1.0 Introduction
Nestle Lanka is a Sri Lanka based
foods company located in Colombo, Sri Lanka. Nestlé Lanka is a subsidiary
of Nestle, a Switzerland based
company. Nettle’s products include baby food, medical food,
bottled water, breakfast cereals, coffee and tea. The company was founded by
Anglo-Swiss Condensed Milk Company in 1906 and incorporated under Nestle Ceylon
Company. Nestle Lanka is the Sri Lanka largest food company. Whole company is
controlled by the Nestle Switzerland parent company. Nestle Lanka PLC became
the seventh most valuable brand in Sri Lanka worth approximately Rs 21 billion
in 2017.
Nestle Lanka was listed on the Colombo Stock Exchange in 1981. The company has 1,200
employees and 23,000 distributors, suppliers and farmers. Company was renamed
in 1980 as Nestle Lanka PLC before being listed on the Stock Exchange.
Financial reporting
refers to standard practices to give stakeholders an accurate depiction of a
company’s finances, including their revenues, expenses, profits, capital, and
cash flow, as formal records that provide in-depth insights into financial
information.
The
role of financial reporting by companies is to provide information about their
performance, financial position and changes in the financial position that is
useful to a wide range of users in making economic decisions. The role of
financial statement analysis is to take financial reports prepared by
companies, combined with other information, to evaluate the past, current and
prospective performance and financial position of a company for the purpose of
making investment, credit and other economic decisions. As Nestle being a prominent
company in Sri Lanka conducting financial statement analysis for Nestle PLC is
found important at this juncture.
The
following were the objectives to analyse the financial statement of Laughs PLC
·
To analyse the Working Capital Position of Nestle PLC.
·
To study the Cash position of Nestle PLC
·
To find out the Profitability Position of Nestle PLC
·
To measure the Returns of Nestle PLC.
·
To study the Efficiency of Nestle PLC in managing its assets
·
To scrutinize the Liquidity position of Nestle PLC.
·
To scrutinize the common size analysis
Period
of the Study A period of five years is taken for the analysis purpose from
2015-2019
2.0 Ratio analysis
Ratio analysis is a kind
of relationship between two or more figures. Ratio analysis coming under four
statements. These are,
1. Liquidity
and efficiency ratios
2. Solvency
ratios
3. Profitability
ratios
4. Market
ratios
2.1 Liquidity
and efficiency ratio
Under
liquidity and efficiency ratio working capital, current ratio, acid test ratio,
accounts receivable turnover, day’s sales uncollected, merchandise turnover, day’s
sales in inventory and total assets turnover is calculated.
|
Ratio |
2015 |
2016 |
2017 |
2018 |
2019 |
|
Working capital |
122289000 |
769359000 |
-1688292000 |
-913249000 |
-474204000 |
|
Current ratio |
1.02 |
1.12 |
0.82 |
0.89 |
0.94 |
|
Acid test ratio |
0.50 |
0.52 |
0.52 |
0.53 |
0.48 |
|
Accounts receivable
turn over |
18.28 |
15.08 |
11.23 |
10.65 |
12.02 |
|
Days’ sale uncollected |
21.45 |
27.32 |
38.50 |
32.86 |
26.97 |
|
Merchandise turnover |
6.77 |
11.31 |
7.13 |
8.02 |
7.37 |
|
Days’ sales in
inventory |
56.72 |
64.49 |
59.64 |
46.43 |
53.35 |
|
Total assets turnover |
3.13 |
2.87 |
2.61 |
1.47 |
2.11 |
·
Working capital
Working capital=Current
Asset - Current Liabilities
Working
capital is the difference between the current asset and current liabilities.
This is the amount used for day to day operations of the company.
·
Current ratio
Current
ratio= Current Assets/Current Liabilities
This measures the short
term solvency of the company using the balance sheet. Also known as the working
capital ratio, it tells if a firm has sufficient funds to pay its liabilities
over the period of next 12 months. The current ratio can also give a sense of
the efficiency of a company’s operating cycle or its ability to turn its
product into cash.
