1. Analysis of Financial Statement
Term project (Nestle Pakistan ltd)
Presented by: Adnan Abdullah
12856
Monday 6-9
Presented to : Mr Ali Dhamani
2. Company Overview
Nestle Pakistan Ltd is a subsidiary of Nestle S.A. - a company of
Swiss origin headquartered in Vevey, Switzerland
It is a food processing company, registered on the Karachi and
Lahore stock exchanges and operating in Pakistan since 1988 under
a joint venture with Milk Pak ltd and took over management in 1992
For ten years in a row, the company has won a place among the top
25 companies of the Karachi Stock Exchange
Headquartered in Lahore, the Company operates four production
facilities, in Sheikhupura, Kabirwala, Islamabad and Karachi
4. Objective/Context
The objective is an analysis of a purchase decision for a
long-term equity investment in Nestle Pakistan
Questions to be answered?
What are Nestle’s earnings potential? What is its recent
earnings performance?
What is Nestle’s current financial condition? What risks and
rewards does Nestle’s financing structure portray?
What are Nestle’s future business prospects? Are Nestle’s
markets expected to Grow?
How does Nestle’s compare with its competitors domestically?
7. Efficiency Ratios
2007 2008 2009 2010 2011
Engro
Foods 2011
Inventory turnover ratio 9.4 10.3 9.2 8.9 8.2 9.8
Asset turnover ratio 2 2.3 2.3 2.5 2.2 2.05
0
2
4
6
8
10
12
Times
Efficiency Ratios
Concern: Declining ITO ratio and ATO ratio in the subsequent years. It
implies that Management is not efficiently managing its inventory and
assets to generate revenue.
8. Liquidity ratios:
0
0.5
1
1.5
2
2007 2008 2009 2010 2011 Engro
Food
2011
1.1 1.1 1.1 0.9 0.8
1.8
0.54 0.6 0.43 0.38 0.38
0.9
Times(X)
Current Ratio Quick Ratio
Liquidity Ratios 2007 2008 2009 2010 2011
Engro Foods
2011
Current ratio 1.1 1.1 1.1 0.9 0.8 1.8
Quick ratio 0.54 0.6 0.43 0.38 0.38 0.9
Declining liquidity ratios: this indicates that Nestle may have problems paying
its bills on time and the company will be vulnerable to its short-term creditor
demands.
10. Leverage Ratios
Nestle’s debt to equity ratio shows an upward trend over the period of 5
years, which is an alarming situation, because it suggests that the
percentage of assets which are financed by the debts is increasing.
Leverage Ratio 2007 2008 2009 2010 2011
EF
2011
Debt to Equity
Ratio 1.6 1.7 1.9 1.9 2.2 2.5
Interest
Coverage Ratio 5.4 5 10.5 12.1 7.2 1.9
11. Earnings Quality (Concern)
Accrual Ratio B/S:
In assessing earnings quality of Nestle, we note that the balance sheet
based accrual ratio of Nestle is 32% in comparison to 26.5% of its
competitor Engro Foods. This indicates that Nestle is accruing more each
than Engro Foods.
12. Earnings Quality (Continue..)
Concern:
Allowance for doubtful accounts
The % increase in Accounts Receivable and Allowance for doubtful Account
seems higher than expected, in relation to change in sales. Not a positive
relationship.
Deviation in the growth rate of Accounts Receivable and Allowance for
doubtful Account. The allowance account did not increased appropriately in
relation
to Accounts Receivable, 86.2% and 118% respectively. The allowance
13. Trend Analysis
0%
100%
200%
300%
2007 2008 2009 2010 2011
Trend %
Sales - net Net income
Nestle’s growth was impressive over the period of 5 years, but it was out
paced by even higher growth in the company's net income
14. Common size (Vertical Analysis)
Income Statement:
Over all, the company’s financial status has improved, while most of the
expenses have decreased, which indicates a favorable prospective from an
investment perspective.
Balance Sheet:
long term liabilities, long term financing has gone down which is a good
sign, as it indicates that company took less loans in 2011, implying less
degree of risk in firms capital structure in terms of long term debt.
Total liabilities are almost 78% of assets, of which more than 30% is long-
term debt.
Current liabilities are 47% of assets, which is larger than its current
assets, not a good sign for Nestles liquidity
15. Cont..
PP&E constitutes almost 46% of its total assets. The
share Of PP&E has dropped over the period, partly
because of depreciation of aging assets and it
indicates that the expense of PP&E is due in the
near future.`
16. Recommendation/Conclusion:
Nestle has been performing very well in comparison with competitors domestically
Nestle’s earnings performance is good. The earnings growth has been generated internally
from operations.
Overall profit margin showed a slight increase but a slight decline in gross profit margin was
witnessed. This was mainly due to cost pressure on some Product/
By assessing Nestle’s trend analysis, it can be estimated that Nestle’s Sales and net
income will grow significantly
Favourable ROE, although it has decreased, it is still better than competitors ROE.
Nestle’s efficiency ratios are acceptable as they are quite close to the competitors
Nestle has lower earnings quality as evidenced by high accrual ratio and deviation in the
growth rate of Accounts receivable and Allowance for doubtful accounts.
Nestle have increased their dependency on debt to meets its obligations and to finance its
capital expenditures over the period of time.
17. Nestle Pakistan has maintained a firm position in the
Pakistani foods market with the leading position in
several categories and is expected to continue its
strong operations on the basis of its current and past
performance. So on the basis of detailed analysis of
Nestle and its favourable earnings and growth
potential, I will recommend investing in Nestle’s long
term Equity shares.
