Financial ratio and industry analysis of Nestle Company

Identify (Calculate) And Critically Analyse Key Relevant Financial Ratios Usingthe Data Provided In The Statements For The Two-Year Period. Try To Include At Least One Ratio From Each Category Of Financial Analysis: Liquidity, Activity, Profitability, Coverage. Make Sure To Provide Formulas For Calculations.

Based On Different Online/Printed Sources, Financial Statements, Reports, Etc., Perform a Company/Business And Industry Analyses Of The Nestlé Company. Please Apply Swot Analysis And Porter’s Five Forces Analysis In Your Discussion.

Explain How (Using Which Techniques) The Company Could Identify Its Main Risks, And Critically Evaluate At Least Three Of The Various Types Of Business Risk The Company Is Facing.

With Reference To The Risks Identified In The Previous Question, Critically Evaluate Some Of The Various Methods The Company Has Available To It In Order To Moderate The Risks.

Nestle, incorporated in 1866, is one of the world’s largest food and beverage providing brand whose headquarter is situated in Switzerland. In this report, different financial ratios such as Profitability, Liquidity, efficiency and coverage ratio of the above-mentioned Company is calculated for the last two financial year 2017 & 2018 taking the amounts from the annual report of the Company. Ratios are crucial to make an idea about how an entity is performing are what area need to be checked regarding improving its performance level. The importance and drawbacks of the selected ratios have also been studied in the report and how they affect the performance of the Company at a financial level. Moreover, the report focuses on a broad analysis of the Nestle brand through SWOT approach and Porter’s five forces approach on the basis of information availed from financial statement and reports of the Company. In addition, the report deals with the area related to the given case study specifying the different types of business risks and how the German Company can identify their main risk. Lastly, concerning those identified risk different methods used by the organization to mitigate such risks are evaluated in the report.

This ratio basically analyzes the profit of a company by considering how an entity is making its profit in terms of sales, cost of operating, assets of the Company and others (Xu 2019). It presents whether the business is performing well by earning income after the deduction of relevant costs and other expenses and ultimately ensures the growth of business.

Net profit margin of the Company was 8.0%, in 2017 showing its efficiency in making profit relative to its costs. In addition, the ratio increased at 11.1% in 2018, making the Company more effective in directing its profit and improving performance. Profitability of financial performance of an entity is guarded using this ratio (Fahari, Andini and Oemar, 2017).

Answer 1(a)

Return on stockholder’s equity of the Company was 11.7% in 2017 and 17.7% in 2018. There is an improvement in the year 2018 stating that the brand has handled their money efficiently. Hence, it depicts that the Company is earning a return on equity of shareholders at 11.7% in 2017 and 17.7% in 2018 respectively.

The ratio measures the overall health of a company and helps to make necessary decisions regarding immediate action during some crisis which an organization may face (Kajananthan and Velnampy 2018). It shows whether an entity is in a stage to pay its obligations on a short-term basis and inspect the liquidity position of the performing entity. Comparing the financial performance with the previous year, an entity come across its performance level. Current ratio and Quick ratio comes under liquidity ratio (Priyar, Sowmya and Pavithra 2020).

The above chart shows that Current ratio of the Company is 0.893 in 2017 and 0.953 in 2018. The Company has shown improvement in 2018 to some extent as the current ratio is improving. It is satisfactory for the Company that it is paying full attention towards payment of short-term debts.

Above graph showing the quick ratio of the Nestle brand where it stood for 0.642 in 2017 and 0.741 in 2018. This ratio measures short-term liabilities payment, including assets that are converted into cash (Shrotriya 2018). The analysis shows the company asset is more convertible in cash in 2018 as compared to the previous year 2017 since improvement is made.

One of the efficiency ratios which present whether a company is executing its operation properly by inspecting fixed assets, accounts receivable and inventories It includes accounts receivable turnover, total asset turnover and inventory turnover. This ratio is a tool to know how better a business runs and how swiftly it can convert its assets into a cash amount. Investors prefer to rely on this ratio as the information gathered from it is based on numbers which ensure accuracy. It does not only reflects the health of a business but also depicts the use of elements of the balance sheet.

Accounts receivable turnover ratio of the Company is 7.23 in 2017 and 7.75 in 2018, which means that there is a stable collection of the organization. The Company is properly collecting its sales that are made on credit and hence, its operation is continuing smoothly.

