FMA Assignment Final Draft

1(a) Calculate ratios which will assist you to assess the performance of the companies
over a period of three to five years. (8 marks)
Please refer to ratio working calculation in appendix A
Dutch Lady
Performace
No indicator 2006 2007 2008
1 ROSF 36 38.1 29.5
2 ROCE 50.21 52.4 40.27
3 COGS/ revenue 62.61 69.75 74.02
4 Gross margin 37.40 30.25 25.97
5 SGA & E / revenue 21.45 14.62 14.16
6 Operating margin 11.69 10.75 8.17
7 Effective tax rate 28.14 27.05 26.29
8 Net profit 8.38 7.81 5.99
ROA ( Net income/
9 TA) 20.37 16.04 14.65
Nestle
Performace
No indicator 2006 2007 2008
1 ROSF 48.79 48.82 59.13
2 ROCE (%) 57.67 62.68 80.00
3 COGS/ revenue 66.28 67.06 68.95
4 Gross margin 33.72 32.94 31.04
5 SGA & E / revenue 22.36 20.32 19.13
6 Operating margin 11.38 11.99 11.99
7 Effective tax rate 27.27 26.12 22.76
8 Net profit 8.07 8.55 8.79
ROA ( Net income/
9 TA) 19.46 20.00 22.3
Table A : Summarized of all performance or profitability ratio using 3 years

Financial
statement ( 2006 to 2008)
Sean Yap ( MacTavish) 1

USGBS ( Malaysia Centre)
1(b) Compare the performance of the two companies, explaining the likely reasons for
the differences between their performances over the period. (16 marks)
Comment one : Net profit

Nestle ‘s net profit margin has increased by 0.72% marginally to 8.55% in
year
end of 2008 since year 2006. However, Dutch Lady Milk Berhad (DLM)’s net
profit margin
has been eroded significantly from 8.38% in year 2006 to 5.99% in year
2008 (Table B)
despite of 38.5% increased in total sales revenue for the same period of
time.
Nestle 2009 Net profit of Nestle rose by 29% compared to FY2006 and stood
at
RM340,887,000 .On the other hand, DLM’s 2009 net profit declined by
0.97% as
compared to its 2006 Fiscal year net profit and recorded RM 42,647,000
(Table C)
+29
Table B : Net profit margin (%) Table C: Net profit

margin in absolute
Value
(RM’000)

Below are some of the plausible reasons behind why DLM’s net profit margin
was eroded
year by year since 2006.
1. DLM operating profit margin was declining at year 2008 due to following
reasons :
a. Erosion of gross profit margin from year to year at 7.15% and 4.28%
in year 2007 and 2008 due to
– Increased of raw material and consumables has increased from RM
299,199 to RM 470,038 or 60.97% increament between year 2006
and 2008.
– COGS / sales ratio has increased from 62.61 % in year 2006 to
74..02% in year 2008 or the increment of cost of goods sold
(COGS) is 174.2% which is faster than the sales revenue growth
(38.50%) between year 2006 and 2008. One of the reason is the
commodities pricing of raw material such as milk powder and solid,
cocoa and oil palm has increased significantly by 50 to 60 %
(Chairman report, 2007 & 2008 of Annual report ; 2006
tftchart.com; Dow Jones International News 2009; Business Times
2007).
– Thus, the increment of COGS was outpaced the sales growth by
135.7% during the duration between 2006 and 2008.
– Hence, the gross profit has been hovering around RM 183,000,000
without recorded any significant growth compare to Nestle which
has diversify their business while less affected by the high cost of
commodity such as milk , cocoa and oil palm.
a. Administrative expenses increased by 46% since 2006.
b. Director remuneration increased by 40.5% to RM 1,808,000
c. Rental of premises has increased by 111.6% from RM 293,000 to
RM620,000 between year 2006 to 2008 respectively.
d. Rental equipment has increased by 59.4% from RM 69,000 to RM
110,000 between year 2006 to 2008 respectively.
e. Allowance for slow moving and obsolete inventories increased from
zero to
RM 1,613,000 between year 2006 to 2008 respectively.

f. 2008 finance costs was RM 246,000 or increased by122.5%
compared with RM 133,000 recorded in year 2006.
Below are some of the plausible reasons behind why Nestle’s net profit
margin was
increased significantly between year 2006 and 2008
1. Nestle gross profit has been increased marginally at 1.89% and 6.97%
respectively in year of 2007 and 2008.
a. Increment of sales revenue is greater than COGS /sales ratio
increment by 3.51 % and 11.61% in year 2007 and 2008 respectively.
As a result, gross profit has improved in term of Riggit from year to
year.
Nestle
2006 2007 2008
Sales revenue
(RM'000) 3275541 3416028 3877068
Growth (%) / 4.29 13.50
COGS/Sales (%) 66.28 67.06 68.95
Gross profit
(RM'000) 1104445 1125309 1203750
Growth (%) / 1.89 6.97
Effective tax rate
(%) 27.27 26.12 22.76
b. Following government policy to reduce corporate tax in order to

increase country competitiveness ,Nestle has enjoy the reduction in
term of effective tax rate from 27.27% to 22.76% which managed to
maintain their tax expenses from year 2006 to 2008 around RM
101,000,000 approximately. Thus, it helps to increase the net profit.
1. Nestle’s operating profit has grown consistently by 8,83% and 11.80 %

in year 2007 and year 2008 due to following reason

a. 2008 Selling, General and admin expenses (SGA & E) to revenue ratio
was decreasing by more than 3.23% since year 2006.
b. Reduction in amortization of intangible asset from RM 6,382,000 to
RM 256,000
c. Reduction of other expenses by RM 19,676, 000 from 2007 to 2008
was significant figure which boast up the operating profit.
Nestle
2006 2007 2008
Operating profit (RM'000) 362950 394984 441578
Growth (%) / 8.83 11.80
SGA & E / revenue (%) 22.36 20.32 19.13
Amortization of intangible asset
(RM'000) 6382 5062 256
Other expenses (RM'000) 6968 22606 2930
Comment on ROSF/ ROE
Table D: ROE for DLM and Nestle
Despite of stronger growth in term of total sales revenue (DLM 38.5%

versus Nestle 18.36%), DLM’s ROE was reduced to 29.5% whereas
Nestlé’s ROE rose to 59.13%.
Following is the likely reason behind the fluctuation of ROE in DLM during
2006 and 2008:

Dutch Lady
Dupont identoty 2006 2007 2008
Net Profit margin (%) 8.38 7.81 5.99
Total asset turnover ( TA /
sales) 2.429 2.052 2.445
Equity multiplier
( TA/Equity) 1.767 2.375 2.015
ROE 36.0 38.1 29.5
Based on dupont identity, ROE is affected by net profit margin, total

asset turnover and equity multiplier:
1. In 2007, ROE tend to increase marginally by 2.1% despite of the

reduction in net profit ( 0.57%) and total asset turnover reduced by
(0.377).However, These reduction was nullified by the significant
increase of equity multiplier of 0.608 because total asset was growth
at a faster rate ( 39.3%) faster than equity (3.7%).
2. In 2008, although total asset turnover has increased by 0.393 over

last year but ROE was reduced significantly to 29.5%. This is because
the compounding effects of reduction in both net profit margin and
equity multiplier by 1.82% and 0.36 which is greater than the
increment of total asset turnover. Another reason is the growth rate of
average shareholders funds or total equity is much higher ( 16.4%) as
opposed to the reduction in 2008 net profit by 9.75% over last year.
Dutch Lady
2005 2006 2007 2008
11829
Shareholder funds (RM'000) 8 120947 127258 161585
Average shraeholders funds 119622. 124102. 144421.
(RM'000) / 5 5 5
Growth (%) / / 3.7 16.4
Net profit (%) / 8.38 7.81 5.99
Net profit (RM'000) / 43065 47255 42647
Growth (%) / / 9.73 -9.75
Following is the likely reason behind the fluctuation of ROE in DLM during
2006 and 2008:
Nestle
Dupont identoty 2006 2007 2008
Net Profit margin (%) 8.07 8.55 8.79
Total asset turnover ( TA / 2.245 2.131 2.335

sales)
Equity multiplier
( TA/Equity) 2.69 2.68 2.88
ROE (%) 48.74 48.83 59.11
Reason for significant increased of ROE in Nestle

1. Despite of slight increase in net profit margin by 0.48%, it was
nullified by the decresed of both total asset turnover and equity
multiplier by 0.114 and 0.01 respectively. Overall in 2007, the ROE
was almost the same as 2006 which stood at 48.83% or marginally
increase by merely 0.09%.
2. In year 2008, we observed significant increase in ROE which was

largely due to the increment in all three factors including net profit
margin , total asset turnover and multiplier by 0.24, 0.204 and 0.2
respectively over last year.
3. ROE for year 2008 was definitely higher than 2006 by 10.37%
because of the increment observed in all three factors including net
profit margin , total asset turnover and multiplier by 0.72, 0.09 and
0.19 relatively.
Comment on ROCE

Table E: ROCE for DLM and Nestle
Overall Nestle has a much better ROCE than DLM by 7.46, 10.28, 39.73 in
year 2006 , 2007 and 2008 respectively.
Nestle ROCE was much higher owing to following reason:

Nestle
2006 2007 2008
Growth (%) / 8.83 11.80
Average total capital employed
(RM’000) 647421.5 654376 580441.5
Growth (%) 1 -11
1. As shown on the table above Nestle’s operating profit year on year

growth always outpaced average total capital employed by 7.73 and
22.8% in year 2007 and 2008 respectively. Thus, the 2007 ROCE was
rosed by increased 5.01%. Meanwhile, 2008 ROCE was grown by
17.32% over last year.
2. In 2008, Nestle has made an imprudent dividend payout of 131.52%

or RM 448,341,000 which is the main reason behind the significant
reduction of 2008 year capital employed in order to boast ROCE to its
highest level.

DLM ROCE was decreasing owing to the following reason:
Dutch Lady
2006 2007 2008
Growth (%) / 8.26 -10.57
Average total capital employed
(RM’000) 119622.5 124102.5 144421.5
Growth (%) 4 16
1. In 2007, ROCE only growth marginally by 2.19% because operating

profit growth (8.26%) is just slightly higher than average total capital
employed (4%).
2. In 2008, ROCE has decreased tremendously because the operating

profit was fell by more than 10% ( as shown on table above) while
average total capital employed still growth at the rate of 16%.
3. DLM has a steadily increased in capital employed ( as shown above)

due to the fact that
a. Increase retained earnings from year on year (YOY) at a rate of 11.1%
and 54.3% in year 2007 and 2008 respectively.
b. In year 2008, DLM has retained more earning by reduced it dividend
payout rate from 86.7% to 19.5%. Hence, it boosts the total equity
upwards significantly by 26.97% compared to last year.
In conclusion, DLM high growth of total capital employed has posed

great
challenge for the company and its management to increase its
operating profit
more diligently and efficiently in order to maintain above industry
ROCE.

(2)(a) Calculate ratios that will enable you to comment on the liquidity and
management of working capital over the period. (10 marks)
Please refer to ratio working calculation in appendix B
Dutch Lady Milk Berhad

2006 2007 2008
Liquidity Ratio
Current Ratio 1.77 1.41 1.76
Quick Ratio 1.15 0.7 1.15
Working capital
Stock holding period (days) 59.5 74.85 66.82
Debtors payment period
(days) 45.1 45.1 51.8
Creditor payment period
(days) 46.9 49.1 46.5
Cash conversion cycle
(days) 57.7 70.85 72.12
Asset turnover Ratio
( times) 2.43 2.05 2.45
Nestle
2006 2007 2008
Liquidity Ratio
Current Ratio 1.196 1.08 0.856
Quick Ratio 0.711 0.567 0.409
Working capital
Stock holding period (days) 49.86 61.93 61.86
Debtors payment period
(days) 49.7 32.6 22.9
Creditor payment period
(days) 39.1 45 39
Cash conversion cycle
(days) 60.46 49.53 45.76
Asset turnover Ratio
( times) 2.43 2.05 2.45
Table F: Summerized of Liquidity ratio and ration related to working capital.