During the last 5 years,
within 2015 – 2016 it kept around 1. It is a good sign. But during 2017-2019
the current ratio is less than 1. A declining ratio may be a sign of
deteriorating financial condition or it might result from eliminating obsolete
inventory.
Acid test ratio= (Total Current Assets-Inventory and prepaid expenses)/Current
liabilities
This ratio shows the relationship between the
quick asset and the current liabilities and shows the company ability to pay
back its current liability within its short period of time. In this company
acid test ratios have been less than 1 in the last five years. It is not a good
sign and it should be improved.
According to the above graph, the acid test ratio
declined in 2019. It is not a good sign of the company’s liquidity.
·
Account receivable turnover
Account Receivable Turnover =
Sales on Account/Average Account Receivable
This ratio measures how many
times a company converts its receivable into cash each year.
During 2015-2017 account
receivable turnover is decreased and during 2018-2019 it was gradually increased.
·
Days’ sales uncollected
Days’
sales uncollected= (Account receivable/Net sales)*365
This ratio measures the
liquidity of receivables
According to the graph days
sales uncollected during 2015-2017 has been increased. And then it was
decreased. It is not good sign for the company.
·
Merchandise turnover
Merchandise
turnover= Cost of goods sold/Average Inventory
This ratio measures the
number of times merchandise is sold and replaced during the year.
According to the graph
merchandise turnover values go up and down. Highest value shows in 2016 and
lowest value shows in 2017 in the graph.
·
Days’ sales in inventory
Days’
sales in inventory= (Ending Inventory/Cost of Sales)*365
This ratio measures the
liquidity of inventory.
·
Total assets turnover
Total
Assets Turnover= Revenue/Average Total Assets
This ratio measures the
efficiency of assets in production sales.
2.2 Solvency ratio
|
Ratio |
2015 |
2016 |
2017 |
2018 |
2019 |
|
Debt ratio |
62.70 |
58.74 |
68.99 |
68.09 |
67.34 |
|
Equity ratio |
37.30 |
41.26 |
31.01 |
31.91 |
32.66 |
|
Times interest earned |
178.34 |
131.62 |
28.25 |
20.65 |
11.59 |
·
Debt ratio
Debt ratio= (Total Liabilities/Total Assets)*100
This
ratio shows how much of the assets are covered by the liabilities of the
organization. Debt ratio has gradually increased during the last five years.
·
Equity ratio
Equity
ratio= (Total Shareholders’ Equity/Total Assets)*100
This
ratio is showing an increasing trend except in 2017 in which it was at its
lowest value because increase in equity is lower than assets.
·
Time interest earned
Time
interest earned= Net income before interest expenses and income taxes/Interest
Expenses
It
shows how many times the company can pay its interest with its income of one
year, higher the ratio will be more favourable for the organization.
2.3 Profitability ratio
|
Ratio |
2015 |
2016 |
2017 |
2018 |
2019 |
|
Profit margin |
11.50 |
12.06 |
9.67 |
9.34 |
7.06 |
|
Gross margin |
40.37 |
38.91 |
35.46 |
37.10 |
34.39 |
|
Return on total assets |
35.97 |
34.62 |
25.23 |
20.98 |
14.86 |
|
Return on common
shareholders |
95.81 |
87.94 |
70.60 |
66.80 |
46.05 |
·
Profit Margin
Profit Margin= (Net Income/Net Sales)*100
This ratio interprets the net profit
as a percentage of net sales. In 2015, the ratio was pretty good but during
2016-2019 it declined, that is Alarming for the organization and it should take
action for its improvement. Lower the ratio results in a lower market position
of the organization.
·
Gross Margin
Gross Margin= (Gross profit / Net Sales) * 100
Gross profit margin ratio shows the gross profit as a % of the net sale.
During 2015-2019 gross margin decreased. It is not a good sign.
·
Return on total assets
Return on total
assets = (Net income/ total asset) * 100
This ratio shows the relationship between net profit and total assets.
It is the main objective of an organization to maximize its return on
assets. Return on total assets has decreased from 2015-2019.