Importance of Selected Ratios

Total asset turnover ratio of Nestle is marked at 0.685 in 2017 which shows a decline of 0.684 in 2018. It shows that the Company is not paying serious attention towards its usage of assets. The brand is not showing efficiency towards using its assets to make sales since it is decreasing.

Coverage ratio is important to know the capacity of business to pay financial obligations. It aims at measuring liquidity position of business by giving reliable cash picture to pay current liabilities. Interest coverage ratio, cash coverage ratio, asset coverage ratio and debt-service coverage ratio is part of this ratio. It estimates the capability of remaining strong, which ultimately prevent from borrowing from others.

The interest coverage ratio of Company is 16.34 in 2017 and 18.07 in 2018, which supports the fact that the business is performing well regarding payments of interest expenses on its obligation relative to the operating income. The Interest coverage ratio of 1.5 is prefer to be the acceptable ratio and below this number can make an entity risk defaulter.

The cash coverage ratio of the Company is 12.82 in 2017 and 5.91 in 2018, showing the ineffectiveness of the Company. In 2017, the Company had sufficient cash to pay off its current liabilities which is reduced to 5.91 in 2018. Such a reduction is not acceptable as it impacts the situation of the Company.

Profitability ratio includes different ratios such as net profit margin, gross profit margin, return on capital employed and return on assets. Different ratio provides different information about a company. This ratio if remains high then it suggests that there is an improvement in profits or earnings of a company when compared to the previous year and if it lows it shows the Company is earning low profit in the current year. Gross profit is a part of profitability ratio showing earnings of an entity out of total sales made after subtraction of the cost of goods sold. ROCE ratio talks about efficiency, which means how smoothly an entity is utilizing its assets in the process of production.

Liquidity ratio is subjected to getting information about a company on how much it can pay short-term debts. It specifies the stability of business in terms of measuring liquidity position by establishing a relationship between current assets and current liabilities. It is useful to give an idea of about capacity of business to transform its assets into cash so that it can pay its current liabilities if there is any requirement. Current ratio, quick ratio and cash ratio are included in this ratio, and all of them reveal different concept towards paying off debts. Thus, it looks overall health of a business.

Activity ratio is an efficiency ratio which presents whether a company is executing its operation properly by inspecting fixed assets, accounts receivable and inventories. It does not only reflects the health of a business but also depicts the use of elements of balance sheet. It includes accounts receivable turnover, total asset turnover and inventory turnover. This ratio is a benchmark of how skilfully a business is running and how swiftly it is converting its assets into a cash amount. Investors prefer to rely on this ratio as the information gathered from it is based on numbers which ensure accuracy. The data are presented in a simple format which ultimately facilitates decision making.

Coverage ratio is important to know the capacity of business to pay financial obligations. Interest coverage ratio, cash coverage ratio, asset coverage ratio and debt-service coverage ratio is part of this ratio. It provides easy cash picture to pay current liabilities and thus measure the liquidity position of a business. The ratio measures the capability of remaining strong which ultimately prevent from borrowing from others. It also shows improvement and decline in the financial position of a business.

Barriers of Selected Ratios

• Ratio analysis becomes useful for small firms than large ones. The reason behind this is that the operation of different activities is done by many large firms in different industries, where it is difficult to make a meaningful set of an average of the industry for comparative purposes.
• One another barrier of above-mentioned ratios is the Seasonal factors which can also misstate ratio analysis. This problem arises in case of calculating turnover ratio, and it can be reduced by using averages for inventory every month when calculating turnover ratios.
• Inflation can impact the balance sheets as the values recorded there may differ from original values. The charge of depreciation and cost of inventory gets affected due to which profits are also affected. Hence, it is important to make ratio analysis and a comparative analysis of different business carefully.
• Companies may change their accounting policies which can influence these ratios. There are different practices of operating and accounting that can hamper comparisons from other business. For instance, valuation of inventory and methods of depreciation can impact the financial statements and hence comparisons among business gets distorted using different accounting procedures.
• The Coverage ratio does not stand alone as it fails to provide a clear picture in which Company higher cash is better or in which Company lower cash. In addition, the majority of business have in their mind regarding usefulness of cash coverage ratio that is limited. Without referring to the quick and current ratio, this ratio unable to give the assumption of the use of the cash.