(b) Discuss the likely causes and effects of the changes in the liquidity ratios over
the period of two years. (15 marks)
Table G: Current ratio Table H: Quick ratio
Overview
In general, Dutch Lady Milk Berhad is much solvency as compared to Nestle

during the entire
duration between 20076and 2008 based on both current and quick ratio (as
illustrated in
Table G & H) . It means that DLM is more “liquid “ and also has better ability
to pay its current
obligations (current liabilities) in time when they become due as compared
to Nestle.
However, in actual fact, Nestle might be slightly more liquid than DLM based
on the fact that
Nestle’s cash conversion cycle for year 2007 and 2008 are much shorter
than DLM by 21.32

days and 33.12 days. On top of that, Nestle has a much shorter stock
holding period during
the entire period of 2006 to 2008; debtors payment period also significantly
shorter than DLM
in year 2007 and 2008 by12.5 days and 28.9 days respectively (Table F).
The implication of the
better cash conversion cycle of Nestle over DLM was further substantiated
by the significant
increase of its net cash from operating activities by 91.3 % ( 2007 -RM
290,657 versus 2008 –
RM555,972). In contrary, due to perpetual longer cash conversion cycle,
DLM net cash from
operating activities was declining 33.7% over last year and stood at RM
29,897.
Discussion of the changes in liquidity ratio over 2006 & 2007
A.Dutch Lady Milks Berhad (DLM)
At the end of 2007, both DLM’s current and quick ratio were drop
significantly and stood at by
1.41 and 0.71 respective compared with year 2006. Quick ratio decreased
more significantly as
compared to current ratio as the inventories growth by 65% from 2006 to
2007. Thus,
inventories contributing 36.9% of the total current asset in 2007 versus
33.5% in 2006.
Below are the likely contributing factors behind the reduction of

both current and quick ratio:
1. Despite of total current asset increased by 49.97% to RM 234,403,000 ,

the current liabilities has increased much more significantly by 79.81% to
RM 165,812,000. Thus, the 2007 current ratio was drop 1.41 compared to
last year.
2. The reason why current liabilities increased much rapidly than current
asset:
a. Shorterm borrow ( RM 16,400)
b. Trade payables ( RM 25,891) or 59% increased

c. Amount owing to other related company up 206% compared to last
year.
– Mainly due to increase purchase from Friesland foods BV and
Friesland foods Foremost (Thailand) plc.
– Know-how and trademark license fee paid to Friesland foods BV by
8,492,000 more than last year ( 2006)
a. Net cash and cash equivalents at the end of 2007 was RM 17,267,000
which is reduction of 35% from last year. This is mainly due to
reduction of cash generated from operation and net cash from
opetaing activities by 10.4% and 16.6% respectively; Increase interest
paid by 84.5% to RM 246,000; increment of net cash used in investing
activities by 199.6% to RM 13,235,000. Thus, reduction in net cash
slower the overall growth of total current asset relatively to current
liabilities.
As a results of the reduction on both current and quick ratio in year 2007,
following are some of the likely effects:
1. The group net cash decreased of RM 9,311,000 compare to last year

surplus of RM 7,820,000.
2. The interested expense in year 2008 has increase from 246 to 296 or
20.3% increased compare to last year due to high current liability mainly
come from short term borrowing of RM 16,400,000.
3. DLM has to consciously reduced its current liabilities as a whole by
a. In year 2008 there isn’t short term borrowing
b. in year 2008 it manage to reduce its trade payables by 7.7% to RM
64,387,000.
4. DLM has done following in year 2008 to increase current asset

a. Increased net cash and cash equivalent from operating activities by
RM 6,525,000 through reducing stock holding period from 74.85 days
to 66.82 days and better working capital management.
b. Increased in trade receivable through better sales growth by 33.9%.
A. Nestle
At the end of 2007, Nestle’s current and quick ratio were drop significantly
and stood at
by 1.08 and 0.567 respective compared with year 2006. Below are the
likely contributing
factors behind the reduction of both current and quick ratio:
1.The overall growth of total current liabilities increased by 27.4% which is

much faster than

the overall growth of total current asset ( growth = 15%) by 12.4%.
Hence, the current ratio
suffered from significant decreased.
2.The 2007 current liabilities was significant higher than 2006 by some
27.4% due to the remarkable increased in 2007 short term loan and
borrowing coupled with slight increased on trade payable. The loan and
borrowing in 2007 is RM 302,703,000 which represent 353% increment over
last year short-term borrowing. At the same time, trade payables also rose to
RM310,439,000 or 22.3% increased over last year. Hence, both current and
quick ratio was declining sharply by 0.224 and 0.158 respectively.
3.The growth of nestle 2007 total asset was slower compared to its total
liabilities due to the fact that cash on hand was reduced by 46.3% to RM
31,670,000; trade receivables reduced marginally by 4.1%; remarked
increase in impairment of trade receivable by 42.9% over last year; Hence,
both current and quick ratio was declining sharply by 0.224 and 0.158
respectively.
4.2007 current ratio declined as a result of 2007 working capital declined by

49.8 % compared to last year. Despite of low current and quick ratio that
doesn’t mean that Nestle having problem of fullfill their short term obligation
(debt) or facing financial problem such as bankruptcy . Firstly, Nestle
working capital productivity (*1) increased from 25.4 to 49.1 which is a
clear sign of efficiency and productivity of Nestle ‘s sales revenue growing
faster than the resources required to generate them. Secondly, Nestle might
be able to generate more cash sales and improve its debtor payment period
(48.5 days to 47.4days ) even before they have to pay to their creditors (45
days on average).
*1 Working capital productivity = Sales revenue ÷ (Current assets –

Current liabilities)
As a result of the reduction on both current and quick ratio, following are
some of the likely effects:
1. Due to reduction on both current and quick ratio from year to year
analysis, the creditor like bank will be very much concern about Nestle
capability to service their short -term debt such as loan and borrowing.
At the same time, banker will consciously reduced the amount of
overdraft , unsecured loan and raised the effective interest rate
correspond to the financial risk such as low current and quick ratio for
Nestle should nestle were to apply for more loan to financial it business.

