Financial Ratios Analysis

Nestle VS Engro Foods

MBA 4th B
Dec 31, 2012

Ma'am Ayesha Javaid

 1. Executive Summary
The report which is based on the financial analysis of NESTLE and ENGRO FOODS. By
going through all the financial statements it is known that overall NESTLE is working so
well if compared to ENGRO FOODS. But by going through the financial ratio analysis the
facts were that ENGRO is much more competitive than NESTLE.

As ENGRO FOODS is not in the market as long as NESTLE is. This is analyzed through
financial analysis that ENGRO is working so efficiently and effectively and is coming up
with new features and advanced technology that others are not using.

In the report history of both companies, SWOT analysis, financial statements, financial
ratios, financial ratio analysis, cash budget and finally the report is concluded and
recommendations are given at the end.

2. Introduction
This is the project about financial statement analysis of two companies of the same
industry. In this regard the companies which were chosen to be analyzed are NESTLÉ
PAKISTAN and ENGRO FOODS LIMITED. Both the companies are of food industry
and are dealing in food business for many years. The companies are well reputed in the
market and deal in a very wide range of food products.

As NESTLÉ, a very, well-known brand started its’ business life with only one product
and that was condensed milk for infants. And now it has captured everyone’s mind for its
tempting products; as chocolates, coffee, bottled water, powdered milk, flavored milk, tea
whitener and many more. The company has strong marketing strategies to come up with
in a competitive market. It has targeted all of its customers no matter they are of what
age. The company is standing in the market with share price of 4,844. How it standing in
the market with such price? How it satisfies its shareholder’s? Why don’t investor’s
invest in other companies?

The answer to all above question is clear after going through its financial reports. The
profit that the company earns and the balance it has kept between its assets and liabilities
is also easily understandable after going through its financial statements. The company is
running its business so well. And that is why it never loses its value.

ENGRO FOODS is also a very, well-reputed company which produces a wide range of
healthy food products. Is product line contains products such as milk, tea whitener,
cream, ice cream, juices, flavored milk and many others. ENGRO FOODS is the 1st
company which is using Bactofuge technology.

The company has not been in this business for as long as NESTLÉ is, but the way it has
grown up is appreciable. It has come up with innovative features in its products. Through
its financial statements it is analyzed that how efficiently it has increased its share price
from Rs. 17 to Rs. 25. It provides many incentives to it stockholder’s is also growing its
market share. The company has capability to pay it liabilities on time and to keep its
assets managed.

ENGRO FOODS not only provide incentives to its stockholder’s but also to its
employees. It offers its employees much outdoor training so that they can work in a
healthy environment and don’t get tired of their hectic routine. That is why it has many
loyal employees to work with.

3. NESTLÉ
Good Food, Good Life
 Nestlé, theCompany which is renowned for its vast collection of foodproducts. The
Companywas formed in 1905 by the merger of the Anglo-Swiss Milk Company, established
in 1866 by brothers George Page and Charles Page, and Farine Lactée.Nestlé was found in
1866 by Henri Nestlé. The company grew significantly during the First World War and again
following the Second World War, expanding its offerings beyond its early condensed milk
and infant formula products. The company has made a number of corporate acquisitions,
including Crosse & Blackwell in 1950, Findus in 1963, Libby's in 1971, Rowntree
Mackintosh in 1988 and Gerber in 2007.

As Nestlé started with a condensed milk and later it climbed so fast at the ladder of
success that it is now a leading brand in food products with so many sub-brands.Currently
Nestlé is dealing with bottled water, breakfast cereals, coffee, confectionery, dairy products,
ice cream, pet foods, other beverages, shelf stable, chilled, Ice cream, Infant nutrition,
performance nutrition, healthcare nutrition, frozen foods, refrigerated products, food services
and professional products and snacks.29 of Nestlé's brands have annual sales of over 1 billion
Swiss francs (about $ 1.1 billion). Nestlé has around 450 factories, operates in 86 countries,
and employs around 328,000 people. It is one of the main shareholders of L'Oréal, the world's
largest cosmetics company.

