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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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TABLE OF CONTENTS
Introduction ............................................................................................................................................................ 3 The Income Statement ....................................................................................................................................... 3 The Balance Sheet .............................................................................................................................................. 4 Assets .............................................................................................................................................................. 4 Liabilities ......................................................................................................................................................... 4 Equity .............................................................................................................................................................. 4 Ratio Analysis ...................................................................................................................................................... 5 What is financial ratio analysis? ..................................................................................................................... 5 Uses of Ratios ................................................................................................................................................. 5 Limitations & problems of Ratio analysis ....................................................................................................... 5 Types of Ratios ................................................................................................................................................ 5 Interpretation of various Ratios: ........................................................................................................................ 6 Turnover Ratios: ............................................................................................................................................. 6 Liquidity Ratios: .............................................................................................................................................. 6 Profitability Ratios: ......................................................................................................................................... 6 Solvency Ratios: .............................................................................................................................................. 7 Financial Statements to be Analysed...................................................................................................................... 8 Balance Sheet of Nestle India Ltd. as at 31 December 2010 ............................................................................ 8 Profit And Loss Account of Nestle India Limited for the year ended December 31, 2010 ............................... 10 Common Ratios .................................................................................................................................................... 12 Liquidity Ratios: ................................................................................................................................................ 12 Long term solvency ratio: ................................................................................................................................. 13 Coverage Ratios ................................................................................................................................................ 14 Inventory Ratios:............................................................................................................................................... 15 Receivables Ratios: ........................................................................................................................................... 16 Computing Profitability Ratios: ......................................................................................................................... 17
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459 Computing Market Value Measures: ................................................................................................................ 18 Conclusion ............................................................................................................................................................ 19 Bibliography .......................................................................................................................................................... 19
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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LIABILITIES
Accounts Payable - The amount of money owed to suppliers for goods and services purchased by the company which haven't been paid yet. Companies often have 30-60 days' worth of payables at any given time. Short-Term Debt - Bank loans used for short-term purposes, normally less than one year. Long-Term Debt - Loans for long-term purposes, such as financing an expansion. These loans are normally 5-25 years in length.
EQUITY
Preferred Stock - Amount of stock which provides a specific dividend before any dividends are paid to common stockholders. Most preferred shares do not provide voting rights. Common Stock - Amount of stock whereby owners have equity in a company and voting rights. Retained Earnings - The difference between total assets and total liabilities. 4|P a g e
An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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USES OF RATIOS
1. 2. Ratios offer help in intra firm comparisons, industry comparison and also for inter-firm comparison. Financial position of the entity can be studied.
TYPES OF RATIOS
Sr. No. 1 2 3
Type of Ratio Turnover Ratios Liquidity Ratios Profitability Ratios Solvency Ratios
Various ratios Debtors, Creditors, Inventory Current, Acid test Gross profit, Net profit
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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TURNOVER RATIOS:
Debtors Turnover Ratio: This ratio measures the average number of days credit given to debtors. It helps to assess the efficiency of the debt collection department. Debt collection period should be kept as low as possible, consistent with maintaining customer goodwill and market trend. Creditors Turnover Ratio: This ratio measures the average number of days credit is exploited from suppliers. Credit given by suppliers depends on various factors such as demand & supply position of material, industry trends, competition etc. Inventory Turnover Ratio: This ratio measures the average number of days for which stock is held. It helps to assess the efficiency of stock utilization. Various factors affect the stock level held by the organization such as product, production-seasonal or otherwise, demand pattern, competition, funds availability etc.
LIQUIDITY RATIOS:
Current Ratio: This ratio is concerned with the assessment of an organization's ability to meet its short-term obligations. The ratio must be high enough for safety. However, high current assets do not normally lead to high profits in themselves, so the usual trade-off between risk and return exists. Industry norm is 2:1 Acid Test Ratio: This ratio is also concerned with short-term liquidity. In a sense it is more appropriate measure since liquid assets represent the source of funds from which current liabilities will probably be met. Industry norm is 1:1
PROFITABILITY RATIOS:
Gross Profit Ratio: GP / Margin on sales Net Profit Ratio: Net profit on sales. It indicates organization's ability to generate profits from sales. Material cost ratio: Material cost to sales Expenses Ratios: Ratio of expenses to sales. Return on Capital: This ratio is expressed as a percentage. Generally, the higher the return the better. Return on Proprietors Funds: This ratio provides a measure of the percentage return on the investment made by the owners.
