In this assignment, we will be conducting a business analysis on two major corporations in the same industry. Nestle and Dutch Lady. The analysis will be based on the companies’ performance for both the years 2010 and 2011 and the data will be extracted from the companies’ financial reports. The analysis will include the working capital cycle and the ratio analysis for both the companies. The ratio analysis will include the profitability ratio, liquidity ratio, efficiency ratio, capital structure and investors’ ratio. 1.1 Nestle
Nestlé is a Swiss multinational company which produces nutritional and health-related consumer goods. Nestlé’s headquarters is located in Vevey, Switzerland. In terms of revenue, Nestle is the largest food company in the world. Nestle was founded in 1905 by the merger of the Anglo-Swiss Milk Company, established in 1866 by Henri Nestle, and Farine Lactée Henri Nestlé, founded in 1866 by brothers George Page and Charles Page. Nestle produces a wide range goods, including coffee, bottled water, confectionary, breakfast cereals, baby food, pet food, dairy products, ice cream and many more. Of the many products, 29 of the goods produced by Nestle have annual sales of over 1 billion Swiss francs. Examples of these goods are Smarties, Nescafe, Maggi and KitKat. Nestle has around 450 factories worldwide, operating in 86 countries, and has around 327,000 employees working for them. Nestle is also one of the biggest shareholders of L’Oreal, one of the biggest cosmetics organization in the world. (Nestle, 2011) 1.2 Dutch Lady
Dutch Lady Malaysia is a manufacturer of nutritional and health related goods too. It was previously under Royal FrieslandFoods, which was a multinational company based in the Nederland dating back to 1879. Currently, Dutch Lady Malaysia is a subsidiary of Royal FrieslandCompina formed in the year 2008. This was a result of the merger of FrieslandFoods and Compina. When Dutch Lady first began in Malaysia in the year 1963, it was called Pacific Milk Industries (Malaysia) Sdn Bhd. The company only sold condensed milk. Up till today, Dutch Lady has a wide range of goods. Examples of the products are dairy products, baby food, milk, yoghurt and many more. Dutch Lady is the market share leader for the growing up milk segment, holding up to 40% of the national share. (Dutch Lady Malaysia, 2011) 2. Ratio Analysis
Ratio analysis is a type of instrument used by people to conduct a quantitative analysis of a company’s financial statements to obtain information. Using the current year numbers from the financial report, ratio are calculated and then compared with other companies, the industry, previous years, or even the economy to evaluate the performance of the company. Ratio analysis is the most reliable technique of analyzing a company today. There are five types of ratio that can be calculated, profitability ratio, liquidity ratio, efficiency ratio, capital structure and investors’ ratio. (Johri, 2010) 2.1 Profitability Ratio
Profitability ratio is a financial metrics that are used to evaluate a business’ capabilities to generate revenue to be compare to the business’ expenses and costs incurred over a time period. There are three types of ratio, gross profit margin, net profit margin, and the expenses margin. (Vailiev, 2010) 2.1.1 Gross Profit Margin
Gross profit margin measures the percentage of gross profit that is generated from the sales of the company. This shows the proportion of money remaining from the sales after accounting for the cost of sales. (Value Click Inc, 2012) Gross Profit Margin=Gross profitsales ×100%
2.1.2 Net Profit Margin
Net profit margin measures the percentage of net profit generated from the sales of the company. This shows the proportion of money remaining from the sales after accounting for the cost of sales and expenses of the company. Net Profit Margin=Net profitsales ×100%
2.1.3 Expenses Margin
Expenses margin measures the percentage of expenses incurred based on the operation of selling of product. This shows the portion of money use for expenses. Expenses Margin=Gross Profit Margin-Net Profit Margin
2.2 Liquidity Ratio
Liquidity ratio is a financial metric that are used to evaluate a business’ capability to pay off its short term obligations and debts. The higher the ratio, the higher the margin for safety that the company is able to pay off any requirements. There are two types of ratio, the current ratio and quick ratio. (Morley, 2010) 2.2.1 Current Ratio
The current ratio measures the ability of a company to pay off its short term obligations or debts. This ratio is measured in times. (InvestingAnswers Inc, 2012) Current Ratio=Current AssetsCurrent Liabilities
2.2.2 Quick Ratio
The quick ratio measures the ability of a company to pay off its short term obligations or debts immediately. This ratio is measured in times. Quick Ratio=Current Assets-StockCurrent Liabilities