3.1 NESTLÉ in Pakistan

Nestlé has been serving Pakistani consumers since 1988, when parentcompany, the
Switzerland-based Nestlé SA, first acquired a share in Milk PakLtd. Today Nestlé is fully
integrated in Pakistani life, and is recognized asthe producer of safe, nutritious and tasty food,
and leaders in developing anduplifting the communities in which they operate.Nestlé Pakistan
ensures that their products are made available toconsumers wherever in the country they
might be. Convenience is at theheart of the Nestlé philosophy, and there aim is to bring
products to people'sdoorsteps.

The following project is about Nestlé Pakistan and the necessary details about Nestlé
Pakistan are as follow:
Ticker: NESTLÉ
Country: PAKISTAN
Exchanges: KAR
Major Industry: Food & Beverages
Sub Industry: Diversified Food

2011 Sales: 64,824,364,000 (Year Ending Jan 2012)

Employees: 2,422
Currency: Pakistan Rupees
Market Capture: 210,875,565,600
Fiscal Year Ends: December
Shares Outstanding: 45,349,584
Share Type: Ordinary
Closely Held Shares: 35,545,078

3.2 Vision

“Nestlé’s global vision is to be the recognized leading Nutrition, Health and Wellness
Company. Nestlé Pakistan subscribes fully to this vision of being the number one Nutrition,
Health, and Wellness Company in Pakistan. In particular, we envision to;

 Lead a dynamic, passionate and professional workforce – proud of our heritage and
positive about the future.

 Meet the nutrition needs of consumers of all ages – from infancy to old age, from
nutrition to pleasure, through an innovative portfolio of branded food and beverage
products of the highest quality.

 Deliver shareholder value through profitable long-term growth, while continuing to

play a significant and responsible role in the Social, Economic, and Environmental
sectors of Pakistan.”

3.3 Mission

“Nestlé is dedicated to providing the best foods to people throughout their day,
throughout their lives, throughout the world. With our uniqueexperience of anticipating
consumers’ needs and creating solutions, Nestlécontributes to your well-being and enhances
your quality of life.”

3.4 Goals and Objectives

The goals and objectives of Nestlé Pakistan are simple and well designed with the core
strategies to meet the demand of the consumers and to fulfill the needs of the customers.
Following are the main goals and;
1. To be, the best and quality providing brand among other brands in Pakistan.

2. Tofulfillcustomers’needs and requirements.

3. To capture it’s desired market share.
4. To dwellinto the life of people and consumers.
5. To boost upits sales.
6. To create value for customer.
7. To keep the loyalty of customer with Nestlé.
8. To be the top nutrition company ofPakistan.
9. To be the leading FMCG company around the world as well as inPakistan.
10. It aims to be the socially responsible and helping company in bad times.
 11. Nestlé aims to be proactive innovation and renovation culture, which is the key to
Nestlé’s success in the marketplace.
12. Nestlé aims to have fully integrated systems with suppliers & retailers so that every
single market can be tapped & focused.

3.5 SWOT Analysis

3.5.1 Strengths

Strength of Nestlé is the presence of its factories or operations in almost every country
in the world employing around 283000 people. The sales values have touched CHF 109.9
billion, with a net profit of CHF 18.0 billion. Nestle has recorded a financial growth even in
times of recession by promoting the sales of smaller and cheaper versions of products in
developing economies.

3.5.2 Weaknesses

Nestlé do not have direct market outlets and this can be one of the weaknesses as it
can cause difference in profit made. There another weakness is not having enough raw
material production units; they depend on either local raw material producers or through
other trade channels.

3.5.3 Opportunities

Nestlé’s weakness of not having a direct outlet can be converted as an opportunity by

introduction of new direct outlets. The acquisition of Cadburys for an example is an
opportunity since they are one of the main competitors for Nestlé. Setting up theirpersonal
farms and raw material production units is an opportunity as it would reduce the cost for
Nestlé.By acquisitions Nestlé can enter the new market, which is easy through already
existing companies. Nestlé has great opportunities in a society which is becoming more and
more health conscious.