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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SOLVENCY RATIOS:
Debt Equity Ratio: This ratio is concerned with establishing the relationship between external and internal long-term financing. The use of long-term debt in the capital structure has both advantages and disadvantages, and in practice the level of debt actually existing is the result of a balancing process. The main advantage of debt is that it provides an opportunity for greater returns to shareholders. Industry norm is 2:1 Proprietary Ratio: It measures the owner's contribution of funds. Interest coverage Ratio: This ratio measures the safety available to Bank for recovery of interest. Industry norm is 2:1 Debt coverage Ratio: This ratio measures the safety available to Bank for recovery of interest & loan instalment. Industry norm is 2.5: 1
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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FINANCIAL STATEMENTS TO BE ANALYSED BALANCE SHEET OF NESTLE INDIA LTD. AS AT 31 S T DECEMBER 2010
Sources of Funds Shareholders funds Capital Reserves and Surplus 96,41,57,000.00 7,58,99,82,000.00 8,55,41,39,000.00 Loan Funds Secured Loans Unsecured loans 0.00 0.00 0.00 Deferred Tax Deferred Tax Assets -Deferred Tax Liabilities 33,27,24,000.00 0.00 33,27,24,000.00 8,88,68,63,000.00 Application of Funds
Fixed Assets Gross Block -Depreciation Net Block Capital Work in Progress 18,54,69,67,000 8,41,95,94,000 10,12,73,73,000 3,48,90,80,000 13,61,64,53,000 Investments 1,50,67,88,000 1,50,67,88,000 Current Assets, loans and advances 8|P a g e
An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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Inventories Sundry debtors/Accounts receivable Cash and bank balances Other current assets Loans and advances
Current liabilities and provisions Liabilities Provisions 7,61,67,02,000 9,07,93,73,000 16,69,60,75,000 Net Current Assets -6236378000 8,88,68,63,000
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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PROFIT AND LOSS ACCOUNT OF NESTLE INDIA LIMITED FOR THE YEAR ENDED DECEMBER 31, 2010
INCOME Sales Domestic Export Gross Less: Excise duty Net sales Other income 60,22,85,62,000 3,53,72,59,000 63,76,58,21,000 1,21,83,96,000 62,54,74,25,000 42,65,41,000 62,97,39,66,000 EXPENDITURE Materials consumed and purchase of goods Manufacturing and other expenses Interest Depreciation Adjustment due to decrease / (increase) in stock of finished goods and work-in-progress 31,38,51,05,000 19,49,52,29,000 1,07,45,000 1,27,75,33,000 -82,94,27,000 51,33,91,85,000
11,63,47,81,000
Impairment loss/(gain) on fixed assets (Refer Note 1 - Schedule N) Provision for contingencies (Refer Note 2 - Schedule N)
0 18,36,79,000
11,45,11,02,000
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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Income tax expense Current tax Deferred tax Fringe benefit tax 3,25,17,02,000 1,27,52,000 0 3,26,44,54,000
PROFIT AFTER TAXATION Balance brought forward BALANCE AVAILABLE FOR APPROPRIATION Appropriations: Dividends: Interim Final proposed Corporate dividend tax General reserve SURPLUS CARRIED TO THE BALANCE SHEET BASIC AND DILUTED EARNINGS PER SHARE (IN RUPEES)
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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COMMON RATIOS
Below I have calculated the values of the common ratios that we discussed in class:
LIQUIDITY RATIOS:
Liquidity ratios help us study the short term position of the organisation. They also help us understand how well the working capital is being used. This is of most interest to commercial banks and short term creditors. The liquidity ratio of Nestle India Ltd is calculated below:
10,45,96,97,000.00 = 16,69,60,75,000.00
0.63
If you look at the balance sheet, you will see that the following items are included in Current Assets: Inventories Sundry debtors/Accounts receivable Cash and bank balances Other current assets Loans and advances
Current liabilities includes both liabilities and provisions. Schedule F and Schedule G, in the attached 2010 Annual Report, give more detailed information about the Current Assets and Liabilities.