2.3 Efficiency Ratio
Efficiency ratio is used to obtain information regarding the time period used for the turnover of receivables, repayment of liabilities and the stock management. There are three types of ratio, the debtor turnover period, creditor turnover period, and the stock turnover period. (Walsh, 2009)
2.3.1 Debtor Turnover Period
The debtor turnover period is used to measure the numbers of days for collection of trade receivables. It measures the credit extended to debtors and shows the credit control system of the company. Debtors Turnover=Trade debtorsSales×365 days
2.3.2 Creditor Turnover Period
The creditor turnover period is used to measure the numbers of days allowed for accounts payable. It measures the credit received from creditors and shows the ability to negotiate credit term the company. Creditor Turnover=Trade CreditorPurchases×365 days
2.3.3 Stock Turnover Period
Stock turnover period measures the control over stock of a company. It shows the average period for the stock to be sold. Low stock holding will indicate a high stock turnover, which will benefit the company with low stock holding cost. Stock Turnover=Closing StockCost of Sales ×365 days
2.4 Capital Structure
The capital structure of a company displays how a company is financed for its overall operations and growth by utilizing different sources of finance. Capital structure is usually referred to as the debt to equity ratio. There are two types of ratio, the gearing and interest cover. (Blais, 2012)
Gearing measures the extent of borrowed capital used in the business. Gearing shows the debt capacity of a company, which indicates the businesses’ ability to borrow funds. The higher the gearing, the higher the financial risk. Gearing can also be considered as a cost of capital because debt is a low cost of capital due to tax advantages, which means the interest is tax deductible process. Gearing=Non Current LiabilitiesNon Current Liabilities+Equity ×100% 2.4.2 Interest Cover
Interest cover measures the ability to pay the interest expenses of a company. The lower the interest cover, the higher the financial risk. This also reflects the bankruptcy risk of a company, as there may be a risk of the company not being able to pay of its interests and obligation. The interest cover is measure in times. Interest Cover=PBITInterest expenses
2.5 Investors Ratio
Investor ratio is the ratio that is used by investors to determine the health, performance and progress of a company. These ratios can show stocks with real value that will be able to survive recessions. There are five types of ratio, the Return on Capital Employed, Earnings per Share, Price Earnings Ratio, Dividend Yield and Earning Yield. (Fridson, 1996) 2.5.1 Return on Capital Employed
Return on capital employed is used to measure the overall profit generated from capital employment. This yield can be compared with other yields. ROCE=PBITCapital Employment ×100%
2.5.2 Earnings per Share
The earning per share ratio is used to measure the earnings generated to each shareholder per share. When the earnings per share ratio increases, the growth ratio will show shareholder value creation. (Kewd Group Inc, 2010) EPS=PATNo.of ord. shares×100sen
2.5.3 Price Earnings Ratio
The price earnings ratio shows the investors’ confidence and the future potential for growth and development of a company. The future potential is dependent on investment opportunity. (The Financial Times Ltd, 2012) Price earning ratio=Market price of sharesEPS=
2.5.4 Dividend Yield
The dividend yield ratio measures the percentage of dividend relative to the market price. Investors can use the dividend yield ration to compare with other companies, to decide on what investments to make. (YCharts Inc, 2012) Dividend Yield= Gross DividendMarket Value Per Share×100%
2.5.5 Earning Yield
The earning yield ratio measures the percentage of earnings compared to the market price. This shows the amount invested by a company in the stock that the company earned. Earning Yield= Earning per ShareMarket Value Per Share×100% 2.6 Ratio Analysis on Nestle
Applying the ratio analysis on Nestlé’s financial reports will show the company’s performance throughout the business year.
2.6.1 Profitability Ratio of Nestle
For nestle, the gross profit margin remained at 33% for both years under review. The net profit margin also remained the same for both years at 12%. The expenses margin of the company will hence be the same for both the years at 21%. The main factor for this to happen despite an increase in sales by 16.8% will be due to the challenges in input cost mitigated by internal cost saving exercises. We recommend the company to put in effort on research and development so that more new product are created, launched successfully, for future growth and profitability.