3.5.4 Threats

Their weakness of not having enough raw material production units (which cause
them to depend on other producers) and their dependency on other producers can threaten to
reduce thequality of products they offer. The contamination of food products is a major threat
to Nestlé in the market. Intense competition in its market segments also possesses a major
challenge to Nestlé as its competitors are also trying to increasing their product ranges which
might make inroads into Nestlé's profit.

Another threat to Nestle can be the maturity of the markets which they are entering n.
For example, in France, DANONE has already established itself as a market leader in case of
yogurt before Nestle launched its LC-1 division in France and could not compete against the
well-establishedDANONE. The consumers frequently tend to change their preference of
brands, so change in consumer trends is a threat to Nestlé.
 4. ENGRO FOODS
The Local Flavor with a global Vision

Engro Foods (Pvt.) Limited (EFL) has been established in 2005 as part of a
diversification process at the Engro Group. The plant located at Sukkhur on 23 acre land, has
the raw milk reception capability of 300,000 liters per day and UHT milk capacity of 200,000
liters per day. The plant has been established at a cost of Rs. 1 billion which provides direct
employment to 750 people.

Engro Foods has entered the Food business through milk processing and sale with the
company’s vision to pursue growth opportunities based on country fundamentals and own
strength. It also positions the company to leverage its corporate social responsibility
initiatives and work closely with rural communities to promote integrated farming and
livestock development. This effort is expected to play a pivotal role in poverty alleviation and
improving livelihoods of the poor in the milk collection areas.

4.1 Vision

“To be the Premier Pakistani Enterprise with a global reach, passionately pursuing
value creation for all stake holders”.

4.2 Mission

“To help farmers maximize their farm produce by providing quality plantnutrients and
technical services upon which they can depend. To create wealth by building new businesses
based on company and country strengths inPetrochemicals, Information Technology,
Infrastructure and other Agriculturalsectors. In pursuing the mission we shall at all-time be
guided in our conductand decision making by our Core Values.”

4.3 Core Values

1. To possess leadership among other companies.

2. To introduce innovative products.
3. To capture diversified marked and international focus.
4. To maintain quality and work for continuous improvement.
5. Candid and open communications.
6. External & Community Involvement
7. To focus on individual growth and development.
8. Enthusiastic pursuit of profit.

9. To keep satisfied ethics and integrity.

10. To promote safety, health and pure environment.
 11. To create opportunities of enjoyment and fun.
12. To promote teamwork and partnership.

4.4 SWOT Analysis

4.4.1 Strengths

 Engro Foods is a well-established brand name; customers automatically have a brand

association.
 They can easily afford research and development costs in order to introduce new
products.
 They have strong supply chain (good PR with farmers provides world class supply
chain management).
 The increasing sale figures form years to years showing customer satisfaction upon
Engro Foods Limited products.
 Engro Foods involve in consumer and product research before and after launching a
product.
 Engro Foods is having strong relationship with global research partners like AC
Nielsen, JWT Asiatic.
 Company is not relying on third parties for sale and distribution and has its own sale
and distributing network.
 Engro Foods Limited only has the third-generation UHT milk plant in the country.
 Engro Foods Limited plant is the only plant in Pakistan that uses Bactofuge
technology to virtually eliminate bacteria and ensure premium quality and hygiene.

4.4.2 Weaknesses

 One major weakness of Engro Foods in dairy products, which is that 85% of its milk
collection centers are in Punjab, while processing unit is in Sindh.
 Higher transportation cost.
 Dependency on TETRA PAK for the entire packing of its dairy products.

 Paying higher cost of packing of products results in higher overall products cost.
 The product range of Engro Foods narrows as compared to its competitors.

4.4.3 Opportunities

 Pakistan is the fourth largest milk producing country. So, it’s an opportunity for
company to grow in this sector.
  Engro Foods can increase awareness though different media, by showing ads thoseare
according to cultural requirements of Pakistan.
 By increasing the milk related products company can go globally.
 Engro can launch products like dry milk, cereal and Yogurts etc.
 Growing dissatisfaction with milkmen’s milk and increasing awareness about
healthand hygiene issues have led to increased processed milk consumption.

