days of inventory in stock. That is adequate and though they could work to bring it down, it is not a highly negative sign.

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RECEIVABLES RATIOS:Receivables ratios are among the most important when it comes to studying the overall health of a company. The working capital cycle results in some capital being tied up at different points in the cycle. The longer it takes for receivables to be collected, the more the working capital needs of a business. The receivables ratio for Nestle India Ltd. Is given below:

Receivables ratiosMeasures efficiency in collecting from Drs.

Receivables Turnover

Sales = Accounts Receivable

62,54,74,25,000.00 = 63,28,54,000.00

98.83

Days' sales in receivables

365 = Receivables turnover

365.00 = 98.83

3.69

Thus we can see that Nestle India Ltd. is very quick in collecting receivables from debtors. This means that its working capital does not get tied up in pending receivables which is a very healthy sign for the company.

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COMPUTING PROFITABILITY RATIOS:While there are many different ratios that can be used to measure profitability, here I have focussed on the profit margin and the return on assets (ROA). Both ratios for Nestle India Ltd. are given below:

Computing Profitability Measures Profit Margin PBIT = Sales 62,54,74,25,000.00 11,64,55,26,000.00 = 0.19

Return on Assets (ROA)

PBIT = Total Assets

11,64,55,26,000.00 = 25,91,56,62,000.00

0.45

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COMPUTING MARKET VALUE MEASURES:These ratios are the most important to measure the profit the business with bring to its stakeholders.

Computing Market Value Measures

At close of day Nov 3, 2011

Market Price No. of shares outstanding

4409.85 9,64,15,716

Earnings per share

PAT Weighted Avg. No. of shares =

8,18,66,48,000.00 = 9,64,15,716

84.91

PE Ratio

Price per share Earnings per share =

4,409.85 = 84.91

51.94

Market-to-book ratio

Market value per share = Book value per share

4,409.85 = 10.00

440.99

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CONCLUSION

From the above analysis it appears that Nestle India Ltd. is in good shape and has a lot of potential. The message to the shareholders from Chairman and Managing Director, Antonio Helio Waszyk, focussed on Growth, Inclusion and Leadership and we can tell that the core of Nestles focus is going to be Nutrition. In todays health-focused world this is clearly the way to go and should be a big hit with consumers. Nestle India has also made it clear that it eyes expansion in India as the next big step and as to paraphrase what Waszyk says "Nestle is not fighting for a slice of the cake. It is here to take a larger piece of cake.

BIBLIOGRAPHY1. 2. 3. 4. Class handouts http://www.investopedia.com/terms/r/ratioanalysis.asp#axzz1cl4g2DMa http://www.spandane.com/books/Training%20Notes%20for%20Bank%20Staff/Concepts/11RatioAnalysis.pdf Nestle India Ltd. 2010 Annual Report http://www.nestle.com/Common/NestleDocuments/Documents/Library/Documents/Financial_State ments/2010-Financial-Statements-EN.pdf http://www.businessstandard.com/india/news/nestle-to-invest-rs-1500-cr-in-two-threeyears/128599/on

5.

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