2.6.2 Efficiency Ratio of Nestle
The debtor collection period for Nestle in 2010 is 32 days, and in the year 2011, increased marginally to 35 days. The creditor days also increased within the year under review. In the year 2010, the period was at 85 days, which then increased to 102 days in 2011. The stock turn over period increased from 52 days in 2010 to 50 days in 2011.
Based on the information obtained, we can conclude that Nestle is managing both their debtors and creditors efficiently. Nestle only extends a one month period for debtors and is able to negotiate a three month term for their creditors.
We can conclude that Nestle is reliant on short term finance for a period of 3 months with no interest obligation. This is possible due to the company’s reputation as listed in the board and 100 years of experience in business and conduct.
2.6.3 Liquidity Ratio of Nestle
The current ratio of nestle increased marginally from the year 2010 at 1.08 times to 1.1 times in 2011. However, the company’s quick ratio declined from 0.56 times in the year 2010 to 0.54 times in 2011.
The company has a low current and quick ratio for both the years. This shows the company will not be able to meet its short term obligation immediately. This is not such a big issue as the company has negotiated with its creditors a 3 month period for repayments, which allows the company some time.
2.6.4 Capital Structure of Nestle
The gearing ratio of the company declined from 42% in the year 2010 to 41% for the year 2011. The gearing of the company is largely contributed by long term loans and borrowings. An example would be the loan obtained by Nestle from a related company which is unsecured.
Based on the findings, we can conclude that Nestle has very minimal financial risk even if the gearing ratio was to increase because a large portion of it is a loan that was obtained from a related company is unsecured. This reflects that Nestle has a significant high capacity for debt. We can assume that this is major source finance due to the low cost of capital as a result of tax advantage on interest payment.
The interest cover of Nestle improved over the year, from 22 times in the year 2010, to 28 times in the year 2011. The main reason for the improved interest cover is due to the increase in profit before interest and tax. The cause for the increase is a result of growth in local and export market, ultimately increasing the sales. 2.6.5 Investors Ratio of Nestle
The ROCE increased from 46% to 53% from the year 2010 to 2011. Meanwhile, the EPS during the same period increased from 167 cent to 195 cent. The main reason for the improvement will be an increase in the market share, both local and export coupled with cost efficiency by elimination non value adding expenses.
The PE ratio of the company increased from 26 times to 29 times. This shows the investors’ confidence in the company for future potential and growth is very high. This is supported by the increase in share price from RM 43.34 in 2010 to RM 56.20 in 2011.
The dividend yield of Nestle declined from 3.8% to 3.2% despite of increase in net dividend from 165 cent to 180 cent. The main reason for the decline is due to increase in share price from RM 43.34 in 2010 to RM 56.20 in 2011. Based on the dividend policy of the firm, the company retains 1% of their earning in 2010 and 8% retention in the year 2011. Despite of the growth in turnover capital expenditure requirement, the company is experiencing constant pressure to meet shareholders’ expectation for high dividend.
2.7 Ratio Analysis on Dutch Lady
Applying the ratio analysis on Dutch Lady’s financial reports will show the company’s performance throughout the business year.
2.7.1 Profitability Ratio of Dutch Lady
The gross profit margin for the year 2010 is 36%, which increased in 2011 to 37%. The net profit margin is 18% in 2011 and 13% in 2010. Hence, the expenses margin for 2010 is 23%, which reduced to 19%. Despite the increase of sales comparing the both years, the gross profit margin only increased marginally, and yet the company’s net profit margin increased due to the cut back on expenses margin. The company has practiced internal cost saving exercise. We recommend the company put more effort in research and development to produce more goods, launch in the market and increasing sales and growing the company. (Vandyck, 2006)
2.7.2 Efficiency Ratio of Dutch Lady
The debtor collection period for the year 2010 is 39 days, which reduced to 16 days in 2011. The creditor turnover period increased from 80 days to 88 days during the same period. However, the stock turnover period increased from 59 days to 67 days from 2010 to 2011.
The company is efficient in both the debtor and creditor collection and repayment. The company gives out a half month term to debtors and negotiates a 3 month term from creditors. This will allow ease of cash flow. However, the stock turnover period increased; hence the company will have to spend money on the stock holding.