4.4.4 Threats

 Engro Foods competitors Nestle and Haleeb are biggest threat.

 There are opportunities and doors for new players are open who can be the future
competitors.
 Consumer is aware now, there is need to maintain the quality of products. If
EngroFoods will not do so it loses its business in foods. There is threat from the
customer side.
 Consumer’s perceptions and price differentials can cause a threat for the company.
 Consumer’s preferences change with time and prices might create certain barriers
interms of the profit margins for ENGRO FOODS.

5. Financial Statements of NESTLÉ Pakistan

5.1 Balance Sheet

NESTLÉ PAKISTAN LIMITED

Balance sheet
 As at December 31st2011

Assets: 2011(Rs)
Tangible fixed assets
Property, plant and equipment 16,230,528
Capital work in progress 5,370,561
Total tangible assets 21,601,089

Intangible assets 11,954

Long term loan and advances 161,982
Long term security deposits 9,817
Total intangible assets 183,753

Current assets
Stores and spares 1,278,416
Stock in trade 7,064,170
Trade debts 276,858
Current portion of long term loans and advances 30,914
Advances, deposits, prepayments and other receivables 4,042,634
Cash and bank balances 702,025
Total current assets 13,395,017
Total assets 35,179,859

Equity and Liabilities: 2011(RS)

Owner’s Equity
Share capital and reserves
Authorized capital 75,000,000(2010:75,000,000)ordinary Shares of Rs 10 each 750,000

Issued, subscribed and paid up capital 453,496

Share premium 249,527
General reserve 280,000

Accumulated profit 6,629,393

Total Owner’s Equity 7,612,416

Non-current liabilities
Long term finances 7,848,050
Deferred taxation 2,476,871
Retirement benefits 440,377
Liabilities against assets Subject to finance lease 13,690
Total non-current liabilities 10,778,988

Current liabilities
Current portion of non-current liabilities 41,587
Short term borrowings from associated company - unsecured ---
Short term borrowings –secured 4,950,000
Short term running finance under markup arrangements-secured 4,175,236
Customer security deposit Interest free 149,791
Trade and other payables 7,343,507
Interest and markup accrued 128,334
Total current liabilities 16,788,455
Total Equity and Liabilities 35,179,859

5.2 Income Statement

NESTLÉ PAKISTAN LIMITED

Income statement
For the year ended December 31st 2011

2011(Rs)
Net sales 64,824,364
Cost of goods sold (48,099,046)
Gross profit 16,725,318
Distribution and selling expenses (6,862,113)
Administration expenses (1,405,298)
Operating profit 8,457,907
Finance cost (1,050,355)
Other operating expenses (1,064,233)
(2,114,588)
Other operating income 159,545
Profit before taxation 6,502,864
Taxation (1,834,507)
Profit after taxation 4,668,357
Earnings per share (Basic and dilute) 102.94
6 Financial Statements of ENGRO FOODS Limited
6.1 Balance Sheet

ENGRO FOODS LIMITED

Balance Sheet
As at December 31st2011

Assets 2011(Rs)
Non-Current Assets
Property,plant and equipment 9,615,426
Biological Assets 496,809
Intangible Assets 133,598
Long term advances, deposits and payments 24,212
Total non-current assets 10,270,045

Current Assets
Stores,spares and loose tools 571,812
Stock in trade 2,637,816
Trade debts 87,121
Advances, deposits and prepayments 266,093
Other receivables 1,160,126
Taxes recoverable 1,443
Derivative financial instrument ---
Short term investments 1,294,000
Cash and bank balance 350,728
Total current assets 6,369,139
Total Assets 16,639,184

Equity and Liabilities 2011(Rs)

Owner’s equity
Share capital 7517,889
Share premium 722,182
Hedging reserve (18,178)
Accumulated loss (984,951)
Total Owner’s Equity 7,236,942

Non- Current Liabilities

Long term finances 5,610,000
Obligation under finance lease 1,295
Deferred taxation 308,090
Deferred liabilities 1,870
Total non-current liabilities 5,921,255