• Brand name- Nestle is one of those brands which is famous all over the world and has gained appreciated reputation in sector of food and beverage by offering products of supreme-quality.
• Identified brand –The brand has created relative awareness by adopting effective strategies of advertising and branding and established a strong brand image around the world (Varma and Ravi 2017). It includes some of the recognized brands of the world such as Kit Kat, Maggi and Nescafe.
• Highly diversified Company –Nestle has occupied major markets in most of the countries which are developed or developing to generate its sales. They aim to sell their products in 189 countries, including its main markets such as the US, China, France, and Brazil.

• Controversy of Water- In recent news, it has been depicted thatNestle was indicted for driving lots of water in many countries illegally where locals were in need of drinking water.
• Controversy of Noodles (Maggi)- In 2017, Nestle face a loss of 80% of the share of the market in India, as locals boycotted the brand. The reason was that it declare no MSG is added in the Noodles packets but it failed in clearing lab test in India where more lead was found in their product.
• Social criticisms–Nestle has gathered the attention of media many times. Dispute for making chocolate employing child labor, misleading in labeling and their claim against privatizing water are some of the instances that have come under a scenario to weaken its reputation in the market.
• Variation in price by retail giants- Sales of Nestlé’s grocery is attained by large retail giants (Tesco, Kroger and Walmart), hence any kind of reduction or price increase by these retail giants can impact its sales.

• Authoritative labeling- Nestle has chance to amend its practices giving reliable details and authentic labeling its products since it has already been condemn for providing false details of nutrition on its labels.
• Partnerships –Planned association with other big food and beverage companies are also a great chance for the Company to increase its revenues and profits (Singh and Alazmi 2019).
• Online shopping platform–There is an opportunity to develop its online platforms to build shopping experience enjoyable and amusing. Enlarging its online service in more areas may render a profitable opportunity for the brand.

• Scarcity of Water- The production process of the brand is largely dependent on usage of water. It has become difficult for it to get clean water through sources that are less costly. The reasons behind such scarcity involve a change in climatic condition, increase in population & pollution, increasing demand for food and water, and overexploitation of resources.
• Government prices and policies- Rules and policies of Government regulationscreate an impact on the operational activity of Nestle. In addition, the Company is forced to increase the price of their products due to increasing price determination by the government. Thus, customers prefer other brands of low cost, which ultimately lead to sales reduction (Djarum et al 2019).
• Increase in competition- There are some CPG companies such as Unilever and Mondelez, which deals with offering identical food and beverage products. In such situation, it is hard for this brand to keep up with their existence where substitute productsare available easily.

• Risk of entry by probable competitor- There are many food companies in the world which ensures competition between them. The risk of entry by new entrants in the market is one of the threats for many food companies. For competing in the market, new arriving companies need to capture a part of Nestle’s market for its survival. The brand is famous all over the world because of its quality product and satisfaction of customer accessing the major amount of share market (Hasan 2019).
• Supplier’s bargaining power- Due to the existence of a large number of suppliers of food, the supplier might not pose a big threat to the Company. If any supplier refuses to sell its product, the Company can buy it from others. Nestle company build and maintain a healthy relationship with its suppliers and have a grip on purchasing power, including its bargaining power. Such existing relationship assures products of great quality.
• Buyer’s bargaining power- The bargaining power of purchaser makes the Company understand the needs, taste and preference of their clients. The brand has taken particular steps towards meeting their needs, and as society is more concern about health, the brand is including wellbeing in their products.
• Threat of substitute products- Nestle is enclosed with the threat of substitutes products as there some substitutes in the market. The companies deal with offering identical food and beverage products. Hence, it is hard for this brand to compete where substitute productsare available easily, so there exists responsibility for Nestle to make improvement in its product to remain competitive (Greer 2018).
• Extreme Rivalry among competitor- Nowadays, food market remains highly competitive where the brand makes approaches towards beating off their competitors by making low-cost structure, providing good customer service and ensuring higher efficiency. However, customers prefer to opt for improving goods and service at a low cost.

The German Company can look upon the different methods and techniques to assess the risk such as Flowchart method, SWOT analysis, brainstorming, questionnaires and survey related to risk (Carroll 2016).