2.7.3 Liquidity Ratio of Dutch Lady
The current ratio of Dutch Lady is 2.4 times in 2011, and 2.2 times in 2010. Meanwhile, the quick ratio is 1.5 times in 2010, which increased to 1.7 times in 2011. The company has a low liquidity ratio which puts the company at risk. In the annual report, it states that the company is at risk at not being able to meet its financial obligation as they fall due. The company’s liquidity risk arises from its various payables. (Dutch Lady Malaysia, 2011)
2.7.4 Capital Structure of Dutch Lady
The company’s gearing ratio for both the year 2010 and 2011 remained constant at a small portion of 1.5%. Alongside the gearing, the interest cover for 2011 was 157 times.
The company is a mainly equity financed firm. This is good for the company as there is minimal financial risk. The company will have no obligation towards creditors which otherwise will finance the company.
2.7.5 Investors Ratio of Dutch Lady
The ROCE increased from 45% to 54% from the year 2010 to 2011. Meanwhile, the EPS during the same period increased from 100 cent to 169 cent. The main reason for the improvement will be an increase in sales and decrease in expenses. The PE ratio of the company increased from 20 times to 34 times. This shows the investors’ confidence in the company for future potential and growth is very high. The dividend yield of Dutch Lady remained constant for both the years at 2.2% in spite of the market value of the share increasing. This shows the excellent performance and progress of the company. The company retains 24% of their earning at RM195 million in 2011 and 19% retention at RM 133 million in the year 2011.
3. Working Capital Cycle
The working capital cycle is a metric used to calculate the period used from the start, investing funds, till the business receives returns on that investment. This will include most aspects, from manufacturing goods, buying raw materials or hiring people to produce goods. An excellent WCC will strike a balance between the incoming and outgoing payment, and will help to determine the parts of the cycle which needs to be reduced. Figure 1 shows the WCC diagram. (Bloomsbury Information Inc, 2012)
The formula for WCC is shown below:
Creditor= CreditorC.O.S. ×365=-days|
3.1 Working Capital Cycle for Nestle
Nestlé’s WCC 2010 and 2011
Working Capital Cycle| 2011| 2010|
Stock Turnover= StockC.O.S.×365| 60 days| 52 days |
Debtor Turnover= DebtorSales×365| 34 days| 32 days|
Creditor Period= CreditorC.O.S. ×365| 102 days| 85 days| WCC | -8 days| -1 day|
The working capital for Nestle for both the years 2010 and 2011 is negative at -1 day and -8 days. This shows that the company has more capital available to finance growth. The company is able to free up cash from the WCC will act as a low cost of capital than other sources. 3.2 Working Capital Cycle for Dutch Lady
Dutch Lady’s WCC 2010 and 2011
Working Capital Cycle| 2011| 2010 |
Stock Turnover= StockC.O.S.×365| 67 days | 59 days |
Debtor Turnover= DebtorSales×365| 16 days| 39 days|
Creditor Period= CreditorC.O.S. ×365| 88 days| 80 days| WCC | -5 days| 18 days|
The WCC for Dutch Lady in 2010 at 18 days was eliminated to -5 days in 2011. The company has freed up cash from the WCC which will ease up cash flow of the company. This will also allow the company to tackle the liquidity issues. (Bloomsbury Information Inc, 2012) 4. Conclusion
We can conclude that both businesses, Nestle and Dutch Lady are performing well and have a bright future. This is proven in both the ratio analysis and the working capital cycle of the company. In terms of the ratio analysis, both the companies have shown good ratios. The profitability ratio, efficiency ratio, liquidity ratio, capital structure, and the investor’s ratio of both Nestle and Dutch Lady are promising to progress towards the future. Even so, there are still rooms for improvement. Like shown in the liquidity ratio of both companies, there may be some issues with it. As long as the companies are able to negotiate a good term with its creditors, this will not become such a big issue. The working capital cycles of both the companies are also in a good position as they have negative days in the cycle.