Current Liabilities
Current portion of
-long term finance 465,000
-obligations under finance lease 3,884
Trade and other payables 2,343,506
Derivative financials instruments 27,966
Accruedinterest/ markup on
-long term finance 368,152
-short term finance 20,229
Short term finance 252,250
Total current liabilities 3,480,987
Total Equity and Liabilities 16,639,184
6.2 Income Statement

ENGRO FOODS
Income Statement
As at December 31st 2011

2011(Rs)
Net sales 29,859,226
Cost of goods sold (23,230,445)
Gross profit 6,628,781

Less operating expenses

Distribution and marketing expenses (3,716,489)
Administrative expenses (504,722)
Other operating expenses (208,902)
Other operating income 213,133
Operating profit 2,411,801
Finance costs (1,049,141)
Profit before taxation 1,362,660
Taxation (471,687)
Profit for the year 890,973
Earnings per share (Basic and dilute) 1.22
 7. Data Table

The other data of NESTLÉ and ENGRO FOODS used in financial ratios analysis is as
follow:
NESTLÉ ENGRO FOODS
Total Assets 35,179,859 16,639,184
Current Assets 13,395,017 6,369,139
Current Liabilities 16,788,455 3,480,987
Inventories 7,046,126.522 3,046,859.795
Net Income 4,524,771 890,973
Average Total Assets* 10,873,970 14,549,624
Beginning Assets 8,352,923 12,460,064
Ending Assets 13,395,017 16,639,184
Average Stockholder’s 6,597,144.5 2,923,870.5
Equity**
Beginning Equity 5,581,873 5,124,047
Ending Equity 7,612,416 7,236,942
Sales 64,824,364 29,859,226
Number of Common Stock 45,350.272 370,305.7377
Cost of Goods Sold 48,099,046 23,230,445
Total Stockholder’s Equity 7,612,416 7,236,942
EBIT*** 6,586,973 1,388,430
EBT 6,502,864 1,362,660
Interest Expenses 84,109 25,770
Market Price Per Shares 4,844 25
EPS 102.94 1.22
Inventory Turnover 9.2 8.9
EAT 4,668,357 890,973
Gross Profit 16,725,318 6,628,781
Total Liabilities 2756443 9,402,242

7.1 The calculations of:

* Average Total Assets = (BeginningAssets + EndingAssets)/2
**Average Stockholder’s Equity = (Beginning Equity + Ending Equity)/2
***EBIT = EBT + Interest Expenses

NESTLÉ ENGRO FOODS

*Average Total Assets = (8,352,923+13,395,017) / 2 = (12,460,064+16,639,184) /
2
= 21747940 / 2 = 29,099,248 / 2
= 10,873,970 = 14,549,624
**Average Stockholder’s = (5,581,873+7,612,416) / 2 = (5,124,047+7,236,942) / 2
Equity
= 13,194,289 / 2 = 5,847,741 / 2
= 6,597,144.5 = 2,923,870.5
***EBIT = 6,502,864+84,109 = 1,362,660+25,770
= 6,586,973 = 1,388,430

8. Balance Sheet Analysis of NESTLE and ENGRO FOODS

 The asset side of balance sheet shows the size of the firm so by comparing balance
sheet of both companies we analyzed that the fixed asset of the nestle company is greater than
ENGRO foods which means that nestle has invested more in the fixed assets than ENGRO
foods whether by starting new project or by any other source. Due to high investment in fixed
assets long term loan and advances of nestle are also greater than engro foods and total assets
of nestle are also greater than engro foods which shows that the size of nestle is greater than
engro. Nestle has more cash and bank balance than engro foods and has more reserves which
shows that nestle hold more than dividing whereas engro divides more than holding with it
means nestle pays less dividend as compared to engro foods.
 9. ANALYSIS OF INCOME STATEMENT OF NESTLE AND ENGRO

We have made analysis between engro and nestle companies .here we analyze that
sales of nestle (64824, 364) is more as compare to engro(29859,226). Because their
investment in fixed asset is more as compare to angro.Production is also increase due to more
investment. And as production increase ultimately their sales is also increase.