2. The group net cash flow (NCF) will be decreased significantly as cash
generated through operation will be eroded as there is less by relatively
higher total liabilities which consists of trade payable, short-term loan
and borrowing , and interest expenses.
3. Due to low level of current and quick ratio, Nestle will probably take
moderate tactical plan to improve and reduced its cash conversion cycle
(CCC) by
a. reduced debtor payment period among their top 30 to 50 percentile
client or dealer while maintain the debtor payment period among their
top 30 percentile client or dealer to prevent loss of sales due to this
factor alone , given other factors remain constants.
b. Reduction of inventory holding period through more effective planning
and
1. In order to improve and preserve cash flow and maintain uninterrupted

goods supply to their value added dealers and customers, Nestle would
probably choose to maintain its inventory at 8.8% of the total sales
revenue projected in the next fiscal year based on the analysis
conducted by myself. This will certainly curb over spending on purchases
of raw materials (cocoa, milk solid & powder, oil palm ) and subsequently
reducing its related opportunity cost in holding those raw material and
finished goods such as storage space.
Nestle
inventories at 31
Table J : Nestle average inventories data
3 (a)
Average inventor
Calculate gearing ratios for the two companies. ( 4 marks)
Please refer to ratio working calculation in appendix C
Growth (%)
Dutch Lady

No Performace indicator 2006 2007 2008
1 Gearing ratio (%) 0 0 0
Interest cover ratio
2 ( times) 451.6 264.3 196.5
3 Proprietary ratio 0.572 0.432 0.555
Debt-to-Equity ratio
4 (LTD/SF) 0 0 0
5 Fixed asset to SF ratio 0.4556 0.474 0.415
6 CA/ SF ratio 1.29 1.84 1.39
7 Capital gearing ratio 0 0 0
8 Debt Ratio (TL/TA) 42.78 56.8 44.47
Nestle
No Performace indicator 2006 2007 2008
1 Gearing ratio (%) 16.1 0.81 0.52
Interest cover ratio
2 ( times) 37 27.6 20.1
3 Proprietary ratio 0.383 0.398 0.3106
Debt-to-Equity ratio
4 (LTD/SF) 19.1 0.81 0.521
5 Fixed asset to SF ratio 1.11 1.041 1.51
6 CA/ SF ratio 1.496 1.474 1.71
7 Capital gearing ratio 5.21 123 191.7
8 Debt Ratio (TL/TA) 61.7 60.25 68.94
*SF = Shareholders funds ; CA = Current asset ; TL= Total liabilities ; TA= Total Asset ; LTD =
Long term debt
Table K : Summarised of the gearing ratio
(b) Discuss the capital structure of the two companies and the implications of
the
funding decisions that were made in the past. (8 Marks)
During 2006 to 2008, Dutch Lady Milk Berhad (DLM) has better long-
term solvency
position as compared Nestle.
Firstly, DLM’s gearing ratio and capital gearing are both zero (Table K)
as compared to
Nestle ( Gearing ratio ranging from 0.52 to 16.1%) due to the fact that
they did not call
for any long term debt such as debenture or preference share issues.
This shown that
Dutch Lady was less relying on external funding to finance their total
asset due to

business expansion and future growth relatively as compare to
Nestle. This fact was
further substantiated by the fact that DLM has a much higher level of
proprietary ratio
than Nestle and the differences ranging from 3.4% to 18.9% across
year 2006 to 2008.
It shown that Dutch lady was less rely on creditor funding by some
3.4% to 18.9%
comparatively to Nestle.
Secondly, Nestle has a fixed asset to shareholders funds ratio more

than 1:1 since
year 2006 whereas DLM ‘s ratio always hovering around 0.4 and 0.5.
This indicate
that Nestle has insufficient shareholders funds to finance their fixed
asset. Thus, they
have to finance their fixed asset with both short and long term debt
as shown in Table
L. In contrast, DLM has only raised relatively small amount of short
term debt as shown
in table M. Between year 2006 and 2008 , Nestle has raised total
debt at RM
590,491,000 versus DLM ‘s RM 16,400,000 (Table M) or RM
574,091,000 more debt
than DLM duration between 2006 and 2008. Hence, DLM has better
long-term solvency
position as compared Nestle.
Nestle 2006 2007 2008

10720
Long term debt 8 5179 2690
30270 10595
Short term debt 66758 3 3
17396 30788 10864
Total debt 6 2 3
Growth 77.0 -64.7
Nestle 2006 2007 2008

55910 63725 51575
Total equity 6 9 5
Table L: Nestle’s total debt and total equity figures
Dutch Lady 2006 2007 2008

Long term debt 0 0 0

Short term debt 0 16400 0
Total debt 0 16400 0
12094 12725 16158
Total Equity 7 8 5
Table M: Dutch Lady total debt and equity figures
Following is the implication of the funding decision that Nestle and

DLM were made in
the past:
First of all, despite of Nestle relatively higher gearing ratio compared

to DLM, Nestle
managed to achieve higher return from borrowed funds which
exceeded the cost of
paying interest. Thus, it manage to achieve impressive operating
profit growth (profit
before tax) of 8.9% and 11.7% in 2007 and 2008 respectively. As a
result, Nestle’s
2008 ROCE has increased to 80% or represent increment of 22.33%
from 2006.
Secondly, Nestle’s interest expenses has increased sharply by 47.1%

and 55.6% in year
2007 and 2008 due to excessive short term borrowing and moderate
long term
Borrowing ( Table M).
Nestle 2006 2007 2008

23450
Share capital (RM'000) 0 234500 234500
reserve (RM'000) 30763 34067 30186
retained earning 29384
(RM'000) 3 368692 251069
Long Term Borrrow 10720 5179 2690