·
Return on common shareholders’ equity
Return on common
shareholders’ equity= ((Net Income- Preferred dividends)/Average shareholders’
equity))*100
These measures
indicate how well the company employed the owner’s investment to earn income.
2.4 Stock
market ratio
|
Ratio |
2015 |
2016 |
2017 |
2018 |
2019 |
|
Book value per common
share |
84.16 |
102.05 |
89.58 |
104.89 |
102.55 |
|
Earnings per share |
76.77 |
81.87 |
67.64 |
64.88 |
47.76 |
|
Price earning share |
26.70 |
24.45 |
24.04 |
26.20 |
27.22 |
|
Dividend yield |
3.15 |
4.00 |
3.08 |
2.94 |
3.65 |
·
Book value per common share
Book value per common share= Total equity/number of shares
In this company book value per common share has increased
from 2015-2019.
·
Earnings per share
Earnings per share = ((Net income-Preferred
dividends)/Weighted average common shares outstanding)
These measures indicates how much income was income was
earned for each share of common stock outstanding.
·
Price earnings ratio
Price
earnings ratio= Market price per share/Earning per share
This measure is often used by investors as a general
guideline in gauging stock values. Generally, the higher the price earnings
ratio, the more opportunity a company has for growth. In 2019 the price
earnings ratio is high. Therefore the more opportunity a company has for growth
in 2019.
·
Dividend
yield
Dividend yield= (Annual
dividends per share/Market price per share)*100
This
ratio identifies the return in terms of each dividend on the current market
price of stock.
3.0 Z score analysis
The Altman Z Score model,
defined as a financial model to
predict the likelihood of bankruptcy in
a company,
was created by Edward I. Altman. Altman was a professor at the Leonard N. Stern
School of Business of New York University
Z = 1.2T1+1.4T2+3.3T3+0.6T4+0.999T5
T1=
Working capital/Total assets
T2=Retained
earnings/Total assets
T3=Earnings
before interest and taxes/Total assets
T4=Market
value of equity/Total liabilities
T5=Sales/Total
assets
Zones of
discrimination
Z>2.99 -“Safe” Zones
1.81<Z<2.99 - “Gray” Zones
Z<1.81 - “Distress” Zones
|
|
2015 |
2016 |
2017 |
2018 |
2019 |
|
Working capital |
122289000 |
769359000 |
-1688292000 |
-913249000 |
-474204000 |
|
Total assets |
12122047000 |
13286638000 |
15520210000 |
17658806000 |
16870559000 |
|
T1 |
0.01 |
0.06 |
-0.11 |
-0.05 |
-0.03 |
|
Retained earning |
3984381000 |
4945319000 |
4275544000 |
5097901000 |
4972354000 |
|
Total assets |
12122047000 |
13286638000 |
15520210000 |
17658806000 |
16870559000 |
|
T2 |
0.33 |
0.37 |
0.28 |
0.29 |
0.29 |
|
Earnings before
interest and taxes |
5456101000 |
5755810000 |
4906768000 |
5192987000 |
4125834000 |
|
Total assets |
12122047000 |
13286638000 |
15520210000 |
17658806000 |
16870559000 |
|
T3 |
0.45 |
0.43 |
0.32 |
0.29 |
0.24 |
|
Market value of equity |
1.1011E+11 |
1.07553E+11 |
87357602838 |
91333287100 |
69832356807 |
|
Total liabilities |
7600411000 |
7804064000 |
10707411000 |
12023650000 |
11360950000 |
|
T4 |
14.49 |
13.78 |
8.16 |
7.60 |
6.15 |
|
Sales |
35854802000 |
36461695000 |
37601472000 |
37336943000 |
36355084000 |
|
Total assets |
12122047000 |
13286638000 |
15520210000 |
17658806000 |
16870559000 |
|
T5 |
2.96 |
2.74 |
2.42 |
2.11 |
2.15 |
|
Z |
13.60 |
13.03 |
8.61 |
7.98 |
7.03 |
During
last five years Z score is greater than 2.99. Therefore company is in the safe
zone during last five years.
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