Nestle have more cost of goods sold that is (48099, 046) whereas engro have (23230,
445). Because engro have only dairy products whereas nestle have broad category of
products. As nestle sales is more so their gross profit is also more as compare to engro.

Nestle have more distribution and selling expense as compare to engro because engro
have their own distribution channels whereas nestle relay on others for distribution. As well
as engro products are also less and due to this their distribution expenses are less.

Nestle company employee (328000) are more as compare to engro. As well as they
uses more advertising compains so that’s why their administrative expenses are more.

Nestle Finance cost is also more because their interest expense are more.

Operating expense of nestle (1064233) engro (208902) means they use more
directions to run their business. Nestle operating income is also more nestle is a well-known
brand and they generate high income.

Nestle have more tax because they have more products that is (1834,507) whereas
engro products are limited and their tax is (471,687).

Nestle have more no of shares and more earning.so Earning per share of nestle is also
more that is 102.94 as compare to engro that is 1.22

So after analysis of income statement we see that nestle have more sales and more profit
than engro which shows that nestle company is good than engro.
10.Ratios of NESTLÉ for Financial Statement Analysis
a. Liquidity Ratios

 Current Ratio
Current Ratio = Current Assets / Current Liabilities
= 13,395,017 / 16,788,455
= 0.80

 Quick Ratio
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
= (13,395,017 – 7,046,126.522) / 16,788,455
= 0.38

 Net Working Capital Ratio

Net Working Capital = (Current Assets –Current Liabilities) / Total Assets
= (13,395,017 –16,788,455) / 35,179,859
= – 0.10

b. Profitability Analysis Ratios

 Return on Assets (ROA)

Return on Assets (ROA) = Net Income / Average Total Assets*
= 4,524,771 / 10,873,970*
= 0.42

 Return on Equity (ROE)

Return on Equity (ROE) = Net Income / Average Stockholders' Equity**
= 4,524,771 / 6,597,144.5
= 0.69

 Return on Investment (ROI)

Return on Investment (ROI) = Net Profit After Taxes / Total Assets
= 4,668,357 / 35,179,859
= 0.13

 Net Profit Margin

Net Profit Margin = Net Profit After Taxes / Net Sales
= 4,668,357 / 64,824,364
= 0.01

 Gross Profit Margin

 Gross Profit Margin = Gross Profit / Sales
= 16,725,318 / 64,824,364
= 0.26

 Earnings Per Share (EPS)

Earnings Per Share (EPS) = Earnings After Taxes / Number of Shares
= 4,668,357 / 45,350.272
= 102.94

c. Activity Analysis Ratios

 Asset Turnover Ratio

Asset Turnover Ratio = Net Sales / Total Assets
= 64,824,364 / 35,179,859
= 1.84

 Inventory Turnover Ratio

Inventory Turnover Ratio = Cost of Goods Sold / inventory
= 48,099,046 / 7,046,126.522
=6.83

d. Capital Structure Analysis Ratios

 Debt to Equity Ratio

Debt to Equity Ratio = Total Liabilities / Total Stockholders' Equity
= 2,756,443 / 7,612,416
= 3.62

 Debt to Asset Ratio

Debt to Asset Ratio =Total Debt/ Total Assets
= 2,756,443 / 35,179,859
= 0.08

 Interest Coverage Ratio

Interest Coverage Ratio = Income Before Interest and Income Tax Expenses*** /
Interest Expense
= 6,586,973*** / 84,109
= 78.31

e. Capital Market Analysis Ratios

 Price Earnings (PE) Ratio

 Price Earnings (PE) Ratio = Market Priceper Share / Earnings per Share
= 4,844 / 102.94
= 47.06

11.Ratios of ENGRO FOODS for Financial Statement Analysis

a. Liquidity Ratios
  Current Ratio
Current Ratio = Current Assets/ Current Liabilities
= 6,369,139 / 3,480,987
= 1.83

 Quick Ratio
Quick Ratio = (Current Assets – Inventories)/Current Liabilities
= (6,369,139– 3,046,859.795) / 3,480,987
= 0.95