(RM'000) 8
Long Term Capital 66631
employ (RM'000) 4 642438 518445
Growth of LTCE (%) -3.6 -19.3
Operating profit 36295
(RM'000) 0 395298 441353
Growth of OP (%) 8.9 11.7
Interest expense,IE 10090 14842 23091
Growth of IE (%) 47.1 55.6
Table N: Nestle Operating profit and interest expenses growth figure
Thirdly, DLM finance their business with short term borrowing such as
overdraft and
loan which had increased the interest expense by 85% and 20.3% in
year 2007 and
2008 respectively.
Dutch Lady 2006 2007 2008

Interest expense (RM'000) 133 246 296
Growth 85.0 20.3
Short term borrowing
(RM'000) 0 16400 0
Bank overdraft (RM'000) 15 15 115
Table P: DLM interested expenses growth figure ( year 2006 - 2008)
4 (a) Calculate investment ratios for the two companies. For this purpose, you can
use the
current share price as the share price on the last day of the financial year may
be
difficult to obtain. (8 marks)
Please refer to ratio working calculation in appendix D
Dutch Lady Milk Berhad

Investment Ratio 2006 2007 2008
Dividend payout ratio
(%) 93.8 86.7 19.5
Dividend yield (%) 5.81 5.4 2.17
Dividend per
share,DPS (RM) 0.631 0.640 0.195
EPS (RM) 0.673 0.738 0.666

PE ratio 16.14 16.06 13.51
Nestle
Investment Ratio 2006 2007 2008
Dividend payout ratio
(%) 88.75 91.39 131.52
Dividend yield (%) 4.03 4.34 7.08
Dividend per
share,DPS (RM) 1.00 1.138 1.912
EPS (RM) 1.127 1.245 1.454
PE ratio 22 21.08 18.57
Table Q: Summarized of both companies investment ratio
b) Discuss the implications of the investment ratios to existing and potential

investors in this industry. (16 marks)
Following are some of the plausible implication of the investment ratio

to existing
investor in the fast moving consumer goods (FMCG) industry:
1. “Growth investors” whom has invested in Nestle ‘s stocks will
continue to hold the share as
a. Nestle has increased its DPS at the rate of 13.8% and 68% in
2007 and 2008 respectively. Its high DPS growth rate was
underpin by the high growth rate of its net profit by 10.53% and
18.73% in 2 year consecutively after year 2006. (Table R)
Nestle
2006 2007 2008
Net profit
( RM'000) 264219 292042 340887
Growth (%) 10.53 16.73
Table R: Nestle net profit figures
b. Nestle has increased EPS at the rate of 9.3% and 16.79% in year
of 2007 and 2008 respectively. The growth of the EPS was due to
the fact that its net profit by 10.53% and 18.73% in 2 year
consecutively after year 2006. (Table M)
c. Nestle has increase its dividend yield more than 3.05 % since
2006 while maintaining healthy growth of its net profit as shown
in Table M.
1. “Growth investors “ whom has invested in Dutch Lady Milk Berhad

(DLM) would probably intend to sell of its stock by year end of 2008
or early 2009 due to following reason:
a. DLM year on year (YOY) sales growth was stagnant or no growth.

b. DLM Net profit margin has gone down more than 2.39% to 5.99%
which would hurt the dividend payout and dividend yield
significantly if this trend persist for the year 2009 and beyond.
Dutch Lady
Performace
indicator 2006 2007 2008
Gross margin (%) 37.40 30.25 25.97
Operating margin
(%) 11.69 10.75 8.17
Net profit (%) 8.38 7.81 5.99
Sales revenue
(RM'000) 513650 604732 711,567
Growth in sales (%) 17.7 17.7
COGS (RM'000) 321587 421792 526711
Growth in COGS (%) 31.2 24.9
Table S: Nestle performance indicator
1. “Value investors” whom has invested in either or both Nestle and

DLM will be tempted to buy in both companies stock at the end of
2008 and later as the PE ratio has fallen below their trailing PE by
2.59 (DLM) and 2.97(Nestle).
[ Assumption: Nestle trailing PE = (22+ 21.08) / 2 = 21.54
DLM Trailing PE= (16.14+16.06)/2 = 16.1 ]
Following are some of the plausible implication of the investment ratio

to potential
investor in the fast moving consumer goods (FMCG) industry:
1. “Value Investors” will be taking this opportunity to purchase Nestle

stock as the PE ratio has drop more than 2.97 compared to its trailing
PE ratio. This indicate that the stock price was under value as
compared to its average trailing PE ratio.
2. “Value Investors” will be taking this opportunity to purchase DLM

stock as the PE ratio has drop more than 2.59 compared to its trailing
PE ratio. This indicate that the stock price was under value as
compared to its average trailing PE ratio.
3. “Momentum investors” will be taking the opportunity to buy in Nestle

share as its share price was increased steadily from RM 24 .80 to RM
27 during 2006 to 2008.
4. “Growth investors” will be buying in to Nestle stock as
a. Nestle has enjoy steadily net profit growth as shown in Table R.

b. EPS , DPS, dividend yield have enjoy a healthy growth as shown in
Table Q.
(5) Discuss the problems that are faced by people who wish to assess the
performance and financial position of a public company if only the published
reports are available. (15 marks)
* I am using Dutch lady milk berhad (DLM) as a example for this section.
First of all, they are many groups of people who wish to assess the
performance and
financial position of a public company such as DLM. Namely, they are DLM
‘s supplier,
lenders, potential investor & investment analyst , competitors,
government body (Inland
department) besides their “internal customers” such as manager, owner
and employee.
From the perspective of lender such as banker, they will facing problems if
only DLM’s
published reports such as financial report quarterly and annual are make
available to them.
First of all, Banker or lender need to assess Nestle the most recent gearing
ratio, capital
structure, cash conversion cycle (CCC), net cash from operating activities,
net cash flow at the
latest fiscal year or end of quarter in order to assess their financial
solvency and its associated
risk ; the ability to repay borrowing interest and its principal when due.
However, those
information mentioned was captured within the annual financial reports
which will be
published only few months after the fiscal year end. Thus, lender has to
take calculated risk
based on the most recent data available to make judgement on the loan
amount and its
margin and interest rate with the assumption that there isn’t any drastic
changes (i.e. change
in accounting policy) happen during this grey period.
Investment analyst and investor whom are obsess with fundamental