The companies should continue their way of conduct to maintain a good working capital cycle. This will ensure that they do not meet any cash flow issues within the organization. Comparing both the companies, Nestle would be the better company than Dutch Lady. This can be seen in terms of the figures in the financial report, like the revenue generated and the dividend return rate. Investors enjoy a higher amount of dividend with Nestle. The performance is also reflected in the market share value. Nestle has the higher value of share price. This is partially due to Nestlé’s experience in conduct of 100 years in the industry. Both companies promises a bright future towards growth and development, and this shows that the company’s sustainability and continuity to generate revenue, increase the shareholder’s value and contribute into the industry, market, and public.
5.1 Financial Report
5.1.1Nestlé’s financial report
5.1.2 Dutch Lady’s financial report
5.3 Working on Ratio Analysis
5.3.1 Working on Nestlé’s Ratio Analysis
Profitability| 2011 000’| 2010 000’|
Gross Profit MarginGross ProfitSales ×100%Net Profit Marginoperating profitsales ×100%Expenses MarginGross Profit Margin – Net Profit Margin| 15424700×100%=33%5794700×100%=12%33% – 12% = 21%| 13444026×100%=33%4874026×100%=12%33% – 12% = 21%| Efficiency| 4444700×365=34 days8783158×365=102 days5183158×365=60 days| 3544026×365=32 days6232682×365=85 days3812682×365=52 days| Debtors TurnoverTrade debtorsSales×365Creditors TurnoverTrade creditorsPurchases ×365Stock TurnoverClosing stockCost of sales ×365| | |
Liquidity| 1015914=1.1 :11015-518914=0.5 :1| 783721=1.08 :1783-381721=0.5 :1| Current RatioCurrent assetsCurrent LiabilityQuick RatioCurrent assets-Closing stockCurrent Liability| | | Capital Structure| 2011 000’| 2010 000’|
GearingLong term loanLong term loan +Equity×100%Interest CoverPBITInterest expenses=____times| 447447+641×100%=41%57921=28 times| 444444+613×100%=42%48722=22 times| Investors| 5791088×100%=53%| 4871057×100%=46%|
Return on Capital EmployedPBITCapital Employed×100%| | |
5.3.2 Working on Dutch Lady’s Ratio Analysis
Profitability| 2011 000’| 2010 000’|
Gross Profit MarginGross ProfitSales ×100%Net Profit Marginoperating profitsales ×100%Expenses MarginGross Profit Margin – Net Profit Margin| 304811×100%=37%142811×100%=18%37% – 18% = 19%| 249697×100%=36%90697×100%=13%36% – 13% = 23%| Efficiency| 37811×365=16 days122506×365=88 days93506×365=67 days| 75697×365=39days99448×365=80 days59448×365=59 days| Debtors TurnoverTrade debtorsSales×365Creditors TurnoverTrade creditorsPurchases ×365Stock TurnoverClosing stockCost of sales ×365| | |
Liquidity| 324135=2.4:1324-93135=1.7:1| 234106=2.2 :1234-72106=1.5 :1| Current RatioCurrent assetsCurrent LiabilityQuick RatioCurrent assets-Closing stockCurrent Liability| | | Capital Structure| 2011 000’| 2010 000’|
GearingLong term loanLong term loan +Equity×100%Interest CoverPBITInterest expenses=____times| 44+259×100%=11.5%1420.9=157 times| 33+197×100%=1.5%90-=- times| Investors| 142263×100%=54%| 90200×100%=45%|
Return on Capital EmployedPBITCapital Employed×100%| | |
5.4 Working Capital Cycle Working
5.4.1 Working Capital Cycle for Nestle WCC
Working Capital Cycle| 2011| 2010|
Stock Turnover= StockC.O.S.×365| 5183158×365=60 days| 3812682×365=52 days | Debtor Turnover= DebtorSales×365| 4444700×365=34 days| 3544026×365=32 days| Creditor Period= CreditorC.O.S. ×365| 8783158×365=102days| 6232682×365=85 days| WCC | -8 days| -1 day|
5.4.2 Working Capital Cycle for Dutch Lady
Working Capital Cycle| 2011| 2010 |
Stock Turnover= StockC.O.S.×365| 93506×365=67 days | 59448×365=59 days | Debtor Turnover= DebtorSales×365| 37811×365=16 days| 75697×365=39 days| Creditor Period= CreditorC.O.S. ×365| 122506×365=88 days| 99448×365=80 days| WCC | -5 days| 18 days|
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