 Net Working Capital Ratio

Net Working Capital = (Current Assets – Current Liabilities)/Total Assets
= (6,369,139 – 3,480,987) / 16,639,184
= 0.17

b. Profitability Analysis Ratios

 Return on Assets (ROA)

Return on Assets (ROA) = Net Income/Average Total Assets*
= 890,973 / 14,549,624
= 0.06

 Return on Equity (ROE)

Return on Equity (ROE) = Net Income/Average Stockholders' Equity**
= 890,973 / 2,923,870.5
= 0.03

 Return on Investment (ROI)

Return on Investment (ROI) = Net Profit After Taxes/ Total Assets
= 890,973 / 16,639,184
= 0.05

 Net Profit Margin

Net Profit Margin = Net Profit After Taxes / Net Sales
= 890,973 / 29,859,226
= 0.03

 Gross Profit Margin

Gross Profit Margin = Gross Profit/ Sales
= 6,628,781 / 29,859, 226
= 0.22
  Earnings Per Share (EPS)
Earnings Per Share (EPS) =Earnings After Taxes / Number of Shares
= 890,973 / 730,305.7377
= 1.22

c. Activity Analysis Ratios

 Asset Turnover Ratio

Asset Turnover Ratio =Net Sales/Total Assets
= 29,859,226 / 16,639,184
= 1.79

 Inventory Turnover Ratio

Inventory Turnover Ratio = Cost of Goods Sold / Inventory
= 23,230,445 / 3,046,859.795
= 7.62

d. Capital Structure Analysis Ratios

 Debt to Equity Ratio

Debt to Equity Ratio = Total Liabilities / Total Stockholders' Equity
= 9,402,242 / 7,236,942
= 1.30

 Debt to Asset Ratio

Debt to Asset Ratio = Total Debt/ Total Assets
= 9,402,242/16,639,184
= 0.57

 Interest Coverage Ratio

Interest Coverage Ratio = Income Before Interest and Income Tax Expenses*** /
Interest Expense
= 1,388,430 / 25,770
= 53.88

e. Capital Market Analysis Ratios

 Price Earnings (PE) Ratio

Price Earnings (PE) Ratio = Market Price of Common Stock per Share / Earnings per
Share
= 25 / 1.22
= 20.49
12.Financial Ratios Analysis

12.1 Liquidity Analysis

 Current Ratio
Current ratio tells us the short term solvency of the firm and tells the ability of
the firm to repay its short term obligations. In nestle the firm has 0.80 ability to repay
against the $ 1 loan and Engro has 1.83 so this implies that Engro food has more
ability to repay its short term obligations.

 Quick Ratio
Quick ratio measures the firm’s ability to pay off short term obligations
without relying on the sale of inventory. Nestle has the quick ratio of 0.38 whereas
Engro foods has 0.95 chances of paying off its short term obligations without relying
on the level or sales of inventory.

12.2Profitability Analysis

 Return on Investment
How much a firm is returning to its stockholder only in the case if the firm is
earning profit? Nestle have return on investment ratio 0.13 or 13% whereas Engro
foods has 0.05 or 5% means nestle is returning more than Engro foods so it is better to
invest in nestle.

 Net Profit Margin Ratio

Net profit margin is calculated by dividing the net profit after taxes by the
sales means after paying the taxes you are earning some of the profit it means firm is
doing its business well. Nestle is earning 0.01 or 1% against $ 1 and Engro food is
earning 0.03 or 3% it shows in the profitability ratios Nestle is earning more than
Engro foods.

 Gross Profit Margin Ratio

It tells that how much a firm will receive against $ 1 sales. Nestle has 0.26
gross profit margin ratio and Engro has 0.22. So in this case nestle is earning more
profit than Engro foods.
12.3Activity Analysis

 Asset Turnover Ratio

This ratio measures the turnover of the entire firm’s asset. It is calculated by
dividing the sales by total assets of the firm. If firm shouldn’t increase its sales so
there is a possibility that a firm will sale its some assets. There is 1.84 chances of
asset turnover in nestle and 1.79 in Engro foods against every $ 1.