analysis will be facing
problem if only published information make available to them. First of all,
they need to judge

the financial performance of the company based on its financial statement
and its health.
However, they cannot find following information from the financial reports:
a. industry trends such as technological changes, market competition
b. changes in consumer tastes and other behaviour which has direct
impact on Nestle’s business viability and vitality
c. the impact of changes in broad macro economic factors such as new
policy of less sugar and salt ; fast food policy ; milk solid contaminated
with melamine.
d. changes within the firm itself such as “brained drain” to competitor
Secondly , all the information presented in published report was based on

historical cost
concept. Thus, financial analyst will have difficulties in assessing company
valuation based on
either earning or dividend model or PVGO model as those information is
not make available
timely. As a results, competitor like Nestle would have difficulty in
assessing the enterprise or
take over value as those were historical value such as preferred stock,
total debt and cash
reserve.
Shareholder need to assess all the profitability and investment ratio timely
before decided to
hold or sell or buy in more share from the stock market. Also, they can
gauge the share holders
confident level of the company future earning by comparing its trailing PE
ratio with their latest
PE ratio. However, the EPS data only make available few months after the
fiscal year end.
Thus, share holder would need to rely on document or other sources such
as financial
Investment strategy related magazine, mutual fund managers besides
published report
provided by company in order to maximize their returns.
Competitor like Nestle and F&N will be facing difficulties in finding more
information with
regards to the details of intangible asset such as brand name (worth) ,
patented technology,
spending in research and development (R&D) for new products which are
not make available
as there are not mandatory by Kuala Lumpur Stock Exchange (KLSE).
Secondly, competitor

would not be able to get the breakdown of sales revenue by product line
and categories from
DLM published reports . Howver , it is only assesible through subscription
from renown
marketing survey company such as frost and Sullivan, AC Nielsens and
Goliath . Thirdly,
competitor would not be able to get enough “up to date” to do
benchmarking study on
working capital efficiency, production efficiency , financial performance
such as PE ratio, EPS,
DPS ,Dividend yield.
The group of supplier which supply raw material, machinery spare parts,
audit firm would face
problems as they need to assess to the company solvency position and
their credit risk. They
would be very much interested to look into the net cash flow , interest
cover, liquidity ratios
and the length of cash conversion cycle (CCC). However, if only company
published reports is
avaibale to them , they might facing problem
a. They can not really make the correct judgement on the credit limit and
its term to DLM as
they didn’t not about their latest financial status.
b. They didn’t know when they should chase for overdue payment if they
didn’t monitor their debtor’s solvency, on going concept and its indicator
in a timely manner.
Appendix A : Working solution for Performance ratio

Formulas:
Return on Capital Employed, ROCE = Profit before tax and interest X

100%
Average Equity + Average long
term borrowing

Return of Equity, ROE = Profit after Taxes X 100%
Or ROSF Average Equity
COGS to Revenue ratio = COGS X 100%

Sales revenue
Gross profit Margin(%) = Gross profit X 100%

Sales revenue
SGA&E to revenue ratio = SGA & E* X 100% *SGA&E = selling,

General administration
Sales revenue
expenses
Operating Profit Margin (%) = Operating profit X 100%

Sales revenue
Net profit margin (%) = Net profit X 100%

Sales revenue
Dutch Lady Milk Berhad Performance ratio working calculation as below:

2006 ROSF = 43,065 X 100% = 36%
(120,947 + 118,298) ÷ 2
2007 ROSF = 47,255 X 100% = 38.1%

(127,258 + 120,947) ÷ 2
2008 ROSF = 42647 X 100% = 29.5%

(161,585 + 127,258) ÷ 2
2006 ROCE = 60,063 X 100% = 50.21%

(120,947 + 118,298) ÷ 2
2007 ROCE = 65,026 X 100% = 52.40%

(120,947 + 118,298) ÷ 2
2008 ROCE = 58,154 X 100% = 40.27%

(120,947 + 118,298) ÷ 2
2006 COGS/ revenue = 321,587 X 100% = 62.6%

513,650
2007 COGS/ revenue = 421,792 X 100% = 69.75%

604,732
2008 COGS/ revenue = 526,711 X 100% = 74.02%

711,567
2006 Gross profit Margin (%) = 192,063 X 100% = 37.4%

513,650

404732

711,567
2006 SGA&E/ sales (%) = 97610 +12561 X 100% = 21.45%

513,650
2007 SGA&E/ sales (%) = 73,089 + 15,352 X 100% = 14.62%

604,732
2008 SGA&E/ sales (%) = 82403 +18342 X 100% = 14.16%

711,567
2006 Operating profit Margin (%) = 60,063 X 100% = 11.69%

513,650

604,732

711,567
2006 Net profit Margin (%) = 43,065 X 100% = 8.38%

513,650

604,732

711,567
Nestle Performance ratio working calculation as below:

2006 ROSF = 264,219 X 100% = 48.79%
(559,106 + 524,052) ÷ 2
2007 ROSF = 292,042 X 100% = 48.82%

(637,259 + 559,106) ÷ 2
2008 ROSF = 340,887 X 100% = 59.13%

(515,755 + 637,259) ÷ 2
2006 ROCE = 60,063 X 100% =

57.67%

(559,106 + 524,052+107,208 +104,477) ÷ 2
2007 ROCE = 65,026 X 100% =

62.68%
(637,259 + 559,106 + 5179 + 107,208) ÷ 2
2008 ROCE = 58,154 X 100% =

80%
(515,755 + 637,259+ 2690 + 5179) ÷ 2
2006 COGS/ revenue = 2,171,096 X 100% = 66.28%