• Flowchart method- This method presents the operational activities graphically and conclusively to identify subjected risks. Product analysis, site analysis, decision analysis and critical path analysis are included in this method. The interdependency within the Company can be revealed using these techniques and thus can easily recognize the barriers and can figure out an analytical path.
• Brainstorming - Brainstorming is one of the most popular approaches towards identifying risk, which includes skills of leadership and trained personnel. The Company can use this method to develop their list of risks if their goals are precisely stated and are understood by participants. Getting different team experience from different history and mindset, this method can be very helpful in analyzing risk.
• SWOT analysis- SWOT (Strengths-Weaknesses-Opportunities-Threats) analysis is a world-wide approach which is used in the formulation of action. It specifies the strengths and weaknesses of the Company and is internal such as structure and culture of Company, including financial and human resources (Grafova et al. 2017). Moreover, Opportunities and threats are outside variables of Company which are not under the control of head management. To make risk identification effective, sufficient time and effort are required to be spent on thinking about the weaknesses and threats of the Company.
• Risk Questionnaires and Surveys- Another way used in identifying risk is responding to risk questionnaire and risk surveys. Questionnaire includes a range of questions on both internal and external facts that effectively help to recognize risks. In addition, Risk Survey can also be conducted to assess the risk.

The Company Is Facing Various Types Of Business Risk Which Are Discussed Below:

1. Financial risk- The risk is associated with financing or can be say the risk of not able to pay its debt taken from bank or any other institution (Bigio and d'Avernas 2019). The Company is not having an adequate amount of funds, and since it requires a large investment, there is a need to get a loan from bank. However, if the business does not perform well and is unable to repay the loan amount, it will become defaulter affecting the reputation of the Company (Giglio 2016).
2. Cultural risk- This risk is subject to struggling with the operations of a business in a nation because of the difference in language, customs, values and lifestyle (Schmidt, Heffernan and Ward 2019). Here, as the German Company is trying to expand its market in non-European countries, it may face difficulty in some areas related to lifestyles, taste and preference of their customers.
3. Country risk- This type of risk arises where business need to inspect different factors related to the country’s stability like its political scenario, rates of inflation, taxation policies and economic health (Damodaran 2018). In this case, the German Company can get impacted by the scandals or other false news and may withdraw its decision to expand production in other non-European countries, which may be reliable.
4. Strategic risk- Several internal and factors may impact the potential of a business achieving their goals. Inappropriate strategy and expansion of existing business come under this kind of risk (Benischke, Marti and Glaser 2019). The European Company is trying to enlarge its business in some other part of the world due to which this risk may arise. There may be some issues related to staffing of human resource, equipment failure or relationship issues with the supplier of raw materials which the Company may deal with in the coming future.

It becomes important for any business to manage its risk to perform continuity in its operation. The different methods to moderate above-mentioned risks are illustrated below:

• Risk avoidance- If there is a possibility of causing major issue due to any risk, it is better to avoid such risks. By doing so, one can remove the obstacle in earning profit, and a different approach can be used to avoid it. Risk avoidance is one of the effective ways to deal with arising risk in business (Keim 2018).
• Risk reduction- Sometimes, it is not possible to avoid all risk together, so in that case, it is preferred to reduce the risk associated with it. The Company can take important steps so that risk can be minimized or it can less likely to occur. This is one of the usually used methods and is suitable for broad range of different risks. Plan of continuing business is there, and it just lists out what business should do if certain event occurs (GBAJOBI 2018).
• Risk transfer- Insurance becomes important here as everyone is familiar with the concept of insuring their business to be on safe side. Here, the risk is transfer from one party to another, promising payment in return. If any uncertainty occurs in a business, insurance company ensures bearing any loss if the subjected Company is insured under it and pays premium (Štulec 2017). The Company can transfer its risk by insuring their property to remain protected from legal action.
• Risk acceptance- Sometimes all the above-mentioned risk are not appropriate so in such case where risk is minor, the best thing is to accept them (Keim 2018). As business is all about risk and every day is a risk-taking challenge for them, it is good to take challenge and proof themselves. If risk is simple and creating a less impact, Company can opt for solution of low cost to reduce it and continue its business as usual.

Moreover, there should be continuous monitoring and eye check on success of risk management method. It helps to learn from mistakes and decide accordingly not to repeat the same (Gatzert and Schmit 2016). Such review ensures that risks have been correctly recognized and evaluated including proper controls.