 Inventory Turnover Ratio

Inventory turnover is calculated by dividing the CGS by inventory. The
inventory turnover of nestle is 6.83 times and of Engro foods is 7.62 times. Here the
best ratio is of Engro foods that is much more than nestle.

12.4Capital Structure Analysis

 Debt to Equity Ratio

Debt to equity ratio shows the comparison to equity this ratio tells that how
much firm has ability to pay its debt and if equity is more than the total debt of the
firm so firm will face low risk. In nestle the firm has 3.62 against $ 1 to pay debt
whereas Engro food has 1.30 to pay against $ 1 debt. Here Nestle has more ability to
pay its debt.

 Debt to Asset Ratio

Debt to asset ratio shows if the firms have more assets regardless of total debt
than that firm will easily pay off its debts. The debt to asset ratio in nestle is 0.08
whereas 0.57 in Engro foods. So Engro foods will pay off its debt more easily than
nestle.

 Interest Coverage Ratio

Interest coverage ratio measures the extent to which the operating income of
the firm can decline before the firm is unable to meet its annual interest cost. Nestle
has 78.31 times interest coverage ratio whereas Engro foods has 53.88 times interest
coverage ratio so Engro foods has less chances of failure and facing bankruptcy than
nestle.
 13. Cash Budget of NESTLE

2011(Rs)
Collection:
Cash Sales 63,493,494
Credit Sales 1,330,870
Total Sales 64,824,364

Disbursement:
Purchases 10,949,999

Other Payment:
Taxes 1,834,507
Rent 241,502
Wages and Salaries 4,277,554
Interest 364,375
Depreciation 1,618,271
Other Expenses 405,262
Total of Other payment and Purchases 19,691,470

Net Cash Flow:

Beginning Balance 67,365
Collections 64,824,364
Disbursement (19,691,470)
Ending Balance 45,200,259

14. Cash budget of ENGRO FOODS

 2011(Rs)
Collections:
Cash Sales 29,419,835
Credit Sales 439,391
Total Sales 29,859,226

Disbursement:
Purchases 3,334,977

Other payments:
Taxes 603,853
Rent 217,821
Wages and Salaries 1,271,114
Interest 51,537
Depreciation 1,023,597
Other expenses 208,902
Total of Other Payments and Purchases 6,711,801
Net Cash flow:
Beginning balance 5,124,407
Collections 29,859,226
Disbursement (6,711,801)
Ending Balance 28,271,832

15.Conclusion
 After all the findings, it is concluded that financial ratios are the basic and
most important part of any business. It describes the firm’s financial position. As the
data indicates that NESTLE is an international brand and has expanded its business on
the large geographical area and also offers the large range of products, but on the
other side ENGRO food offers the limited range of the products and most of them are
dairy products.

From the financial statements it is clear that the financial position of the
NESTLE is far better than ENGRO as it is more preferred by the customers and also
an internationally distributed. It also has less risk. It gives more return because it gains
more profit than ENGRO.On the other hand ENGRO deals with the limited products
in a limited geographical area but on the basis of financial ratios ENGRO has a better
financial position and also has an opportunity to expand its business. Both the
companies have some opportunities and threads and they need to work on it.
16.Recommendations

 NESTLE doesn’t have any direct market and outlets so it can be a disadvantage so
they should facilitate their customers through pricing strategies and if they start direct
market or open the outlets so the prices will fall automatically and customers need not
to pay any extra money to the suppliers.
 NESTLE Pakistan mostly depends on the local raw material and sometimes the
quality of the raw material is not as good as in the other countries so they should not
rely on the local raw material if they want to provide the quality products.
 ENGRO foods should introduce other product lines and expand the business.
 ENGRO foods should distribute their products to more geographical areas.
 As NESTLE is a well-known product and ENGRO food is not as known
internationally as NESTLE is, so they need to spend more money on the marketing
activities.
 ENGRO food is better than NESTLE in the financial analysis so if they expand their
product line and cover the same geographical area as NESTLE has covered so
ENGRO can appear as a strong competitor of NESTLE and HALEEB.
17.References

1. NESTLE annual report 2011

2. ENGRO FOODS annual report 2011
3. www.nestle.pk
4. www.engrofoods.com