3,275,541
2007 COGS/ revenue = 2,290,719 X 100% = 67.05%

3,416,028
2008 COGS/ revenue = 2,673,318 X 100% = 68.95%

3,877,068
2006 Gross profit Margin (%) = 1,104,445 X 100% = 33.72%

3,275,541

3,416,028

3,877,068
2006 SGA&E/ sales (%) = 248,075 + 484,490 X 100% = 22.36%

3,275,541
2007 SGA&E/ sales (%) = 73,089 + 15,352 X 100% = 20.32%

3,416,028
2008 SGA&E/ sales (%) = 82403 +18342 X 100% = 19.13%

3,877,068

3,275,541

3,416,028

3,877,068

3,275,541

3,416,028

3,877,068
Appendix B : working solution for Liquidity and working capital ratio
Liquidity ratios formulas
Curreny Ratio = Current asset

Current Liabilities
Quick ratio = Current asset - Inventory ( stock)

Current Liabilities
Working Capital Ratio formulas
Average Stock Holding period (days) = Average Inventory X 365

Cost of sales
Average Debtor payment period (days) = Average trade receivables X 365

Sales revenue

Average Creditor payment period (days) = Average trade payables X 365
Cost of sales
Cash Conversion cycle (days) = Stock holding + Debtor payment -

Creditor payment
Period Period
Period
Asset turnover ratio = Sales revenue

Total Asset
Dutch Lady Milk Berhad Liquidity and working capital ratios working calculation
as below:
2006 Current ratio = 156,293 = 1.77

88,153
2007 Current ratio = 234,403 = 1.414

165,812
2008 Current ratio = 223,976 = 1.76

127,089
2006 Quick ratio = 211,400 – 55,057 = 1.148

88,153
2007 Quick ratio = 234,403 – 117,945 = 0.702

165,812

2008 Quick ratio = 223,976 – 74,902 = 1.173
127,089
2006 Stock Holding period (days) = (55,057 + 49,810)÷ 2 X 365 =

59.5
321,587
2007 Stock Holding period (days) = (117,945 +55,057)÷2 X 365 =

74.85
421,792
2008 Stock Holding period (days) = (74,902 + 117,945)÷ 2 X 365

= 66.82
526,711
2006 Debtor payment period (days) = (64,199 + 62799) ÷ 2 X 365

= 45.1
513,650
2007 Debtor payment period (days) = (86,468+64,199) ÷ 2 X 365

= 45.1
609,232
2008 Debtor payment period (days) = (115,774+ 86468) ÷ 2 X 365

= 51.8
711,567
2006 Creditor payment period (days) = (43,846 + 38,829) ÷2 X 365

= 46.9 days
321,587
2007 Creditor payment period (days) = (69,737+ 43846) ÷ 2 X 365

= 49.1 days
421,792
2008 Creditor payment period (days) = (64,387 +69737) ÷ 2 X 365

= 46.5 days
526,711

2006 Cash Convertion cycle = 59.5 + 45.1 - 46.9 = 57.7 days
2006 Cash Convertion cycle = 74.85 + 45.1 - 49.1 = 70.85 days
2006 Cash Convertion cycle = 66.82 + 51.8 -46.5 = 72.12 days
2006 Total asset turnover = 513,650 = 2.43

211400

294,688

290,974
Nestle Liquidity and working capital ratios working calculation as below:
2006 Current ratio = 816,133 = 1.196

682,565
2007 Current ratio = 939,353 = 1.08

869,761
2008 Current ratio = 881,882 = 0.856

1,030,457

2006 Quick ratio = 836,133 – 330,674 = 0.711
682,565
2007 Quick ratio = 939,353 – 446,602 = 0.567

869,761
2008 Quick ratio = 881,882 – 459,489 = 0.409

1,030,457
2006 Stock Holding period (days) = (330,674 + 262,456)÷ 2 X 365

= 49.86 days
2,171,096
2007 Stock Holding period (days) = (446,602 + 330,674)÷2 X 365

= 61.93 days
2,290,719
2008 Stock Holding period (days) = (459,489 + 446,602) ÷ 2 X 365

= 61.86 days
2,673,318
2006 Debtor payment period (days) = (311,562 +308,334) ÷ 2 X

365 = 49.7 days
3,275,541
2007 Debtor payment period (days) = (298,891+ 311,562 ) ÷ 2 X

365 = 32.6 days
3,416,028
2008 Debtor payment period (days) = (187,450 +298,891) ÷ 2 X

365 = 22.9 days
3,877,068
2006 Creditor payment period (days) = (253,863 + 211546) ÷ 2 X 365

= 39.1
2,171,096
2007 Creditor payment period (days) = (310,439 +253,863) ÷ 2 X 365

= 45
2,290,719

2008 Creditor payment period (days) = (261,215 + 310,439) ÷ 2 X 365
= 39
2,673,318
2006 Cash Convertion cycle = 49.86 + 49.7 – 39.1 = 60.46 days
2006 Cash Convertion cycle = 61.93 + 32.6 - 45 = 49.53 days
2006 Cash Convertion cycle = 61.86 + 22.9 - 39 = 45.76 days

211400

294,688

290,974
Appendix C: Working solution for gearing ratio

Gearing Ratio formulas
Gearing Ratio (%) = Long term debt X 100%
Equity + Long term debt
Interest cover (times) = Profit before interest and tax

Interest expense

Following is the working calculation for Dutch Lady Milk Berhad Gearing ratio:
2006 Gearing Ratio (%) = 0 X 100% = 0

120,947 + 0
2007 Gearing Ratio (%) = 0 X 100% = 0

127,258 + 0
2008 Gearing Ratio (%) = 0 X 100% = 0

161,585 + 0
2006 interest cover (times) = 60,063 = 451.6

133
2007 interest cover (times) = 65026 = 264.33

246

296
Following is the working calculation for Nestle Gearing ratio:
2006 Gearing Ratio (%) = 107,208 X 100% = 0.161

559106 + 107,208
2007 Gearing Ratio (%) = 5179 X 100% = 0.806

637,259 + 5179
2008 Gearing Ratio (%) = 2690 X 100% = 0.52

515,755 + 2690

2006 interest cover (times) = 353,195 = 35
10,090

14,842

23,091
Appendic D: Working solution for investment ratio
Investment ratio formulas
Divident payout ratio = Dividend announce of the year X 100%