Conclusion

Therefore it can be concluded from the discussion made above that the Nestle brand is performing well in the food market and prove to be a strong competitor for the other firms. There are some areas where it needs to manage its performance level to remain strong throughout their existence. In addition, the report covers the importance and obstacles faced by some selected ratios such as profitability, liquidity, activity and coverage ratio. In this report, industry analysis of Nestle Company has been performed by applying SWOT analysis and Porter’s five forces analysis. Some fields are still found where this renowned brand can improve to strengthen its standing position in the market such as upgrading the online services, proposing innovation in its offerings, building a good reputation by setting all the controversies and scandals away and many more. In the second part of discussion, the report  is about the different business risks such as Financial, Cultural, Country and Strategic risk being associated with the ‘German company’ mentioned in the case study and how different techniques are useful in assessing those risks. The techniques used for recognizing business risks such as flowchart approach, brainstorming, SWOT analysis, risk questionnaire and risk survey have also been briefly discussed in the study. Lastly, the report presents the methods of moderating all the risks that have been associated with the German Company.

References

Benischke, M.H., Martin, G.P. and Glaser, L., 2019. CEO equity risk bearing and strategic risk taking: The moderating effect of CEO personality. Strategic Management Journal, 40(1), pp.153-177.

Bigio, S. and d'Avernas, A., 2019. Financial risk capacity (No. w26561). National Bureau of Economic Research.

Carroll, R., 2016. Identifying risks in the realm of enterprise risk management. Journal of Healthcare Risk Management, 35(3), pp.24-30.

Damodaran, A., 2018. Country Risk: Determinants, Measures and Implications-The 2018 Edition. Measures and Implications-The.

Djarum, S.V., Kee, D.M.H., Azmin, N.N.B., Isdianto, R.D., Elghoul, A.O. and Pandit, S.S., 2019. The Challenges and the Opportunities of introducing Organic KitKat Chocolate by Nestle (A Study Case: NESTLE). Journal of the community development in Asia, 2(3), pp.59-67.

Fahari, h., Andini, r., And Oemar, a. 2017. Comparative Analysis Of Current Ratio, Debt To Assets Ratio, Debt To Equity Ratio, Net Profit Margin And Return On Assets Before And After Ifrs Convergence (Study On Trading Companies Listed On The Stock Exchange Year 2009-2015). Journal Of Accounting, 3(3).

Gatzert, n. And Schmit, j., 2016. Supporting Strategic Success Through Enterprise-Wide Reputation Risk Management. The Journal Of Risk Finance.

Gbajobi, c., Odediran, s.j., Adegoke, b.f., Aduloju, t.o., Ogunyemi, b.r. And Olukoya, b.f., 2018. Quantity Surveyors’ Perception Of Risk Management Techniques In Construction Projects. Technology (Iconseet), 3(18), Pp.125-132.

Giglio, S., 2016. Credit default swap spreads and systemic financial risk (No. 15). ESRB Working Paper Series.

Grafova, T.O., Skorev, M.M., Andreeva, L.Y. and Kirischeeva, I.R., 2017. Tools of financial management of reputational risks.

Greer, G., 2018. Win in India: An Analysis of Market Entry Strategy Into India’s Food and Beverage Industry.

Hasan, S., 2019. Study and analysis of current trends in advertising in Bangladesh-a case study on Film Logic.

Kajananthan, R. and Velnampy, T., 2018. Liquidity, Solvency and Profitability Analysis Using Cash Flow Ratios and Traditional Ratios: The Telecommunication Sector in Sri Lanka. Research Journal of Finance and Accounting, 5(23).

Keim, M., 2018. Defining disaster-related health risk: a primer for prevention. Prehospital and disaster medicine, 33(3), pp.308-316.

Keim, M., 2018. Managing disaster-related health risk: a process for prevention. Prehospital and disaster medicine, 33(3), pp.326-334.

Priyar, M.R.J., Sowmya, S. and Pavithra, M., 2020. Financial Performance Of Infosys And TCS Using Liquidity Ratios A Comparative Analysis. Our Heritage, 68(44), pp.402-408.

Schmidt, S., Heffernan, R. and Ward, T., 2019. Why we cannot explain cross-cultural differences in risk assessment. Aggression and Violent Behavior, p.101346.

Shrotriya, V., 2018. Analysis of Liquidity Management of Dabur India Limited through Liquidity Ratios.

Singh, A. and Alazmi, F.K., 2019, October. A Case Study on Nestle. In Journal of International Conference Proceedings (Vol. 2, No. 2, pp. 80-85).

Štulec, I., 2017. Effectiveness of weather derivatives as a risk management tool in food retail: The case of Croatia. International Journal of Financial Studies, 5(1), p.2.

Varma, G.R. and Ravi, J., 2017. Strategic Analysis on FMCG Goods: A Case Study on Nestle.

Xu, X., 2019. Assessment of Profitability of the Company BMW AG.