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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0.00 = 8,55,41,39,000.00
0.00
25,91,56,62,000.00 = 0.00
#DIV/0!
As you can see from above and from the balance sheet, Nestle India has no long term debt. This is unusual but should give a sense of security to someone who is trying to understand the long term viability of the company. It reduces its dependence on outside variables and gives it more money to play with.
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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COVERAGE RATIOS
While the ratios above study data from the Balance Sheet, the coverage ratios depend on data from the Profit & Loss Statement. It indicates whether the business generates sufficient profit to service interest payment.
EBIT = Interest
11,64,55,26,000.00 = 1,07,45,000.00
1083.81
Cash coverage
12,92,30,59,000.00 = 1,07,45,000.00 =
1202.70
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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INVENTORY RATIOS:
The first ratio given below measures how quickly inventory is sold. The second gives us the expected number of days between manufacture or purchase of inventory, and sale. Cost of goods sold includes total cost of manufacture or purchase of goods but does not include financial costs, depreciation costs, admin costs etc.
Inventory Ratios
measures how quickly inventory is sold
Inventory Turnover
50,88,03,34,000.00 = 5,75,95,16,000.00
8.83
365.00 = 8.83
41.32
This ratio should be low as a high ratio here would indicate that there is inefficiency in stocking of the inventory creating the possibility that the inventory is stale or obsolete. However, if the ratio is too low is also indicates the possibility that the business may run the risk of being unable to satisfy all its customers if it runs short of stock. Nestle has about 41 days of inventory in stock. That is adequate and though they could work to bring it down, it is not a highly negative sign.
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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RECEIVABLES RATIOS:
Receivables ratios are among the most important when it comes to studying the overall health of a company. The working capital cycle results in some capital being tied up at different points in the cycle. The longer it takes for receivables to be collected, the more the working capital needs of a business. The receivables ratio for Nestle India Ltd. Is given below:
Receivables ratios
Measures efficiency in collecting from Drs.
Receivables Turnover
62,54,74,25,000.00 = 63,28,54,000.00
98.83
365.00 = 98.83
3.69
Thus we can see that Nestle India Ltd. is very quick in collecting receivables from debtors. This means that its working capital does not get tied up in pending receivables which is a very healthy sign for the company.
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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Computing Profitability Measures Profit Margin PBIT = Sales 62,54,74,25,000.00 11,64,55,26,000.00 = 0.19
11,64,55,26,000.00 = 25,91,56,62,000.00
0.45
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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4409.85 9,64,15,716
8,18,66,48,000.00 = 9,64,15,716
84.91
PE Ratio
4,409.85 = 84.91
51.94
Market-to-book ratio
4,409.85 = 10.00
440.99
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An Analysis of Financial Statements of Nestle India Ltd. as of 31 December 2010 Karen Dias - 34459
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CONCLUSION
From the above analysis it appears that Nestle India Ltd. is in good shape and has a lot of potential. The message to the shareholders from Chairman and Managing Director, Antonio Helio Waszyk, focussed on Growth, Inclusion and Leadership and we can tell that the core of Nestles focus is going to be Nutrition. In todays health-focused world this is clearly the way to go and should be a big hit with consumers. Nestle India has also made it clear that it eyes expansion in India as the next big step and as to paraphrase what Waszyk says "Nestle is not fighting for a slice of the cake. It is here to take a larger piece of cake.
BIBLIOGRAPHY
1. 2. 3. 4. Class handouts http://www.investopedia.com/terms/r/ratioanalysis.asp#axzz1cl4g2DMa http://www.spandane.com/books/Training%20Notes%20for%20Bank%20Staff/Concepts/11RatioAnalysis.pdf Nestle India Ltd. 2010 Annual Report http://www.nestle.com/Common/NestleDocuments/Documents/Library/Documents/Financial_State ments/2010-Financial-Statements-EN.pdf http://www.businessstandard.com/india/news/nestle-to-invest-rs-1500-cr-in-two-threeyears/128599/on
5.
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