Profit of the year
Dividend yield ratio = Dividend per share X 1 X

100 %
(DPS) Market value per share

Earning Per share (EPS) = Profit for the year
Number of ordinary share in issue
Price / earnings (PE) Ratio = Market value per share

Earnings per share
Following is the working solution for Dutch Lady milk berhad investment ratios:
2006 Dividend payout ratio = 40,416,000 X 100% = 93.8%

43,065,000
2007 Dividend payout ratio = 40,944,000 X 100% = 86.7%

47,255,000
2008 Dividend payout ratio = 8320 X 100% = 19.5%

42,447,000
2006 Dividend yield ratio = 40,416,000 X 1 X 100 % =

5.81%
64,000,000 10.86*
2007 Dividend yield ratio = 40,944,000 X 1 X 100 % =

5.4%
64,000,000 11.85*
2008 Dividend yield ratio = 8,320,000 X 1 X 100 % = 1.4%

64,000,000 9*
*All the historical market price per share from 2006 to 2008 were obtained
from Yahoo finance website.
2006 Earnings Per share (EPS) = 43,065 X 100% = RM 0.673

64,000
2007 Earnings Per share (EPS) = 47255 X 100% = RM 0.738

64,000
2008 Earnings Per share (EPS) = 42647 X 100% = RM0.666

64,000
2006 Price / earnings (PE) Ratio = 10.86 = 16.14

0.673

0.738
2008 Price / earnings (PE) Ratio = 9 = 13.51

0.666
Following is the working solution for Nestle investment ratios:
2006 Dividend payout ratio = 234,500 X 100% = 88.75%

264,219

292,042

340,887
2006 Dividend yield ratio = 234,500 X 1 X 100 % = 4.03%

234,500 24.80*

234,500 26.25*

234,500 27*
*All the historical market price per share from 2006 to 2008 were obtained
from 2008 Nestle
annual report.

234,500

234,500

234,500
2006 Price / earnings (PE) Ratio = 24.8 = 22

1.127

1.245
2008 Price / earnings (PE) Ratio = 27 = 18.57

1.454
Reference list :
1. Chairman statement, 2007 DLM annual report, page 4
2. Chairman statement, 2008 DLM annual report, page 4
3. Cocoa historical commodity pricing , http://tfc-charts.w2d.com/chart/CC/M

(assessed on 11 Feb 2010)
4. Butter historical commodity pricing http://tfc-charts.w2d.com/chart/BU/M

5. Milk historical commodity pricing http://tfc-charts.w2d.com/chart/DA/M

6. Dutch Lady Sees 2009 Gross Margins Above 2008's 20%, Dow Jones
International News, 5 Feb 2009 ( from Factiva, SBS Intranet)
7. Dutch Lady dairy products to cost on average 5pc more, Business Times,
2 May 2007
( from Factiva , SBS Intranet)

8. http://finance.yahoo.com/ (assessed on Feb 11 2009)


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1(a) Calculate ratios which will assist you to assess the performance of the companies

over a period of three to five years. (8 marks)

Please refer to ratio working calculation in appendix A

Table A : Summarized of all performance or profitability ratio using 3 years

Sean Yap ( MacTavish) 1

Comment one : Net profit

Table B : Net profit margin (%) Table C: Net profit

Sean Yap ( MacTavish) 2

Sean Yap ( MacTavish) 3

b. Following government policy to reduce corporate tax in order to

1. Nestle’s operating profit has grown consistently by 8,83% and 11.80 %

Sean Yap ( MacTavish) 4

Comment on ROSF/ ROE

Table D: ROE for DLM and Nestle

Despite of stronger growth in term of total sales revenue (DLM 38.5%

Sean Yap ( MacTavish) 5

Based on dupont identity, ROE is affected by net profit margin, total

1. In 2007, ROE tend to increase marginally by 2.1% despite of the

2. In 2008, although total asset turnover has increased by 0.393 over

Sean Yap ( MacTavish) 6

Reason for significant increased of ROE in Nestle

2. In year 2008, we observed significant increase in ROE which was

Sean Yap ( MacTavish) 7

Nestle ROCE was much higher owing to following reason:

1. As shown on the table above Nestle’s operating profit year on year

2. In 2008, Nestle has made an imprudent dividend payout of 131.52%

Sean Yap ( MacTavish) 8

1. In 2007, ROCE only growth marginally by 2.19% because operating

2. In 2008, ROCE has decreased tremendously because the operating

3. DLM has a steadily increased in capital employed ( as shown above)

In conclusion, DLM high growth of total capital employed has posed

Sean Yap ( MacTavish) 9

Please refer to ratio working calculation in appendix B

Dutch Lady Milk Berhad

Table F: Summerized of Liquidity ratio and ration related to working capital.

Sean Yap ( MacTavish) 10

Table G: Current ratio Table H: Quick ratio

In general, Dutch Lady Milk Berhad is much solvency as compared to Nestle

Sean Yap ( MacTavish) 11

Discussion of the changes in liquidity ratio over 2006 & 2007

A.Dutch Lady Milks Berhad (DLM)

Below are the likely contributing factors behind the reduction of

1. Despite of total current asset increased by 49.97% to RM 234,403,000 ,

Sean Yap ( MacTavish) 12

1. The group net cash decreased of RM 9,311,000 compare to last year

4. DLM has done following in year 2008 to increase current asset

1.The overall growth of total current liabilities increased by 27.4% which is

Sean Yap ( MacTavish) 13

4.2007 current ratio declined as a result of 2007 working capital declined by

*1 Working capital productivity = Sales revenue ÷ (Current assets –

Sean Yap ( MacTavish) 14

1. In order to improve and preserve cash flow and maintain uninterrupted

Please refer to ratio working calculation in appendix C

Sean Yap ( MacTavish) 15

Table K : Summarised of the gearing ratio

Sean Yap ( MacTavish) 16

Secondly, Nestle has a fixed asset to shareholders funds ratio more

Nestle 2006 2007 2008

Nestle 2006 2007 2008

Table L: Nestle’s total debt and total equity figures

Dutch Lady 2006 2007 2008

Sean Yap ( MacTavish) 17

Table M: Dutch Lady total debt and equity figures